**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly periodended:  July 31, 2009**

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

** **

**For the transition period from:                   to                   **

** **

**Commission filenumber:  000-20685**

 

**AMERICAN WAGERING, INC.**

(Exact name of registrant asspecified in its charter)

** **

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

 

**702-735-0101**

(Registrant’stelephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.** **Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T §232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files) Yes  o    No  o

 

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

 

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

 

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

 

**APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY PROCEEDINGS DURING**

**THE PRECEDING FIVE YEARS**

 

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

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock as of the latest practicable date:****Asof September 8, 2009, there were 8,129,879 shares of common stock, parvalue $0.01, outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I —  FINANCIAL INFORMATION**                                                            | **3**  |
|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     |   |
| Item 1. Consolidated Financial Statements                                                                | 3      |
|                                                                                                     |   |
| Consolidated Balance Sheets as of July 31, 2009  (Unaudited) and January 31, 2009              | 3      |
|                                                                                                     |   |
| Consolidated Statements of Operations for the Three  and Six Months Ended July 31, 2009 (Unaudited) | 4      |
|                                                                                                     |   |
| Consolidated Statements of Cash Flows for the Six  Months Ended July 31, 2009 and 2008 (Unaudited)  | 5      |
|                                                                                                     |   |
| Notes to Consolidated Financial Statements (Unaudited)                                                   | 6      |
|                                                                                                     |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations      | 11     |
|                                                                                                     |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                      | 19     |
|                                                                                                     |   |
| Item 4T. Controls and Procedures                                                                         | 19     |
|                                                                                                     |   |
| **PART II  — OTHER INFORMATION**                                                               | **20** |
|                                                                                                     |   |
| Item  1. Legal Proceedings                                                                               | 20     |
|                                                                                                     |   |
| Item 1A. Risk Factors                                                                                    | 21     |
|                                                                                                     |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                     | 21     |
|                                                                                                     |   |
| Item 3. Defaults Upon Senior Securities                                                                  | 21     |
|                                                                                                     |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                             | 21     |
|                                                                                                     |   |
| Item  5. Other Information                                                                               | 21     |
|                                                                                                     |   |
| Item 6. Exhibits                                                                                         | 21     |

 

 

2

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**PART I — FINANCIAL INFORMATION**

** **

**Item1.  Financial Statements.**

 

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **July 31,   2009** | ** **    | **January 31,   2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**          | ** **    | ** **                  | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **               | ** **    | ** **                  | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                     |          |                        |       |
| Cash and Equivalents                                                                                                                             |       | $                        | 1,223,459     |                        | $          | 3,357,978 |   |
| Restricted Cash                                                                                                                                  |       | 1,276,548                |          | 1,298,463                   |       |
| Accounts Receivable                                                                                                                              |       | 327,372                  |          | 219,264                     |       |
| Inventories                                                                                                                                      |       | 238,767                  |          | 219,601                     |       |
| Deferred Tax Assets, net  of allowance                                                                                                           |       | 369,000                  |          | 369,000                     |       |
| Prepaid Expenses                                                                                                                                 |       | 291,669                  |          | 379,910                     |       |
| ** **                                                                                                                                       | ** ** | **3,726,815**            | ** **    | **5,844,216**               | ** ** |
|                                                                                                                                             |       |                     |          |                        |       |
| Property and Equipment,  net of accumulated depreciation and amortization                                                                        |       | 3,704,861                |          | 4,171,160                   |       |
| Goodwill                                                                                                                                         |       | 103,725                  |          | 103,725                     |       |
| Other                                                                                                                                            |       | 238,577                  |          | 321,222                     |       |
| ** **                                                                                                                                       | ** ** | **$**                    | **7,773,978** | ** **                  | **$**      | **10,440,323** | ** ** |
|                                                                                                                                             |       |                     |          |                        |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **               | ** **    | ** **                  | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                     |          |                        |       |
|                                                                                                                                             |       |                     |          |                        |       |
| Short-Term Debt                                                                                                                                  |       | $                        | 375,000       |                        | $          | 499,295 |   |
| Current Portion of  Long-Term Debt                                                                                                               |       | 654,609                  |          | 612,759                     |       |
| Accounts Payable                                                                                                                                 |       | 1,100,196                |          | 1,191,649                   |       |
| Accrued Expenses                                                                                                                                 |       | 660,287                  |          | 652,439                     |       |
| Unpaid Winning Tickets                                                                                                                           |       | 447,358                  |          | 1,193,900                   |       |
| Customer Deposits and  Other                                                                                                                     |       | 731,399                  |          | 2,150,230                   |       |
| ** **                                                                                                                                       | ** ** | **3,968,849**            | ** **    | **6,300,272**               | ** ** |
|                                                                                                                                             |       |                     |          |                        |       |
| Long-Term Debt, less  current portion                                                                                                            |       | 2,669,863                |          | 3,075,244                   |       |
| Redeemable Series A  Preferred Stock (3,238 shares)                                                                                         |       | 323,800                  |          | 323,800                     |       |
| Other                                                                                                                                            |       | 366,277                  |          | 530,071                     |       |
|                                                                                                                                             |       | 7,328,789                |          | 10,229,387                  |       |
|                                                                                                                                             |       |                     |          |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                     |          |                        |       |
| Series A Preferred  Stock — 10.00% cumulative; $100.00 par and liquidation value; 18,924 shares  authorized; 10,924 shares outstanding |       | 1,092,400                |          | 1,092,400                   |       |
| Common Stock - $0.01 par  value; 25,000,000 shares authorized; 8,129,879 shares issued                                                           |       | 81,299                   |          | 81,299                      |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,502,279               |          | 12,361,309                  |       |
| Deficit                                                                                                                                          |       | (12,903,296              | )             | (12,996,579                 | )          |
| Treasury Stock, at cost  (61,100 common shares)                                                                                                  |       | (327,493                 | )             | (327,493                    | )          |
| ** **                                                                                                                                       | ** ** | **445,189**              | ** **    | **210,936**                 | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                    | **7,773,978** | ** **                  | **$**      | **10,440,323** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

3

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** **

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

### **(UNAUDITED)**

 
| ** **                              | ** ** | **For the Three Months Ended   July 31,** | ** ** | **For the Six Months Ended   July 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                       | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| **REVENUES:**                           |       |                                           |       |                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                                |       | $                                              | 1,890,533  |                                         | $          | 1,718,427 |   | $ | 3,896,778 |   | $ | 4,420,248 |   |
| Hotel Casino                            |       | 665,827                                        |       | 764,704                                      |       | 1,229,174 |   | 1,392,235 |   |
| Systems                                 |       | 806,608                                        |       | 1,038,115                                    |       | 1,569,805 |   | 1,968,223 |   |
| ** **                              |       | 3,362,968                                      |       | 3,521,246                                    |       | 6,695,757 |   | 7,780,706 |   |
| **OPERATING COSTS AND EXPENSES:**       |       |                                           |       |                                         |       |   |   |   |   |
| **Direct Costs:**                       |       |                                           |       |                                         |       |   |   |   |   |
| Wagering                                |       | 1,381,826                                      |       | 1,993,195                                    |       | 2,995,617 |   | 4,202,124 |   |
| Hotel Casino                            |       | 477,275                                        |       | 551,226                                      |       | 922,066 |   | 1,055,829 |   |
| Systems                                 |       | 187,748                                        |       | 290,704                                      |       | 385,138 |   | 590,485 |   |
| ** **                              |       | 2,046,849                                      |       | 2,835,125                                    |       | 4,302,821 |   | 5,848,438 |   |
| **Operating Expenses:**                 |       |                                           |       |                                         | ** ** | ** ** |   |   |   |
| Research and Development                |       | 132,065                                        |       | 135,947                                      |       | 270,910 |   | 302,797 |   |
| Selling, General and  Administrative    |       | 744,167                                        |       | 967,778                                      |       | 1,367,916 |   | 1,749,431 |   |
| Depreciation and Amortization           |       | 245,615                                        |       | 254,305                                      |       | 497,105 |   | 511,809 |   |
| ** **                              |       | 1,121,847                                      |       | 1,358,030                                    |       | 2,135,931 |   | 2,564,037 |   |
|                                    |       | 3,168,696                                      |       | 4,193,155                                    |       | 6,438,752 |   | 8,412,475 |   |
| **OPERATING INCOME (LOSS)**             |       | 194,272                                        |       | (671,909                                     | )          | 257,005 |   | (631,769 | ) |
|                                    |       |                                           |       |                                         |       |   |   |   |   |
| **OTHER INCOME (EXPENSE):**             |       |                                           |       |                                         | ** ** | ** ** |   |   |   |
| Interest Income                         |       | 1,429                                          |       | 13,886                                       |       | 7,042 |   | 27,496 |   |
| Interest Expense                        |       | (69,581                                        | )          | (69,569                                      | )          | (139,341 | ) | (132,578 | ) |
| Litigation Expense                      |       | (16,815                                        | )          | (19,152                                      | )          | (26,417 | ) | (44,069 | ) |
| Other                                   |       | 17,732                                         |       | 33,431                                       |       | 65,257 |   | 51,779 |   |
|                                    |       | (67,235                                        | )          | (41,404                                      | )          | (93,459 | ) | (97,372 | ) |
| ** **                              |       |                                           |       |                                         | ** ** | ** ** |   |   |   |
| **NET INCOME (LOSS)**                   |       | $                                              | 127,037    |                                         | $          | (713,313 | ) | $ | 163,546 |   | $ | (729,141 | ) |
| ** **                              |       |                                           |       |                                         | ** ** | ** ** |   |   |   |
| **NET INCOME (LOSS) PER COMMON  SHARE** |       |                                           |       |                                         |       |   |   |   |   |
| **BASIC**                               |       | $                                              | 0.01       |                                         | $          | (0.09 | ) | $ | 0.01 |   | $ | (0.10 | ) |
| **DILUTED**                             |       | $                                              | 0.01       |                                         | $          | N/A |   | $ | 0.01 |   | $ | N/A |   |

