**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

 

**FORM 10-QSB**

 
| **(Mark One)**                                                                                                                                                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                              | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                                                                                                                                                                                                                                         | ** ** | ** ** |
| **For the quarterly period  ended:  October 31, 2007**                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                               |   |   |
| **o**                                                                                                                                                                                                                                                              | ** ** | **TRANSITION  REPORT UNDER 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 smallbusiness issuer as 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**

(Addressof principal executive offices)

 

**702-735-0101**

(Issuer’stelephone number)

 

 

(Formername, former address and former fiscal year, if changed since last report)

 
| Check  whether the issuer (1) filed all reports required to be filed by  Section 13 or 15(d) of the Exchange Act during the past 12 months  (or for such shorter period that the registrant was required to file such  reports), and (2) has been subject to such filing requirements for the  past 90 days. |   | x  Yes     o  No |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|

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

 

**APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY**

**PROCEEDINGS DURING THE PRECEDINGFIVE YEARS**

 
| Check  whether the registrant filed all documents and reports required to be filed  by Section 12, 13 or 15(d) of the Exchange Act after the  distribution of securities under a plan confirmed by a court. |   | x  Yes     o  No |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 8,129,880 shares of Common Stock asof December 10, 2007

 

TransitionalSmall Business Disclosure Format (Check one): oYes     x No

 

 

----

 

**TABLE OF CONTENTS**

 
| ** **                                    | ** ** | ** **                                                      | **Page**   |
|-----------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                                      | ** ** |
| **PART I —  FINANCIAL INFORMATION** | **3**      |
| ** **                                    | ** ** | ** **                                                      | ** ** |
| ** **                                    | ** ** | ** **                                                      | ** ** |
|                                          | Item 1.    | Consolidated Financial Statements                               | 3          |
|                                          |       |                                                            |       |
|                                          |       | Balance Sheet  (Unaudited)                                      | 3          |
|                                          |       |                                                            |       |
|                                          |       | Statements  of Operations (Unaudited)                           | 4          |
|                                          |       |                                                            |       |
|                                          |       | Statements  of Cash Flows (Unaudited)                           | 5          |
|                                          |       |                                                            |       |
|                                          |       | Notes  to Consolidated Financial Statements (Unaudited)         | 6          |
|                                          |       |                                                            |       |
|                                          | Item 2.    | Management’s  Discussion and Analysis or Plan of Operation | 14         |
|                                          |       |                                                            |       |
|                                          | Item 3.    | Controls and Procedures                                         | 21         |
|                                          |       |                                                            |       |
| **PART II  — OTHER INFORMATION**    | **24**     |
| ** **                                    | ** ** | ** **                                                      | ** ** |
|                                          | Item 1.    | Legal Proceedings                                               | 24         |
|                                          |       |                                                            |       |
|                                          | Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds    | 25         |
|                                          |       |                                                            |       |
|                                          | Item 3.    | Defaults Upon  Senior Securities                                | 25         |
|                                          |       |                                                            |       |
|                                          | Item 4.    | Submission of  Matters to a Vote of Security Holders            | 25         |
|                                          |       |                                                            |       |
|                                          | Item 5.    | Other Information                                               | 25         |
|                                          |       |                                                            |       |
|                                          | Item 6.    | Exhibits                                                        | 26         |
|                                               |            |                                                                 |            |  |  |

 

# 2

# 

#  

# **PART I —FINANCIAL INFORMATION**

#  

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

##  

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED BALANCE SHEET**

### **(Unaudited)**

 
| ** **                                                                                                                                       | ** ** | **October 31  2007** | ** **     |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|----------------|
| **ASSETS**                                                                                                                                       | ** ** | ** **                | ** **     |
| CURRENT ASSETS                                                                                                                                   |       |                      |           |
| Cash and Cash  Equivalents                                                                                                                       |       | $                         | 4,252,766      |   |
| Restricted Cash                                                                                                                                  |       | 1,109,359                 |           |
| Accounts  Receivable                                                                                                                             |       | 600,975                   |           |
| Inventories                                                                                                                                      |       | 531,475                   |           |
| Deferred Tax  Assets, net of allowance                                                                                                           |       | 440,481                   |           |
| Prepaid Expenses  and Other                                                                                                                      |       | 628,021                   |           |
| ** **                                                                                                                                       | ** ** | **7,563,077**             | ** **     |
| Property and  Equipment, net of depreciation and amortization                                                                                    |       | 4,748,424                 |           |
| Goodwill                                                                                                                                         |       | 103,725                   |           |
| Other                                                                                                                                            |       | 360,748                   |           |
| ** **                                                                                                                                       | ** ** | **$**                     | **12,775,974** | ** ** |
|                                                                                                                                             |       |                      |           |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **                | ** **     |
| CURRENT  LIABILITIES                                                                                                                             |       |                      |           |
| Current Portion  of Long-Term Debt                                                                                                               |       | $                         | 3,762,771      |   |
| Accounts Payable                                                                                                                                 |       | 1,278,612                 |           |
| Accrued Expenses                                                                                                                                 |       | 1,197,332                 |           |
| Unpaid Winning  Tickets                                                                                                                          |       | 1,659,921                 |           |
| Customer  Deposits and Other                                                                                                                     |       | 1,538,511                 |           |
| ** **                                                                                                                                       | ** ** | **9,437,147**             | ** **     |
|                                                                                                                                             |       |                      |           |
| Long-Term Debt,  less current portion                                                                                                            |       | 1,593,568                 |           |
| Other Long-Term  Liabilities                                                                                                                     |       | 742,592                   |           |
| ** **                                                                                                                                       | ** ** | **2,336,160**             | ** **     |
|                                                                                                                                             |       |                      |           |
| Redeemable  Series A Preferred Stock (3,238 shares)                                                                                         |       | 323,800                   |           |
|                                                                                                                                             |       |                      |           |
| ** **                                                                                                                                       | ** ** | **12,097,107**            | ** **     |
|                                                                                                                                             |       |                      |           |
| 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                 |           |
| Common Stock -  $0.01 par value; 25,000,000 shares authorized; 8,129,880 shares issued and  outstanding                                          |       | 81,299                    |           |
| Additional  Paid-In Capital                                                                                                                      |       | 12,250,901                |           |
| Deficit                                                                                                                                          |       | (12,418,240               | )              |
| Treasury Stock,  at cost (61,100 common shares)                                                                                                  |       | (327,493                  | )              |
| ** **                                                                                                                                       | ** ** | **678,867**               | ** **     |
| ** **                                                                                                                                       | ** ** | **$**                     | **12,775,974** | ** ** |

 

**See Notes to Consolidated Financial Statements**

 

3

----

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED STATEMENTS OF OPERATIONS**

