Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

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

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

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

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

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

 

**AMERICAN WAGERING, INC.**

(Exact name of 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’s telephonenumber, including area code)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.**                                     **Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange 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) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o**  **No x.

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

** **

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.

Yes x  No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

** **

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date:** **As of December 8, 2008, there were 8,129,879 shares of common stock,par value $0.01, outstanding.

** **

** **

** **

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**Table of Contents**

** **

**TABLE OF CONTENTS**

** **
| **PART I —  FINANCIAL INFORMATION** | **3**                                                                                       |
|-----------------------------------------------|---------------------------------------------------------------------------------------------|
| ** **                                    | ** **                                                                                  | ** ** |
| Item  1.                                      | Consolidated  Financial Statements                                                          | 3 |
|                                          |                                                                                        |   |
|                                          | BALANCE SHEETS AS  OF OCTOBER 31, 2008 (UNAUDITED) AND AS OF JANUARY 31, 2008     | 3 |
|                                          |                                                                                        |   |
|                                          | STATEMENTS OF OPERATIONS FOR  THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2008 (UNAUDITED)  | 4 |
|                                          |                                                                                        |   |
|                                          | STATEMENTS OF CASH FLOWS FOR  THE NINE MONTHS ENDED OCTOBER 31, 2008 (UNAUDITED)            | 5 |
|                                          |                                                                                        |   |
|                                          | NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                     | 6 |
|                                          |                                                                                        |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|                                          |                                                                                        |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 21 |
|                                          |                                                                                        |   |
| Item 4T.                                      | Controls and  Procedures                                                                    | 21 |
|                                          |                                                                                        |   |
| **PART II  — OTHER INFORMATION**    | **22**                                                                                      |
| ** **                                    | ** **                                                                                  | ** ** |
| Item 1.                                       | Legal Proceedings                                                                           | 22 |
|                                          |                                                                                        |   |
| Item  1A.                                     | Risk  Factors                                                                               | 22 |
|                                          |                                                                                        |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23 |
|                                          |                                                                                        |   |
| Item 3.                                       | Defaults Upon  Senior Securities                                                            | 23 |
|                                          |                                                                                        |   |
| Item 4.                                       | Submission of  Matters to a Vote of Security Holders                                        | 23 |
|                                          |                                                                                        |   |
| Item 5.                                       | Other Information                                                                           | 23 |
|                                          |                                                                                        |   |
| Item  6.                                      | Exhibits                                                                                    | 23 |
|                                          |                                                                                        |   |

# ** **

2

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Table of Contents

 

# **PART I —FINANCIAL INFORMATION**

# ** **

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

## ** **

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

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

 
| ** **                                                                                                                                       | ** ** | **October 31,  2008** | ** **     | **January 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|----------------|----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**            | ** **     | ** **                 | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                       |           |                       |       |
| Cash and Cash Equivalents                                                                                                                        |       | $                          | 2,995,294      |                       | $          | 3,316,595 |   |
| Restricted Cash                                                                                                                                  |       | 1,281,069                  |           | 1,323,688                  |       |
| Accounts Receivable, net of allowance for  doubtful accounts of $0 and $2,835                                                                    |       | 188,841                    |           | 345,145                    |       |
| Inventories                                                                                                                                      |       | 295,708                    |           | 443,639                    |       |
| Deferred Tax Assets, net of allowance                                                                                                            |       | 440,481                    |           | 440,481                    |       |
| Prepaid Expenses and Other Current Assets                                                                                                        |       | 502,708                    |           | 497,056                    |       |
| ** **                                                                                                                                       | ** ** | **5,704,101**              | ** **     | **6,366,604**              | ** ** |
|                                                                                                                                             |       |                       |           |                       |       |
| Property and Equipment, net of accumulated  depreciation and amortization                                                                        |       | 4,316,392                  |           | 4,783,451                  |       |
| Goodwill                                                                                                                                         |       | 103,725                    |           | 103,725                    |       |
| Other Assets                                                                                                                                     |       | 305,688                    |           | 289,192                    |       |
| ** **                                                                                                                                       | ** ** | **$**                      | **10,429,906** | ** **                 | **$**      | **11,542,972** | ** ** |
|                                                                                                                                             |       |                       |           |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                    | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                       |           |                       |       |
| Current Portion of Long-Term Debt                                                                                                                |       | $                          | 744,482        |                       | $          | 1,280,161 |   |
| Accounts Payable                                                                                                                                 |       | 908,687                    |           | 1,055,547                  |       |
| Line of Credit                                                                                                                                   |       | 494,129                    |           | —                     |       |
| Accrued Expenses                                                                                                                                 |       | 668,661                    |           | 1,006,310                  |       |
| Unpaid Winning Tickets                                                                                                                           |       | 1,232,955                  |           | 1,401,382                  |       |
| Customer Deposits and Other                                                                                                                      |       | 1,935,767                  |           | 1,535,960                  |       |
| ** **                                                                                                                                       | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| ** **                                                                                                                                       | ** ** | **5,984,681**              | ** **     | **6,279,360**              | ** ** |
|                                                                                                                                             |       |                       |           |                       |       |
| Long-Term Debt, less current portion                                                                                                             |       | 2,996,535                  |           | 3,046,655                  |       |
| Other Long-Term Liabilities                                                                                                                      |       | 611,963                    |           | 655,693                    |       |
|                                                                                                                                             |       | **3,608,498**              | ** **     | **3,702,348**              | ** ** |
| Redeemable Series A Preferred Stock  (3,238 shares)                                                                                         |       | 323,800                    |           | 323,800                    |       |
|                                                                                                                                             |       | **9,916,979**              | ** **     | **10,305,508**             | ** ** |
|                                                                                                                                             |       |                       |           |                       |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                       |           |                       |       |
| Series A Preferred Stock — 10.00%  cumulative; $100.00 par and liquidation value; 18,924 shares authorized;  10,924 shares outstanding |       | 1,092,400                  |           | 1,092,400                  |       |
| Common Stock - $0.01 par value; 25,000,000  shares authorized; 8,129,879 shares issued                                                           |       | 81,299                     |           | 81,299                     |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,302,570                 |           | 12,246,651                 |       |
| Deficit                                                                                                                                          |       | (12,635,849                | )              | (11,855,393                | )          |
| Treasury Stock, at cost (61,100 common  shares)                                                                                                  |       | (327,493                   | )              | (327,493                   | )          |
| ** **                                                                                                                                       | ** ** | **512,927**                | ** **     | **1,237,464**              | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                      | **10,429,906** | ** **                 | **$**      | **11,542,972** | ** ** |

 

**SeeNotes to Consolidated Financial Statements**

** **

**3**

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**Table of Contents**

** **

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **STATEMENTS OFOPERATIONS(UNAUDITED)**