 

**See Notes to ConsolidatedFinancial Statements**

 

4

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**AMERICANWAGERING, INC. AND SUBSIDIARIES**

**CONDOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

** **
| ** **                                                         | ** ** | **For the Six Months Ended  July 31,** | ** **     |
|--------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                         | ** ** | **2009**                                    | ** **     | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Operating Activities**                                           | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Net cash used in operating  activities**                         | ** ** | **$**                                       | **(1,720,468** | **)** | **$** | **(2,051,515** | **)** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Investing Activities**                                           | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| Gross increases in  restricted cash                                |       | (6,846                                      | )              | (421,948 | ) |
| Withdrawal of restricted  cash                                     |       | 28,761                                      |           | 393,083 |   |
| Proceeds from the sale of  property and equipment                  |       | —                                      |           | 1,500 |   |
| Purchase of property and  equipment                                |       | (27,877                                     | )              | (200,531 | ) |
| **Net cash used in investing  activities**                         | ** ** | **(5,962**                                  | **)**          | **(227,896** | **)** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Financing Activities**                                           |       |                                        |           |   |   |
| Repayment of borrowings                                            |       | (338,531                                    | )              | (2,092,623 | ) |
| Proceeds from borrowings                                           |       | 705                                         |           | 2,517,657 |   |
| Dividends on preferred  stock                                      |       | (70,263                                     | )              | (70,414 | ) |
| **Net cash provided by (used in)  financing activities**           | ** ** | **(408,089**                                | **)**          | **354,620** | ** ** |
|                                                               |       |                                        |           |   |   |
| **NET DECREASE IN CASH AND  EQUIVALENTS**                          | ** ** | **(2,134,519**                              | **)**          | **(1,924,791** | **)** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, BEGINNING  OF PERIOD**                     | ** ** | **3,357,978**                               | ** **     | **3,316,595** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, END OF  PERIOD**                           | ** ** | **$**                                       | **1,223,459**  | ** ** | **$** | **1,391,804** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                           | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| Cash paid for interest                                             | ** ** | **$**                                       | **85,565**     | ** ** | **$** | **91,488** | ** ** |
| ** **                                                         | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **NON-CASH INVESTING ACTIVITY:**                                   | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| Property and equipment  acquired with bank and/or vendor financing | ** ** | **$**                                       | **—**     | ** ** | **$** | **43,492** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

5

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**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

### **(UNAUDITED)**

###  

**Threeand Six Months Ended July 31, 2009**

** **

**1.  Basis of Presentation**

** **

The accompanying unaudited interim consolidatedfinancial statements of American Wagering, Inc. and its subsidiaries(collectively “the Company” or “AWI”) have been prepared in accordance with theinstructions to Form 10-Q as published by the Securities and ExchangeCommission (“SEC”).  The financialstatements do not include all of the information and disclosures required bygenerally accepted accounting principles for annual financial statements.  All significant inter-company accounts andtransactions have been eliminated in consolidation.  In the opinion of management, all adjustmentsnecessary for a fair presentation have been included.  Due to seasonality and other factors, resultsof operations for any interim period are not necessarily indicative of expectedannual results.  Management has evaluatedthe consolidated financial statements for subsequent events through September 14,2009, which was the date the consolidated financial statements were issued, andthis Form 10-Q was filed with the SEC. These unaudited interimconsolidated financial statements should be read in conjunction with theaudited annual consolidated financial statements of the Company, and therelated notes, included in the Company’s Annual Report on Form 10-K filedon May 4, 2009, with the SEC, from which the balance sheet information asof January 31, 2009 was derived.

 

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

** **

Basic net income (loss) per common share is calculatedbased on the weighted average number of shares of common stock outstandingduring the reporting period.  Diluted netincome per common share is ordinarily calculated giving effect to allpotentially dilutive common shares, assuming such shares were outstandingduring the reporting period.  However,there is no calculation made or presented for diluted net loss per common sharefor loss periods, since the effect of including potentially dilutive commonshares would be anti-dilutive because of the losses.  Potentially dilutive stock options for commonshares of 1,600 and 2,400 for the three and six months ended July 31,2008, respectively,  were not used tocompute diluted loss per share because the effects would be anti-dilutive.  In addition, other stock options for commonshares of 648,099 and 746,899 were outstanding for the six months ended July31, 2009 and 2008, that were not “in-the-money” and therefore excluded from thecalculation.

 

The following is a reconciliation of the numeratorsand denominators of the net income (loss) per common share computations for theperiods presented.

 
| ** **                                                       | ** ** | **Numerator** | ** **    |
|------------------------------------------------------------------|------------|---------------|---------------|
| ** **                                                       | ** ** | **2009**      | ** **    | **2008** | ** ** |
| **Three Months Ended July 31,**                             |       |          |          |   |   |
| ** **                                                       |       |          |          |   |   |
| Net income (loss)                                                |       | $             |  127,037 |   | $ |  (713,313 | ) |
| Less preferred stock  dividends                                  |       | (35,830       | )             | (35,594 | ) |
| Net income (loss)  available to common shares, basic and diluted |       | $             |  91,207  |   | $ |  (748,907 | ) |

 
| ** **                                           | ** ** | **Denominator** | ** **      |
|------------------------------------------------------|------------|-----------------|-----------------|
| ** **                                           | ** ** | **2009**        | ** **      | **2008** | ** ** |
| Weighted average common  shares outstanding, basic   |       | $               |  8,068,779 |   | $ |  8,068,779 |   |
| Effect of dilutive stock  options                    |       | 80              |            | — |   |
| Weighted average common  shares outstanding, diluted |       | $               |  8,068,859 |   | $ |  8,068,779 |   |
|                                                 |       |            |            |   |   |
| Net income (loss) per  common share                  |       |            |            |   |   |
| Basic                                                |       | $               |  0.01      |   | $ |  (0.09 | ) |
| Diluted                                              |       | $               |  0.01      |   | $ |  N/A |   |

 
| ** **                                                       | ** ** | **Numerator** | ** **    |
|------------------------------------------------------------------|------------|---------------|---------------|
| ** **                                                       | ** ** | **2009**      | ** **    | **2008** | ** ** |
| **Six Months Ended July 31,**                               |       |          |          |   |   |
| ** **                                                       |       |          |          |   |   |
| Net income (loss)                                                |       | $             |  163,546 |   | $ |  (729,141 | ) |
| Less preferred stock  dividends                                  |       | (70,263       | )             | (70,414 | ) |
| Net income (loss) available to common shares,  basic and diluted |       | $             |  93,283  |   | $ |  (799,555 | ) |

 

6

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| ** **                                           | ** ** | **Denominator** | ** **      |
|------------------------------------------------------|------------|-----------------|-----------------|
| ** **                                           | ** ** | **2009**        | ** **      | **2008** | ** ** |
| Weighted average common  shares outstanding, basic   |       | $               |  8,068,779 |   | $ |  8,068,779 |   |
| Effect of dilutive stock  options                    |       | 150             |            | — |   |
| Weighted average common  shares outstanding, diluted |       | $               |  8,068,929 |   | $ |  8,068,779 |   |
|                                                 |       |            |            |   |   |
| Net income (loss) per  common share                  |       |            |            |   |   |
| Basic                                                |       | $               |  0.01      |   | $ |  (0.10 | ) |
| Diluted                                              |       | $               |  0.01      |   | $ |  N/A |   |

 

**3.  Income Taxes**

 

At July 31, 2009, the Company had federal tax netoperating loss (“NOL”) carryforwards available to potentially reduce future taxobligations in the aggregate amount of approximately $7.0 million, of whichapproximately $1.3 million expires in 2019. In assessing the realizability of deferred tax assets, which resultedprimarily from the NOLs, the Company considers whether it is more likely thannot that some portion or all of the deferred tax assets will not berealized.  The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible.