### **(Unaudited)**

###  

| ** **                              | ** ** | **For the Three Months Ended  October 31,** | ** **      | **For the Nine Months Ended  October 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------|-----------------|---------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                             | ** **      | **2006**                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUES:**                           | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                                |       | $                                                                    | 3,479,725       |                                                                | $          | 2,501,438 |   | $ | 8,002,881 |   | $ | 6,456,447 |   |
| Hotel/Casino                            |       | 835,751                                                              |            | 878,084                                                             |       | 2,392,095 |   | 2,174,357 |   |
| Systems                                 |       | 812,716                                                              |            | 1,347,147                                                           |       | 2,897,584 |   | 5,486,685 |   |
| ** **                              | ** ** | **5,128,192**                                                        | ** **      | **4,726,669**                                                       | ** ** | **13,292,560** | ** ** | **14,117,489** | ** ** |
| **OPERATING  COSTS AND EXPENSES:**      | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Direct Costs:**                       | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                                |       | 2,943,959                                                            |            | 1,903,354                                                           |       | 7,378,137 |   | 4,728,427 |   |
| Hotel/Casino                            |       | 636,167                                                              |            | 743,478                                                             |       | 1,829,752 |   | 1,823,363 |   |
| Systems                                 |       | 359,424                                                              |            | 408,228                                                             |       | 1,053,710 |   | 1,894,082 |   |
| ** **                              | ** ** | **3,939,550**                                                        | ** **      | **3,055,060**                                                       | ** ** | **10,261,599** | ** ** | **8,445,872** | ** ** |
| **Operating  Expenses:**                | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  Development               |       | 236,956                                                              |            | 322,132                                                             |       | 754,075 |   | 822,866 |   |
| Selling, General  and Administrative    |       | 906,121                                                              |            | 905,119                                                             |       | 2,840,307 |   | 2,461,704 |   |
| Depreciation and  Amortization          |       | 237,329                                                              |            | 227,743                                                             |       | 686,458 |   | 601,267 |   |
| ** **                              | ** ** | **1,380,406**                                                        | ** **      | **1,454,994**                                                       | ** ** | **4,280,840** | ** ** | **3,885,837** | ** ** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| ** **                              | ** ** | **5,319,956**                                                        | ** **      | **4,510,054**                                                       | ** ** | **14,542,439** | ** ** | **12,331,709** | ** ** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **OPERATING  INCOME (LOSS)**            | ** ** | **(191,764**                                                         | **)**           | **216,615**                                                         | ** ** | **(1,249,879** | **)** | **1,785,780** | ** ** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **OTHER  INCOME (EXPENSES):**           | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                         |       | 22,401                                                               |            | 26,425                                                              |       | 83,675 |   | 64,476 |   |
| Interest Expense                        |       | (72,029                                                              | )               | (58,839                                                             | )          | (206,079 | ) | (140,164 | ) |
| Litigation  Expense                     |       | (28,871                                                              | )               | (329,396                                                            | )          | (137,208 | ) | (329,396 | ) |
| Other, net                              |       | 73,885                                                               |            | (29,859                                                             | )          | 135,331 |   | 90,256 |   |
| ** **                              | ** ** | **(4,614**                                                           | **)**           | **(391,669**                                                        | **)**      | **(124,281** | **)** | **(314,828** | **)** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **INCOME  (LOSS) BEFORE INCOME TAXES**  | ** ** | **(196,378**                                                         | **)**           | **(175,054**                                                        | **)**      | **(1,374,160** | **)** | **1,470,952** | ** ** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **PROVISION  FOR INCOME TAXES**         |       | —                                                               |            | —                                                              |       | — |   | — |   |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **NET  INCOME (LOSS)**                  | ** ** | **$**                                                                | **(196,378**    | **)**                                                               | **$**      | **(175,054** | **)** | **$** | **(1,374,160** | **)** | **$** | **1,470,952** | ** ** |
|                                    |       |                                                                 |            |                                                                |       |   |   |   |   |
| **NET  INCOME (LOSS) PER COMMON SHARE** | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **BASIC**                               | ** ** | **$**                                                                | ** (0.03** | **)**                                                               | **$**      | ** (0.03** | **)** | **$** | ** (0.18** | **)** | **$** | ** 0.17** | ** ** |
| ** **                              | ** ** | ** **                                                           | ** **      | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DILUTED**                             | ** ** | **$**                                                                | **N/A**         | ** **                                                          | **$**      | **N/A** | ** ** | **$** | **N/A** | ** ** | **$** | **0.17** | ** ** |

 

**See Notes to Consolidated Financial Statements**

 

4

----

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

### **(Unaudited)**

###  

| ** **                                                        | ** ** | **For the Nine Months Ended  October 31,** | ** **    |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|---------------|
| ** **                                                        | ** ** | **2007**                                                            | ** **    | **2006** | ** ** |
| **CASH  AND CASH EQUIVALENTS AT  BEGINNING OF PERIOD**            | ** ** | **$**                                                               | **4,537,424** | ** ** | **$** | **2,221,445** | ** ** |
| ** **                                                        | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Net  cash provided by operating activities**                    | ** ** | **801,022**                                                         | ** **    | **2,534,045** | ** ** |
| ** **                                                        | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Investing  Activities**                                         | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| Increases in  restricted cash                                     |       | (466,920                                                            | )             | (1,001,089 | ) |
| Withdrawals of  restricted cash                                   |       | 471,217                                                             |          | 1,225,442 |   |
| Acquisition of  Sturgeon’s, net of $126,829 in cash acquired |       | —                                                              |          | (300,000 | ) |
| Purchase of  property and equipment                               |       | (678,097                                                            | )             | (460,714 | ) |
| **Net  cash used in investing activities**                        | ** ** | **(673,800**                                                        | **)**         | **(536,361** | **)** |
| ** **                                                        | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Financing  Activities**                                         |       |                                                                |          |   |   |
| Stock options  exercised                                          |       | —                                                              |          | 82,484 |   |
| Repayment of  borrowings                                          |       | (317,596                                                            | )             | (515,486 | ) |
| Proceeds from  borrowings                                         |       | —                                                              |          | 900,000 |   |
| Preferred stock  dividends                                        |       | (94,284                                                             | )             | (105,924 | ) |
| **Net  cash provided by (used in) financing activities**          | ** ** | **(411,880**                                                        | **)**         | **361,074** | ** ** |
|                                                              |       |                                                                |          |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**         | ** ** | **(284,658**                                                        | **)**         | **2,358,758** | ** ** |
|                                                              |       |                                                                |          |   |   |
| **CASH  AND CASH EQUIVALENTS AT END OF PERIOD**                   | ** ** | **$**                                                               | **4,252,766** | ** ** | **$** | **4,580,203** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

5

----

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

### **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

### **NINE MONTHS ENDED OCTOBER 31, 2007**

### **(Unaudited)**

###  

#### **1. Basis of Presentation**

#### ** **

The accompanyingunaudited interim, consolidated financial statements of American Wagering, Inc.and subsidiaries (collectively, the “Company”) have been prepared in accordancewith the instructions to Form 10-QSB per Item 310(b) of RegulationS-B published by the Securities and Exchange Commission (“SEC”). Accordingly,the financial statements do not include all of the information and disclosuresrequired by United States generally accepted accounting principles for annualfinancial statements. In the opinion of management, all adjustments necessaryfor a fair presentation have been included. Results of operations for thecurrent interim periods are not necessarily indicative of results to beexpected for the full year. For further information, please refer to theconsolidated financial statements of the Company, and the related notes,included in its Annual Report on Form 10-KSB/A of AWI for the fiscal yearended January 31, 2007, previously filed November 28, 2007, with the SEC. Allsignificant inter-company accounts and transactions have been eliminated in theconsolidation.

 

Certain minorreclassifications have been made to the consolidated financial statements ofprior periods to conform to the current period presentation including (i) toreport Hotel/Casino financial information separately from the Wageringfinancial information and (ii) minor reclassifications between “Other Income(Expenses)” and “Selling, General and Administrative” operating expenses.

 

#### **2. Net Income (Loss) Per Common Share**

#### ** **

Basic net income (loss)per common share is calculated based on the weighted average number of sharesof common stock outstanding during the reporting period. Diluted net income percommon share is calculated when applicable giving effect to all potentiallydilutive common shares, assuming such shares were outstanding during thereporting period. Except for loss periods, net income per common shareconsiders potentially dilutive securities, which consist solely of stockoptions of 42,400 and 112,400 for the nine months and 2,400 and 112,400 for thethree months ended October 31, 2007 and 2006, respectively. Diluted lossper common share is not calculated for loss periods, since the effect ofincluding potentially dilutive common shares in such a calculation would beanti-dilutive because of the losses.

 

Following is areconciliation of the numerators and denominators of the net income (loss) percommon share computations for the periods presented:

 

6

----

 
| ** **                                            | ** ** | **Net  Income (Loss)** | ** ** | **Weighted  Average  Common  Shares** | ** ** | **Per  Share  Amount** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|------------------------|------------|
|                                                  |       | **(numerator)**             |       | **(denominator)**                     |       |                   |       |
| **For the  three months ended October 31, 2007** |       |                        |       |                                  |       |                   |       |
| Net loss                                              |       | $                           | (196,378   | )                                     |       |                   |       |   |
| Less preferred  stock dividends                       |       | (24,056                     | )          |                                  |       |                   |       |
| **Basic  net loss per common share:**                 |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | (220,434                    | )          | 8,068,780                             |       | $                      | (0.03      | ) |
| Effect of  dilutive stock options                     |       |                        |       | *                                     |       |                   |       |
| **Diluted  net loss per common share:**               |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | $                           | *          |                                  | *          |                   | $          | * |   |
|                                                  |       |                        |       |                                  |       |                   |       |
| **For the  three months ended October 31, 2006** |       |                        |       |                                  |       |                   |       |
| Net loss                                              |       | $                           | (175,054   | )                                     |       |                   |       |   |
| Less preferred  stock dividends                       |       | (35,696                     | )          |                                  |       |                   |       |
| **Basic  net loss per common share:**                 |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | (210,750                    | )          | 8,246,386                             |       | $                      | (0.03      | ) |
| Effect of  dilutive stock options                     |       |                        |       | *                                     |       |                   |       |
| **Diluted  net loss per common share:**               |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | $                           |       | *                                     | *          |                   | $          | * |   |
|                                                  |       |                        |       |                                  |       |                   |       |
| **For the  nine months ended October 31, 2007**  |       |                        |       |                                  |       |                   |       |
| Net loss                                              |       | $                           | (1,374,160 | )                                     |       |                   |       |   |
| Less preferred  stock dividends                       |       | (94,283                     | )          |                                  |       |                   |       |
| **Basic  net loss per common share:**                 |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | (1,468,443                  | )          | 8,068,780                             |       | $                      | (0.18      | ) |
| Effect of  dilutive stock options                     |       |                        |       | *                                     |       |                   |       |
| **Diluted  net loss per common share:**               |       |                        |       |                                  |       |                   |       |
| Net loss  available to common shares                  |       | $                           | *          |                                  | *          |                   | $          | * |   |
|                                                  |       |                        |       |                                  |       |                   |       |
| **For the  nine months ended October 31, 2006**  |       |                        |       |                                  |       |                   |       |
| Net income                                            |       | $                           | 1,470,952  |                                  |       |                   |       |   |
| Less preferred  stock dividends                       |       | (105,924                    | )          |                                  |       |                   |       |
| **Basic  net income per common share:**               |       |                        |       |                                  |       |                   |       |
| Net income  available to common shares                |       | 1,365,028                   |       | 8,214,744                             |       | $                      | 0.17       |   |
| Effect of  dilutive stock options                     |       |                        |       | 48,167                                |       |                   |       |
| **Diluted  net income per common share:**             |       |                        |       |                                  |       |                   |       |
| Net income  available to common shares                |       | $                           | 1,365,028  |                                  | 8,262,911  |                   | $          | 0.17 |   |
|                                                       |            |                             |            |                                       |            |                        |            |  |  |  |