 
| ** **                                   | ** ** | **For the Three Months Ended   October 31,** | ** ** | **For the Nine Months Ended  October 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                                                   | ** ** | **2007**                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **REVENUES:**                                |       |                                                                       |       |                                                                |       |   |   |   |   |
| Wagering                                     |       | $                                                                          | 2,583,246  |                                                                | $          | 3,479,725 |   | $ | 7,003,494 |   | $ | 8,002,881 |   |
| Hotel/Casino                                 |       | 756,029                                                                    |       | 835,751                                                             |       | 2,148,264 |   | 2,392,095 |   |
| Systems                                      |       | 960,207                                                                    |       | 812,716                                                             |       | 2,928,430 |   | 2,897,584 |   |
|                                         |       | 4,299,482                                                                  |       | 5,128,192                                                           |       | 12,080,188 |   | 13,292,560 |   |
| **OPERATING COSTS AND EXPENSES:**            |       |                                                                       |       |                                                                |       |   |   |   |   |
| **Direct Costs:**                            |       |                                                                       |       |                                                                |       |   |   |   |   |
| Wagering                                     |       | 2,219,824                                                                  |       | 2,943,959                                                           |       | 6,421,948 |   | 7,378,137 |   |
| Hotel/Casino                                 |       | 530,015                                                                    |       | 636,167                                                             |       | 1,585,844 |   | 1,829,752 |   |
| Systems                                      |       | 266,122                                                                    |       | 359,424                                                             |       | 856,607 |   | 1,053,710 |   |
|                                         |       | 3,015,961                                                                  |       | 3,939,550                                                           |       | 8,864,399 |   | 10,261,599 |   |
|                                         |       |                                                                       |       |                                                                |       |   |   |   |   |
| **Operating Expenses:**                      |       |                                                                       |       |                                                                |       |   |   |   |   |
| Research and Development                     |       | 139,191                                                                    |       | 236,956                                                             |       | 441,988 |   | 754,075 |   |
| Selling, General and Administrative          |       | 783,426                                                                    |       | 906,121                                                             |       | 2,532,857 |   | 2,840,307 |   |
| Depreciation and Amortization                |       | 258,239                                                                    |       | 237,329                                                             |       | 770,048 |   | 686,458 |   |
|                                         |       | 1,180,856                                                                  |       | 1,380,406                                                           |       | 3,744,893 |   | 4,280,840 |   |
|                                         |       | 4,196,817                                                                  |       | 5,319,956                                                           |       | 12,609,292 |   | 14,542,439 |   |
| **OPERATING INCOME (LOSS)**                  |       | 102,665                                                                    |       | (191,764                                                            | )          | (529,104 | ) | (1,249,879 | ) |
|                                         |       |                                                                       |       |                                                                |       |   |   |   |   |
| **OTHER INCOME (EXPENSE):**                  |       |                                                                       |       |                                                                |       |   |   |   |   |
| Interest Income                              |       | 10,245                                                                     |       | 22,401                                                              |       | 37,741 |   | 83,675 |   |
| Interest Expense                             |       | (63,823                                                                    | )          | (72,029                                                             | )          | (196,401 | ) | (206,079 | ) |
| Litigation Expense                           |       | (17,653                                                                    | )          | (28,871                                                             | )          | (72,970 | ) | (137,208 | ) |
| Other                                        |       | 23,260                                                                     |       | 73,885                                                              |       | 86,287 |   | 135,331 |   |
|                                         |       | (47,971                                                                    | )          | (4,614                                                              | )          | (145,343 | ) | (124,281 | ) |
|                                         |       |                                                                       |       |                                                                |       |   |   |   |   |
| **NET INCOME (LOSS)**                        |       | $                                                                          | 54,694     |                                                                | $          | (196,378 | ) | $ | (674,447 | ) | $ | (1,374,160 | ) |
|                                         |       |                                                                       |       |                                                                |       |   |   |   |   |
| **NET INCOME (LOSS) PER COMMON SHARE BASIC** |       | $                                                                          | 0.00       |                                                                | $          | (0.03 | ) | $ | (0.10 | ) | $ | (0.18 | ) |
| **DILUTED**                                  |       | $                                                                          | 0.00       |                                                                | $          | N/A |   | $ | N/A |   | $ | N/A |   |

 

**SeeNotes to Consolidated Financial Statements**

** **

**4**

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** **

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **STATEMENTS OF CASHFLOWS (UNAUDITED)**

 
| ** **                                               | ** ** | **For the Nine Months Ended  October 31,** | ** **    |
|----------------------------------------------------------|------------|---------------------------------------------------------------------|---------------|
| ** **                                               | ** ** | **2008**                                                            | ** **    | **2007** | ** ** |
| ** **                                               | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Operating Activities**                                 | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Net cash (used in) provided by operating  activities** | ** ** | **$**                                                               | **(311,164**  | **)** | **$** | **801,022** | ** ** |
| ** **                                               | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Investing Activities**                                 | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| Gross increases in restricted cash                       |       | (559,161                                                            | )             | (466,920 | ) |
| Withdrawal of restricted cash                            |       | 601,780                                                             |          | 471,217 |   |
| Proceeds from the sale of property and  equipment        |       | 1,500                                                               |          | — |   |
| Purchase of property and equipment                       |       | (301,577                                                            | )             | (678,097 | ) |
| **Net cash used in investing activities**                | ** ** | **(257,458**                                                        | **)**         | **(673,800** | **)** |
| ** **                                               | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **Financing Activities**                                 |       |                                                                |          |   |   |
| Repayment of borrowings                                  |       | (3,292,365                                                          | )             | (317,596 | ) |
| Proceeds from borrowings                                 |       | 3,645,694                                                           |          | — |   |
| Preferred stock dividends                                |       | (106,008                                                            | )             | (94,284 | ) |
| **Net cash provided by (used in) financing  activities** | ** ** | **247,321**                                                         | ** **    | **(411,880** | **)** |
|                                                     |       |                                                                |          |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**            | ** ** | **(321,301**                                                        | **)**         | **(284,658** | **)** |
| ** **                                               | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD**    | ** ** | **3,316,595**                                                       | ** **    | **4,537,424** | ** ** |
| ** **                                               | ** ** | ** **                                                          | ** **    | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**           | ** ** | **$**                                                               | **2,995,294** | ** ** | **$** | **4,252,766** | ** ** |

 

**SeeNotes to Consolidated Financial Statements**

** **

**5**

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**AMERICAN WAGERING, INC.AND SUBSIDIARIES**

### **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

### **(UNAUDITED)**

###  

**Three and Nine MonthsEnded October 31, 2008**

** **

**1.**                                     Basis ofPresentation

** **

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

 

The United States has been experiencing a severeeconomic downturn and recession that has curtailed casino gaming development,activity and profitability. This is a local and nationwide problem, resultingin highly reduced availability of credit and capital financing.  The current economic recession has had anegative impact on cash flow and earnings for the three and nine months ended October 31,2008. The effects and the duration of these negative developments and relateduncertainties on the Company’s future operations and cash flows cannot beestimated at this time, but may likely be significant. Management hasinstituted cost saving programs, which will continue to benefit the Company inthe future. See also Note 7. Subsequent Events.

 

**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 net income per common share is ordinarilycalculated giving effect to all potentially dilutive common shares, assumingsuch shares were outstanding during the reporting period. However, diluted netloss per common share is not presented for loss periods, since the effect ofincluding potentially dilutive common shares would be anti-dilutive due to thelosses. The amounts of potentially anti-dilutive common shares that have beenexcluded from any calculation of basic net income (loss) per share were 748,099and 2,400 for the three months ended October 31, 2008 and 2007,respectively. The amounts of potentially anti-dilutive common shares that havebeen excluded from any calculation of basic net loss per share were 747,699 and42,400 for the nine months ended October 31, 2008 and 2007,respectively.  Following is areconciliation of the numerators and denominators of the net loss per common sharecomputations for the periods presented.

 
| ** **                                            | ** ** | **Net Income  (Loss)  (numerator)** | ** ** | **Weighted  Average  Common  Shares  (denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|
| **For the three months ended October 31,  2008** |       |                                     |       |                                                 |       |                       |       |
| Net income                                            |       | $                                        | 54,694     |                                                 |       |                       |       |   |
| Less preferred stock dividends                        |       | (35,594                                  | )          |                                                 |       |                       |       |
| **Basic net income per common share:**                |       |                                     |       |                                                 |       |                       |       |
| Net income available to common shares                 |       | 19,100                                   |       | 8,068,779                                            |       | $                          | 0.00       |   |
| Effect of dilutive stock options                      |       |                                     |       | 691                                                  |       |                       |       |
| **Diluted net income per common share:**              |       |                                     |       |                                                 |       |                       |       |
| Net income available to common shares                 |       | $                                        | 19,100     |                                                 | 8,069,470  |                       | $          | 0.00 |   |

 