 

Management believes that, subject to the satisfactorynegotiation of a settlement with Racusin, or success on the Company’sprocedural alternatives (Note 4), the Company will be profitable for at leastthe short-term future and that it is therefore more likely than not that theCompany’s deferred tax asset of $369,000, net of the valuation allowanceprovided, will be realized.

 

The Company’s estimatedannual effective tax rate of zero for the interim periods presented differsfrom statutory tax rates primarily due to the expected utilization of NOLcarryforwards or changes in the valuation allowance for deferred tax assets.

 

**4.  Contingencies**

** **

Litigation expense included in other income (expense)consists of judgment interest incurred on our previously recorded obligationdue to Michael Racusin, for the periods presented.

 

As of July 31, 2009, the aggregate recordedprovisions equal to the lower end of the estimated probable loss range for thefollowing matters in litigation or other disputes, included in long-term debt,was $307,642, excluding future legal and related defense costs and judgmentinterest.

 

**Racusin**

** **

The Company and Racusin entered into the SettlementAgreement on September 3, 2004.  Onor about March 11, 2005, the Company consummated its Plan ofReorganization and emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved anInterpleader Order, whereby pursuant to the Settlement Agreement, the Companyagreed to place 250,000 shares of common stock with the clerk of the courtas payment of the Racusin Claim while Racusin pursued its appeal of theBankruptcy Appellate Panel’s decision in our favor to the 9th CircuitCourt of Appeals.  The Interpleader Orderfurther stated that the Company’s stock would be substituted with cash paymentin the event that the 9th Circuit reversed the Bankruptcy Appellate Panelwhich decision was subsequently reversed, leading to the November 2, 2007hearing with the Bankruptcy Court.  On November 2,2007, the Bankruptcy Court heard an argument to determine whether the Companycould withdraw its 250,000 shares of common stock and whether it couldbegin depositing funds pursuant to a schedule attached to the Company’s motionwhich calculated estimated post-judgment simple interest at 8% per annum, from March 11,2005, without taking into consideration the Interpleader Order of July 27,2005, which was still in effect.  Thatis, by calculating post-judgment interest during the same time that our stockwas held by the Court, we previously accrued interest over a period of time forwhich interest we believed should not be accrued pursuant to the InterpleaderOrder.

 

As previously reported, on March 17, 2008, theCompany filed with the Bankruptcy Court what it believed was an appropriatelycorrected amortization schedule (“Corrected Amortization Schedule”) relating tothe calculation of pre-judgment interest occurring under the settlementagreement.  A hearing was held on May 8,2009, regarding a Motion for Summary Judgment filed by Racusin related to theCompany’s filing of the Corrected Amortization Schedule.    The Court entered its order on August 18,2009, granting the Motion for Summary Judgment in favor of Racusin, awardingdamages as of May 1, 2009.  Thetotal damages awarded 

 

7

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pursuant to the orderwere $3,935,932.70 of which $2,306,649.25 has already been paid (including$1,806,041.80 paid into the bankruptcy court registry).  Therefore, as of May 1, 2009,$1,629,283.45 at 12% interest per annum is deemed due and payable immediately,less any principal amounts deposited into the bankruptcy court’s registry on orafter May 1, 2009 which amounts to $125,000, through September 1,2009.  The remaining amount of$1,504,283.45 exceeds the existing recorded current liability of $300,000.00,which is in accordance with management’s interpretation of the settlementagreement and related proceedings.  TheCompany is attempting to negotiate a settlement with Racusin and, based onlegal arguments that management believes to have merit, is considering itsprocedural alternatives.  Managementintends to file a motion for a rehearing, or in the alternative, a motion forreconsideration and if unsuccessful, may file an appeal to the U.S. DistrictCourt of Nevada, which may require the posting of an appeal bond.  In the event the Company is unable tonegotiate a settlement under acceptable terms, post an appeal bond, or is alsounsuccessful as to its other procedural alternatives, it would likely be unableto satisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending, in part, on the course of action pursuedby Racusin in this matter and the Company’s ability to finance the judgment.

 

**Internet Sports International, Ltd.**

** **

This case has been removed from arbitration andrecalendared in the District Court of Clark County, Nevada; however, there havebeen no material legal changes for this matter during the six months ended July 31,2009 from the fiscal year ended January 31, 2009.

 

**Economic Conditions and Related Risks and Uncertainties**

** **

The United States is currently experiencing a severeeconomic downturn accompanied by, among other things, weakness in thecommercial and investment banking systems resulting in reduced credit andcapital financing availability, and highly curtailed gaming and otherrecreational activities, and general discretionary consumer spending, and isalso engaged in war, all of which are likely to continue to have far-reachingeffects on economic conditions in the country for an indeterminate period.  The effects and duration of thesedevelopments and related risks and uncertainties on our future operations andcash flows, including, our principal officer’s ability to continue to providefinancial support to the Company, as in the past, and other access to capitalor credit financing, cannot be estimated at this time but may likely besignificant.

 

**Uninsured Cash Deposits**

** **

The Company often carries cash and cash equivalents ondeposit with financial institutions substantially in excess offederally-insured limits, and the risk of losses related to such concentrationsmay be increasing as a result of recent economic developments and uncertaintiesdiscussed in the foregoing paragraph. The extent of any loss that might be incurred as a result of uninsureddeposits in the event of a future failure of a bank or other financialinstitutions, if any, is not subject to estimation at this time.

 

Restricted Cash Requirements (Regulation 22.040)

 

Nevada Gaming Commission (“Commission”) Regulation22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, suretybonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstandingwagering liability including unpaid winning tickets, future tickets andtelephone account deposits.  From November 16,2007 to May 8, 2009, we maintained a Regulation 22.040 reserve in the formof a surety bond issued by Fidelity and Deposit Company of Maryland (asubsidiary of Zurich American Insurance) (“Fidelity”) secured by $1.2 millionin cash deposits.  The cash deposits, inthe form of one certificate of deposit and one checking account, are held atGreat Basin Bank of Nevada (now Nevada State Bank) along with an irrevocableletter of credit, also with Great Basin Bank of Nevada (now Nevada State Bank).

 

The Company maintained Regulation 22.040 cashreserves of $1.8 million through August 15, 2009, as approved by theCommission in April 2009.  The reserve is collateralized by $1.2million of restricted cash deposits and an assumed “floating” $600,000availability of other funds.  The amount of the required reserve and themethodology for determining the amount is currently a topic of discussionbetween management and the Nevada Gaming Control Board.  With increasedwagering associated with the football season that is now underway, theCommission may require an increase to the reserve amount.    Ifthe required reserve amount is increased substantially and/or is notcommensurate with the seasonality of the Company’s wagering business, theCompany may be unable to either fund the reserve or, alternatively, obtain asurety bond to satisfy the requirement.  The possible effects of notmeeting the requirement may include, but are not necessarily limited to, areduction in the number of the Company’s race/sports locations and/or theelimination or reduction of telephone wagering accounts which would adverselyaffect the Company’s operating results and cash flows.