 

----

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

 

7

----

 

#### **3. Income Taxes**

#### ** **

At October 31, 2007,the Company had federal tax net operating loss (“NOL”) carryforwards availableto potentially reduce future tax obligations in the aggregate amount ofapproximately $4,300,000; of which $1,856,000 expires in 2020, and the balanceexpires in 2026. Management believes that the Company will likely be profitablefor at least the short-term future and that it is therefore more likely thannot that its net deferred tax asset of $440,481, which resulted primarily fromNOLs, will be fully realized.

 

Managementhas assessed the valuation allowance against the remainder of the deferred taxassets and continues to reevaluate this asset periodically.  The change inthe deferred tax asset valuation allowance for the three- month periods ended October 31,2007 and 2006, based on these estimates, created a deferred income tax benefitof approximately $67,000 and $60,000, respectively, which was offset by likeincreases in the deferred tax asset valuation allowance for these periods. Thechange in the deferred tax asset valuation allowance for the nine-month periodsended October 31, 2007 and 2006, based on these estimates, created adeferred income tax expense (benefit) of approximately $(467,000) and $500,000,respectively, which offset the current income tax expense (benefit) for these periods.

 

In June 2006,the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes*(“FIN 48”), which was effective for us beginning on February 1, 2007. Basedon its evaluation, management concluded that adopting FIN 48 did not have aneffect on the Company’s opening deficit, its tax provision or benefit for thethree or nine months ended October 31, 2007, or its net NOL carryforwardsor the related deferred tax assets or related valuation allowance.

 

**4. Litigation**

 

TheCompany continues to be involved in previously disclosed ongoing legalproceedings over certain issues that remain unresolved regarding an otherwisesubstantially settled matter with Michael Racusin, d/b/a M.  Racusin &Company, who introduced certain underwriters to the Company and providedcertain advisory services in relation to the Company’s initial public offering.For the three and nine month periods ended October 31, 2007, the Companyrecorded litigation judgment expense of $28,871 and $137,208, respectively, inadditional accrued interest on our previously recorded debt and related accruedinterest due to Racusin under a settlement agreement relative to thismatter.  A hearing was held on November 2, 2007, and the bankruptcy courtordered the release and return of the Company’s previously deposited 250,000shares of common stock and the payment amounts to begin on November 6, 2007,pursuant to the settlement agreement as of June 28, 2007. The bankruptcy courtorder does not preclude either party from requesting the court to modify thepayment schedule in the future.

 

#### **5. Stock Options**

#### ** **

**2001 Employee Stock Option Plan.**Ingeneral, the Company may, upon approval from the Board of Directors, awardoptions to any employee at any time except that no employee may receive inexcess of 250,000 options per year and more than 1,150,000 options in total maybe granted under the 2001 Employee Stock Option Plan (the “2001 Plan”). The2001 Plan does not require any specific vesting schedule and/or term; as such,the vesting and term is at the discretion of the Board of Directors. Pursuantto the terms of the 2001 Plan, the exercise price of options must be equal toor greater than the market value of the Common Stock on the date of the grant. The2001 Plan is scheduled to terminate on August 8, 2011, except as to theoutstanding stock options on that date.

 

**Directors Stock Option Plan**.In 1996, the Company adopted the Directors Stock Option Plan (the “DirectorsPlan”). The Directors Plan was extended in August 2006 to terminate on April 30,2011. Beginning in fiscal year 2002, each non-employee director of the Companyhas been awarded options for 400 shares of stock on the last day of each fiscalyear, in lieu of 100 shares of stock per committee on which such non-employeedirector serves. In October 2007, the Board of Directors ratified thispractice as an amendment to the Directors Plan and recommend that such priorgrants and amendments to the Directors Plan be approved by the stockholders atthe next Annual Stockholders’ Meeting. No more than 40,000 options may begranted pursuant to the Directors Plan, which

 

8

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increase issubject to stockholder approval at the next Annual Stockholders’ Meeting. TheDirectors Plan provides that options will vest 100.00% after one year ofservice and will expire 10 years from the grant date. Pursuant to the terms ofthe Directors Plan, the exercise price of options must be equal to the marketvalue of the Company’s common stock on the date of the grant.

 

Activity related to boththe 2001 Plan and the Directors Plan for the nine months ended October 31,2007 and 2006 is as follows:

 
| ** **                        | ** ** | **Option Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|-----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Balance at  January 31, 2007 |       | 757,749                |       | $                                           | 1.80       |   |
| Granted                           |       | 30,000                 |       | 0.96                                        |       |
| Exercised                         |       | —                 |       | —                                      |       |
| Forfeited or  Canceled            |       | (26,250                | )          | 2.00                                        |       |
|                              |       |                   |       |                                        |       |
| Balance at  October 31, 2007 |       | 761,499                |       | 1.76                                        |       |
|                              |       |                   |       |                                        |       |
| Balance at  January 31, 2006 |       | 897,998                |       | $                                           | 1.64       |   |
| Granted                           |       | 40,000                 |       | 1.38                                        |       |
| Exercised                         |       | (131,016               | )          | 0.63                                        |       |
| Forfeited or  Canceled            |       | (23,295                | )          | 1.53                                        |       |
|                              |       |                   |       |                                        |       |
| Balance at  October 31, 2006 |       | 783,687                |       | 1.80                                        |       |

 

Stock options exercisableand available for future grants for both current stock option plans as of October 31,2007 are as follows:

 
| ** **                    | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Life** | ** **      |
|-------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|-----------------|
| Exercisable                   |       | 481,499    |       | $                                       | 1.76       |                                    | 5.71 years |   |
| Available for  future grants* |       | 176,567    |       | —                                  |       | —                                  |            |
|                               |            |            |            |                                         |            |                                         |                 |  |

 

----

*Prior to the increaseunder the Directors Plan from 20,000 to 40,000 authorized shares, whichincrease is subject to stockholder approval at the next Annual Stockholders’Meeting.

 

Stock-based compensationexpense recorded in the line item “Selling, General and Administrative Expenses”on the consolidated income statements for the three- and nine-month periodsended October 31, 2007 and 2006 was $32,074 and $129,079, and $70,339 and$229,313, respectively.

 

#### **6. Acquisition of Sturgeon’s**

#### ** **

On March 1, 2006,AWI Gaming Inc. (“AWIG”) acquired Sturgeon’s Inn and Casino (“Sturgeon’s”) for$1,800,000. The purposes of the acquisition of Sturgeon’s were to diversify andstrengthen our cash flows and broaden our revenue base by operating this smallcasino. In connection with the acquisition, AWIG incurred initial indebtednessof $1,800,000, which included a bank loan of $1,500,000, collateralized by a1st deed of trust on the Sturgeon’s real estate and a security interest in thepersonal property and fixtures of Sturgeon’s and a loan for $300,000 fromVictor Salerno, the Company’s CEO, and his wife, its General Counsel, which wasrepaid prior to January 31, 2007. Interest on the bank loan is payablemonthly at the Wall Street Journal-listed prime rate plus 2.00% and theprincipal is due in a single payment on March 1, 2008.

