** **

**UNITED STATES********SECURITIES 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 periodended:  October 31, 2009**

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

 

**For the transition period from:                   to                  **

 

**Commission filenumber:  000-20685**

 

**AMERICAN WAGERING, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Nevada**                                                      | ** ** | **88-0344658**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **675 Grier Drive, Las Vegas,  Nevada**   | ** ** | **89119**  |
|-------------------------------------------|------------|------------|
| (Address of principal  executive offices) |       | (Zip Code) |

 

**702-735-0101**

(Registrant’stelephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.** **Yes x   No o

 

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

 

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

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

 

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

 

**APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

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

 

**APPLICABLE ONLY TOCORPORATE ISSUERS**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date:****As of December 11, 2009, there were8,129,879 shares of common stock, par value $0.01, outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| PART I —  FINANCIAL INFORMATION                                                                     | 3      |
|---------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                          |   |
| Item 1. Financial  Statements                                                                                 | 3      |
| Consolidated  Balance Sheets as of October 31, 2009 (Unaudited) and January 31,  2009               | 3      |
| Consolidated  Statements of Operations for the Three and Nine Months Ended October 31,  2009 (Unaudited) | 4      |
| Consolidated  Statements of Cash Flows for the Nine Months Ended October 31, 2009 and  2008 (Unaudited)  | 5      |
| Notes to  Consolidated Financial Statements (Unaudited)                                                       | 6      |
|                                                                                                          |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                           | 22     |
|                                                                                                          |   |
| Item 4T. Controls  and Procedures                                                                             | 22     |
|                                                                                                          |   |
| PART II — OTHER  INFORMATION                                                                        | 23     |
|                                                                                                          |   |
| Item 1. Legal  Proceedings                                                                                    | 23     |
|                                                                                                          |   |
| Item  1A. Risk Factors                                                                                        | 23     |
|                                                                                                          |   |
| 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                                                                                             | 24     |

 

2

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# ** **

# **PART I —FINANCIAL INFORMATION**

# ** **

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

##  

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **CONSOLIDATEDBALANCE SHEETS**

### **asof October 31, 2009 (Unaudited) and January 31, 2009**

 
| ** **                                                                                                                                       | ** ** | **October 31,   2009** | ** **    | **January 31,   2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**             | ** **    | ** **                  | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **                  | ** **    | ** **                  | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                        |          |                        |       |
| Cash and Equivalents                                                                                                                             |       | $                           | 2,640,167     |                        | $          | 3,357,978 |   |
| Restricted Cash                                                                                                                                  |       | 1,457,871                   |          | 1,298,463                   |       |
| Accounts Receivable                                                                                                                              |       | 207,800                     |          | 219,264                     |       |
| Inventories                                                                                                                                      |       | 164,937                     |          | 219,601                     |       |
| Deferred Tax Assets, net  of allowance                                                                                                           |       | 369,000                     |          | 369,000                     |       |
| Prepaid Expenses                                                                                                                                 |       | 389,698                     |          | 379,910                     |       |
| ** **                                                                                                                                       | ** ** | **5,229,473**               | ** **    | **5,844,216**               | ** ** |
|                                                                                                                                             |       |                        |          |                        |       |
| Property and Equipment,  net of accumulated depreciation and amortization                                                                        |       | 3,554,211                   |          | 4,171,160                   |       |
| Goodwill                                                                                                                                         |       | 103,725                     |          | 103,725                     |       |
| Other                                                                                                                                            |       | 215,739                     |          | 321,222                     |       |
| ** **                                                                                                                                       | ** ** | **$**                       | **9,103,148** | ** **                  | **$**      | **10,440,323** | ** ** |
|                                                                                                                                             |       |                        |          |                        |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **                  | ** **    | ** **                  | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                        |          |                        |       |
|                                                                                                                                             |       |                        |          |                        |       |
| Short-Term Debt                                                                                                                                  |       | $                           | 210,000       |                        | $          | 499,295 |   |
| Current Portion of  Long-Term Debt, including $311,464 and $0 due to Chief Executive Officer                                                     |       | 732,126                     |          | 612,759                     |       |
| Accounts Payable                                                                                                                                 |       | 1,265,334                   |          | 1,191,649                   |       |
| Accrued Expenses                                                                                                                                 |       | 606,281                     |          | 652,439                     |       |
| Unpaid Winning Tickets                                                                                                                           |       | 1,575,101                   |          | 1,193,900                   |       |
| Customer Deposits and  Other                                                                                                                     |       | 1,639,325                   |          | 2,150,230                   |       |
| ** **                                                                                                                                       | ** ** | **6,028,167**               | ** **    | **6,300,272**               | ** ** |
|                                                                                                                                             |       |                        |          |                        |       |
| Long-Term Debt, less  current portion, including $688,536 and $1,000,000 due to Chief Executive  Officer                                         |       | 2,457,137                   |          | 3,075,244                   |       |
| Redeemable Series A  Preferred Stock (3,238 shares)                                                                                         |       | 323,800                     |          | 323,800                     |       |
| Other                                                                                                                                            |       | 284,379                     |          | 530,071                     |       |
|                                                                                                                                             |       | 9,093,483                   |          | 10,229,387                  |       |
|                                                                                                                                             |       |                        |          |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                        |          |                        |       |
| Series A Preferred  Stock — 10.00% cumulative; $100.00 par and liquidation value; 18,924 shares  authorized; 10,924 shares outstanding |       | 1,092,400                   |          | 1,092,400                   |       |
| Common Stock - $0.01 par  value; 25,000,000 shares authorized; 8,129,879 shares issued                                                           |       | 81,299                      |          | 81,299                      |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,551,869                  |          | 12,361,309                  |       |
| Deficit                                                                                                                                          |       | (13,388,410                 | )             | (12,996,579                 | )          |
| Treasury Stock, at cost  (61,100 common shares)                                                                                                  |       | (327,493                    | )             | (327,493                    | )          |
| ** **                                                                                                                                       | ** ** | **9,665**                   | ** **    | **210,936**                 | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                       | **9,103,148** | ** **                  | **$**      | **10,440,323** | ** ** |

 

**See Notes to ConsolidatedFinancial Statements**

 

3

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**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