 

8

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** **

**5.  Stock Options**

 

Activity related to both the employee and directors’stock option plans for the six months ended July 31, 2009 and 2008 was asfollows:

 
| ** **                        | ** ** | **Option  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------------------|------------|
| Balance at  February 1, 2009 |       | 709,299            |       | $                                      |  1.78 |   |
| Granted                           |       | —             |       |                                   |       |
| Exercised                         |       | —             |       |                                   |       |
| Forfeited or canceled             |       | (62,000            | )          | (1.27                                  | )          |
|                              |       |               |       |                                   |       |
| Balance at July 31,  2009    |       | 647,299            |       | $                                      |  1.83 |   |
|                              |       |               |       |                                   |       |
| Balance at  February 1, 2008 |       | 749,299            |       | $                                      |  1.75 |   |
| Granted                           |       | —             |       |                                   |       |
| Exercised                         |       | —             |       |                                   |       |
| Forfeited or canceled             |       | —             |       |                                   |       |
|                              |       |               |       |                                   |       |
| Balance at July 31,  2008    |       | 749,299            |       | $                                      |  1.75 |   |

 

Stock options exercisable and available for futuregrants for both current stock option plans as of July 31, 2009 are asfollows:

 
| ** **                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining   Life** | ** ** |
|------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|
| Exercisable                  |       | 577,300    |       | $                                       |  1.86 |                                          | 3.93 years |   |
| Available for future  grants |       | 310,767    |       | —                                  |       | —                                        |       |
|                              |            |            |            |                                         |            |                                               |            |  |

 

Non-cash stock-based compensation expense recorded inthe line item “Selling, General and Administrative Expenses” on theconsolidated income statements for the three months ended July 31, 2009and 2008 was $28,913 and $26,615, respectively. Non-cash stock-based compensation expense recorded “Selling, General andAdministrative Expenses” for the six months ended July 31, 2009 and 2008was $37,722 and $43,811, respectively.

 

**6.  Business Segments**

** **

The Company reports the results of operations throughthree operating segments as follows:

 
| ** **                   | ** ** | **For the Three Months Ended   July 31,** | ** **      | **For the Six Months Ended   July 31,** | ** ** |
|------------------------------|------------|------------------------------------------------|-----------------|----------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                       | ** **      | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues:**                |       |                                           |            |                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                     |       | $                                              |  1,890,533 |                                         | $          |  1,718,427 |   | $ |  3,896,778 |   | $ |  4,420,248 |   |
| Hotel Casino                 |       | 665,827                                        |            | 764,704                                      |       | 1,229,174 |   | 1,392,235 |   |
| Systems                      |       | 806,608                                        |            | 1,038,115                                    |       | 1,569,805 |   | 1,968,223 |   |
| ** **                   |       | $                                              |  3,362,968 |                                         | $          |  3,521,246 |   | $ |  6,695,757 |   | 7,780,706 |   |
| **Operating income (loss):** |       |                                           |            |                                         |       |   |   |   |   |
| Wagering                     |       | $                                              |  121,773   |                                         | $          |  (769,777 | ) | $ |  191,352 |   | $ |  (657,495 | ) |
| Hotel Casino                 |       | 47,797                                         |            | 50,958                                       |       | 27,421 |   | 14,380 |   |
| Systems                      |       | 24,702                                         |            | 46,910                                       |       | 38,232 |   | 11,346 |   |
|                         |       | 194,272                                        |            | (671,909                                     | )          | 257,005 |   | (631,769 | ) |
| **Other expense, net**       |       | (67,235                                        | )               | (41,404                                      | )          | (93,459 | ) | (97,372 | ) |
| **Net Income (Loss)**        |       | $                                              |  127,037   |                                         | $          |  (713,313 | ) | $ |  163,546 |   | $ |  (729,141 | ) |

 

Additional information for the Hotel Casino segmentfollows:

 

9

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| ** **                           | ** ** | **For the Three Months Ended   July 31,** | ** **    | **For the Six Months Ended   July 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------|---------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                       | ** **    | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues:**                        |       |                                           |          |                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                               |       | $                                              |  293,495 |                                         | $          |  341,152 |   | $ |  600,274 |   | $ |  684,997 |   |
| Hotel                                |       | 170,433                                        |          | 189,322                                      |       | 272,220 |   | 302,588 |   |
| Food/Beverage                        |       | 201,899                                        |          | 234,230                                      |       | 356,680 |   | 404,650 |   |
| ** **                           |       | $                                              |  665,827 |                                         | $          |  764,704 |   | $ |  1,229,174 |   | $ |  1,392,235 |   |
| **Direct Costs and Expenses:**       |       |                                           |          |                                         |       |   |   |   |   |
| Casino                               |       | 127,740                                        |          | 143,401                                      |       | 253,271 |   | 293,332 |   |
| Hotel                                |       | 49,839                                         |          | 58,800                                       |       | 87,184 |   | 106,343 |   |
| Food/Beverage                        |       | 199,138                                        |          | 239,640                                      |       | 377,635 |   | 442,263 |   |
| Unallocated                          |       | 100,558                                        |          | 109,386                                      |       | 203,976 |   | 213,892 |   |
|                                 |       | 477,275                                        |          | 551,227                                      |       | 922,066 |   | 1,055,830 |   |
| Selling, General and  Administrative |       | 77,656                                         |          | 93,430                                       |       | 151,177 |   | 183,851 |   |
| Depreciation and  Amortization       |       | 63,099                                         |          | 69,089                                       |       | 128,510 |   | 138,174 |   |
|                                 |       | 618,030                                        |          | 713,746                                      |       | 1,201,753 |   | 1,377,855 |   |
| **Operating Income**                 |       | $                                              |  47,797  |                                         | $          |  50,958 |   | $ |  27,421 |   | $ |  14,380 |   |

 

10

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** **

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

##  

The following discussion and analysis should be readtogether with our unaudited consolidated financial statements and theaccompanying notes.  This discussioncontains forward-looking statements, within the meaning of Section 27A ofthe Securities Act of 1933, as amended, Section 21E of the SecuritiesExchange Act of 1934, as amended, and the Private Securities Litigation ReformAct of 1995, including statements regarding our expected financial position,business and financing plans.  Some ofthe forward-looking statements can be identified by the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,”“plans,” “estimates,” “anticipates,” or other comparable terms.  Forward-looking statements involve inherentrisks and uncertainties which could cause actual results to differ materiallyfrom those in the forward-looking statement including those discussed hereinand elsewhere in our Form 10-K for the year ended January 31, 2009,particularly under the heading “Risk Factors.” We caution readers not to place undue reliance upon any suchforward-looking statements, which speak only as of the date made.  We do not intend, and undertake no obligationto update our forward-looking statements to reflect future events orcircumstances.

 

**Definitions. **For the purposes of this report, the following termshave the following meanings:

 

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

 

“AWI” means American Wagering, Inc.

 

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

 

“AWIM” means AWI Manufacturing, Inc., awholly-owned subsidiary of AWI.

 

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

 

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

 

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

 

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

 

**Overview. **Our primary operating strategies for theforeseeable future are to focus on our core businesses relating to the race andsports industry, and the operation of Sturgeon’s.  Our intentions regarding the followingsubsidiaries are to continue:

 

·                  Leroy’s - operating existing sports books, generating revenuefrom customer wagers less pay outs, adding new books where and whenappropriate, and continuing to become more efficient in order to reduceexpenses.  We periodically review ourexisting Leroy’s locations in order to close those locations that are notoperating efficiently.  Based on ourstrategy, the number of race and sports books operated by Leroy’s may increaseor decrease in the future, due to the closure of unprofitable locations or hostproperties, closures due to other factors beyond our control and/or thepossible opening of new locations with greater potential forprofitability.  There is no assurance that Leroy’s will be able to add newlocations and/or that any new locations so added will be profitable.

 

·                  CBS — developing, selling and maintaining computerizedrace and sports wagering systems for the gaming industry and seeking strategicinternational alliances with third party gaming suppliers and/or gamingoperators that desire to utilize our expertise in the race and sportsindustry.  These strategies should enable us to gain a competitiveadvantage by offering the gaming operator and/or the betting patron awell-rounded gaming experience, both in the United States and abroad.  There is no assurance that CBS will besuccessful in obtaining any strategic alliances.

 

·                  AWIM — developing the self-service wagering kiosk,installing kiosks in Leroy’s locations to assist in controlling personnelcosts, and marketing the kiosks to non-Leroy’s locations.

 

·                  Sturgeon’s — effectively operating the hotel/casino whileperiodically reviewing and modifying existing procedures and personnelalignment to increase efficiency and reduce expenses.