 

9

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In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 141, *Business Combinations*, the Company performed a valuation todetermine, among other things, the cost of the acquired entity and to assignthat cost to the assets acquired on the basis of their fair values. Based uponthis valuation process, the Company determined an overall asset value forSturgeon’s of $2,091,570, which amount exceeded the purchase price of$1,800,000 and resulted in tentative negative goodwill in the amount of$291,570. Pursuant to paragraphs 44 and 45 of SFAS No. 141, the negativegoodwill was apportioned to all of the acquired assets on a pro rata basis,subject to the applicable exceptions. The purchase price allocation was asfollows:

 

**Sturgeon’s Inn & Casino**

**PurchasePrice Allocation**

 
| Land                  |   | $       | 505,558   |   |
|-----------------------|--------|---------|-----------|--------|
| Buildings             |   | 795,618 |      |
| Other                 |   | 498,824 |      |
| Total Purchase  Price |   | $       | 1,800,000 |   |

 

The operations ofSturgeon’s are included in the accompanying consolidated financial statementssince the acquisition date of March 1, 2006. The following unaudited proforma consolidated financial information has been prepared assuming that theacquisition of Sturgeon’s had occurred on February 1, 2006.

 

10

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| ** **                   | ** ** | **Nine Months Ended  October 31,  2006** | ** **    |
|------------------------------|------------|---------------------------------------------------------|---------------|
| Revenue                      |       | $                                                       | 14,301,512    |   |
| Operating  Expenses          |       | 12,591,079                                              |          |
| Operating Income             |       | 1,710,433                                               |          |
| Other Income                 |       | (329,160                                                | )             |
| Income Before  Income Taxes  |       | 1,381,273                                               |          |
| Provision for  Income Taxes  |       | —                                                  |          |
| **Net  Income**              | ** ** | **$**                                                   | **1,381,273** | ** ** |
| Basic Net Income  Per Share  |       | $                                                       | 0.16          |   |
| Diluted Net Income Per Share |       | $                                                       | 0.15          |   |

 

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

 

#### **7. Business Segments**

#### ** **

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

 

**Wagering Segment**.The following table indicates the primary components of revenue and operatingcosts resulting in this segment’s operating income (loss).

 
| ** **                           | ** ** | **Three Months Ended October 31,** | ** **    | **Nine Months Ended October 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|---------------|-------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                               | ** **    | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                                  | **3,479,725** | ** **                                            | **$**      | **2,501,438** | ** ** | **$** | **8,002,881** | ** ** | **$** | **6,456,447** | ** ** |
| Direct Costs                         |       | 2,943,959                                              |          | 1,903,354                                             |       | 7,378,137 |   | 4,728,427 |   |
| Selling, General  and Administrative |       | 421,679                                                |          | 247,728                                               |       | 923,421 |   | 702,130 |   |
| Depreciation and  Amortization       |       | 67,503                                                 |          | 93,642                                                |       | 206,902 |   | 251,539 |   |
| ** **                           | ** ** | **3,430,141**                                          | ** **    | **2,244,724**                                         | ** ** | **8,508,460** | ** ** | **5,682,096** |   |
| **Operating  Income (Loss)**         | ** ** | **$**                                                  | **49,584**    | ** **                                            | **$**      | **256,714** | ** ** | **$** | **(505,579** | **)** | **$** | **774,351** | ** ** |

 

11

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**Hotel/Casino Segment**.The following table indicates the primary components of revenue and operatingcosts resulting in this segment’s operating loss.

 
| ** **                                                           | ** ** | **Three Months Ended October 31,** | ** **  | **Nine Months Ended October 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------|-------------|-------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                               | ** **  | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**                                                          |       |                                                   |        |                                                  |       |   |   |   |   |
| Casino                                                               |       | $                                                      | 394,510     |                                                  | $          | 433,611 |   | $ | 1,126,886 |   | $ | 1,050,178 |   |
| Hotel                                                                |       | 179,131                                                |        | 172,377                                               |       | 566,926 |   | 430,177 |   |
| Food/Beverage                                                        |       | 293,108                                                |        | 307,194                                               |       | 791,770 |   | 775,796 |   |
| Less:  Casino Cash Incentives and Other  Promotional Allowances |       | (30,998                                                | )           | (35,098                                               | )          | (93,487 | ) | (81,794 | ) |
|                                                                 |       | 835,751                                                |        | 878,084                                               |       | 2,392,095 |   | 2,174,357 |   |
| **Direct  Costs and Expenses**                                       |       |                                                   |        |                                                  |       |   |   |   |   |
| Casino                                                               |       | $                                                      | 312,093     |                                                  | $          | 373,936 |   | $ | 885,215 |   | $ | 893,596 |   |
| Hotel                                                                |       | 59,448                                                 |        | 67,890                                                |       | 187,243 |   | 170,049 |   |
| Food/Beverage                                                        |       | 264,626                                                |        | 301,652                                               |       | 757,294 |   | 759,718 |   |
|                                                                 |       | 636,167                                                |        | 743,478                                               |       | 1,829,752 |   | 1,823,363 |   |
|                                                                 |       |                                                   |        |                                                  |       |   |   |   |   |
| Selling, General  and Administrative                                 |       | 179,208                                                |        | 319,639                                               |       | 743,382 |   | 827,628 |   |
| Depreciation and  Amortization                                       |       | 70,644                                                 |        | 85,148                                                |       | 192,193 |   | 207,893 |   |
|                                                                 |       | 886,019                                                |        | 1,148,265                                             |       | 2,765,327 |   | 2,858,884 |   |
| **Operating  Loss**                                                  | ** ** | **$**                                                  | **(50,268** | **)**                                                 | **$**      | **(270,181** | **)** | **$** | **(373,232** | **)** | **$** | **(684,527** | **)** |

 

**Systems Segment.**The following table indicates the primary components of revenue andoperating costs resulting in this segment’s operating income (loss).

 
| ** **                           | ** ** | **Three Months Ended October 31,** | ** **   | **Nine Months Ended October 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|--------------|-------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                               | ** **   | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                                  | **812,716**  | ** **                                            | **$**      | **1,347,147** | ** ** | **$** | **2,897,584** | ** ** | **$** | **5,486,685** | ** ** |
| Direct Costs                         |       | 359,424                                                |         | 408,228                                               |       | 1,053,710 |   | 1,894,082 |   |
| Research and  Development            |       | 236,956                                                |         | 322,132                                               |       | 754,075 |   | 822,866 |   |
| Selling, General  and Administrative |       | 308,234                                                |         | 337,752                                               |       | 1,173,504 |   | 931,946 |   |
| Depreciation and  Amortization       |       | 99,182                                                 |         | 48,953                                                |       | 287,363 |   | 141,835 |   |
|                                 |       | 1,003,796                                              |         | 1,117,065                                             |       | 3,268,652 |   | 3,790,729 |   |
| **Operating  Income (Loss)**         | ** ** | **$**                                                  | **(191,080** | **)**                                                 | **$**      | **230,082** | ** ** | **$** | **(371,068** | **)** | **$** | **1,695,956** | ** ** |
|                                      |            |                                                        |              |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Operating Income (Loss) to Income(Loss) Before Income Taxes.**The following tablereconciles the operating income (loss) from each segment to income (loss)before income taxes.

 
| ** **                             | ** ** | **Three Months Ended October 31,** | ** **   | **Nine Months Ended October 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------|--------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                               | ** **   | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating  Income (Loss)**           |       |                                                   |         |                                                  |       |   |   |   |   |
| Wagering                               |       | $                                                      | 49,584       |                                                  | $          | 256,714 |   | $ | (505,579 | ) | $ | 774,351 |   |
|                                   |       |                                                   |         |                                                  |       |   |   |   |   |   |   |   |   |
| Hotel/Casino                           |       | (50,268                                                | )            | (270,181                                              | )          | (373,232 | ) | (684,527 | ) |
|                                   |       |                                                   |         |                                                  |       |   |   |   |   |
| Systems                                |       | (191,080                                               | )            | 230,082                                               |       | (371,068 | ) | 1,695,956 |   |
|                                   |       | (191,764                                               | )            | 216,615                                               |       | (1,249,879 | ) | 1,785,780 |   |
| **Other  Income (Expenses)**           |       |                                                   |         |                                                  |       |   |   |   |   |
| Interest Income                        |       | 22,401                                                 |         | 26,425                                                |       | 83,675 |   | 64,476 |   |
| Interest Expense                       |       | (72,029                                                | )            | (58,839                                               | )          | (206,079 | ) | (140,164 | ) |
| Litigation  Expense                    |       | (28,871                                                | )            | (329,396                                              | )          | (137,208 | ) | (329,396 | ) |
| Other, net                             |       | 73,885                                                 |         | (29,859                                               | )          | 135,331 |   | 90,256 |   |
|                                   |       | (4,614                                                 | )            | (391,669                                              | )          | (124,281 | ) | (314,828 | ) |
| **Income  (Loss) Before Income Taxes** | ** ** | **$**                                                  | **(196,378** | **)**                                                 | **$**      | **(175,054** | **)** | **$** | **(1,374,160** | **)** | **$** | **1,470,952** | ** ** |

 

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#### **Identifiable Property:**

 
| ** **                              | ** ** | **October 31,** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| **Identifiable Property (1)** | ** ** | **2007**             | ** ** | **2006** | ** ** |
| Wagering                                |       | $                    | 499,009    |   | $ | 473,117 |   |
| Hotel/Casino                            |       | 2,643,059            |       | 2,476,281 |   |
| Systems                                 |       | 2,065,174            |       | 2,481,196 |   |
|                                    |       | $                    | 5,207,242  |   | $ | 5,430,594 |   |

 

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(1)          Includes property andequipment, shown net of accumulated depreciation and amortization; goodwill;intangibles; and other assets.