### **(Unaudited)**

 
| ** **                                 | ** ** | **For the Three Months Ended   October 31,** | ** ** | **For the Nine Months Ended   October 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| **REVENUES**                               |       |                                              |       |                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                                   |       | $                                                 | 1,937,282  |                                             | $          | 2,583,246 |   | $ | 5,834,061 |   | $ | 7,003,494 |   |
| Hotel Casino                               |       | 620,185                                           |       | 756,029                                          |       | 1,849,359 |   | 2,148,264 |   |
| Systems                                    |       | 681,910                                           |       | 960,207                                          |       | 2,251,715 |   | 2,928,430 |   |
| ** **                                 |       | 3,239,377                                         |       | 4,299,482                                        |       | 9,935,135 |   | 12,080,188 |   |
| **OPERATING COSTS AND EXPENSES**           |       |                                              |       |                                             |       |   |   |   |   |
| **Direct Costs:**                          |       |                                              |       |                                             |       |   |   |   |   |
| Wagering                                   |       | 1,754,040                                         |       | 2,219,824                                        |       | 4,749,657 |   | 6,421,948 |   |
| Hotel Casino                               |       | 471,365                                           |       | 530,015                                          |       | 1,393,431 |   | 1,585,844 |   |
| Systems                                    |       | 214,425                                           |       | 266,122                                          |       | 599,563 |   | 856,607 |   |
| ** **                                 |       | 2,439,830                                         |       | 3,015,961                                        |       | 6,742,651 |   | 8,864,399 |   |
| **Operating Expenses:**                    |       |                                              |       |                                             | ** ** | ** ** |   |   |   |
| Research and Development                   |       | 216,902                                           |       | 139,191                                          |       | 487,812 |   | 441,988 |   |
| Selling, General and  Administrative       |       | 698,507                                           |       | 783,426                                          |       | 2,066,423 |   | 2,532,857 |   |
| Depreciation and  Amortization             |       | 243,398                                           |       | 258,239                                          |       | 740,503 |   | 770,048 |   |
| ** **                                 |       | 1,158,807                                         |       | 1,180,856                                        |       | 3,294,738 |   | 3,744,893 |   |
|                                       |       |                                              |       |                                             |       |   |   |   |   |
| **OPERATING INCOME (LOSS)**                |       | (359,260                                          | )          | 102,665                                          |       | (102,254 | ) | (529,104 | ) |
|                                       |       |                                              |       |                                             |       |   |   |   |   |
| **OTHER INCOME (EXPENSE)**                 |       |                                              |       |                                             | ** ** | ** ** |   |   |   |
| Interest Income                            |       | 1,320                                             |       | 10,245                                           |       | 8,362 |   | 37,741 |   |
| Interest Expense, Chief  Executive Officer |       | (25,000                                           | )          | (12,282                                          | )          | (75,000 | ) | (35,283 | ) |
| Interest Expense, other                    |       | (49,692                                           | )          | (51,541                                          | )          | (139,033 | ) | (161,118 | ) |
| Litigation Expense                         |       | (16,866                                           | )          | (17,653                                          | )          | (43,283 | ) | (72,970 | ) |
| Other                                      |       | 80                                                |       | 23,260                                           |       | 65,336 |   | 86,287 |   |
|                                       |       | (90,158                                           | )          | (47,971                                          | )          | (183,618 | ) | (145,343 | ) |
| ** **                                 |       |                                              |       |                                             | ** ** | ** ** |   |   |   |
| **NET INCOME (LOSS)**                      |       | $                                                 | (449,418   | )                                                | $          | 54,694 |   | $ | (285,872 | ) | $ | (674,447 | ) |
| ** **                                 |       |                                              |       |                                             | ** ** | ** ** |   |   |   |
| **NET INCOME (LOSS) PER COMMON  SHARE**    |       |                                              |       |                                             |       |   |   |   |   |
| **BASIC**                                  |       | $                                                 | (0.06      | )                                                | $          | 0.00 |   | $ | (0.05 | ) | $ | (0.10 | ) |
| **DILUTED**                                |       | $                                                 | —     |                                             | $          | 0.00 |   | $ | — |   | $ | — |   |

 

**See Notes to ConsolidatedFinancial Statements**

 

4

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

### **(Unaudited)**

 
| ** **                                                         | ** ** | **For the Nine Months Ended  October 31,** | ** **    |
|--------------------------------------------------------------------|------------|-------------------------------------------------|---------------|
| ** **                                                         | ** ** | **2009**                                        | ** **    | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **Operating Activities**                                           | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **Net cash provided by (used in)  operating activities**           | ** ** | **$**                                           | **229,751**   | ** ** | **$** | **(311,164** | **)** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **Investing Activities**                                           | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| Restricted cash deposits                                           |       | (188,169                                        | )             | (559,161 | ) |
| Withdrawal of restricted  cash                                     |       | 28,761                                          |          | 601,780 |   |
| Proceeds from the sale of  property and equipment                  |       | —                                          |          | 1,500 |   |
| Purchase of property and  equipment                                |       | (119,160                                        | )             | (301,577 | ) |
| **Net cash used in investing  activities**                         | ** ** | **(278,568**                                    | **)**         | **(257,458** | **)** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **Financing Activities**                                           |       |                                            |          |   |   |
| Repayment of borrowings                                            |       | (563,740                                        | )             | (3,292,365 | ) |
| Proceeds from borrowings                                           |       | 705                                             |          | 3,645,694 |   |
| Dividends on preferred  stock                                      |       | (105,959                                        | )             | (106,008 | ) |
| **Net cash provided by (used in)  financing activities**           | ** ** | **(668,994**                                    | **)**         | **247,321** | ** ** |
|                                                               |       |                                            |          |   |   |
| **NET DECREASE IN CASH AND  EQUIVALENTS**                          | ** ** | **(717,811**                                    | **)**         | **(321,301** | **)** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **CASH AND EQUIVALENTS, BEGINNING  OF PERIOD**                     | ** ** | **3,357,978**                                   | ** **    | **3,316,595** | ** ** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **CASH AND EQUIVALENTS, END OF  PERIOD**                           | ** ** | **$**                                           | **2,640,167** | ** ** | **$** | **2,995,294** | ** ** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                           | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| Cash paid for interest                                             | ** ** | **$**                                           | **82,183**    | ** ** | **$** | **77,864** | ** ** |
| ** **                                                         | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| **NON-CASH INVESTING ACTIVITY:**                                   | ** ** | ** **                                      | ** **    | ** ** | ** ** |
| Property and equipment  acquired with bank and/or vendor financing | ** ** | **$**                                           | **6,424**     | ** ** | **$** | **17,416** | ** ** |

 

**See Notes to Consolidated FinancialStatements**

 

5

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** **

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

### **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

### **(Unaudited)**

**THREEAND NINE MONTHS ENDED OCTOBER 31, 2009**

** **

**1. Basis of Presentation**

** **

The accompanying unaudited interim consolidatedfinancial statements of American Wagering, Inc. and its subsidiaries(collectively “the Company” or “AWI”) have been prepared in accordance with theinstructions to Form 10-Q as published by the Securities and ExchangeCommission (“SEC”). The financial statements do not include all of the informationand disclosures required by generally accepted accounting principles for annualfinancial statements. All significant inter-company accounts and transactionshave been eliminated in consolidation. In the opinion of management, alladjustments necessary for a fair presentation have been included. Due toseasonality and other factors, results of operations for any interim period arenot necessarily indicative of expected annual results. Management has evaluatedthe consolidated financial statements for subsequent events through December 15,2009, which was the date the consolidated financial statements were issued, andthis Form 10-Q was filed with the SEC. These unaudited interimconsolidated financial statements should be read in conjunction with theaudited annual consolidated financial statements of the Company, and therelated notes, included in the Company’s Annual Report on Form 10-K filedon May 4, 2009, with the SEC, from which the balance sheet information asof January 31, 2009 was derived.