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED) cont’d**

 
| ** **                                            |   | **Net Income  (Loss)  (numerator)** |       | **Weighted  Average  Common  Shares  (denominator)** | ** ** | **Per Share  Amount** |   |
|-------------------------------------------------------|--------|------------------------------------------|------------|------------------------------------------------------|------------|----------------------------|--------|
| **For the three months ended October 31,  2007** |   |                                     |       |                                                 |       |                       |   |
| Net loss                                              |   | $                                        | (196,378   | )                                                    |       |                       |   |   |
| Less preferred stock dividends                        |   | (24,056                                  | )          |                                                 |       |                       |   |
| **Basic net loss per common share:**                  |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | (220,434                                 | )          | 8,068,779                                            |       | $                          | (0.03  | ) |
| Effect of dilutive stock options                      |   |                                     |       | *                                                    |       |                       |   |
| **Diluted net loss per common share:**                |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | $                                        | *          |                                                 | *          |                       | $      | * |   |
| ** **                                            |   |                                     |       |                                                 |       |                       |   |
| **For the nine months ended October 31,  2008**  |   |                                     |       |                                                 |       |                       |   |
| Net loss                                              |   | $                                        | (674,447   | )                                                    |       |                       |   |   |
| Less preferred stock dividends                        |   | (106,008                                 | )          |                                                 |       |                       |   |
| **Basic net loss per common share:**                  |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | (780,455                                 | )          | 8,068,787                                            |       | $                          | (0.10  | ) |
| Effect of dilutive stock options                      |   |                                     |       | *                                                    |       |                       |   |
| **Diluted net loss per common share:**                |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | $                                        | *          |                                                 | *          |                       | $      | * |   |
|                                                  |   |                                     |       |                                                 |       |                       |   |
| **For the nine months ended October 31,  2007**  |   |                                     |       |                                                 |       |                       |   |
| Net loss                                              |   | $                                        | (1,374,160 | )                                                    |       |                       |   |   |
| Less preferred stock dividends                        |   | (94,284                                  | )          |                                                 |       |                       |   |
| **Basic net loss per common share:**                  |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | (1,468,444                               | )          | 8,068,779                                            |       | $                          | (0.18  | ) |
| Effect of dilutive stock options                      |   |                                     |       | *                                                    |       |                       |   |
| **Diluted net loss per common share:**                |   |                                     |       |                                                 |       |                       |   |
| Net loss available to common shares                   |   | $                                        | *          |                                                 | *          |                       | $      | * |   |

 

----

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

 

**3.**                                     Income Taxes

** **

Effective February 1, 2007, as required, theCompany adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes*(“FIN 48”). Accordingly, management has reviewed the Company’s previously filedtax returns and particularly its federal income tax net operating loss (“NOL”)carryforwards available to reduce current and future tax obligations for thepossible effect of FIN 48 as of January 1, 2007, and subsequently. Basedon its evaluation, management believes that adopting FIN 48 did not have amaterial effect on our opening deficit at the time of adoption, the Company’sNOL carryforwards, or the related deferred tax assets or the valuationallowance. The income tax years of 2007, 2006, 2005 and 2004 remain open toexamination under the statute of limitations by the U.S. federal, state andlocal respective taxing jurisdictions.

 

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

 

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** **

**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED) cont’d**

 

Management believes that AWI will be sufficientlyprofitable for the short-term future, with the continued football season, andit is therefore more likely than not that a portion, estimated to beapproximately $440,000, of its net deferred tax asset, which resulted primarilyfrom NOL carryforwards, will be realized. However, there can be no assurancethat the Company will be profitable in the future.

 

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

 

**4.**                                     Litigationand Contingencies

** **

For the three-month and nine-month periods ended October 31,2008 and 2007, the Company recorded additional interest expense of $17,653 and$28,871, and $62,722 and $137,208, respectively, with respect to our previouslyrecorded obligation due to Michael Racusin under a litigation settlementagreement. The remainder related to other litigation expense.

 

Due to several recent financial institution failures,the Company is continuing to monitor and evaluate the risk regarding itsuninsured deposits held in banks. The Company continues to explore alternativesto further mitigate these risks by monitoring the health of the financialinstitutions. The Company has evaluated existing deposit and related loanagreements.

 

***Racusin***

 

On June 13, 2008, the Company received written notification fromRacusin of an alleged breach of the Settlement Agreement by the Company.  The Company filed a Notice of Filing aCorrected Amortization Schedule on March 17, 2008 to rectify an inaccurateinterest calculation in the prior Exhibit 1 to the SettlementAgreement.  As a result, the Companybegan making payments according to the corrected Exhibit 1 on March 1,2008, and has continued to do so every month thereafter.  Racusin alleges that the Company’s actionsbreach the Settlement Agreement.  Racusinfurther alleges that under the terms of the Settlement Agreement the entireobligation became due and payable with interest calculated at twelve percent(12%) from June 30, 2004, and Racusin threatened to commence anadversarial proceeding.

 

On October 10, 2008, Racusin filed a Motion to File SupplementalPleadings and Michael Racusin’s (Proposed) Counterclaim Against Plaintiffsasserting the allegations discussed above. The hearing on Racusin’s motion is scheduled for December 23, 2008.

 

The Company disputes Racusin’s allegation that it breached theSettlement Agreement. The Company has engaged counsel and intends to vigorouslydefend itself against the allegations.

 

***Internet Sports International, Ltd.***

 

On July 17, 2008, Internet Sports International,Ltd. (“ISI”) filed a complaint against three of the Company’s subsidiaries, AWIManufacturing, Inc. (“AWIM”), AWI Gaming, Inc. (“AWIG”) andComputerized Bookmaking Systems, Inc. (“CBS”), and the Company’s GeneralCounsel.  The complaint was filed in theDistrict Court, Clark County, Nevada as Case No. A567638, asserting claimsfor breach of contract, breach of implied covenant of good faith and fairdealing, intentional and negligent interference with prospective economicadvantage, and quantum meruit.  Theclaims arise out of agreements with plaintiff to jointly develop an uprightkiosk, including an equipment purchase agreement, software license agreement,and a marketing agreement.  Plaintiffalleges that the Company failed to perform under, and effectively andprematurely terminated, the equipment purchase agreement as to 100 uprightkiosks.  Plaintiff further allegesthat it had entered into negotiations with an established customer of theCompany to place kiosks and plaintiff’s products on the customer’s casinofloor, and that management contacted the customer and terminated plaintiff’sopportunity.  Plaintiff seeks for (i) therecovery of actual, consequential and punitive damages, and (ii) therecovery of attorneys’ fees, costs and expenses.

 

On December 8, 2008, the Court grantedin part and denied in part a Motion to Dismiss and/or for Summary Judgmentfiled by AWIM, AWIG, CBS and the Company’s General Counsel.  The Court granted the

 

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** **

**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED) cont’d**

 

Motion regarding ISI’s claims of (i) breachof contract and breach of the implied covenant of good faith and fair dealingagainst CBS and AWIG, (ii) unjust enrichment against AWIM, and (iii) negligentinterference with a prospective business advantage against all defendants.  The Court denied the Motion regarding ISI’sclaims of (i) intentional interference with prospective economic advantageagainst all defendants, (ii) quantum meruit against CBS and AWIG, and (iii) unjustenrichment against CBS and AWIG.

 

The Company expects to file its Answer to the remaining claims on orbefore December 18, 2008, and the case will proceed to discovery.

 

***Other***

 

From time to time the Company is also involved in other legal matters,litigation and claims of various types in the ordinary course of businessoperations, including matters involving bankruptcies of debtors, collectionefforts, disputes with former employees and other matters.  Management is unable to estimate any minimumlosses from any of these proceedings. Accordingly, no losses have been accrued for the nine months ended October 31,2008.  The Company intends to defend allof these matters stridently. However, there is no assurance that it will besuccessful in defending any of the matters described above or any other legalmatters, litigation or claims in which it may become involved from time totime. If the Company is not successful in defending these matters, it may berequired to pay substantial license fees, royalties or damages, includingstatutory or other damages, post significant bonds and/or discontinue a portionof its operations. Furthermore, the Company’s insurance coverage and othercapital resources may be inadequate to cover anticipated costs of theselawsuits or any possible settlements, damage awards, bonds or license fees.Even if it is successful in defending these matters, these claims still canharm the Company severely by damaging its reputation, requiring it to incurlegal costs, lowering its stock price and public demand for its stock, anddiverting management’s attention away from the Company’s primary businessactivities in general.