 

**8. Subsequent Event**

 

On November 8, 2007, theBoard of Directors approved and authorized Victor and Terina Salerno to borrow$400,000 for the benefit of the Company pursuant to the terms of a GuarantyAgreement with the Company. The Guaranty Agreement provides for the Company topay the Salernos interest at the rate of 10% per annum (payable monthly) on theoutstanding portion of the loan and to reimburse them for finance charges,fees, payments and other expenses they incur under a personal revolving line ofcredit with their bank. The Guaranty Agreement expires on February 16, 2011.The personal line of credit is secured by the Salerno’s residence and providesfor an interest rate of 0.5% below the prime rate published by the Wall StreetJournal, adjusted annually. From May 1, 2006 through November 7, 2007, theoutstanding balance has been $0. Victor Salerno is the President and ChiefExecutive Officer of the Company. Terina Salerno is the spouse of VictorSalerno as well as General Counsel of the Company.

 

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## **Item 2. Management’s Discussion and Analysis or Plan of Operation.**

##  

**Forward-LookingStatements** Throughout this report we make statementsregarding our business, expectations and prospects, such as projections offuture performance, statements of our plans and objectives, forecasts of markettrends, and other matters that are “forward-looking statements” as defined in Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Statementscontaining words or phrases such as “will likely result,” “are expected to,” “willcontinue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”“intends,” “target,” “goal,” “plans,” “objective,” “might,” “may,” “could,” “will,”“should,” or similar expressions, or the negative thereof, constituteforward-looking statements. Although we believe that our plans, objectives andexpectations reflected in, or suggested by, such forward-looking statements arereasonable at the present time, we might not achieve them or we may modify themfrom time to time. You should read this report thoroughly and with theunderstanding that actual future results may be materially different from whatwe expect. We do not plan to update forward-looking statements even though oursituation or plans may change in the future, unless applicable law requires usto do so.

 

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

 

•                  increasedintense competition in the race and sports wagering business;

 

•                  our ability todevelop and refine products and technologies in a timely manner, and the market’sacceptance of them;

 

•                  volatility inquarterly results due to the timing of system sales installations, fluctuationsin levels of wagering during particular times of the year and fluctuations inthe win percentage;

 

•                  our ability tosecure external sources of financing on acceptable terms, including financingto implement our acquisition plans mentioned above;

 

•                  changes ordevelopments in laws, regulations or taxes affecting the race and sportswagering business;

 

•                  economic,demographic, business and other conditions in our local and regional markets;

 

•                  our ability tocomplete our assessment of or the receipt of a qualified opinion from ourauditors, and the excessive costs, all related to the implementation of Section 404of the Sarbanes-Oxley Act of 2002;

 

•                  the availabilityand adequacy of our cash flow to meet our requirements and the paymentsregarding the Racusin Settlement;

 

•                  our ability tocontrol our operating expenses;

 

•                  actions taken ornot taken by third parties, such as our customers, competitors and vendors, aswell as legislative, regulatory, judicial and other governmental authorities;

 

•                  changes in ourkey management, other personnel or their compensation, including thoseresulting from changes in minimum wage requirements;

 

14

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•                  the potentialpolitical, economic and other issues related to our international operationsthrough our CBS subsidiary;

 

•                  our failure toobtain, delays in obtaining, or loss of, any proprietary rights, patents,trademarks, copyrights, licenses, permits or approvals, or the limitation,conditioning, suspension or revocation of any such proprietary rights, patents,trademarks, copyrights, licenses, permits or approvals, or our failure toobtain an unconditional renewal of any of our proprietary rights, patents,trademarks, and copyrights, licenses, permits or approvals on a timely basis;

 

•                  other adverseconditions, such as economic downturns, changes in general customer confidenceor spending, increased transportation costs or travel concerns that mayadversely affect the economy in general or the Nevada gaming industry inparticular;

 

•                  a decline in thepublic acceptance of wagering;

 

•                  our ability tocontinue to meet the reserve requirements of the Nevada Gaming Commission; theconsequences of the war in Iraq and other military conflicts or politicalinstability in the Middle East or elsewhere and any future security alerts orterrorist attacks such as the attacks that occurred on September 11, 2001;and

 

•                  other riskfactors discussed elsewhere in this report.

 

All future written andoral forward-looking statements attributable to us or any person acting on ourbehalf are expressly qualified in their entirety by the cautionary statementscontained or referred to in this section. In light of these and other risks,uncertainties and assumptions, the forward-looking events discussed in thisreport might not occur.

 

**Definitions.**For the purposes of this report, the following terms have thefollowing meanings:

 

“Company” means AmericanWagering, Inc. and its subsidiaries collectively.

 

“AWI” means AmericanWagering, Inc.

 

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

 

“AWIM” means AWIManufacturing, Inc., a wholly-owned subsidiary of AWI.

 

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

 

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

 

“Sturgeons, LLC” meansSturgeons, LLC, a wholly-owned subsidiary of AWIG.

 

“Sturgeon’s” meansSturgeon’s Inn & Casino (which, as of March 1, 2006, is owned bySturgeons, 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. Concerning Leroy’s, we intend to continue operating existing sportsbooks, adding new books where and when appropriate, and continue to become moreefficient in order to reduce expenses. Regarding CBS, we intend to continuedeveloping, selling and maintaining computerized race and sports wageringsystems for the gaming industry. As to AWIM, we intend to continue developingthe self-service wagering kiosk, installing kiosks in Leroy’s locations toassist in controlling escalating personnel costs, and marketing the kiosk tonon-Leroy’s locations. With regard to AWI Int’l, we dissolved this legalentity, effective August 27, 2007; however we still intend, through ourestablished CBS subsidiary, to seek strategic international alliances withthird party gaming suppliers and/or gaming operators that desire to utilize ourexpertise in the race and sports industry. These strategies should enable us togain a competitive advantage by offering the gaming operator and/or the bettingpatron a well-rounded gaming experience, both in the United States and abroad.

 

15

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Regarding theSturgeon’s facility, we intend to continue to evaluate and change the slot mixat Sturgeon’s where and when appropriate, and modify existing procedures toincrease efficiency and reduce expenses. We have implemented, and arecontinuing to initiate, other cost cutting measures throughout Sturgeon’s andthe remainder of the Company.

 

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

 

#### **Liquidity and Capital Resources.**

#### ** **

#### **Cash Flow**

#### ** **

As of October 31,2007, we had a working capital deficit of $1,874,069, compared to workingcapital of $1,205,572 at January 31, 2007. The decrease in working capitalis primarily due to fewer systems sales and installations in the nine months endedOctober 31, 2007 and the loan payable of $1.5 million owed to Great BasinBank of Nevada becoming a current versus a long-term liability. We believe theworking capital deficit will be overcome in the future due to our potentialrefinancing of the $1.5 million Great Basin Bank of Nevada loan and ouranticipated positive fourth quarter results, which will include the endingportion of the football season and the beginning of basketball; provided,however, no assurance can be given that we will be able to refinance our loanwith Great Basin Bank of Nevada on terms acceptable to the Company or that ourfourth quarter result will be positive. Our principal cash requirements consistof payroll and benefits, business insurance, real estate and equipment leases,legal expenses, telecommunications, debt service, interest expense, and costsrelated to inventory and to assemble race/sports systems for our CBS customers.

 

As of October 31,2007, cash provided by operations was $801,022 for the nine months ended October 31,2007 as compared to the cash provided by operations of $2.5 million in thecomparable period of last year, primarily due to decreased revenues fromsystems operations, primarily due to decreased systems sales and installations.In the nine months ended October 31, 2006, we recorded one-time systemsand software sales of approximately $1.8 million while no similar one-timesales occurred in the nine months ended October 31, 2007.