 

**2. New Accounting Standards**

** **

**The Financial Accounting Standards Board (“FASB”) issuedStatement No. 168, “Accounting Standards Codification (“ASC”)” in June 2009.This statement incorporates all then existing accounting standards, other thanthose promulgated by the Securities and Exchange Commission, into the FASBcodification ASC Topic 105, “Generally Accepted Accounting Principles” and iseffective for interim and annual periods ending after September 15, 2009.The change from FASB references to ASC Topic references did not have any effecton the Company’s financial position, results of operations, or cash flows.**

** **

**3. 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, there is nocalculation made or presented for diluted net loss per common share for lossperiods, since the effect of including potentially dilutive common shares wouldbe anti-dilutive because of the losses. Potentially dilutive stock options forcommon shares of 400 and 1,200 for the three and nine months ended October 31,2009, respectively, were not used to compute diluted loss per share because theeffects would be anti-dilutive. In addition, other stock options for commonshares of 647,299 and 747,699 were outstanding for the nine months ended October 31,2009 and 2008 that were not “in-the-money” and therefore excluded from thecalculation.

 

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

 
| ** **                                                       | ** ** | **Numerator** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                       | ** ** | **2009**      | ** ** | **2008** | ** ** |
| **Three Months Ended October 31,**                          |       |          |       |   |   |
| ** **                                                       |       |          |       |   |   |
| Net income (loss)                                                |       | $             | (449,418   | ) | $ | 54,694 |   |
| Less preferred stock  dividends                                  |       | (35,696       | )          | (35,594 | ) |
| Net income (loss)  available to common shares, basic and diluted |       | $             | (485,114   | ) | $ | 19,100 |   |

 
| ** **                                         | ** ** | **Denominator** | ** ** |
|----------------------------------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | **2009**        | ** ** | **2008** | ** ** |
| Weighted average common  shares outstanding, basic |       | 8,068,779       |       | 8,068,779 |   |

 

6

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| ** **                                           | ** ** | **Denominator** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
| Effect of dilutive stock  options                    |       | —          |       | 691 |   |
| Weighted average common  shares outstanding, diluted |       | 8,068,779       |       | 8,069,470 |   |
|                                                 | ** ** | ** **      | ** ** | ** ** | ** ** |
| Net income (loss) per  common share                  | ** ** | ** **      | ** ** | ** ** | ** ** |
| Basic                                                |       | $               | (0.06      | ) | $ | 0.00 |   |
| Diluted                                              |       | $               | —     |   | $ | 0.00 |   |

 
| ** **                                              | ** ** | **Numerator** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|
| ** **                                              | ** ** | **2009**      | ** ** | **2008** | ** ** |
| **Nine Months Ended  October 31,**                 |       |          |       |   |   |
| ** **                                              |       |          |       |   |   |
| Net loss                                                |       | $             | (285,872   | ) | $ | (674,447 | ) |
| Less preferred stock  dividends                         |       | (105,959      | )          | (106,008 | ) |
| Net loss available to  common shares, basic and diluted |       | $             | (391,831   | ) | $ | (780,455 | ) |

 
| ** **                                           | ** ** | **Denominator** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
| Weighted average common  shares outstanding, basic   |       | 8,068,779       |       | 8,068,787 |   |
| Effect of dilutive stock  options                    |       | —          |       | — |   |
| Weighted average common  shares outstanding, diluted |       | 8,068,779       |       | 8,068,787 |   |

 
| Net  loss per common share |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|
| Basic                      |   | $      | (0.05  | )      | $      | — |   |
| Diluted                    |   | $      | — |   | $      | — |   |

 

**4. Income Taxes**

** **

At October 31, 2009, the Company had federal taxnet operating loss (“NOL”) carryforwards available to potentially reduce futuretax obligations in the aggregate amount of approximately $6.7 million, of whichapproximately $1.3 million expires in 2019. In assessing the realizability ofdeferred tax assets, which resulted primarily from the NOLs, the Companyconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.

 

Management believes that, subject to the satisfactorynegotiation of a settlement with Racusin, or success on the Company’sprocedural alternatives (Note 5), the Company will be profitable for at leastthe short-term future and that it is therefore more likely than not that theCompany’s deferred tax asset of $369,000, net of the valuation allowanceprovided, will be realized.

 

The Company’s estimated annual effective tax rate of zero for the interim periods presenteddiffers from statutory tax rates primarily due to the expected utilization ofNOL carryforwards or changes in the valuation allowance for deferred taxassets.

 

**5. Contingencies**

** **

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

 

As of October 31, 2009, the aggregate recordedprovisions equal to the lower end of the estimated probable loss range for thefollowing matters in litigation or other disputes, included in long-term debt,was $232,642, excluding future legal and related defense costs and judgmentinterest.

 

7

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**Racusin**

** **

The Company and Racusin entered into the SettlementAgreement on September 3, 2004. On or about March 11, 2005, theCompany consummated its Plan of Reorganization and emerged from Bankruptcy. Onor about July 27, 2005, the Bankruptcy Court approved an InterpleaderOrder, whereby pursuant to the Settlement Agreement, the Company agreed toplace 250,000 shares of common stock with the clerk of the court aspayment of the Racusin Claim while Racusin pursued its appeal of the BankruptcyAppellate Panel’s decision in our favor to the 9th Circuit Court ofAppeals. The Interpleader Order further stated that the Company’s stock wouldbe substituted with cash payment in the event that the 9th Circuitreversed the Bankruptcy Appellate Panel which decision was subsequentlyreversed, leading to the November 2, 2007 hearing with the BankruptcyCourt. On November 2, 2007, the Bankruptcy Court heard an argument todetermine whether the Company could withdraw its 250,000 shares of commonstock and whether it could begin depositing funds pursuant to a scheduleattached to the Company’s motion which calculated estimated post-judgmentsimple interest at 8% per annum, from March 11, 2005, without taking intoconsideration the Interpleader Order of July 27, 2005, which was still ineffect. That is, by calculating post-judgment interest during the same timethat our stock was held by the Court, we previously accrued interest over aperiod of time for which interest we believed should not be accrued pursuant tothe Interpleader Order.