 

11

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We have implemented, and are continuing to initiatecost-cutting measures throughout the Company.  In the first quarter offiscal 2009, the Company reduced its workforce by means of a lay-off of severalemployees in each of our subsidiaries and began to focus on additional ways tocontrol costs.  During the remainder offiscal 2009 and continuing though the first six months of fiscal 2010, AWI’scorporate expenses that are allocated to Leroy’s and CBS have been reducedprimarily due to reductions in administrative salaries and benefits, includingaccounting, decreased audit fees and outside services; which were partiallyoffset by increases in interest expense, contributed services expense forcertain executives, legal expense and insurance expenses.  We will continue to evaluate and closelymonitor costs, looking for additional efficiencies and improvements during atleast the remainder of fiscal 2010. Subject to our cost constraints, where appropriate, we will continue toexplore possible new locations for our products, including foreign jurisdictions.Additionally, we have products that are in various stages of development andregulatory approval, which could potentially increase future revenue and cashflow.

 

During the latter part of fiscal 2008, and continuingthroughout fiscal 2009 and into 2010, our local, regional and national economyhas been negatively impacted due to a number of factors, including thenationwide economic downturn and the subprime mortgage crisis.  Confidence in the credit market has alsoeroded, which resulted in a tightening of credit availability.  Duringfiscal 2009 and continuing through the first quarter of fiscal 2010, Las Vegashas experienced higher than average foreclosure and unemployment rates andreduced passenger traffic at McCarran airport. We face the risk that the effects of higher average unemployment rates,foreclosures and continued pressure on housing prices, as well as businessfailures and stock market volatility will place added strain on consumers’ability to make purchases, repay their loans and thus, leave less fundsavailable for travel and leisure activities. Consumer demand for gambling, due to decreased disposable income, hasdeclined as a result of the current economic environment.  We have alsoexperienced a change in gambling patterns of our patrons, including a trendtoward more conservative bets, which tend to be less profitable to theCompany.  In addition, because Sturgeon’s Hotel and Casino is heavilydependent on the drive-through market, these factors have and will continue tohave an adverse affect on our business.  Accordingly, if the economicdownturn in the United States continues, it will likely continue to hurt ourfinancial performance, due to, among other things, decreased wagering activityand a change in the types of wagers made.

 

**Liquidity and CapitalResources.**

** **

The United States is currently experiencing a severeeconomic downturn accompanied by, among other things, weakness in thecommercial and investment banking systems resulting in reduced credit andcapital financing availability, and highly curtailed gaming and otherrecreational activities, and general discretionary consumer spending, and isalso engaged in war, all of which are likely to continue to have far-reachingeffects on economic conditions in the country for an indeterminate period.  The effects and duration of thesedevelopments and related risks and uncertainties on our future operations andcash flows, including, our principal officer’s ability to continue to providefinancial support to the Company, as in the past, and other access to capitalor credit financing, cannot be estimated at this time but may likely besignificant.

 

As of July 31, 2009, we had a working capitaldeficit of ($242,034) compared to a working capital deficit ($470,703) at July 31,2008. (Also see Restricted Cash Requirements (Regulation 22.040.))  The increase in working capital is primarilydue to the timing of future bets and unpaid tickets outstanding; increasedaccounts receivable and prepaid expenses; and decreased short-term debt due tothe repayment of equipment leases nearing maturity.  The working capital improvement was partiallyoffset by decreased inventory due to kiosk sales; the decrease in hold amountsdue to a decreased wagers and mix of wagers influenced by the poor economicenvironment; and the result of the ongoing pay-down of the Racusin obligation.

 

In addition, as discussed below, on August 18,2009, the court in the Racusin matter entered an order that would have the neteffect of increasing the Company’s obligation to Racusin by approximately $1.0****million, increasing the Company’s working capital deficitby approximately $1.2 million, and causing the then entire obligation toRacusin of approximately $1.5 million to be immediately due and payable. TheCompany is attempting to negotiate a settlement with Racusin and, based onlegal arguments that management believes to have merit, is considering itsprocedural alternatives.  Managementintends to file a motion for a rehearing, or in the alternative, a motion forreconsideration and if unsuccessful, may file an appeal to the U.S. DistrictCourt of Nevada, which may require the posting of an appeal bond.  In the event the Company is unable tonegotiate a settlement under acceptable terms, post an appeal bond or is alsounsuccessful as to its other procedural alternatives, it would likely be unableto satisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending, in part, on the course of action pursuedby Racusin in this matter and the Company’s ability to finance the judgment.

 

In light of the Racusin matter and the currenteconomic environment, the Company has taken the following additional measuresto increase cash flow.  Effective January 1,2009, the Company no longer matches the employees’ 401(k) contributions.  The salaries of the President of AWIG and thecontroller of Sturgeon’s Hotel and Casino were reduced by 20%, effective October 3,2008.  On December 2, 2008, the CEOand the in-house general counsel each agreed to reduce their annual basesalaries to the amount sufficient to cover payroll deductions for benefits,effective November 24, 2008. Pursuant to the original terms of Mr. Salerno’s employmentagreement, Mr. Salerno was entitled to an annual base salary of$240,000.  Melody J. Sullivan, theCompany’s Chief Financial Officer and Treasurer, agreed to reduce her annualbase salary by 20% effective January 3, 2009.  Pursuant to the original 

 

12

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terms of her employmentagreement, Ms. Sullivan was entitled to an annual base salary of$180,000.  Additionally, several otherhigh salaried employees agreed to reduce their salaries by 20% effective January 3,2009.  Certain high paid hourly employeesagreed to a 32-hour work week, effective January 4, 2009, also resultingin a 20% pay reduction.  Additionally,the Company’s outside directors elected not to receive their directors’ fees,effective for the last three calendar months of 2008, continuing through thefirst six calendar months of 2009, and renounced their stock option grants forfiscal 2009 effective January 31, 2009. The salary reductions and discontinued 401(k) match are intended tobe temporary pending an improvement in the Company’s cash flow but were inplace as of July 31, 2009.

 

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

 

On December 11, 2008, U.S. Bank gave theCompany oral approval to extend the maturity date of its $500,000 revolvingline of credit for 90 days after the original maturity date of December 31,2008, and further negotiated the terms of the line of credit, converting it toa term loan, maturing in January 2010.

 

As previously reported, on March 17, 2008, theCompany filed with the Bankruptcy Court what it believed was an appropriatelycorrected amortization schedule (“Corrected Amortization Schedule”) relating tothe calculation of pre-judgment interest occurring under the settlementagreement regarding the Racusin matter. A hearing was held on May 8, 2009, regarding a Motion for SummaryJudgment filed by Racusin related to the Company’s filing of the CorrectedAmortization Schedule. The Court entered its order on August 18, 2009,granting the Motion for Summary Judgment in favor of Racusin, awarding damagesas of May 1, 2009.  The totaldamages awarded pursuant to the order were $3,935,932.70 of which $2,306,649.25has already been paid (including $1,806,041.80 paid into the bankruptcy courtregistry).  Therefore, as of May 1,2009, $1,629,283.45 at 12% interest per annum is deemed due and payableimmediately, less any principal amounts deposited into the bankruptcy court’sregistry on or after May 1, 2009 which amounts to $125,000, through September 1,2009.  The remaining amount of$1,504,283.45 exceeds the existing recorded current liability of $300,000.00,which is in accordance with management’s interpretation of the settlementagreement and related proceedings.  TheCompany is attempting to negotiate a settlement with Racusin and, based onlegal arguments that management believes to have merit, is considering itsprocedural alternatives.  Managementintends to file a motion for a rehearing, or in the alternative, a motion forreconsideration and if unsuccessful, may file an appeal to the U.S. DistrictCourt of Nevada, which may require the posting of an appeal bond.  In the event the Company is unable tonegotiate a settlement under acceptable terms, post an appeal bond, or is alsounsuccessful as to its other procedural alternatives, it would likely be unableto satisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending, in part, on the course of action pursuedby Racusin in this matter and the Company’s ability to finance the judgment.

 

Our principal cash requirements consist of cash usedin operations for the first half of fiscal 2010 of approximately $1.7 millionas compared to cash used in operations of $2.1 million for the same period offiscal 2009, primarily due to unpaid winning tickets, as a result of the timingof bets placed on the last big football game of the year, which occurred on February 1,2009. In the event the Company is unable to successfully resolve the Racusinmatter and is required to immediately pay $1.5 million, the future principalcash requirements in operations would be impacted.

 

Net cash used in investing activities for the firstsix months of fiscal 2010 was approximately $6,000 as compared to approximately$228,000 for the same period of fiscal 2009, primarily as a result of thedecrease in purchases of upgraded computers and networks, leaseholdimprovements, new kiosk locations and other furniture and equipment from theprior fiscal year, due to cost controls.