 

Net cash used ininvesting activities for the nine months ended October 31, 2007 was$673,800 as compared to the same period last year primarily as a result of thepurchase of upgraded computers and networks, leasehold improvements, new kiosklocations and other furniture and equipment.

 

Net cash used infinancing activities for the nine months ended October 31, 2007 was$411,880, primarily due to repayment of existing borrowings of $317,596.

 

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. From September 1, 2005 to August 2006, we maintained a Regulation 22.040 reserve in theamount of $2.4 million; which was increased to $3.0 million in August 2006in the form of a surety bond issued by Fidelity and Deposit Company of Maryland(a subsidiary of Zurich American Insurance) (“Fidelity”). On November 16,2007, due to increased handle, we increased the bond to $3.4 million along withthe cash deposit of $1.2 million which secures this bond. The cash deposits, inthe form of certificates of deposit, are held at Great Basin Bank of Nevada (“GreatBasin Bank”) along with the irrevocable letter of credit which was alsoincreased to $1.2 million.

 

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

 

16

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#### **Other.**

#### ** **

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

 

We believe that we willbe able to satisfy our operating cash requirements for at least the next 12months from existing cash balances and anticipated cash flows. We plan toaccumulate cash liquidity during the current fiscal year (ending January 31,2008) to help us fund the following: litigation expenses and judgments; potential purchase of kiosks;volatility and seasonality effects of sports betting; volatility and timing ofsystem sales; compliance costs associated with Section 404 of theSarbanes-Oxley Act of 2002; and the possible effects of legislation to banwagering on amateur athletic events.

 

#### **Results of Operations.**

#### ** **

We report our results ofoperations through three operating segments: Wagering, Hotel/Casino and Systems. Although numerous factors are takeninto consideration, the operating income (loss) of the segment represents asignificant profitability measure used by us in allocating resources andassessing performance of the segments.

 
| ** **                         | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Summary**                        | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **$  Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **$  Change** | ** ** | **% Change** | ** ** |
| Revenues                           |       | $                                                      | 5,128,192  |                                                  | $          | 4,726,669 |   | $ | 401,523 |   | 8.49 |   | $ | 13,292,560 |   | $ | 14,117,489 |   | $ | (824,929 | ) | (5.84 | ) |
| Costs and  Expenses                |       | 5,319,956                                              |       | 4,510,054                                             |       | 809,902 |   | 17.96 |   | 14,542,439 |   | 12,331,709 |   | 2,210,730 |   | 17.93 |   |
| Other Income  (Expense)            |       | (4,614                                                 | )          | (391,669                                              | )          | 387,055 |   | (98.82 | ) | (124,281 | ) | (314,828 | ) | 190,547 |   | (60.52 | ) |
| Income (Loss)  Before Income Taxes |       | $                                                      | (196,378   | )                                                     | $          | (175,054 | ) | $ | (21,324 | ) | (12.18 | ) | $ | (1,374,160 | ) | $ | 1,470,952 |   | $ | (2,845,112 | ) | (193.42 | ) |

#### ** **

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

 

#### **For the Nine Months Ended October 31,2007 Compared to the Nine Months Ended October 31, 2006.**

#### ** **

#### **Wagering Segment.**

#### ** **

The Wagering Segmentincludes the operating results of the sports gaming wagers, net of payouts andexpenses.

 

**Wagering Segment revenues for the nine monthsended October 31, 2007 increased $1,546,434 (+23.95%) over the nine monthsended October 31, 2006.**This increase is attributed to thefollowing factors:

 

We experienced increasedbaseball and football handle during the nine months ended October 31, 2007compared to the same period in the prior year due to having more locations andthe improvements and expansion of some of our previously existing locations.These increases in handle resulted in increased revenues for this period.

 

**Wagering Segment total costs and expenses for thenine months ended October 31, 2007 increased $1,455,774 (+39.33%) over thenine months ended October 31, 2006.**Thisincrease is attributed to the following factors:

 

Direct costs increasedprimarily due to increased expenses related to establishing new locations,advertising expenses, wages due to additional locations, increasedcommunication costs and increases in rent paid to our Leroy’s sports booklocations.

 

Selling, general andadministrative costs decreased primarily due to decreases in variousadministrative costs in the nine months ending October 31, 2007 comparedto the nine months ending October 31, 2006.

 

17

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Management feesallocated to the segments also increased due to increased insurance, legal, andother public company costs.

 

Depreciation andamortization expense decreased over the prior year’s nine month periodprimarily due to a cumulative decrease in capitalized acquisitions compared tothe same nine month period ending October 31, 2006.

 

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

 

We intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently. There is no assurance that the number of race and sportsbooks operated by us will not decrease in the future due to elimination ofunprofitable locations, closure of host properties, and other factors beyondour control, that we will be able to add new locations, and/or that any new locationsso added will be profitable.

 

#### **Hotel/Casino Segment.**

#### ** **

The Hotel/Casino Segmentincludes the operating results of Sturgeon’s. Sturgeon’s commenced operationson March 1, 2006.

 

**Hotel/Casino Segment revenues forthe nine months ended October 31, 2007 increased $217,738 (+10.01%) overthe eight months ended October 31, 2006.**This increaseis attributed to the following factors:

 

Casino revenues increasedprimarily due to the inclusion of all nine months in the first nine monthsending October 31, 2007 compared to the eight month period ending October 31,2006, along with increased handle.

 

Hotel revenues increaseddue to the inclusion of all nine months in the period ending October 31,2007 compared to eight months in the period ending October 31, 2006, alongwith increased room occupancies.

 

Food and Beveragerevenues increased primarily due to the inclusion of all nine months in theperiod ending October 31, 2007 compared to eight months in the periodending October 31, 2006. Casino cash incentives and other promotionalallowances increased primarily due to the inclusion of all nine months in theperiod ending October 31, 2007 compared to eight months in the periodending October 31, 2006, along with additional promotions offered.

 

**Hotel/Casino Segment total costsand expenses for the nine months ended October 31, 2007 increased $93,557(+3.27%) over the nine months ended October 31, 2006.**Thisincrease is attributed to the following factors:

 

Direct costs for thecasino operations increased over the prior eight months ended October 31,2006 primarily due to the inclusion of all nine months in the period ending October 31,2007 compared to eight months in the period ending October 31, 2006, andincreased personnel expense.

 

Direct costs for thehotel operations increased primarily due to the inclusion of all nine months inthe period ending October 31, 2007 compared to eight months in the periodending October 31, 2006, and increased advertising, leading to higher roomoccupancies.

 

Selling, general and administrative costs forSturgeon’s decreased primarily due to increased efficiencies and a one timepayout from a workers’ compensation insurance demutualization due to thatorganization going public, for $40,885 in the second quarter of fiscal 2008.

 

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#### **Systems Segment.**

#### ** **

The Systems Segmentincludes the operating results of our systems sales, installations andmaintenance, less the related expenses.

 

**Systems Segment revenues for thenine months ended October 31, 2007 decreased $2,589,101 (-47.19%) over thenine months ended October 31, 2006.**This decrease isattributed to the following factors:

 

System sales decreasedover the prior fiscal year due to a decreased number of one-time sales. In the2006 period, we recorded one-time systems and software sales of $1.8 millionwhile no similar sales occurred in the nine months ended October 31, 2007.

 

Revenues from maintenancecontracts increased over the prior fiscal year. This increase is attributableto the addition of the number of new customers and the higher fees charged tocustomers.

 

**Systems Segment total costs andexpenses for the nine months ended October 31, 2007 decreased $522,077(-13.77%) over the nine months ended October 31, 2006.**Thisdecrease is attributed to the following factors:

 

Direct costs for systemsdecreased over the prior nine months ended October 31, 2006 primarily dueto decreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies and a decline in the numberof sales installations.

 

Research and developmentcosts decreased from the prior nine months ended October 31, 2006primarily due to improvement in efficiencies.

 

Management fees allocatedto the segments also increased due to increased insurance, legal, publiccompany costs, and bonuses paid pursuant to employment contracts.

 

Depreciation andamortization increased from the prior nine months ended October 31, 2006due to increased property acquisitions, primarily due to the equipment andsoftware upgrades to our networks.

 

**Other income and (expenses).**Theother income and (expenses) categories are primarily administrative in natureand, as such, are not directly attributable to any operating segment. Accordingly,these items are generally not taken into consideration by us when we allocateresources to the segments or assess 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. (Refer to the discussion regarding this matterlocated in “Liquidity and Capital Resources” above.)  The remainder of the interest income isattributable to interest earned on interest-bearing checking accounts.