 

As previously reported, on March 17, 2008, theCompany filed with the Bankruptcy Court what it believed was an appropriatelycorrected amortization schedule (“Corrected Amortization Schedule”) relating tothe calculation of pre-judgment interest occurring under the settlementagreement. A hearing was held on May 8, 2009, regarding a Motion forSummary Judgment filed by Racusin related to the Company’s filing of theCorrected Amortization Schedule. The Court entered its order on August 18,2009, granting the Motion for Summary Judgment in favor of Racusin, awardingdamages as of May 1, 2009. The total damages awarded pursuant to the orderwere $3,935,932.70 of which $2,306,649.25 has already been paid (including $1,806,041.80paid into the bankruptcy court registry). Therefore, as of May 1, 2009,$1,629,283.45 at 12% interest per annum is deemed due and payable immediately,less any principal amounts deposited into the bankruptcy court’s registry on orafter May 1, 2009 which amounts to $175,000, through November 1,2009. The remaining amount of $1,429,283.45 exceeds the existing recordedcurrent liability of $300,000, which is in accordance with management’sinterpretation of the settlement agreement and related proceedings. The Companyis attempting to negotiate a settlement with Racusin and, based on legalarguments that management believes to have merit, is considering its proceduralalternatives. Management intends to file a motion for a rehearing, or in thealternative, a motion for reconsideration and if unsuccessful, may file anappeal to the U.S. District Court of Nevada, which may require the posting ofan appeal bond. In the event the Company is unable to negotiate a settlementunder acceptable terms, post an appeal bond, or is also unsuccessful as to itsother procedural alternatives, it would likely be unable to satisfy itsobligations as they become due and may, therefore, be unable to continue as agoing concern depending, in part, on the course of action pursued by Racusin inthis matter and the Company’s ability, if any, to finance the judgment. Therewere no material developments in this matter during the three months ended October 31,2009.

 

**Internet Sports International, Ltd.**

** **

This case has been removed from arbitration andrecalendared in the District Court of Clark County, Nevada; however, there wereno material developments in this matter during the three months ended October 31,2009 from the fiscal year ended January 31, 2009.

 

EconomicConditions and Related Risks and Uncertainties

 

The United States is currently experiencing a severeeconomic downturn accompanied by, among other things, weakness in thecommercial and investment banking systems resulting in reduced credit andcapital financing availability, and highly curtailed gaming and otherrecreational activities, and general discretionary consumer spending, and isalso engaged in war, all of which are likely to continue to have far-reachingeffects on economic conditions in the country for an indeterminate period. Theeffects and duration of these developments and related risks and uncertaintieson our future operations and cash flows, including, our principal officer’sability to continue to provide financial support to the Company, as in the past,and other access to capital or credit financing, cannot be estimated at thistime but may likely be significant.

 

8

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UninsuredCash Deposits

 

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

 

RestrictedCash Requirements (Regulation 22.040)

 

Nevada Gaming Commission Regulation 22.040 (“Regulation22.040”) requires us to maintain reserves (cash, surety bonds, irrevocablestandby letter of credit, etc.) sufficient to cover any outstanding wageringliability including unpaid winning tickets, future tickets and telephoneaccount deposits. From November 16, 2007 to May 8, 2009, wemaintained a Regulation 22.040 reserve in the form of a surety bond issued byFidelity and Deposit Company of Maryland (a subsidiary of Zurich AmericanInsurance) (“Fidelity”) secured by $1.2 million in cash deposits. The cashdeposits, in the form of one certificate of deposit and one checking account,are held at Great Basin Bank of Nevada (now Nevada State Bank).

 

Additionally, on October 1,2009, subject to the execution of definitive pledge agreements, Victor J.and Terina Salerno, the Company’s Chief Executive Officer and General Counsel,respectively, agreed to pledge a certificate of deposit in the amount of$200,000 in favor of the Nevada Gaming Control Board (“NGCB”), and Robert andTracey Kocienski agreed to pledge certificates of deposit in the aggregateamount of $500,000, for the benefit of the Company to increase the Company’sreserve balance to satisfy the requirements of Regulation 22.040. The pledgedcertificates of deposit will be accounted for as off-balance sheetarrangements. On November 23, 2009, the Salernos and the Kocienskis eachsigned a definitive agreement in favor of the NGCB, pledging their respectivecertificates of deposit.

 

Any reserve amount may be released to the NGCB if,pursuant to Regulation 22.040, it determines such funds are necessary toprotect Leroy’s wagering creditors. The Company has agreed to pay Mr. and Mrs. Salernoand Mr. and Mrs. Kocienski a fee in connection with the pledges equalto 1% per month of the pledged amounts. With the addition of the pledgedcertificates of deposit in the agreed upon amount of $700,000, the Company’scurrent reserve balance is $2.680 million as of October 31, 2009.

 

If the required reserve amount is subsequentlyincreased substantially and/or is not commensurate with the seasonality of theCompany’s wagering business, the Company may be unable to either fund thereserve or, alternatively, obtain a surety bond to satisfy the requirement. Thepossible effects of not meeting the requirement may include, but are notnecessarily limited to, a reduction in the number of the Company’s race/sportslocations and/or the elimination of the telephone wagering accounts which wouldadversely affect the Company’s operating results and cash flows.

 

**6. Stock Options**

** **

Activity related to both the employee and directors’stock option plans for the nine months ended October 31, 2009 and 2008 wasas follows:

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

 

9

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| ** **                        | ** ** | **Option  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------------------|------------|
| Granted                           |       | —             |       |                                   |       |
| Exercised                         |       | —             |       |                                   |       |
| Forfeited or canceled             |       | —             |       |                                   |       |
|                              |       |               |       |                                   |       |
| Balance at  October 31, 2008 |       | 749,299            |       | $                                      | 1.75       |   |
|                                   |            |                    |            |                                        |            |  |

 

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

 
| ** **                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Life** | ** ** |
|------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Exercisable                  |       | 587,299    |       | $                                       | 1.85       |                                    | 3.67 years |   |
| Available for future  grants |       | 310,767    |       | —                                  |       | —                                  |       |
|                              |            |            |            |                                         |            |                                         |            |  |

 

Non-cash stock-based compensation expense recorded inthe line item “Selling, General and Administrative Expenses” on theconsolidated income statements for the three months ended October 31, 2009and 2008 was $5,961 and $12,108, respectively. Non-cash stock-basedcompensation expense recorded “Selling, General and Administrative Expense” forthe nine months ended October 31, 2009 and 2008 was $43,683 and $55,919,respectively.