 

Net cash used in financing activities for the firsthalf of fiscal 2010 was approximately $408,000 compared to approximately$355,000 in cash provided by financing activities for the same period of fiscal2009 primarily due to decreased borrowings and repayments on debt, primarilywith U.S. Bank.

 

**Restricted CashRequirements (Regulation 22.040)**

** **

Nevada Gaming Commission (“Commission”) Regulation22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, suretybonds, irrevocable standby letter of credit, etc.) sufficient to cover anyoutstanding wagering liability including unpaid winning tickets, future ticketsand telephone account deposits.  From November 16,2007 to May 8, 2009, we maintained a Regulation 22.040 reserve in the formof a surety bond issued by Fidelity and Deposit Company of Maryland (asubsidiary of Zurich American Insurance) (“Fidelity”) secured by $1.2 millionin cash deposits.  The cash deposits, inthe form of one certificate of deposit and one checking account, are held 

 

13

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atGreat Basin Bank of Nevada (now Nevada State Bank) along with an irrevocableletter of credit, also with Great Basin Bank of Nevada (now Nevada State Bank).

 

The Company maintained Regulation 22.040 cashreserves of $1.8 million through August 15, 2009, as approved by theCommission in April 2009.  The reserve is collateralized by $1.2million of restricted cash deposits and an assumed “floating” $600,000availability of other funds.  The amount of the required reserve and themethodology for determining the amount is currently a topic of discussionbetween management and the Nevada Gaming Control Board.  With increasedwagering associated with the football season that is now underway, theCommission may require an increase to the reserve amount.    Ifthe required reserve amount is increased substantially and/or is notcommensurate with the seasonality of the Company’s wagering business, theCompany may be unable to either fund the reserve or, alternatively, obtain asurety bond to satisfy the requirement.  The possible effects of notmeeting the requirement may include, but are not necessarily limited to, areduction in the number of the Company’s race/sports locations and/or theelimination or reduction of telephone wagering accounts which would adverselyaffect the Company’s operating results and cash flows.

 

**Other**

** **

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

 

Subject to uncertainties resulting from the currenteconomic conditions and the Racusin judgment, we plan to accumulate cashliquidity during the current fiscal year (ending January 31, 2010) to helpus fund the following:  payroll andbenefits; sports book supplies and improvements; required cash reserves;business insurance; real estate and equipment leases; the Racusin obligations;legal expenses; telecommunications; costs related to inventory and to assemblerace/sports systems for our CBS customers; compliance costs associated withgaming regulations and Section 404 of the Sarbanes-Oxley Act of 2002; anddebt service.

 

**Results of Operations**

** **

We report our results of operations through threeoperating segments:  Wagering, HotelCasino and Systems.  Although numerousfactors are taken into consideration, the operating income (loss) of thesegment represents a significant profitability measure used by us in allocatingresources and assessing performance of each segment.

 
| ** **                        | ** ** | **Three  Months Ended July 31,** | ** ** | **Six  Months Ended July 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **Summary**                       | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenues                          |       | $                                     | 3,362,968  |                                | $          | 3,521,246 |   | $ | (158,278 | ) | (4.49 | ) | $ | 6,695,757 |   | $ | 7,780,706 |   | $ | (1,084,949 | ) | (13.94 | ) |
|                              |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and Expenses                |       | 3,168,696                             |       | 4,193,155                           |       | (1,024,459 | ) | (24.43 | ) | 6,438,752 |   | 8,412,475 |   | (1,973,723 | ) | (23.46 | ) |
| Other Income and (Expense)        |       | (67,235                               | )          | (41,404                             | )          | 25,831 |   | 62.39 |   | (93,459 | ) | (97,372 | ) | (3,913 | ) | (4.02 | ) |
|                              |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) Before Income Taxes |       | $                                     | 127,037    |                                | $          | (713,313 | ) | $ | 840,350 |   | 117.81 |   | $ | 163,546 |   | $ | (729,141 | ) | $ | 892,687 |   | 122.43 |   |

 

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

 

**For the Three MonthsEnded July 31, 2009 Compared to the Three Months Ended July 31, 2008.**

** **

**Wagering Segment**

** **

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

 

**Wagering Segment revenues for the three monthsended July 31, 2009, increased $172,106 (+10.02%) over the three monthsended July 31, 2008.**  This increase is attributed tothe following factors:

 

During the three months ended July 31, 2009,pursuant to Nevada Gaming Control Board guidelines, the Company changed themaximum time limit before expiration for payment of outstanding winning ticketsfrom 180 days to 90 days, resulting in increased winnings of approximately$132,000.  Conversely, we haveexperienced a change in gambling patterns of our patrons, including a trendtoward more conservative bets, which tend to be less profitable to the Company.

 

14

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**Wagering Segment total costs and expenses for thethree months ended July 31, 2009, decreased $719,445 (-28.91%) over thethree months ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Direct costs decreased primarily due to decreased expenses relatedto the results of negotiations with select sports book locations, reducedpersonnel, advertising and telephone expenses related to our overall costreduction strategies.

 

Selling, general and administrative costs decreased primarily due to decreases invarious administrative costs allocated from the AWI parent in the three monthsending July 31, 2009, compared to the three months ending July 31,2008.  The decreases in management feesallocated to the segments were partially offset by contributed services fromcertain executives for this quarter compared to no contributed services for thesame period the prior year.

 

It is noted that an increase or decrease in handle isnot necessarily indicative of an increase or decrease in revenues or profits,due to the volatility of the win percentages. Elimination of unprofitable locations, closure of host properties,changes in state and/or federal regulations, and other factors beyond ourcontrol may result in declines in handle.

 

As the opportunity may arise, we intend to continue toopen new locations and to continue our periodic review of existing locations inorder to close those locations that are not operating efficiently.  There is no assurance that the number of raceand sports books operated by us will not decrease in the future due toelimination of unprofitable locations, closure of host properties, changes instate and/or federal regulations and other factors that may be beyond ourcontrol, that we will be able to add new locations, or that any new locationsso added will be profitable.

 

**Hotel Casino Segment**

** **

The Hotel Casino Segment includes the operatingresults of Sturgeon’s.

 

**Hotel Casino Segment revenues for the three monthsended July 31, 2009, decreased $98,877 (-12.93%) over the three monthsended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Casino revenues decreased primarily due to decreased handle andwagering activities for the quarter ending July 31, 2009 compared to thesame period ending July 31, 2008 primarily due to the current economicdownturn.

 

Hotel revenues decreased in the second quarter of fiscal 2010compared to the second quarter of fiscal 2009 due to a lower occupancy rate,primarily due to decreased travel.

 

Food and beverage revenues decreased primarily due to the declinein occupancy for the three months ended July 31, 2009 compared to thethree months ended July 31, 2008, due to decreased travel and consumerspending due to the current economic downturn.

 

Casino cash incentives and other promotionalallowancesdecreased for the second quarter of fiscal 2010 compared to the same quarter offiscal 2009, primarily due to closer scrutiny of these costs by management,combined with a decline in hotel occupancy.

 

**Hotel Casino Segment total costs and expenses forthe three months ended July 31, 2009, decreased $95,716 (-13.41%) over thethree months ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Direct costs for the casino operations decreased for the three months ended July 31,2009, compared to the three months ended July 31, 2008 due to decreasedhandle at the casino.

 

Direct costs for the hotel operations decreased primarily due to loweroccupancies for the three months ended July 31, 2009, compared to thethree months ended July 31, 2008, due to decreased travel and consumerspending due to the current economic downturn.

 

Direct costs for food and beverage operations decreased primarily due to loweroccupancies in the hotel for the three months ended July 31, 2009 comparedto the three months ended July 31, 2008, due to decreased travel andconsumer spending due to the current economic downturn.

 

Selling, general and administrative costs for Sturgeon’s decreased compared to thesecond quarter of fiscal 2009, due to decreased personnel costs and otherexpenses.

 

15

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**Systems Segment.**

** **

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

 

**Systems Segment revenues for the three monthsended July 31, 2009, decreased $231,507 (-22.30%) over the three monthsended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

During the second quarter of fiscal 2010, equipmentsales declined, which was partially offset by increased maintenance revenue,due to additional locations compared to the second quarter of fiscal 2009.