 

Interest Expense:  The increase in interest expense is primarilydue to our financing of Sturgeon’s, including three additional loans totaling$295,629 for casino equipment obtained in the second quarter of fiscal 2008. (Referto the discussion regarding the Sturgeon’s acquisition financing located in “Liquidityand Capital Resources” above.)

 

Litigation expense of$137,208 was recorded in the first nine months of fiscal 2008 related to theRacusin litigation, compared to Racusin litigation expense of $329,396 for thesame nine month period of the prior fiscal year.

 

Other, net:  Other, net increased $45,181 primarily due toincreased rental income and various other income in the nine months ended October 31,2007 compared to the same period in the prior year.

 

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**Criticalaccounting estimates and policies.**

 

Although our financialstatements necessarily make use of certain accounting estimates by ourmanagement, we believe that, except as discussed below, we do not employ anycritical accounting policies or estimates that are either selected from amongavailable alternatives, or require the exercise of significant managementjudgment to apply, or that if changed are likely to affect future periods. Thefollowing summarizes our critical estimates and policies.

 

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

 

Hotel/CasinoRevenue:  We report the wagering revenuesof Sturgeon’s, which is primarily comprised of slot revenue, hotel room revenueand food and beverage revenue, in compliance with Nevada law and theregulations of the Nevada gaming regulators. These revenues are generally inthe form of cash, personal checks, credit cards, or gaming chips and tokens,which do not require estimates. We do estimate certain liabilities with paymentperiods that extend for longer than several months. We believe these estimatesare reasonable based on our assumptions related to possible outcomes in thefuture. Future actual results might differ materially from these estimates. Slotrevenue is the drop (the total amount removed from the machine) less the fills andthe payouts. Bingo revenue is calculated as the total handle (the amountwagered) less the payouts. For non-gaming revenues, such as food and beverage,hotel, etc., we record revenues in compliance with generally acceptedaccounting principles, recognizing revenue when it is earned. The Sturgeon’sacquisition was completed on March 1, 2006 and wagering revenues for theSturgeon’s operation were reported for the first time in the fiscal year ended January 31,2007.

 

System — Software:  We recognize software revenue in accordancewith the provisions of Statement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition, as amended by SOP 98-9, Software Revenue Recognition, WithRespect to Certain Transactions*. Software license fees representrevenues related to licenses for race/sports software delivered to customersfor in-house use. Revenues from software license agreements (including anyrelated training revenue) are recognized upon installation of the software.

 

System — Hardware:  We recognize hardware revenue (including anyrelated installation revenue) upon installation of the hardware.

 

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

 

Accounting for long-livedassets:  Owned property and equipment arerecorded at cost and depreciated to residual values over the estimated usefullives using the straight-line method. Leasehold improvements on operatingleases are amortized over the life of the lease or the life of the asset,whichever is shorter. The useful life, currently estimated, of our equipmentgenerally ranges from 3 to 10 years. We test for impairment losses onlong-lived assets used in operations when events and circumstances indicatethat the assets might be impaired, under the standards of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.An impairment loss is recognized if the carrying amount of the asset is notrecoverable from its undiscounted cash flows and is measured as the differencebetween the carrying amount and fair value of the asset.

 

Accounting for incometaxes:  We review the net loss operatingcarryforwards available to reduce current and future tax obligations; which wasapproximately $4,300,000 as of October 31, 2007. We assess the valuationallowance against the remainder of the deferred tax assets in our calculationsto estimate the effective tax rate for the

 

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fiscal year, andat this time, we believe that more likely than not there is sufficient losscarryforward to offset the current year’s net income. We consider and evaluatethe components of the tax calculations and are satisfied as to realization andprobability of the permanent and temporary differences.

 

We additionally believethat it is probable that we will continue to be profitable annually, for atleast the short-term future, and it is therefore more likely than not that ournet deferred tax asset of $440,481, which resulted primarily from net losscarryforwards, will be fully realized; provided, however, that no assurance canbe given that we will continue to be profitable.

 

#### **Recent Accounting Pronouncements.**

#### ** **

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS No. 157”), which defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115,*which will permit the option of choosing to measure certain eligible items atfair value at specified election dates and report unrealized gains and lossesin earnings. SFAS Nos. 157 and 159 are now scheduled to become effective for usfor financial statements issued for the fiscal year ending January 31,2009, but a delay has been proposed. We are currently evaluating the likelyimpact, if any, of these standards on our future consolidated financialstatements.

 

**SEC Comment Regarding Acquired Company FinancialStatements**

 

UnderSEC Regulation 310(c) of SEC Regulation S-B, the Company must filehistorical audited financial statements of a company it acquires if theacquired company meets any of a series of conditions which compare the size ofthe acquired company to the Company. The Company originally had determined thatthese conditions were not met and therefore did not provide historical auditedfinancial statements of Sturgeon’s in its prior SEC filings. The Companyreceived a comment letter from the SEC in August 2007, in which the SECstaff, among other things, commented that the condition comparing income wasmet and thus historical audited financial statements and pro forma financialinformation were required to have been filed. Due to the condition of thefinancial records of Sturgeon’s at the time of the acquisition by the Company,the Company cannot obtain historical audited financial statements of Sturgeon’swithout unreasonable effort and expense. Sturgeon’s financial information hasbeen included in the Company’s periodic reports filed after the March 1, 2006acquisition date. However, since the Company failed to file historical auditedfinancial statements of Sturgeon’s, any registration statement the Company mayfile will not be declared effective by the SEC and the Company will not beconsidered to be in compliance with Item 13(a)(1) of the proxy rules, tothe extent possible. At the present time, the Company has no intention to filea registration statement or take any action within the scope of Item13(a)(1) of the proxy rules in the foreseeable future.

## ** **

## **Item 3. Controls and Procedures.**

#### ** **

#### **Evaluation of Disclosure Controls andProcedures**

 

We carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of October 31, 2007 (the end of the third quarter of our2008 fiscal year). This evaluation was carried out under the supervision andwith the participation of our management, including our Chief Executive Officer(“CEO”) and the Chief Financial Officer (“CFO”). Based upon that evaluation,our CEO and CFO concluded that our disclosure controls and procedures werestill not effective to ensure that the information required to be disclosed inthe reports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC because of the material weaknesses in our internal controlover financial reporting due to in sufficient personnel with requisite knowledgeof generally accepted accounting principles and related practices.

 

As discussed in ourForm 10-KSB/A for the period ended January 31, 2007, our former CFOgave us 30 days’ notice of termination of his employment on November 17,2006. Since then, we have appointed persons to assist in the preparation of ourquarterly and annual reports on Forms 10-QSB and 10-KSB, respectively, and wehave continued to seek personnel on both a full-time and part-time basis forour accounting/finance department. We filled the CFO position on August 6,2007, and we continue to evaluate the personnel requirements of ouraccounting/finance department. That situation, together with our already-smallaccounting/finance staff, the turnover we have experienced in that staff, and atriennial routine gaming audit that began in March 2007, created the needfor additional time to complete our October 31, 2006 Form 10-QSB andJanuary 31, 2007 Form 10-KSB, which we did not file timely. TheForm 10-KSB was filed on May 31, 2007, which was followed (two weekslater) with the first quarter filing for the period ended April 30, 2007,filed on June 14, 2007. In response to a comment letter from the SEC inAugust 2007, we filed a Form 10-KSB/A on November 28, 2007. Our controls inplace were not adequate, among other things, to identify that the acquisition ofSturgeon’s casino in March 2006 was a significant acquisition that required theCompany to file historical audited financial statements and pro forma financialinformation for Sturgeon’s. Our management, based on additional analysis andpost-closing work performed during the preparation of this report, hasconcluded that the consolidated financial statements for the periods covered byand included in this report fairly present, in all material respects, ourfinancial condition, results of operations and cash flows for the periodspresented in conformity with generally accepted accounting principles.

 

The factors described abovehave significantly increased the risk of continued significant deficiencies andmaterial weaknesses. Such deficiencies or weaknesses could cause us again to belate in satisfying our Exchange Act reporting obligations, cause the OTCBB toremove our stock from quotation and cause investors to lose confidence in ourreported financial information, all of which could lead to a decline in theprice of our stock.

 

#### **Changes in Internal Control Over FinancialReporting**

 

During the third quarterof our 2008 fiscal year, there were no changes in our internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting, except asdescribed below. 

 

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In response to thematerial weaknesses as identified by management (as discussed above), theCompany has taken the initial steps as discussed below, and will continue totake further steps to strengthen our disclosure controls, evaluate and remediatedeficiencies and test these procedures and controls as appropriate.