 

**7. Business Segments**

** **

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

 
| ** **                   | ** ** | **For the Three Months Ended   October 31,** | ** ** | **For the Nine Months Ended   October 31,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues:**                |       |                                              |       |                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                     |       | $                                                 | 1,937,282  |                                             | $          | 2,583,246 |   | $ | 5,834,061 |   | $ | 7,003,494 |   |
| Hotel Casino                 |       | 620,185                                           |       | 756,029                                          |       | 1,849,359 |   | 2,148,264 |   |
| Systems                      |       | 681,910                                           |       | 960,207                                          |       | 2,251,715 |   | 2,928,430 |   |
| ** **                   |       | $                                                 | 3,239,377  |                                             | $          | 4,299,482 |   | $ | 9,935,135 |   | $ | 12,080,188 |   |
| **Operating income (loss):** |       |                                              |       |                                             |       |   |   |   |   |
| Wagering                     |       | $                                                 | (180,885   | )                                                | $          | (24,797 | ) | $ | 10,468 |   | $ | (682,292 | ) |
| Hotel Casino                 |       | 1,498                                             |       | 113,935                                          |       | 28,919 |   | 128,315 |   |
| Systems                      |       | (179,873                                          | )          | 13,527                                           |       | (141,641 | ) | 24,873 |   |
|                         |       | (359,260                                          | )          | 102,665                                          |       | (102,254 | ) | (529,104 | ) |
| **Other expense, net**       |       | (90,158                                           | )          | (47,971                                          | )          | (183,618 | ) | (145,343 | ) |
| **Net Income (Loss)**        |       | $                                                 | (449,418   | )                                                | $          | 54,694 |   | $ | (285,872 | ) | $ | (674,447 | ) |

 

Additional informationfor the Hotel Casino segment follows:

 

10

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| ** **                               | ** ** | **For the Three Months Ended   October 31,** | ** ** | **For the Nine Months Ended   October 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues:**                            |       |                                              |       |                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                                   |       | $                                                 | 284,358    |                                             | $          | 334,697 |   | $ | 884,632 |   | $ | 1,019,694 |   |
| Hotel                                    |       | 145,146                                           |       | 189,517                                          |       | 417,366 |   | 492,105 |   |
| Food/Beverage                            |       | 190,681                                           |       | 231,815                                          |       | 547,361 |   | 636,465 |   |
| ** **                               |       | 620,185                                           |       | 756,029                                          |       | 1,849,359 |   | 2,148,264 |   |
| **Direct Costs and Expenses**            |       |                                              |       |                                             |       |   |   |   |   |
| Casino                                   |       | 224,525                                           |       | 179,076                                          |       | 681,772 |   | 754,160 |   |
| Hotel                                    |       | 46,194                                            |       | 53,012                                           |       | 133,378 |   | 159,355 |   |
| Food/Beverage                            |       | 200,646                                           |       | 297,926                                          |       | 578,280 |   | 672,328 |   |
|                                     |       | 471,365                                           |       | 530,014                                          |       | 1,393,430 |   | 1,585,843 |   |
| **Selling, General and  Administrative** |       | 83,956                                            |       | 42,404                                           |       | 235,134 |   | 226,254 |   |
| **Depreciation and Amortization**        |       | 63,366                                            |       | 69,676                                           |       | 191,876 |   | 207,852 |   |
| ** **                               |       | 618,687                                           |       | 642,094                                          |       | 1,820,440 |   | 2,019,949 |   |
| **Operating Income**                     |       | $                                                 | 1,498      |                                             | $          | 113,935 |   | $ | 28,919 |   | $ | 128,315 |   |

 

**8. Subsequent Event**

** **

**On November 17, 2009, AWI Gaming , Inc. (“AWIGaming”), a wholly-owned subsidiary of American Wagering, Inc., enteredinto an agreement (the “Agreement”) to sell to 777 Gaming, Inc., a Nevadacorporation (“777 Gaming”), substantially all the assets and businessescommonly known as Sturgeon’s Inn and Casino (“the Casino”). On December 8,2009, 777 Gaming issued a request to the title company to cancel the escrow.AWI Gaming executed the cancellation on December 10, 2009.**

 

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

 

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

 

Definitions. For the purposes of this report, the following terms have the followingmeanings:

 

“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 thefollowing subsidiaries are to continue:

 

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

 

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

 

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

 

·                  Sturgeon’s — effectively operating the hotel casinowhile periodically reviewing and modifying existing procedures and personnelalignment to increase efficiency and reduce expenses

 

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

 

Our local, regional and national economy has beennegatively impacted due to a number of factors, including the nationwideeconomic downturn and the subprime mortgage crisis.  Confidence in the credit market has alsoeroded, which resulted in a tightening of credit availability.  Duringfiscal 2009, and continuing through most of the third quarter of fiscal 2010,Las Vegas has experienced higher than average foreclosure and unemployment ratesand reduced passenger traffic at McCarran airport.  Consumer demand for gambling, due todecreased disposable income, has declined as a result of the current economicenvironment.  We have also experienced a change in gambling patterns ofour patrons, including a trend toward more conservative bets, which tend to beless profitable to the Company.  In addition, because Sturgeon’s Hotel andCasino is heavily dependent on the drive-through market, these factors have andwill continue to have an adverse affect on our business.  Accordingly, ifthe economic downturn in the United States continues, it will likely continueto hurt our financial performance, due to, among other things, decreasedwagering activity and a change in the types of wagers made. More specifically,sportsbook handle and win for October 2009, was very disappointing due toa decrease in hold and wagers as a result of the mix of wagers. Because ofthese factors, total revenues for the three and nine months ended October 31,2009, relative to the comparable prior year period were down 25% and 18%,respectively; direct costs were down 19% and 24%, respectively; and operatingexpense were down 2% and 12%, respectively.

 

**Liquidity and Capital Resources.**

** **

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

 

As of October 31, 2009, we had a working capitaldeficit of ($798,694) compared to a working capital deficit of ($280,580) at October 31,2008. (Also see Restricted Cash Requirements (Regulation 22.040.))  The decrease in working capital is primarilydue to the timing of future bets and unpaid tickets outstanding; influenced bythe poor economic environment; and the result of the ongoing pay-down of theRacusin judgment and U.S. Bank loan obligations.