 

**5.**                                     StockOptions

** **

Activity related to both the employee and directors’stock option plans for the nine months ended October 31, 2008 and 2007,was as follows:

 
| ** **                       | ** ** | **Option Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Balance at February 1, 2008 |       | 749,299                |       | $                                           | 1.75       |   |
| Granted                          |       | —                 |       |                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | —                 |       |                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at October 31, 2008 |       | 749,299                |       | 1.75                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at February 1, 2007 |       | 757,749                |       | $                                           | 1.80       |   |
| Granted                          |       | 30,000                 |       | 0.96                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | (26,250                | )          | 2.00                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at October 31, 2007 |       | 761,499                |       | 1.76                                        |       |

 

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

 
| ** **                  | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining Life** | ** ** |
|-----------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Exercisable                 |       | 558,500    |       | $                                           | 1.83       |                                        | 4.73 years |   |
| Available for future grants |       | 208,767    |       | —                                      |       | —                                      |       |
|                             |            |            |            |                                             |            |                                             |            |  |

 

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED) cont’d**

 

Non-cash stock-based compensation expense recorded in “Selling,General and Administrative Expenses” on the consolidated income statements forthe three months ended October 31, 2008 and 2007, was $12,108 and $32,074,respectively.  Non-cash stock-basedcompensation expense recorded in “Selling, General and Administrative Expenses”on the consolidated income statements for the nine months ended October 31,2008 and 2007, was $55,919 and $70,339, respectively.

 

**6.**                                     BusinessSegments

 

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

 

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

 
| ** **                          | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                         |       | $                                                      | 2,583,246  |                                                  | $          | 3,479,725 |   | $ | 7,003,494 |   | $ | 8,002,881 |   |
| Direct Costs                        |       | 2,219,824                                              |       | 2,943,959                                             |       | 6,421,948 |   | 7,378,137 |   |
| Selling, General and Administrative |       | 307,543                                                |       | 418,679                                               |       | 1,024,682 |   | 923,421 |   |
| Depreciation and Amortization       |       | 80,676                                                 |       | 67,503                                                |       | 239,156 |   | 206,902 |   |
|                                |       | 2,608,043                                              |       | 3,430,141                                             |       | 7,685,786 |   | 8,508,460 |   |
| **Operating Income (Loss)**         |       | $                                                      | (24,797    | )                                                     | $          | 49,584 |   | $ | (682,292 | ) | $ | (505,579 | ) |

 

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

 
| ** **                                                    | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                                                   |       |                                                   |       |                                                  |       |   |   |   |   |
| Casino                                                        |       | $                                                      | 363,853    |                                                  | $          | 394,510 |   | $ | 1,108,214 |   | $ | 1,126,886 |   |
| Hotel                                                         |       | 189,517                                                |       | 179,131                                               |       | 492,105 |   | 566,926 |   |
| Food/Beverage                                                 |       | 231,815                                                |       | 293,108                                               |       | 636,465 |   | 791,770 |   |
| Less: Casino Cash Incentives and Other  Promotional Allowance |       | (29,156                                                | )          | (30,998                                               | )          | (88,520 | )  | (93,487 | ) |
|                                                          |       | 756,029                                                |       | 835,751                                               |       | 2,148,264 |   | 2,392,095 |   |
| **Direct Costs and Expenses**                                 |       |                                                   |       |                                                  |       |   |   |   |   |
| Casino                                                        |       | 179,076                                                |       | 312,093                                               |       | 754,160 |   | 885,215 |   |
| Hotel                                                         |       | 53,012                                                 |       | 59,448                                                |       | 159,355 |   | 187,243 |   |
| Food/Beverage                                                 |       | 297,926                                                |       | 264,626                                               |       | 672,328 |   | 757,294 |   |
|                                                          |       | 530,014                                                |       | 636,167                                               |       | 1,585,843 |   | 1,829,752 |   |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| Selling, General and Administrative                           |       | 42,404                                                 |       | 179,208                                               |       | 226,254 |   | 743,382 |   |
| Depreciation and Amortization                                 |       | 69,676                                                 |       | 70,644                                                |       | 207,852 |   | 192,193 |   |
|                                                          |       | 642,094                                                |       | 886,019                                               |       | 2,019,949 |   | 2,765,327 |   |
| **Operating Income (Loss)**                                   |       | $                                                      | 113,935    |                                                  | $          | (50,268 | ) | $ | 128,315 |   | $ | (373,232 | ) |

 

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

 
| ** **                          | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                                   |       |                                                  |       |   |   |   |   |
| **Revenue**                         |       | $                                                      | 960,207    |                                                  | $          | 812,716 |   | $ | 2,928,430 |   | $ | 2,897,584 |   |
| Direct Costs                        |       | 266,122                                                |       | 359,424                                               |       | 856,607 |   | 1,053,710 |   |
| Research and Development            |       | 139,191                                                |       | 236,956                                               |       | 441,988 |   | 754,075 |   |
| Selling, General and Administrative |       | 433,510                                                |       | 308,234                                               |       | 1,281,921 |   | 1,173,504 |   |
| Depreciation and Amortization       |       | 107,857                                                |       | 99,182                                                |       | 323,041 |   | 287,363 |   |
|                                |       | 946,680                                                |       | 1,003,796                                             |       | 2,903,557 |   | 3,268,652 |   |
| **Operating Income (Loss)**         |       | $                                                      | 13,527     |                                                  | $          | (191,080 | ) | $ | 24,873 |   | $ | (371,068 | ) |

 

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED) cont’d**

 

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

 
| ** **                            | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating Income (Loss)**           |       |                                                   |       |                                                  |       |   |   |   |   |
| Wagering                              |       | $                                                      | (24,797    | )                                                     | $          | 49,584 |   | $ | (682,292 | ) | $ | (505,579 | ) |
| Hotel/Casino                          |       | 113,935                                                |       | (50,268                                               | )          | 128,315 |   | (373,232 | ) |
| Systems                               |       | 13,527                                                 |       | (191,080                                              | )          | 24,873 |   | (371,068 | ) |
|                                  |       | 102,665                                                |       | (191,764                                              | )          | (529,104 | ) | (1,249,879 | ) |
| **Other Income (Expenses)**           |       |                                                   |       |                                                  |       |   |   |   |   |
| Interest Income                       |       | 10,245                                                 |       | 22,401                                                |       | 37,741 |   | 83,675 |   |
| Interest Expense:                     |       | (63,823                                                | )          | (72,029                                               | )          | (196,401 | ) | (206,079 | ) |
| Litigation Expense                    |       | (17,653                                                | )          | (28,871                                               | )          | (72,970 | ) | (137,208 | ) |
| Other, net                            |       | 23,260                                                 |       | 73,885                                                |       | 86,287 |   | 135,331 |   |
|                                  |       | (47,971                                                | )          | (4,614                                                | )          | (145,343 | ) | (124,281 | ) |
| **Income (Loss) Before Income Taxes** |       | $                                                      | 54,694     |                                                  | $          | (196,378 | ) | $ | (674,447 | ) | $ | (1,374,160 | ) |

 

**7.**                                     SubsequentEvents

** **

Due to the current negative economic environment, the Company has takenadditional measures to increase cash flow after October 31, 2008.  Effective January 1, 2009, the Companywill no longer match the employees’ 401(k) contributions.  The salaries of the President of AWIG and thecontroller of Sturgeon’s Hotel and Casino were reduced by 20 percent, effectiveOctober 3, 2008. On December 2, 2008, the CEO and the in-housegeneral counsel each agreed to reduce their annual base salaries to the amountsufficient to cover payroll deductions for benefits, effective November 24,2008.  Pursuant to the original terms of Mr. Salerno’semployment agreement, Mr. Salerno is entitled to an annual base salary of$240,000. Melody J. Sullivan, the Company’s Chief Financial Officer andTreasurer, agreed to reduce her annual base salary by 20% effective January 3,2009.  Pursuant to the original terms of heremployment agreement, Ms. Sullivan is entitled to an annual base salary of$180,000.  Additionally, several highersalaried employees each agreed to reduce their salaries by 20 percent effectiveJanuary 3, 2009. Certain higher paid hourly employees agreed to a 32 hourwork week, effective January 4, 2009, resulting in a 20 percent payreduction. The salary reductions are intended to be temporary pending animprovement in the Company’s cash flow.