 

On August 6, 2007, theCompany hired a CFO, who is in the process of strengthening the internalcontrols over financial reporting, instituting accounting procedures forenhanced controls and segregation of duties; reorganizing and hiring competentaccounting staff; simplifying certain accounting processes; increasing trainingfor accounting personnel; developing corporate governance procedures;increasing documentation of accounting transactions and the related reviews;improving the timeliness and quality of financial reports to management; andimproving the communication between the accounting/finance department and theother areas of the Company, including the Audit Committee.

 

The newly hired CFO hasnot had sufficient time to resolve and remediate or test the deficiencies thatexisted during the prior periods, even though some progress has been made, weare still experiencing accounting department turnover. Even though we believethat the internal controls have been improved, we expect that management’sannual review and evaluation of our internal control over financial reportingfor the fiscal year ended January 31, 2008, will likely result in continuedand/or new material weaknesses, since there has not been sufficient time to putall of the necessary controls in place, test the controls, remediate theoutstanding issues and test the controls again to be certain the improvementsare permanent.  

 

We may be required tospend a substantial amount of management time and resources and incursignificant costs in order to comply with laws, regulations and standardsrelating to corporate governance and public disclosure, including theSarbanes-Oxley Act of 2002. In particular, Section 404 of theSarbanes-Oxley Act of 2002 will require our management’s annual review andevaluation of our internal control over financial reporting, commencing withour Annual Report on Form 10-KSB for fiscal year ended January 31,2008 and attestations by our independent public accounting firm as to theeffectiveness of our internal control over financial reporting for the fiscalyear ended January 31, 2009.

 

Our process of reviewing,documenting and testing our internal controls over financial reporting may causea significant strain on members of our management, diverting them from theirdaily business focus; and strain on our information systems and other resources.We likely will have to hire additional personnel and use outside legal,accounting and advisory services and software. In addition, the fees to ourindependent public accounting firm will increase, as that firm performs thereview work necessary for its attestation. Even with those expenditures, we maybe unable to complete our assessment or obtain an unqualified attestation as tothe sufficiency of our internal controls.

 

Further, we or ourindependent registered public accounting firm may again identify significantdeficiencies or material weaknesses in our internal control over financialreporting. If we fail to maintain the adequacy of our internal controls, we maynot be able to conclude on an ongoing basis that we have effective internalcontrol over financial reporting. If we fail to maintain the adequacy of ourinternal controls or fail to implement any required new or improved controls,this could have a material adverse effect on our business, financial positionand results of operations.

 

You should also note thatinternal control over financial reporting may not prevent or detect misstatementsbecause of its inherent limitations, including the possibility of human error,circumvention or overriding of controls, or fraud. Therefore, even effectiveinternal controls can provide only reasonable assurance with respect to thepreparation and fair presentation of financial statements. In addition,projections of any evaluation of effectiveness of internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the applicable policies or procedures may deteriorate.

 

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We do not expect that ourdisclosure controls and procedures or our internal control over financialreporting will necessarily prevent all fraud and material error. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts.

 

Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that we have detected all control issues and instances of fraud, ifany. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerrors or mistakes. Additionally, controls can be circumvented by theindividual acts of certain persons, by collusion of two or more persons, or bymanagement override of the internal control. The design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time, controlsmay become inadequate because of changes in conditions or deterioration in thedegree of compliance with the applicable policies.

 

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# **PART II— OTHER INFORMATION**

#  

## **Item 1. Legal Proceedings**

##  

On June 28, 2007, inthe case titled Michael Racusin, d/b/a M. Racusin & Company v.American Wagering, Inc. *et al*.,Case No. 05-15969, the United States Court of Appeals for the NinthCircuit (the “9th Circuit”)issued a decision that reversed the ruling in our favor by the BankruptcyAppellate Panel for the Ninth Circuit (the “BAP”) on the issue of whether a July 8,2003 judgment (the “Judgment”) by the United States District Court for theDistrict of Nevada in favor of Michael Racusin, d/b/a M. Racusin &Company (“Racusin”), in a breach of contract action against us was subject tosubordination under Section 510(b) of the U.S. Bankruptcy Code (the “Code”)pursuant to our prior plan of reorganization under Chapter 11 of the Code (the “Plan”).In all material respects, the 9th Circuit’sJune 28, 2007 decision has the same effect as its October 6, 2006decision in which it ruled that the Judgment was not subject to subordination(as to which we had filed a petition for rehearing), but the 9th Circuit withdrew the latterdecision and replaced it with the June 28, 2007 decision. The 9th Circuit also ruled that nofurther petitions for rehearing may be filed.

 

As a result of the 9th Circuit’s reversal of the BAP’sruling, and in accordance with our September 3, 2004 Settlement Agreementwith Racusin described and included as Exhibit 99.1 in our Form 8-Kfiled on September 7, 2004 (the “Settlement Agreement”), we estimate thatour future payment obligations to (or for the benefit of) Racusin for thebalance of our current fiscal year and for subsequent fiscal years will beapproximately as follows:

 
| **Period**                               | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------|------------|--------------|------------|-----------|------------|
| August 2007  to January 2008   |       | $             | 1,095,035  |         | $          | 67,213    |       | $ | 1,162,248 |   |
| February 2008  to January 2009 |       | 750,000       |       | 103,099      |       | 853,099   |       |
| February 2009  to January 2010 |       | 300,000       |       | 71,310       |       | 371,310   |       |
| February 2010  to January 2011 |       | 300,000       |       | 47,310       |       | 347,310   |       |
| February 2011  to January 2012 |       | 300,000       |       | 23,310       |       | 323,310   |       |
| February 2012  to July 2012    |       | 130,000       |       | 2,671        |       | 132,671   |       |
| Total future  payments                   |       | $             | 2,875,035  |         | $          | 314,913   |       | $ | 3,189,948 |   |

 

The $2,875,035 totalPrincipal amount reported in the table above equals the $2,800,000 debt owed toRacusin under the Settlement Agreement (giving effect to the 9th Circuit’s decision), minus$427,323 we paid to Racusin during our fiscal years ended January 31, 2005and 2006, plus interest calculated on a daily basis from March 11,2005 (the date we consummated the Plan and emerged from Chapter 11 proceedingsunder the Code) through July 31, 2007.

 

The 9th Circuit issued its originaldecision reversing the BAP’s ruling during our fiscal year ended January 31,2007. For information concerning the effects of that decision on our 2007fiscal year’s financial statements (which are not changed by the 9th Circuit’s June 28, 2007decision), please see Part I, Item 3 - “Legal Proceedings” andour financial statements and notes thereto in our January 31, 2007 Form 10-KSB/A.For the period from February 1 to July 31, 2007, we are recordinglitigation judgment expense of $111,811 to account for accrued interest on ourdebt to Racusin for this period. That amount is included in the Principalcolumn of the table above because that table reports our indebtedness as of August 1,2007, after giving effect to the accrual of interest for the six months ended July 31,2007. In future periods we will record litigation judgment expense to accountfor our future interest payment obligations, as estimated in the Interestcolumn of the table above.

 

A hearing was scheduledfor September 12, 2007 in order to determine the manner and timing of thepayments, however, we received notice on September 7, 2007 that thebankruptcy court continued the matter until November 2, 2007. On November 2,2007, the bankruptcy court heard argument to determine whether the Companycould withdraw its 250,000 shares of common stock and begin depositing fundspursuant to the Exhibit 2, revised payment schedule to the SettlementAgreement attached to the Company’s motion (the “Revised Payment Schedule”). Thebankruptcy court ordered in pertinent part that pursuant to the Order ApprovingPlaintiff’s Motion

 

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to Deposit Sharesof Stock with the Clerk of the Court Pursuant to Fed. R. Bankr. P. 7067 (“InterpleaderOrder”) previously entered into by the bankruptcy court on August 2, 2005,(i) we are to deposit with the bankruptcy court amounts provided for inRevised Payment Schedule commencing November 6, 2007, less sumsdistributed to any lienholders of the Racusin Claim, and continuing each month;and (ii) the clerk of the court is ordered to release and return ourpreviously deposited 250,000 shares of common stock deposited pursuant to theInterpleader Order. The Interpleader Order does not preclude either party fromrequesting the court to modify the Revised Payment Schedule in the future.

 

## **Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.**

##  

Not applicable.

 

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

##  

Not applicable.

 

## **Item 4. Submission of Matters to a Vote ofSecurity Holders.**

##  

Not applicable.

 

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

##  

Not applicable.

 

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## **Item 6. Exhibits.**

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                            |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                       |
| 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 therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| **AMERICAN WAGERING, INC.**                         |                    |
|-----------------------------------------------------|-------------------------|
|                                                |                    |
| Dated:                                              | December 17,  2007 |   |
|                                                |                    |
| /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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