 

As previously reported, on March 17, 2008, theCompany filed with the Bankruptcy Court what it believed was an appropriatelycorrected amortization schedule (“Corrected Amortization Schedule”) relating tothe calculation of pre-judgment interest occurring under the settlementagreement regarding the Racusin matter. A hearing was held on May 8, 2009, regarding a Motion for SummaryJudgment filed by Racusin related to the

 

13

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Company’s filing of theCorrected Amortization Schedule. The Court entered its order on August 18,2009, granting the Motion for Summary Judgment in favor of Racusin, awardingdamages as of May 1, 2009.  Thetotal damages awarded pursuant to the order were $3,935,932.70 of which$2,306,649.25 has already been paid (including $1,806,041.80 paid into thebankruptcy court registry).  Therefore,as of May 1, 2009, $1,629,283.45 at 12% interest per annum is deemed dueand payable immediately, less any principal amounts deposited into thebankruptcy court’s registry on or after May 1, 2009 which amounts to$175,000, through November 1, 2009. The remaining amount of $1,429,283.45 exceeds the existing recordedcurrent liability of $300,000.00, which is in accordance with management’sinterpretation of the settlement agreement and related proceedings.  The Company is attempting to negotiate asettlement with Racusin and, based on legal arguments that management believesto have merit, is considering its procedural alternatives.  Management intends to file a motion for arehearing, or in the alternative, a motion for reconsideration and ifunsuccessful, may file an appeal to the U.S. District Court of Nevada, whichmay require the posting of an appeal bond. In the event the Company is unable to negotiate a settlement underacceptable terms, post an appeal bond, or is also unsuccessful as to its otherprocedural alternatives, it would likely be unable to satisfy its obligationsas they become due and may, therefore, be unable to continue as a going concerndepending, in part, on the course of action pursued by Racusin in this matterand the Company’s ability, if any, to finance the judgment.

 

In light of the Racusin matter and the currenteconomic environment, the Company took the following additional measures to increasecash flow.  Effective January 1,2009, the Company no longer matches the employees’ 401(k) contributions.  The salaries of the President of AWIG and thecontroller of Sturgeon’s Hotel and Casino were reduced by 20%, effective October 3,2008.  On December 2, 2008, the CEOand the in-house general counsel each agreed to reduce their annual basesalaries to the amount sufficient to cover payroll deductions for benefits,effective November 24, 2008. Pursuant to the original terms of Mr. Salerno’s employmentagreement, Mr. Salerno was entitled to an annual base salary of $240,000.Also, from January 2009 to September 16, 2009, Melody J. Sullivan,the Company’s Chief Financial Officer and Treasurer, agreed to reduce herannual base salary by 20%. Several other high paid salaried and hourlyemployees also had 20% salary reductions. Additionally, the Company’s outsidedirectors elected not to receive their directors’ fees, effective for the lastthree calendar months of 2008, continuing through the first ten calendar monthsof 2009, and renounced their stock option grants for fiscal 2009 effective January 31,2009.  The remainder of the salaryreductions and discontinued 401(k) match are intended to be temporarypending an improvement in the Company’s cash flow but were in place as of October 31,2009.

 

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

 

On December 11, 2008, U.S. Bank gave theCompany oral approval to extend the maturity date of its $500,000 revolvingline of credit for 90 days after the original maturity date of December 31,2008, and further

 

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negotiated the terms ofthe line of credit, converting it to a term loan, maturing in January 2010.  As of October 31, 2009, the outstandingbalance on the term loan was $210,000, representing three remaining months ofprincipal payments.

 

Our principal cash requirements consist of cash providedby operations for the first nine months of fiscal 2010 of $229,751 as comparedto cash used in operations of $311,164 for the same period of fiscal 2009,primarily due to the timing of unpaid winning tickets. In the event the Companyis unable to successfully resolve the Racusin matter and is required toimmediately pay $1.5 million, the future principal cash requirements inoperations would be impacted.

 

Net cash used in investing activities for the firstnine months of fiscal 2010 was $278,568 compared to $257,458 for the sameperiod of fiscal 2009, primarily as a result of the decrease in purchases ofupgraded computers and networks, leasehold improvements, new kiosk locationsand other furniture and equipment from the prior fiscal year, due to cost controls.

 

Net cash used in financing activities for the firstnine months of fiscal 2010 was $668,994 compared to $247,321 in cash providedby financing activities for the same period of fiscal 2009 primarily due todecreased borrowings and repayments on debt, primarily with U.S. Bank.

 

**Restricted Cash Requirements (Regulation 22.040)**

** **

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

 

Additionally, on October 1, 2009, subject to theexecution of definitive pledge agreements, Victor J. and Terina Salerno,the Company’s Chief Executive Officer and General Counsel, respectively, agreedto pledge a certificate of deposit in the amount of $200,000 in favor of theNevada Gaming Control Board (“NGCB), and Robert and Tracey Kocienski agreed topledge certificates of deposit in the aggregate amount of $500,000, for thebenefit of the Company to increase the Company’s reserve balance to satisfy therequirements of Regulation 22.040.  Thepledged certificates of deposit will be accounted for as off-balance sheetarrangements. On November 23, 2009, the Salernos and the Kocienskis eachsigned a definitive agreement in favor of the NGCB, pledging their respectivecertificates of deposit.

 

Any reserve amount may be released to the NGCB if,pursuant to Regulation 22.040 it determines such funds are necessary to protectLeroy’s wagering creditors.  The Companyhas agreed to pay Mr. and Mrs. Salerno and Mr. and Mrs. Kocienskia fee in connection with the pledges equal to 1% per month of the pledgedamounts.  With the addition of thepledged certificates of deposit in the agreed upon amount of $700,000, theCompany’s current reserve balance is $2.680 million as of October 31,2009.

 

If the required reserve amount is subsequentlyincreased substantially and/or is not commensurate with the seasonality of theCompany’s wagering business, the Company may be unable to either fund thereserve or, alternatively, obtain a surety bond to satisfy therequirement.  The possible effects of not meeting the requirement mayinclude, but are not necessarily limited to, a reduction in the number of theCompany’s race/sports locations and/or the elimination or reduction oftelephone wagering accounts which would adversely affect the Company’soperating results and cash flows.

 

**Other**

** **

Other than the above-mentioned pledged depositagreements, we have no other off-balance sheet financing arrangements orliabilities.  Occasionally, we may seekadditional capital to fund our operations, reduce our

 

15

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liabilities, or fund ourexpansion plans (including acquisitions). To raise capital, we may seek to sell additional equity securities(common or preferred), issue debt or convertible securities, or obtain creditfacilities through financial institutions. The sale of additional equity or convertible securities would result indilution to our shareholders.

 

Subject to uncertainties resulting from the currenteconomic conditions, the repayment of the U.S. Bank term loan, and the Racusinjudgment, we believe that cash on hand, and operating cash flows will beadequate to meet our anticipated working capital requirements, capitalexpenditures, and scheduled payments for indebtedness for the remainder offiscal 2010.  We plan to accumulate cashliquidity during the current fiscal year (ending January 31, 2010) to helpus fund the following:  payroll andbenefits; sports book supplies and improvements; required cash reserves;business insurance; real estate and equipment leases; the Racusin obligations;legal expenses; telecommunications; costs related to inventory and to assemblerace/sports systems for our CBS customers; compliance costs associated withgaming regulations and Section 404 of the Sarbanes-Oxley Act of 2002; anddebt service.  No assurance can be given,however, that our cash flow will be sufficient, that our estimates foranticipated operational cash needs will be adequate, that new businessdevelopment or unforeseen events will not occur, that we will be able tonegotiate a settlement with Racusin, or that we will be able to repay the U.S.Bank term loan. If we are unable to repay the U.S. Bank loan or negotiate asettlement with Racusin, post an appeal bond or are unsuccessful as to ourother procedural alternatives related to the Racusin matter, we will likely beunable to satisfy our obligations as they become due and may, therefore, beunable to continue as a going concern.