 

Victor Salerno, the Company’s President, Chief Executive Officer andChief Operating Officer, loaned the Company an additional $500,000 on December 1,2008 to fund urgent cash flow needs of the Company.  Due to the urgency, the funds were advancedon an expedited basis without formal board approval.  As reported in the Company’s Form 10-Qfor the quarter ended July 31, 2008, Mr. Salerno had previouslyloaned the Company $500,000 pursuant to a loan agreement dated April 21,2008.  The independent directors of theCompany are considering for fairness, a proposed amendment to that loanagreement to cover the total $1,000,000 that has been loaned by Mr. Salernoas well as other proposed terms and are considering other alternatives.

 

On December 11, 2008, U.S. Bank gave the Company verbal approvalto extend the maturity date of the Company’s $500,000 revolving line of creditto 90 days after the original maturity date of December 31, 2008 and tofurther negotiate the terms of the line of credit.  However, until definitive agreements aresigned, there can be no assurance the line of credit will be extended or thatthe terms of the line of credit can be renegotiated on terms favorable to theCompany.

 

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## **Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

## ** **

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

 

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

 

“AWI” means American Wagering, Inc.

 

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

 

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

 

·                  Leroy’s– operating existing sports books, generating revenue from customer wagers lesspay outs, adding new books where and when appropriate, and continuing to becomemore efficient in order to reduce expenses. We will also continue our review ofexisting Leroy’s locations in order to close those locations that are notoperating efficiently.  Based on ourstrategy, the number of race and sports books operated by Leroy’s may increaseor decrease in the future, due to the closure of unprofitable locations or hostproperties, closures due to other factors beyond our control and/or thepossible opening of new locations with greater potential forprofitability.  There is no assurancethat Leroy’s will be able to add new locations and/or that any new locations soadded will be profitable.

 

·                  CBS– developing, selling and maintaining computerized race and sports wageringsystems for the gaming industry and seeking strategic international allianceswith third party gaming suppliers and/or gaming operators that desire toutilize our expertise in the race and sports industry.  These strategies should enable us to gain acompetitive advantage by offering the gaming operator and/or the betting patrona well-rounded gaming experience, both in the United States and abroad.

 

·                  AWIM– developing the self-service wagering kiosk, installing kiosks in Leroy’slocations to assist in controlling personnel costs, and marketing the kiosks tonon-Leroy’s locations.

 

·                  Sturgeon’s– effectively operating the hotel/casino while reviewing and modifying existingprocedures and personnel alignment to increase efficiency and reduce expenses.

 

We have implemented, and are continuing to initiatecost cutting measures throughout the Company. In the first quarter of fiscal 2009, the Company reduced its workforceby means of a lay-off of several employees in each of our subsidiaries andbegan to focus more on cost controls. During the nine months ended October 31,2008, AWI’s corporate expenses that are allocated to Leroy’s and CBS have beenreduced primarily due to reductions in administrative salaries and benefits,including accounting, decreased audit fees and outside services; which werepartially offset by increases in insurance expense, legal expense and computerexpenses. We will continue to evaluate and closely monitor costs, looking foradditional efficiencies and improvements during at least the remainder offiscal 2009. Subject to our cost constraints, where appropriate, we willcontinue to explore possible new locations for our products, including foreignjurisdictions.

 

During the latter part of fiscal 2008, and continuingthrough the three quarters of fiscal 2009, our local, regional and nationaleconomy has been negatively impacted due to a number of factors, including thenationwide economic recession and the subprime mortgage crisis and highergasoline and transportation costs during much of the year. 

 

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Confidence in the creditmarket has also eroded, which resulted in a tightening of creditavailability.  During the nine monthsended October 31, 2008, Las Vegas has experienced higher foreclosure andunemployment rates and reduced passenger traffic at McCarran airport and highertransportation costs for much of the year. We face the risk that the effects ofhigher unemployment rates, foreclosures and continued pressure on housingprices, as well as business failures and stock market volatility will placeadded strain on consumers’ ability to make purchases, repay their loans andthus, leave less funds available for travel and leisure activities. Consumerdemand for gambling, due to decreased disposable income, has declined as aresult of the current economic recession. We have also experienced a change in gambling patterns of our patrons,including a trend towards more conservative bets, which tend to be lessprofitable to the Company.  In addition,because Sturgeon’s Hotel and Casino is heavily dependent on the drive-throughmarket, especially travelers on Interstate 80; these factors have and willcontinue to have an adverse affect on our business.  Accordingly, if the economic recession in theUnited States continues, it will likely continue to hurt our financialperformance, due to, among other things, decreased wagering activity and achange in the types of wagers made.

 

**Liquidity and Capital Resources**

** **

**Cash Flow**

** **

As of October 31, 2008, we had a working capitaldeficit of $(280,580), compared to working capital of $87,244 at January 31,2008.  The decrease in working capital isprimarily due to the decrease in hold amounts due to decreased types of wagersdue to the poor economic environment; the result of the ongoing pay-down of theRacusin obligation; and the timing of and increases in future bets and unpaidwinning tickets.   The third and fourthquarters have historically been the best two quarters regarding cash flow andearnings for us and we have made substantial improvement from the third quarterof last year regarding the reduction of our net loss to net income for thequarter.

 

The United States has been experiencing a severeeconomic downturn and recession that has curtailed casino gaming development,activity and profitability. This is a local and nationwide problem, resultingin highly reduced availability of credit and capital financing.  The current economic recession has had a negativeimpact on cash flow and earnings for the third quarter and nine months endedOctober 31, 2008.  The effects and theduration of these negative developments and related uncertainties on theCompany’s future operations and cash flows cannot be estimated at this time,but may likely be significant. 

 

Due to the current negative economic environment, the Company has takenadditional measures to increase cash flow after October 31, 2008.  Effective January 1, 2009, the Companywill no longer match the employees’ 401(k) contributions.  The salaries of the President of AWIG and thecontroller of Sturgeon’s Hotel and Casino were reduced by 20 percent, effectiveOctober 3, 2008. On December 2, 2008, the CEO and the in-housegeneral counsel each agreed to reduce their annual base salaries to the amountsufficient to cover payroll deductions for benefits, effective November 24,2008.  Pursuant to the original terms of Mr. Salerno’semployment agreement, Mr. Salerno is entitled to an annual base salary of$240,000. Melody J. Sullivan, the Company’s Chief Financial Officer andTreasurer, agreed to reduce her annual base salary by 20% effective January 3,2009.  Pursuant to the original terms ofher employment agreement, Ms. Sullivan is entitled to an annual basesalary of $180,000.  Additionally,several higher salaried employees each agreed to reduce their salaries by 20percent effective January 3, 2009. Certain higher paid hourly employeesagreed to a 32 hour work week, effective January 4, 2009, resulting in a20 percent pay reduction. The salary reductions are intended to be temporarypending an improvement in the Company’s cash flow.

 

Victor Salerno, the Company’s President, Chief Executive Officer andChief Operating Officer, loaned the Company an additional $500,000 on December 1,2008 due to the cash flow needs of the Company. Due to the urgency, the funds were advanced on an expedited basiswithout formal board approval.  Asreported in the Company’s Form 10-Q for the quarter ended July 31,2008, Mr. Salerno had previously loaned the Company $500,000 pursuant to aloan agreement dated April 21, 2008. The independent directors of the Company are considering for fairness aproposed amendment to that loan agreement to cover the total $1,000,000 thathas been loaned by Mr. Salerno as well as considering other alternatives.

 

On December 11, 2008, U.S. Bank gave the Company verbal approvalto extend the maturity date of the Company’s $500,000 revolving line of credit for90 days after the original maturity date of December 31, 2008 and tofurther negotiate the terms of the line of credit.  However, until definitive agreements aresigned, there can be no assurance the line of credit will be extended or thatthe terms of the line of credit can be renegotiated on terms favorable to theCompany.