 

**Systems Segment total costs and expenses for thethree months ended July 31, 2009, decreased $205,417 (-24.02%) over thethree months ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Direct costs for systems decreased over the prior three monthsended July 31, 2008, primarily due to decreased equipment sales anddecreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies.

 

Research and development costs decreased from the prior threemonths ended July 31, 2008, primarily due to decreased wages and benefitsdue to decreased personnel expense and greater efficiencies.

 

Depreciation and amortization decreased from the prior three monthsended July 31, 2008, due to decreased property acquisitions.

 

**Other income and (expense). **The other income and (expense) categories areprimarily administrative in nature and, as such, are not directly attributableto 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 majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve.  The decrease in interest income of $12,457 isdue primarily to decreased interest rates paid on our cash deposits and loweramounts held in cash deposits.  Interestexpense remained primarily the same.

 

Litigation expense includes $16,815 of settlement interest for thesecond quarter of fiscal 2010 and $19,152 for the same three month period ofthe prior fiscal year related to the Racusin matter.  This is considered a non-operating expensebecause this settlement related to a capital raising activity.

 

Income tax expense (benefit). The Company’s effective tax rate of zero for the interim periodspresented differs from statutory tax rates primarily due to the utilization ofNOL carryforwards and changes in deferred tax activity.

 

**For the Six Months EndedJuly 31, 2009 Compared to the Six Months Ended July 31, 2008.**

** **

**Wagering Segment**

** **

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

 

**Wagering Segment revenues for the six months endedJuly 31, 2009, decreased $523,470 (-11.84%) over the six months ended July 31,2008.**  This decrease is attributed to the followingfactors:

 

During the six months ended July 31, 2009, ourbasketball and baseball handle decreased, compared to the same period in theprior year, which was unusually high. The decreased handle was also due to the economic recession.  We also experienced lower than normal holdpercentages during the last month of the second quarter which were primarilybaseball wagers.  We have experienced achange in gambling patterns of our patrons, including a trend toward moreconservative bets, which tend to be less profitable to the Company.  This decrease was partially offset by theCompany’s change during the second quarter of fiscal 2010, pursuant to NevadaGaming Control Board guidelines, of payments of unpaid winning tickets from amaximum time limit before expiration of 180 days to 90 days, resulting inincreased winnings of approximately $132,000.

 

**Wagering Segment total costs and expenses for thesix months ended July 31, 2009, decreased $1,372,317 (-27.03%) over thesix months ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

16

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Direct costs decreased primarily due to decreased expenses relatedto the results of negotiations with select sports book locations, reducedpersonnel, advertising and telephone expenses related to our overall costreduction strategies.

 

Selling, general and administrative costs decreased primarily due to decreases invarious administrative costs allocated from the AWI parent in the six monthsending July 31, 2009, compared to the six months ending July 31,2008.  The decreases in management feesallocated to the segments were partially offset by contributed services fromcertain executives for this quarter compared to no contributed services for thesame period the prior year.

 

It is noted that an increase or decrease in handle isnot necessarily indicative of an increase or decrease in revenues or profits,due to the volatility of the win percentages. Elimination of unprofitable locations, closure of host properties,changes in state and/or federal regulations, and other factors beyond ourcontrol may result in declines in handle.

 

As the opportunity may arise, we intend to continue toopen new locations and to continue our periodic review of existing locations inorder to close those locations that are not operating efficiently.  There is no assurance that the number of raceand sports books operated by us will not decrease in the future due toelimination of unprofitable locations, closure of host properties, changes instate and/or federal regulations and other factors beyond our control, that wewill be able to add new locations, or that any new locations so added will beprofitable.

 

**Hotel Casino Segment**

** **

The Hotel Casino Segment includes the operatingresults of Sturgeon’s.

 

**Hotel Casino Segment revenues for the six monthsended July 31, 2009, decreased $163,061 (-11.71%) over the six monthsended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Casino revenues decreased primarily due to decreased handle andwagering activities for the six months ending July 31, 2009, compared to thesame period ending July 31, 2008 primarily due to the current economicdownturn.

 

Hotel revenues decreased in the first six months of fiscal 2010compared to the first six months of fiscal 2009 due to a lower occupancy rate,primarily due to decreased travel, due to decreased travel and consumerspending due to the current economic downturn.

 

Food and beverage revenues decreased primarily due to the declinein occupancy for the six months ended July 31, 2009, compared to the sixmonths ended July 31, 2008, due to decreased travel and consumer spendingdue to the current economic downturn.

 

Casino cash incentives and other promotionalallowancesdecreased for the first six months of fiscal 2010 compared to the same periodof fiscal 2009, primarily due to closer scrutiny of these costs by management,combined with a decline in hotel occupancy.

 

**Hotel Casino Segment total costs and expenses forthe six months ended July 31, 2009, decreased $176,101 (-12.78%) over thesix months ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Direct costs for the casino operations decreased for the six months ended July 31,2009, compared to the six months ended July 31, 2008 due to decreasedhandle at the casino.

 

Direct costs for the hotel operations decreased primarily due to loweroccupancies for the six months ended July 31, 2009, compared to the sixmonths ended July 31, 2008.

 

Direct costs for food and beverage operations decreased primarily due to loweroccupancies in the hotel for the six months ended July 31, 2009, comparedto the six months ended July 31, 2008, due to decreased travel andconsumer spending due to the current economic downturn.

 

Selling, general and administrative costs for Sturgeon’s decreased compared to thefirst six months of fiscal 2009, due to decreased personnel costs and otherexpenses.

 

17

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**Systems Segment**

 

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

 

**Systems Segment revenues for the six months ended July 31,2009, decreased $398,418 (-20.24%) over the six months ended July 31,2008. **This decrease is attributed to the following factors:

 

Systems revenues decreased over the prior fiscal yeardue to a decreased number of infrequent sales. During the first six months of fiscal 2010, equipment sales declined,which was partially offset by increased maintenance revenue, due to additionallocations compared to the first six months of fiscal 2009.

 

**Systems Segment total costs and expenses for thesix months ended July 31, 2009, decreased $393,417 (-23.78%) over the sixmonths ended July 31, 2008. **This decrease is attributed to thefollowing factors:

 

Direct costs for systems decreased over the prior six monthsended July 31, 2008, primarily due to decreased equipment sales anddecreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies.

 

Research and development costs decreased from the prior sixmonths ended July 31, 2008, primarily due to decreased wages and benefitsdue to decreased personnel expense and greater efficiencies.

 

Depreciation and amortization decreased from the prior six monthsended July 31, 2008, due to decreased property acquisitions.

 

**Other income and (expense). **The other income and (expense) categories areprimarily administrative in nature and, as such, are not directly attributableto 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 majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve.  The decrease in interest income of $20,454 isdue primarily to decreased interest rates paid on our cash deposits and loweramounts held in cash deposits.  Interestexpense increased $6,763 due to increased debt to Victor Salerno and the U.S.Bank line of credit/term loan.

 

Litigation expense includes $26,417 of settlement interest for thesecond six months of fiscal 2010 and $44,069 for the same six month period ofthe prior fiscal year related to the Racusin matter.  This is considered a non-operating expensebecause this settlement related to a capital raising activity.

 

Income tax expense (benefit). The Company’s effective tax rate of zero for the interim periodspresented differs from statutory tax rates primarily due to the utilization ofNOL carryforwards and changes in deferred tax activity.

 

**Critical accountingestimates and policies.**

** **

Although our financial statements necessarily make useof certain accounting estimates by our management, we believe that, except asdiscussed below, we do not employ any critical accounting policies or estimatesthat are either selected from among available alternatives, or require theexercise of significant management judgment to apply, or that if changed arelikely to affect future periods except with regard to the estimated effects, ifany, on estimated costs associated with the Racusin litigation discussedelsewhere herein.  The followingsummarizes our critical estimates and policies.

 

**Wagering**

** **

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

 

18

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** **

**Hotel Casino Revenue**

** **

Casino revenue is the aggregate net difference betweengaming wins and losses, with liabilities recognized for funds deposited bycustomers before gaming play occurs. Hotel, food and beverage revenues are recognized as services areperformed.  Revenue does not include theretail value of hotel accommodations, food and beverages gratuitously furnishedto customers.