 

**Results of Operations**

** **

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

 
| ** **                         | ** ** | **Three Months Ended  October 31,** | ** ** | **Nine Months Ended  October 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **Summary**                        | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenues                           |       | $                                        | 3,239,377  |                                    | $          | 4,299,482 |   | $ | (1,060,105 | ) | (24.66 | ) | $ | 9,935,135 |   | $ | 12,080,188 |   | $ | (2,145,053 | ) | (17.76 | ) |
|                               |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and Expenses                 |       | 3,598,637                                |       | 4,196,817                               |       | (598,180 | ) | (14.25 | ) | 10,037,389 |   | 12,609,292 |   | (2,571,903 | ) | (20.40 | ) |
| Other Income and  (Expense)        |       | (90,158                                  | )          | (47,971                                 | )          | 42,187 |   | 87.94 |   | (183,618 | ) | (145,343 | ) | 38,275 |   | 26.33 |   |
|                               |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) Before  Income Taxes |       | $                                        | (449,418   | )                                       | $          | 54,694 |   | $ | (504,112 | ) | (921.70 | ) | $ | (285,872 | ) | $ | (674,447 | ) | $ | (388,575 | ) | (57.61 | ) |

 

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, 2009Compared to the Three Months Ended October 31, 2008.**

** **

**Wagering Segment**

** **

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

 

**Wagering Segment revenues for the three monthsended October 31, 2009, decreased $645,964 (-25.01%) over the three monthsended October 31, 2008.  Thisincrease is attributed to the following factors:**

 

We have experienced a change in gambling patterns ofour patrons, including a trend toward more conservative bets, which tend to beless profitable to the Company. Additionally, in the month of October 2009,we experienced lower than expected handle and win.

** **

**Wagering Segment total costs and expenses for thethree months ended October 31, 2009, decreased $489,876 (-18.78%) over thethree months ended October 31, 2008. This decrease is attributed to the following factors:**

 

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Direct costs decreased primarily due to decreased expenses relatedto the results of negotiations with select sports book locations, reduced personnel,advertising and telephone expenses related to our overall cost reductionstrategies.

 

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

 

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

 

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

 

**Hotel Casino Segment**

** **

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

 

**Hotel Casino Segment revenues for the three monthsended October 31, 2009, decreased $135,844 (-17.97%) over the three monthsended October 31, 2008.  Thisdecrease is attributed to the following factors:**

 

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

 

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

 

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

 

Casino cash incentives and other promotionalallowances decreased for the third quarter of fiscal 2010 compared to the thirdquarter of fiscal 2009, primarily due to closer scrutiny of these costs bymanagement, combined with a decline in hotel occupancy.

 

**Hotel Casino Segment total costs and expenses forthe three months ended October 31, 2009, decreased $23,407 (-3.65%) overthe three months ended October 31, 2008. This decrease is attributed to the following factors:**

 

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

 

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

 

17

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

 

Selling, general and administrative costs for Sturgeon’s increased for the thirdquarter of fiscal 2010 compared to the third quarter of fiscal 2009, due to anincrease in vacation expenses, partially offset by decreased salary, personnelcosts and other expenses.

 

**Systems Segment**

** **

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

 

**Systems Segment revenues for the three monthsended October 31, 2009, decreased $278,297 (-28.98%) over the three monthsended October 31, 2008.**  This decreaseis attributed to the following factors:

 

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

 

**Systems****Segment total costs andexpenses for the three months ended October 31, 2009, decreased $84,897(-8.97%) over the three months ended October 31, 2008.**  This decrease is attributed to the followingfactors:

 

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

 

Research and development costs increased from the prior threemonths ended October 31, 2008, primarily due to decreased wages andbenefits due to the development of new sports betting technology.

 

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

 

**Other income and (expense).**  Theother income and (expense) categories are primarily administrative in natureand, 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 majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve.  The decrease in interest income of $8,925from the third quarter of fiscal 2009 is due primarily to decreased interestrates paid on our cash deposits and lower amounts held in cash deposits.  Interest expense remained primarily the same.

 

Litigation expense includes $16,866 of settlement interest for the thirdquarter of fiscal 2010 and $17,653 for the same three month period of the priorfiscal year related to the Racusin matter. This is considered a non-operating expense because this settlementrelated to a capital raising activity.

 

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

 

18

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**For the Nine Months Ended October 31, 2009Compared to the Nine Months Ended October 31, 2008.**

** **

**Wagering Segment**

** **

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

 

**Wagering Segment revenues for the nine monthsended October 31, 2009, decreased $1,169,433 (-16.70%) over the ninemonths ended October 31, 2008.**  This decreaseis attributed to the following factors:

 

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

 

**Wagering Segment total costs and expenses for thenine months ended October 31, 2009, decreased $1,865,193 (-24.27%) overthe nine months ended October 31, 2008.**  This decreaseis attributed to the following factors:

 

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

 

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

 

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

 

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

 

**Hotel Casino Segment**

** **

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

 

**Hotel Casino Segment revenues for the nine monthsended October 31, 2009, decreased $298,905 (-13.91%) over the nine monthsended October 31, 2008.**  This decreaseis attributed to the following factors:

 

Casino revenues decreased primarily due to decreased handle andwagering activities for the nine months ended October 31, 2009, comparedto the same period ended October 31, 2008 primarily due to the currenteconomic downturn.

 

19

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

 

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

 

Casino cash incentives and other promotional allowances decreased for the first nine months offiscal 2010 compared to the same period of fiscal 2009, primarily due to closerscrutiny of these costs by management, combined with a decline in hoteloccupancy.

 

**Hotel Casino Segment total costs and expenses forthe nine months ended October 31, 2009, decreased $199,509 (-9.88%) overthe nine months ended October 31, 2008.**  This decreaseis attributed to the following factors:

 

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

 

Direct costs for the hotel operations decreased primarily due to loweroccupancies for the nine months ended October 31, 2009, compared to thenine months ended October 31, 2008.

 

Direct costs for food and beverage operations decreased primarily due to loweroccupancies in the hotel for the nine months ended October 31, 2009,compared to the nine months ended October 31, 2008, due to decreasedtravel and consumer spending due to the current economic downturn.