 

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

 

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As of October 31, 2008, net cash used inoperations increased by $1,112,186 over the comparable nine month period oflast year, primarily due to the payout on the last big professional footballgame wagers, and the continued reduction of the Racusin debt due to pay-downs.

 

Net cash used in investing activities for the ninemonths ended October 31, 2008 decreased by $416,342, compared to the sameperiod last year, primarily as a result of decreased purchases of furniture andequipment as we did not acquire or remodel as many sports book locations as wedid in the prior year.

 

Net cash provided by financing activities for the ninemonths ended October 31, 2008 was $247,321, as compared to net cash usedin financing activities of ($411,880) for the nine months ended October 31,2007. The increase was due primarily to the utilization of the bank revolvingline of credit.

 

Regulation:  Nevada Gaming Commission Regulation 22.040 (“Regulation22.040”) requires us to maintain reserves (cash, surety bonds, irrevocablestandby letter of credit, etc.) sufficient to cover any outstanding wageringliability including unpaid winning tickets, future tickets and telephoneaccount deposits.  Since November 16,2007, we maintained a Regulation 22.040 reserve in the amount of $3.4 millionin the form of a surety bond issued by Fidelity and Deposit Company of Maryland(a subsidiary of Zurich American Insurance) secured by a $1.2 milliondeposit.  The cash deposits, in the formof certificates of deposit, are held at Great Basin Bank of Nevada along withan irrevocable letter of credit, also with Great Basin Bank of Nevada. On February 22,2008, the bond amount was decreased to $2.8 million, due to decreased handle,and still secured by $1.2 million in deposits, and we remain in compliance withRegulation 22.040. However, if we are required to increase the Regulation22.040 reserve and are unable to do so, it would have an adverse impact on usincluding, but not limited to, requiring a significant reduction in the numberof race/sports locations operated by Leroy’s, an elimination or reduction oftelephone wagering accounts, and/or a reduction in net income. At this time,our reserve requirement is deemed sufficient.

 

**Outlook**

** **

Our liquidity has been adversely impacted by a number of factors,including those summarized under “Overview” above.

 

At October 31, 2008, we had approximately $3.0million in cash and equivalents, a majority of which cash is held to fundwinning tickets and future bets. Based upon our anticipated operations,assuming the $500,000 line of credit with U.S. Bank is extended as discussedabove, we believe that cash on hand and operating cash flows will be adequateto meet our anticipated working capital requirements, capital expenditures, andscheduled payments for indebtedness for the remainder of fiscal 2009.  No assurance can be given, however, that ourcash flow will be sufficient, that our estimates for anticipated operationalcash needs will be accurate, that U.S. Bank extends our revolving line ofcredit, that new business development or unforeseen events will not occur, thatthe outcome of litigation will be positive, including any amounts that may beaccelerated under the Racusin settlement agreement, resulting in the need toraise additional funds sooner, or that we will be able to raise additionalfunds. We anticipate that we will require additional funds to meet our cashrequirements sometime in fiscal 2010. To raise capital, we may seek to selladditional securities, issue debt or convertible securities, obtain additional creditfacilities through financial institutions or third parties, or sell assets ofthe Company. No assurance can be given, however, that we will be able to raiseany additional capital, or that such capital will be available to us onacceptable terms. Given the current financial market disruption, credit crisisand state of the economy, including the current downturn in the gamingindustry, it may be particularly difficult at this time to raise any capital onacceptable terms. In the event we cannot raise additional capital or operationscontinue to decline, we may be unable to satisfy our obligations as they becomedue.  See “Liquidity and CapitalResources, Cash Flow”.

 

We do not haveany off-balance sheet financing arrangements or liabilities. 

 

**Results of Operations**

** **

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

 
| ** **                    | ** ** | **Three Months Ended October 31,** | ** ** | **Nine Months Ended October 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Summary**                   | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Revenues                      |       | $                                                      | 4,299,482  |                                                  | $          | 5,128,192 |   | $ | (828,710 | ) | (16.16 | ) | $ | 12,080,188 |   | $ | 13,292,560 |   | $ | (1,212,372 | ) | (9.12 | ) |
| Less: Costs and  Expenses     |       | 4,196,817                                              |       | 5,319,956                                             |       | (1,123,139 | ) | (21.11 | ) | 12,609,292 |   | 14,542,439 |   | (1,933,147 | ) | (13.29 | ) |
| Less: Other  Income (Expense) |       | (47,971                                                | )          | (4,614                                                | )          | (43,357 | ) | 939.68 |   | (145,343 | ) | (124,281 | ) | (21,062 | ) | (16.95 | ) |
|                          |       |                                                   |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)             |       | $                                                      | 54,694     |                                                  | $          | (196,378 | ) | $ | 251,072 |   | (127.85 | ) | $ | (674,447 | ) | (1,374,160 | ) | $ | 699,713 |   | (50.92 | ) |
|                               |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

** **

**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 October 31, 2008, decreased $(896,479) (-25.76%) over the threemonths ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

We experienced a decline in handle and win percentageduring the three months ended October 31, 2008, compared to the sameperiod last year. The decline in handle and the related win percentage is dueprimarily to the overall gaming economic recession.

 

**Wagering Segment total costs and expenses for thethree months ended October 31, 2008, decreased ($822,128)(-23.97%) overthe three months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs decreased ($724,135)(-24.60%) primarily due to cost reductions in personnel expense, and a decreasein advertising spending.

 

Selling, general and administrative costsdecreased ($111,136) (-26.54%) primarily due to decreased ticket writershortages charges in the three months ended October 31, 2008, compared tothe three months ended October 31, 2007.

 

Depreciation and amortization expenseincreased $13,173 (+19.51%) over the prior year’s three month period primarilydue to an increase in capitalized acquisitions made in prior periods for newand remodeled sports books.

 

An increase or decrease in handle is not necessarilyindicative of an increase or decrease in revenues or profits.  The types of wagers placed and the accuratepredictability of the outcomes of the games are also factors. Elimination ofunprofitable locations, closure of host properties, changes in state and/orfederal regulations, and other factors beyond our control may result indeclines in handle.

 

Subject to cost constraints, we intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently or reduce staffing with more automation.  There is no assurance that the number of raceand sports books operated by us will not decrease in the future due toelimination of unprofitable locations, closure of host properties, and otherfactors beyond our control, that we will be able to add new locations, and/orthat any new locations so added will be profitable.

 

**Hotel/Casino Segment.**

** **

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

 

**Hotel/Casino Segment revenues for the three monthsended October 31, 2008, decreased ($79,722) (-9.54%) over the three monthsended October 31, 2007.** This decrease is attributed to the following factors:

 

Casino revenues decreased ($30,657)(-7.77%) primarily due to decreased handle and wagering activities for thequarter ended October 31, 2008, compared to the same period ended October 31,2007, which can be attributed to reduced tourism travel and reduced localcustomers due to the economic recession.

 

Hotel revenues increased $10,386(+5.80%) in the third quarter of fiscal 2009 compared to the third quarter offiscal 2008 due to an increase in occupancy rate, primarily due to increasedmining activities in the area.

 

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Food and beverage revenues decreased($61,293) (-20.91%) primarily due to the decline in local casino customers forthe three months ended October 31, 2008 and a decline in tourism traffic,compared to the three months ended October 31, 2007.   The contra-revenue accounts of “casino cashincentives and other promotional allowances” were reduced slightly by the morestringent monitoring of these costs by management.

 

**Hotel/Casino Segment total costs and expenses forthe three months ended October 31, 2008, decreased ($243,925) (-27.53%)over the three months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for the casino operationsdecreased ($133,017) (-42.62%) for the three months ended October 31,2008, compared to the three months ended October 31, 2007, due to lowercasino revenue, decreased staffing,  andan emphasis on other cost controls.

 

Direct costs for the hotel operationsdecreased ($6,436) (-10.83%) primarily due to reduced staffing for the threemonths ended October 31, 2008, compared to the three months ended October 31,2007.