 

**System — Software**

** **

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

 

**System — Hardware**

** **

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

 

**System — Maintenance**

** **

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

 

**Long-Lived Assets**

** **

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

 

**Accounting for IncomeTaxes**

** **

We have reviewed our previously filed tax returns andparticularly our net operating loss (“NOL”) carryforwards available to reducecurrent and future tax obligations and assessed the valuation allowance weestablished against our deferred tax assets to estimate the extent to which itremains needed as of January 31, 2009. We additionally believe that, subject to the effect of the Racusinuncertainty (see Part II, Item 1, Legal Proceedings), we will beprofitable for at least the short-term future, and it is therefore more likelythan not that $369,000 of our net deferred tax asset, which resulted primarilyfrom NOL carryforwards, will be realized.

 

**Recent AccountingPronouncements**

** **

There have been no recent accounting pronouncementsthat are not yet effective that management believes are likely to have asignificant effect on our future financial statements.

 

## **Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

##  

Not required.

 

## **Item 4T.  Controls andProcedures.**

##  

**Evaluation of DisclosureControls and Procedures**

** **

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange 

 

19

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Act of 1934 (“ExchangeAct”)) as of July 31, 2009.  As partof our evaluation, management took into account the material weakness in ourdisclosure controls and procedures identified by management in our Form 10-Kfor the fiscal year ended January 31, 2009.  We determined that our disclosure controlsand procedures, specifically with respect to a late Form 8-K filed on February 29,2008, which should have been filed on or before February 13, 2008, and alate Form 8-K filed on April 29, 2009, which should have been filedon or before April 2, 2009, were not effective.  Management has implemented a procedurerequiring that any material agreement or amendment thereto be submitted to andreviewed by our Chief Financial Officer and in-house counsel prior to executionthereof.

 

**Changes in InternalControl over Financial Reporting**

** **

There were no changes in our internal controls overfinancial reporting that occurred during our last fiscal quarter, i.e. thequarter ended July 31, 2009, that have materially affected or arereasonably likely to materially affect our internal controls over financialreporting.

 

**PART II— OTHER INFORMATION**

** **

**Item 1.  Legal Proceedings.**

##  

Currently, except as noted below, the Company is not aparty in any litigation and has no knowledge of any pending material legalproceedings in any court or agency of government or governmentalauthority.  In accordance with aninterpretation of SFAS No. 5, *Accountingfor Contingencies*, the Company has recorded provisions for probablelosses equal to the lower end of the estimated probable loss range for thelitigation matters.  As of July 31,2009 and 2008, respectively, the aggregate recorded provision for the followingmatters, included in long-term debt, was $307,642 and $1.0 million.

 

**Racusin**

** **

The Company and Racusin entered into the SettlementAgreement on September 3, 2004.  Onor about March 11, 2005, the Company consummated its Plan ofReorganization and emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved anInterpleader Order, whereby pursuant to the Settlement Agreement, the Companyagreed to place 250,000 shares of common stock with the clerk of the courtas payment of the Racusin Claim while Racusin pursued its appeal of theBankruptcy Appellate Panel’s decision in our favor to the 9th CircuitCourt of Appeals.  The Interpleader Orderfurther stated that the Company’s stock would be substituted with cash paymentin the event that the 9th Circuit reversed the Bankruptcy Appellate Panelwhich decision was subsequently reversed, leading to the November 2, 2007hearing with the Bankruptcy Court.  On November 2,2007, the Bankruptcy Court heard an argument to determine whether the Companycould withdraw its 250,000 shares of common stock and whether it couldbegin depositing funds pursuant to a schedule attached to the Company’s motionwhich calculated estimated post-judgment simple interest at 8% per annum, from March 11,2005, without taking into consideration the Interpleader Order of July 27,2005, which was still in effect.  Thatis, by calculating post-judgment interest during the same time that our stockwas held by the Court, we previously accrued interest over a period of time forwhich interest we believed should not be accrued pursuant to the InterpleaderOrder.

 

As previously reported, on March 17, 2008, theCompany filed with the Bankruptcy Court what it believed was an appropriatelycorrected amortization schedule (“Corrected Amortization Schedule”) relating tothe calculation of pre-judgment interest occurring under the settlementagreement regarding the Racusin matter. A hearing was held on May 8, 2009, regarding a Motion for SummaryJudgment filed by Racusin related to the Company’s filing of the CorrectedAmortization Schedule. The Court entered its order on August 18, 2009, grantingthe Motion for Summary Judgment in favor of Racusin, awarding damages as of May 1,2009.  The total damages awarded pursuantto the order were $3,935,932.70 of which $2,306,649.25 has already been paid(including $1,806,041.80 paid into the bankruptcy court registry).  Therefore, as of May 1, 2009,$1,629,283.45 at 12% interest per annum is deemed due and payable immediately,less any principal amounts deposited into the bankruptcy court’s registry on orafter May 1, 2009 which amounts to $125,000, through September 1,2009.  The remaining amount of$1,504,283.45 exceeds the existing recorded current liability of $300,000.00,which is in accordance with management’s interpretation of the settlementagreement and related proceedings.  TheCompany is attempting to negotiate a settlement with Racusin and, based onlegal arguments that management believes to have merit, is considering itsprocedural alternatives.  Managementintends to file a motion for a rehearing, or in the alternative, a motion forreconsideration and if unsuccessful, may file an appeal to the U.S. DistrictCourt of Nevada, which may require the posting of an appeal bond.  In the event the Company is unable tonegotiate a settlement under acceptable terms, post an appeal bond, or is alsounsuccessful as to its other procedural alternatives, it would likely be unableto satisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending, in part, on the course of action pursuedby Racusin in this matter and the Company’s ability to finance the judgment.

 

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**Internet Sports International, Ltd.**

 

This case has been removed from arbitration andrecalendared in the District Court of Clark County, Nevada; however, there havebeen no material legal changes for this matter during the six months ended July 31,2009 from the fiscal year ended January 31, 2009.

 

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

 

A description of our risk factors can be found in Item1A of our Annual Report on Form 10-K for the year ended January 31,2009.  The following informationrepresents material changes to those risk factors during the six months ended July 31,2009.  As previously reported, on March 17,2008, the Company filed with the Bankruptcy Court what it believed was anappropriately corrected amortization schedule (“Corrected Amortization Schedule”)relating to the calculation of pre-judgment interest occurring under thesettlement agreement regarding the Racusin matter.  A hearing was held on May 8, 2009,regarding a Motion for Summary Judgment filed by Racusin related to the Company’sfiling of the Corrected Amortization Schedule. At the hearing, the Court stated its intention to rule in favor ofRacusin.  The Court entered its order on August 18,2009, granting the motion for summary judgment in favor of Racusin, statingthat damages were awarded as of May 1, 2009.  The total damages awarded pursuant to theorder were $3,935,932.70; of which $2,306,649.25 had already been paid(including $1,806,041.80 paid into the bankruptcy court registry).  Therefore, $1,629,283.45 as of May 1,2009, at 12% interest per annum, is deemed due and payable immediately, lessany amounts deposited into the bankruptcy court’s registry on or after May 1,2009; which amounts to $125,000, through September 1, 2009.  The remaining amount of $1,504,283.45 exceedsthe existing recorded current liability of $300,000.00, which is in accordancewith management’s interpretation of the settlement agreement and related proceedings.  The Company is attempting to negotiate asettlement with Racusin and, based on legal arguments that management believesto have merit, is considering its procedural alternatives.  Management intends to file a motion for arehearing, or in the alternative, a motion for reconsideration and ifunsuccessful, may file an appeal to the U.S. District Court of Nevada, whichmay require the posting of an appeal bond. In the event the Company is unable to negotiate a settlement underacceptable terms, post an appeal bond, or is also unsuccessful as to its otherprocedural alternatives, it would likely be unable to satisfy its obligationsas they become due and may, therefore, be unable to continue as a going concerndepending, in part, on the course of action pursued by Racusin in this matterand the Company’s ability to finance the judgment.

 

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

 

Not applicable.

 

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

 

Not applicable.

 

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

 

Not applicable.

 

**Item 5.  Other Information.**

 

Not applicable.

 

**Item 6.  Exhibits.**

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                            |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                    |       | Certification of  Principal Executive Officer pursuant to Exchange Act  Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002                                                                             |
|                    |       |                                                                                                                                                                                                                       |
| 31.2                    |       | Certification of  Principal Financial Officer pursuant to Exchange Act  Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002                                                                             |
|                    |       |                                                                                                                                                                                                                       |
| 32.1                    |       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  Exchange Act Rule 13a-14(b) and Title 18 U.S.C.  Section 1350-Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

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

 

 

**AMERICANWAGERING, INC.**

 

 
| Dated:     September 14,  2009 |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| /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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