 

Selling, general and administrative costs for Sturgeon’s increased 3.09% comparedto the first nine months of fiscal 2009, due to the timing of vacation expenseand other personnel costs and 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, 2009, decreased $676,715 (-23.11%) over the nine months ended October 31,2008.**  This decrease is attributed to the followingfactors:

 

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

 

**Systems Segment total costs and expenses for thenine months ended October 31, 2009, decreased $510,201 (-17.57%) over thenine months ended October 31, 2008.**  This decreaseis attributed to the following factors:

 

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

 

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

 

**Other income and (expense). **The other income and (expense) categories areprimarily administrative in nature and, as such, are not directly attributableto any operating segment.  Accordingly,these items are generally 

 

20

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not taken into consideration by us when weallocate resources to the segments or assess the performance of the segments.

 

Interest Income:  The majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve.  The decrease in interest income of $29,379 isdue primarily to decreased interest rates paid on our cash deposits and loweramounts held in cash deposits.  Interestexpense increased $17,632 due to increased debt to Victor Salerno and the U.S.Bank line of credit/term loan.

 

Litigation expense includes $43,283 of settlement interest for the firstnine months of fiscal 2010 and $72,970 for the same nine month period of theprior fiscal year related to the Racusin matter.  This is considered a non-operating expensebecause this settlement related to a capital raising activity.

 

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

 

**Critical 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 except with regard to the estimated effects, ifany, on estimated costs associated with the Racusin litigation discussedelsewhere herein.  The followingsummarizes our critical estimates and policies.

 

**Wagering**

** **

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

 

**Hotel Casino Revenue**

** **

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

 

**System — Software**

** **

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

 

**System — Hardware**

** **

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

 

21

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**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 and circumstancesindicate that the assets might be impaired, under the standards of Statement ofFinancial Accounting Standard (“SFAS”) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  An impairment loss is recognized if thecarrying amount of the asset is not recoverable from its undiscounted cashflows and is measured as the difference between the carrying amount and fairvalue of the asset.

 

**Accounting for Income Taxes**

** **

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

 

**Recent Accounting Pronouncements**

** **

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

 

## **Item 3.  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 July 31, 2009.  As part of ourevaluation, management took into account the material weakness in ourdisclosure controls and procedures identified by management in our Form 10-Kfor the fiscal year ended January 31, 2009.  We determined that our disclosure controlsand procedures, specifically with respect to a late Form 8-K filed on February 29,2008, which should have been filed on or before February 13, 2008, a late Form 8-Kfiled on April 29, 2009, which should have been filed on or before April 2,2009, and a late Form 8-K filed on October 16, 2009, which shouldhave been filed on or before October 7, 2009, were not effective.  Management has implemented a procedurerequiring that any material agreement or amendment thereto be submitted to andreviewed by our Chief Financial Officer and in-house counsel prior to executionthereof.

 

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**Changes in Internal Control over Financial Reporting**

** **

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

 

# **PART II — OTHERINFORMATION**

# ** **

## **Item 1.  Legal Proceedings.**

##  

For a description of our legal proceedings, see Note 5in the “Notes to Consolidated Financial Statements” of this Quarterly Report onForm 10-Q, which is incorporated by reference in response to this 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 year ended January 31,2009.  The following informationrepresents material changes to those risk factors during the nine months ended October 31,2009.  As previously reported, on March 17,2008, the Company filed with the Bankruptcy Court what it believed was anappropriately corrected amortization schedule (“Corrected Amortization Schedule”)relating to the calculation of pre-judgment interest occurring under thesettlement agreement regarding the Racusin matter.  A hearing was held on May 8, 2009,regarding a Motion for Summary Judgment filed by Racusin related to the Company’sfiling of the Corrected Amortization Schedule. At the hearing, the Court stated its intention to rule in favor ofRacusin.  The Court entered its order on August 18,2009, granting the motion for summary judgment in favor of Racusin, statingthat damages were awarded as of May 1, 2009.  The total damages awarded pursuant to theorder were $3,935,932.70; of which $2,306,649.25 had already been paid(including $1,806,041.80 paid into the bankruptcy court registry).  Therefore, $1,629,283.45 as of May 1,2009, at 12% interest per annum, is deemed due and payable immediately, lessany amounts deposited into the bankruptcy court’s registry on or after May 1,2009; which amounts to $125,000, through September 1, 2009.  The remaining amount of $1,429,283.45 exceedsthe existing recorded current liability of $300,000.00, which is in accordancewith management’s interpretation of the settlement agreement and relatedproceedings.  The Company is attemptingto negotiate a settlement with Racusin and, based on legal arguments thatmanagement believes to have merit, is considering its proceduralalternatives.  Management intends to filea motion for a rehearing, or in the alternative, a motion for reconsiderationand if unsuccessful, may file an appeal to the U.S. District Court of Nevada,which may require the posting of an appeal bond.  In the event the Company is unable tonegotiate a settlement under acceptable terms, post an appeal bond, or is alsounsuccessful as to its other procedural alternatives, it would likely be unableto satisfy its obligations as they become due and may, therefore, be unable tocontinue as a going concern depending, in part, on the course of action pursuedby Racusin in this matter and the Company’s ability, if any, to finance thejudgment.

 

## **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.

 

23

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## **Item 6.  Exhibits.**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                       |
| 10.1                |       | Reimbursement  Agreement, dated as of December 10, 2009, by Victor and Terina Salerno  in favor of the Nevada Gaming Control Board to pay interest to Victor and  Terina Salerno for amounts pledged in certificate of deposit accounts     |
|                |       |                                                                                                                                                                                                                                             |
| 10.2                |       | Reimbursement  Agreement, dated as of December 10, 2009, by Robert and Tracey Kocienski  in favor of the Nevada Gaming Control Board to pay interest to Robert and  Tracey Kocienski for amounts pledged in certificate of deposit accounts |
|                |       |                                                                                                                                                                                                                                             |
| 31.1                |       | Certification of  Principal Executive Officer pursuant to Exchange Act  Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                   |
|                |       |                                                                                                                                                                                                                                             |
| 31.2                |       | Certification of  Principal Financial Officer pursuant to Exchange Act  Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                   |
|                |       |                                                                                                                                                                                                                                             |
| 32.1                |       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  Exchange Act Rule 13a-14(b) and Title 18 U.S.C.  Section 1350-Section 906 of the Sarbanes-Oxley Act of 2002                       |

 

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**SIGNATURES**

 

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

 

**AMERICANWAGERING, INC.**

 

 
| Dated:     December 15,  2009                                           |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| /s/ Victor J. Salerno                                                                                 |   |
| Victor J. Salerno                                                                                     |   |
| President, Chief  Executive Officer, Chief Operating Officer, and Chairman of the Board of  Directors |   |
|                                                                                                  |
|                                                                                                  |   |
| /s/ Melody J. Sullivan                                                                                |   |
| Melody J. Sullivan                                                                                    |   |
| Chief Financial Officer and Treasurer                                                                 |   |

 

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