 

Direct costs for food and beverage operationsincreased $33,300 (+12.58%) primarily due to increased costs for food andbeverage, primarily transportation, for the three months ended October 31,2008, compared to the three months ended October 31, 2007.

 

Selling, general and administrative costsfor Sturgeon’s decreased ($136,804) (-76.34%) for the third quarter of fiscal2009 compared to the third quarter of fiscal 2008, primarily due to reducedstaffing and credit card fees, donations and other expenses.

 

**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 October 31, 2008 increased $147,491 (+18.15%) over the three monthsended October 31, 2007.** This is attributed primarily to increased equipment sales during thethird quarter of fiscal 2009 compared to the same quarter of fiscal 2008.

 

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

 

**Systems Segment total costs and expenses for thethree months ended October 31, 2008, decreased ($57,116) (-5.69%) over thethree months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for systems decreased($93,302) (-25.96%) over the prior three months ended October 31, 2007,primarily due to decreased wages and benefits resulting from a reduction andrealignment of personnel, improving our operational efficiencies.

 

Research and development costsdecreased ($97,765) (-41.26%) from the prior three months ended October 31,2007, primarily due to decreased personnel expense and greater efficiencies.

 

Selling, General and Administrativecosts increased $125,276 (+40.64%) from the prior three months ended October 31,2007, primarily due to a bad debt expense write off of $39,000 in this periodand other operating expenses.

 

Depreciation and amortizationincreased $8,675 (+8.75%) from the prior three months ended October 31,2007, due to increased property acquisitions, primarily due to the equipmentand software upgrades to our networks.

 

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

 

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Interest income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  The decreasein interest income of $12,156 is due primarily to decreased interest rates paidon our cash deposits and smaller amounts being held in our consolidated bankaccounts.

 

Litigation expense of $17,653 wasrecorded in the three months ended October 31, 2008; which was related tothe Racusin litigation settlement, compared to Racusin litigation expense of$28,871 for the same three month period of the prior fiscal year.  The decreased interest is due to a decline inthe principal amount owed to Racusin, due to our payments.

 

Other decreased $50,625 due todecreased rental income in the third quarter of fiscal 2009 compared to thethird quarter of fiscal 2008.

 

**For the Nine Months Ended October 31, 2008,Compared to the Nine Months Ended October 31, 2007.**

** **

**Wagering Segment.**

** **

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

 

**Wagering Segment revenues for the nine monthsended October 31, 2008 decreased ($999,387) (-12.49%) over the nine monthsended October 31, 2007.** This decrease is attributed to the following factors:

 

We experienced increased basketball and baseballhandle during the nine months ended October 31, 2008 compared to the sameperiod in the prior year due to having more locations and the improvements andexpansion of some of our previously existing locations.  However, the increase handle for those sportswas not carried forward to football, due to the economic recession. Additionally,the handle increases earlier in the year was more than offset by a reduction inthe win percentage for the nine months ended October 31, 2008 whencompared with the previous year.   Thiswas primarily due to negative change in the results of the last big game of theprofessional football season, held on February 3, 2008, which occurredduring the first quarter of fiscal 2009 and a lower than normal hold percentagefrom the last month of the second quarter which were primarily baseball wagersthrough the end of the third quarter.

 

**Wagering Segment total costs and expenses for thenine months ended October 31, 2008 decreased ($822,674) (-9.67%) over thenine months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs decreased ($956,189)(-12.96%) primarily due to reductions in personnel costs and a reduction inadvertising spending.

 

Selling, general and administrative costsincreased $101,261 (+10.97%) primarily due to increases in variousadministrative costs, including gaming license expenses, in the nine monthsended October 31, 2008 compared to the nine months ended October 31,2007, partially offset by a decrease in ticket writer shortages.

 

Depreciation and amortization expenseincreased $32,254 (+15.59%) over the prior year’s nine month period primarilydue to an increase in capitalized acquisitions for new and remodeled locationsmade during prior periods.

 

An increase or decrease in handle is not necessarilyindicative of an increase or decrease in revenues or profits.  The types of wagers placed and the accuratepredictability of the outcomes of the games are also factors. Elimination ofunprofitable locations, closure of host properties, changes in state and/orfederal regulations, and other factors beyond our control may result in declinesin handle.

 

Subject to cost constraints, we intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently or reduce staffing with more automation.  There is no assurance that the number of raceand sports books operated by us will not decrease in the future due toelimination of unprofitable locations, closure of host properties, and otherfactors beyond our control, that we will be able to add new locations, and/orthat any new locations so added will be profitable.

 

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**Hotel/Casino Segment.**

** **

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

 

**Hotel/Casino Segment revenues for the nine monthsended October 31, 2008, decreased ($243,831) (-10.19%) over the ninemonths ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Casino revenues decreased ($18,672)(-1.66%) compared to the nine months ended October 31, 2007, which can beattributed to the due to reduced tourism travel and reduced local customers dueto the economic recession.

 

Hotel revenues decreased ($74,821)(-13.20%) in the first nine months of fiscal 2009 compared to the same periodof fiscal 2008 due to a lower occupancy rate, primarily due to decreased travelwhich may have been influenced by slowing economic conditions and the price ofgasoline.

 

Food and beverage revenues decreased($155,305) (-19.61%) primarily due to the reduced tourism travel and reducedlocal customer traffic, due to the economic recession, for the nine monthsended October 31, 2008 compared to the nine months ended October 31,2007.  The contra-revenue accounts of “casinocash incentives and other promotional allowances” declined primarily due tocloser scrutiny of these costs by management combined with a decrease in hoteloccupancy.

 

**Hotel/Casino Segment total costs and expenses forthe nine months ended October 31, 2008, decreased ($745,378) (-26.95%)over the nine months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for the casino operationsdecreased ($131,055) (-14.80%) for the nine months ended October 31, 2008,compared to the nine months ended October 31, 2007, due to an emphasis oncost controls implemented by management.

 

Direct costs for the hotel operationsdecreased ($27,888) (-14.89%) primarily due to lower occupancies for the ninemonths ended October 31, 2008, compared to the nine months ended October 31,2007.

 

Direct costs for food and beverage operationsdecreased ($84,966) (-11.22%) primarily due to lower occupancies in the hotelfor the nine months ended October 31, 2008, but partially offset byincreased prices for food and beverages in the third quarter of fiscal 2009,compared to the nine months ended October 31, 2007.

 

Selling, general and administrative costsfor Sturgeon’s decreased ($517,128) (-69.56%) primarily because there was nobonus payment made during the first nine months of fiscal 2009 compared to thesame period of fiscal 2008, reduced personnel costs, lower credit card fees,donations and other expenses.

 

**Systems Segment.**

** **

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

 

**Systems Segment revenues for the nine months endedOctober 31, 2008, increased $30,846 (+1.06%) over the nine months ended October 31,2007.**  This increase isattributed to the following factors:

 

Systems revenues increased over the prior fiscal yeardue to the timing and in the number of infrequent or non-recurring sales duringthe nine months ended October 31, 2008, when compared to the nine monthperiod ended October 31, 2007.

 

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

 

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**Systems Segment total costs and expenses for thenine months ended October 31, 2008 decreased ($365,095) (-11.17%) over thenine months ended October 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for systems decreased($197,103) (-18.71%) over the prior nine months ended October 31, 2007,primarily due to decreased wages and benefits resulting from a reduction andrealignment of personnel, improving our operational efficiencies.

 

Research and development costsdecreased ($312,087) (-41.39%) from the prior nine months ended October 31,2007, primarily due to decreased personnel expense and greater efficiencies.

 

Selling, general and administrativecosts increased $108,417 (+9.24%) for the nine months ended October 31,2008, compared to the prior year nine month period, primarily due to a bad debtexpense write off of $39,000 in the third quarter of fiscal 2009 and otherincreased operating expenses.

 

Depreciation and amortizationincreased $35,678 (+12.42%) from the prior nine months ended October 31,2007, due to increased property acquisitions, primarily due to the equipmentand software upgrades to our networks.

 

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

 

Interest income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  The decreasein interest income of $45,934 is due primarily to decreased interest rates paidon our cash deposits and less overall cash held in deposits.

 

Litigation expense of $72,970 wasrecorded in the nine months ended October 31, 2008; of which $61,722 wasrelated to the Racusin litigation settlement, compared to Racusin litigationexpense of $137,208 for the same nine month period of the prior fiscalyear.  The decreased interest is due to adecline in the principal amount owed to Racusin, due to our payments.

 

**Critical Accounting Estimates and Policies.**

** **

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

 

**Wagering**

** **

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

 

**Hotel/Casino Revenue**

** **

We report the revenues of Sturgeon’s, which isprimarily comprised of slot revenue, hotel room revenue and food and beveragerevenue, in compliance with Nevada law and the regulations of the Nevada gamingregulators.  These revenues are generallyin the form of cash, personal checks, credit cards, or gaming chips and tokens,which do not require estimates.  We doestimate certain liabilities with payment periods that extend for longer thanseveral months.  We believe theseestimates are reasonable based on our assumptions related to possible outcomesin the future.  Future actual resultsmight differ materially from these estimates. Slot revenue is the drop

 

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(the total amount removedfrom the machine) less the fills and the payouts.  For non-gaming revenues, such as food andbeverage, hotel, etc., we record revenues in compliance with generally acceptedaccounting principles, recognizing revenue when it is earned.  The Sturgeon’s acquisition was completed on March 1,2006 and wagering revenues for the Sturgeon’s operation were reported for thefirst time in the fiscal year ended January 31, 2007.

 

**System — Software**

** **

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

 

**System — Hardware**

** **

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

 

**System — Maintenance**

** **

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

 

**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 Income Taxes**

** **

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

 

**Recent Accounting Pronouncements**

** **

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*, whichdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an Amendment of SFAS No 115*,which will permit the option of choosing to measure certain eligible items atfair value at specified election dates and report unrealized gains and lossesin earnings.  SFAS No. 157 iseffective for us for financial statements issued for the fiscal year ending January 31,2009, and interim period therein, except that for nonfinancial assets andliabilities, it will not become effective for us until the

 

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following year. Since wehave no assets or liabilities carried at estimated fair values, and we do notpresently intend to take the fair value option offered by SFAS No. 159,there will likely be no affect of SFAS No. 157 or SFAS No. 159 on ourfuture consolidated financial statements.

 

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

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements — an Amendment of Accounting Research Bulletin No. 51*,which establishes accounting and reporting standards for interests insubsidiaries, including certain variable interest entities, held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. The Statement also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. SFAS 160 will be effective for fiscal yearsbeginning after December 15, 2008. The Company currently has and presentlycontemplates obtaining no noncontrolling interests in any subsidiaries, andaccordingly, we do not expect any effect of SFAS 160 in the foreseeable future.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an Amendmentof FASB Statement No. 133”. SFAS No. 161 expands the disclosurerequirements in SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” regarding an entity’s derivative instruments and hedgingactivities. SFAS No. 161 will be effective for the Company’s fiscal yearand interim periods beginning February 1, 2009. However, we do not expectthat SFAS No. 161 will have an impact on the Company’s future financialcondition, results of operations or cash flows.

 

In April 2008, the FASB issued Staff Position No. 142-3“*Determination of the Useful Life of IntangibleAssets*” (“FSP No. 142-3”) to improve the consistency betweenthe useful life of a recognized intangible asset (under SFAS No. 142) andthe period of expected cash flows used to measure the fair value of theintangible asset (under SFAS No. 141R). FSP No. 142-3 amends thefactors to be considered when developing renewal or extension assumptions thatare used to estimate an intangible asset’s useful life under SFAS No. 142.The guidance in the new staff position is to be applied prospectively tointangible assets acquired after December 31, 2008. In addition, FSP No. 142-3increases the disclosure requirements related to renewal or extensionassumptions. Management is currently assessing the possible impact of theadoption of FSP No. 142-3 on our future consolidated financial statements.

 

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

## ** **

Not required.

 

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

## ** **

**Evaluation of Disclosure Controls and Procedures**

** **

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) asof October 31, 2008. It was determined that our disclosure controls andprocedures were effective as of the end of the period covered by this report, withthe exception of our late Form 8-K filing with regard to the $500,000 loan fromVictor Salerno. The Form 8-K filing was delayed due to the delay in finalizingthe terms of the loan and the immediate need of the funds by the Company. TheDirector are currently considering the fairness of these terms. In the future,a more timely Form 8-K will be filed.

 

**Changes in Internal Control over FinancialReporting**

** **

There has not been any changes in the Company’sinternal controls over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and15d-15(f)) during the three months ended October 31, 2008 that havematerially affected, or are reasonably likely to materially affect the Company’sinternal controls over financial reporting. *See also, Part II-OtherInformation, Item 1.A. Risk Factors.*

 

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# **PART II — OTHERINFORMATION**

# ** **

## **Item 1.  Legal Proceedings**

## ** **

For a description of our legal proceedings, see Note 4contained in the “Consolidated Notes to Financial Statements” of this QuarterlyReport on Form 10-Q, which is incorporated by reference in response tothis item.

 

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

## ** **

A description of our risk factors can be found in Item1A of our Annual Report on Form 10-K for the fiscal year ended January 31,2008 and subsequent Quarterly Reports on Form 10-Q. There were no materialchanges to those risk factors during the three months ended October 31,2008, except as follows:

 

**Liquidity — *If we areunable to raise additional capital in the near term, we may be unable tosatisfy our obligations as they become due.***

 

At October 31, 2008, we had approximately $3.0million in cash and equivalents, a majority of which cash is held to fundwinning tickets and future bets. Based upon our anticipated operations,assuming the $500,000 line of credit with U.S. Bank is extended as discussed herein,we believe that cash on hand and operating cash flows will be adequate to meetour anticipated working capital requirements, capital expenditures, andscheduled payments for indebtedness for the remainder of fiscal 2009.  No assurance can be given however, that ourcash flow will be sufficient, that our estimates for anticipated operationalcash needs will be accurate, that U.S. Bank extends our revolving line ofcredit, that new business development or unforeseen events will not occur, thatthe outcome of litigation will be positive, resulting in the need to raiseadditional funds sooner, or that we will be able to raise additional funds. Weanticipate that we will require additional funds to meet our cash requirementssometime in fiscal 2010. To raise capital, we may seek to sell additionalsecurities, issue debt or convertible securities, obtain additional creditfacilities through financial institutions or third parties, or sell assets ofthe Company. No assurance can be given, however, that we will be able to raiseany additional capital, or that such capital will be available to us onacceptable terms. Given the current financial market disruption, credit crisisand state of the economy, including the current downturn in the gaming industry,it may be particularly difficult at this time to raise any capital onacceptable terms. In the event we cannot raise additional capital or operationscontinue to decline, we may be unable to satisfy our obligations as they becomedue.

 

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**Staffing Reductions andInternal Controls — *Due to our staffreductions and reduced staff hours worked, particularly in the Accountingdepartment, we may experiencedeficiencies in disclosure controls and internal controls over financialreporting leading to a material weakness and non-compliance with theSarbanes-Oxley Act of 2002.***

** **

Subsequent to October 31, 2008, we have reducedstaffing hours worked in the accounting and revenue auditing areas and may haveadditional layoffs in the future.  Thelack of sufficient staffing may cause existing controls to erode, possiblyleading to a deficiency in disclosure controls and internal controls overfinancial reporting. While every effort will be made to monitor and retainthese controls, there can be no assurance that we will continue to haveeffective internal controls over financial reporting.

 

## **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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**Table of Contents**

 

**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:    December 15,  2008 |   |
|-------------------------------------------------------|--------|
|                                                  |   |
| /s/  Victor J. Salerno                                |   |
| Victor  J. Salerno                                    |   |
| President, Chief Executive  Officer, Chief Operating  |   |
| Officer,  and Chairman of the Board of Directors      |   |
|                                                  |   |
| /s/  Melody J. Sullivan                               |   |
| Melody  J. Sullivan                                   |   |
| Chief Financial Officer  and Treasurer                |   |

 

24

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