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

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended: July 31, 2010**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from:              to              **

 

**Commission file number:  000-20685**

 

**AMERICAN WAGERING, INC.**

(Exact name of registrant as specified in itscharter)

** **

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

 

**702-735-0101**

(Registrant’s telephone number, including areacode)

 

 

(Former name, former address and formerfiscal year, if changed since last report)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T §232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files) Yes  o    No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

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

 

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

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING**

**THE PRECEDING FIVE YEARS**

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court. Yes x  No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date:****As of September 20, 2010, there were 8,404,879shares of common stock, par value $0.01, outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I —  FINANCIAL INFORMATION**                                                            | **2**  |
|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     |   |
| Item 1. Consolidated Financial Statements                                                                | 2      |
|                                                                                                     |   |
| Consolidated Balance Sheets as of July 31, 2010  (Unaudited) and January 31, 2010              | 2      |
|                                                                                                     |   |
| Consolidated Statements of Operations for the Three  and Six Months Ended July 31, 2010 (Unaudited) | 3      |
|                                                                                                     |   |
| Consolidated Statements of Cash Flows for the Six  Months Ended July 31, 2010 and 2009 (Unaudited)  | 4      |
|                                                                                                     |   |
| Notes to Consolidated Financial Statements (Unaudited)                                                   | 5      |
|                                                                                                     |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations      | 10     |
|                                                                                                     |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                      | 18     |
|                                                                                                     |   |
| Item 4T. Controls and Procedures                                                                         | 18     |
|                                                                                                     |   |
| **PART II  — OTHER INFORMATION**                                                               | **19** |
|                                                                                                     |   |
| Item  1. Legal Proceedings                                                                               | 19     |
|                                                                                                     |   |
| Item 1A. Risk Factors                                                                                    | 19     |
|                                                                                                     |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                     | 19     |
|                                                                                                     |   |
| Item 3. Defaults Upon Senior Securities                                                                  | 19     |
|                                                                                                     |   |
| Item 4. Reserved                                                                                         | 19     |
|                                                                                                     |   |
| Item  5. Other Information                                                                               | 19     |
|                                                                                                     |   |
| Item 6. Exhibits                                                                                         | 19     |

 

1

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**PART I — FINANCIALINFORMATION**

 

**Item 1.  Financial Statements.**

 

**AMERICANWAGERING, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **July 31,  2010** | ** **    | **January 31,  2010** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**         | ** **    | ** **                 | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **              | ** **    | ** **                 | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                    |          |                       |       |
| Cash and Equivalents                                                                                                                             |       | $                       | 1,073,420     |                       | $          | 2,084,268 |   |
| Restricted Cash                                                                                                                                  |       | 1,763,039               |          | 1,729,209                  |       |
| Accounts Receivable                                                                                                                              |       | 63,509                  |          | 204,706                    |       |
| Inventories                                                                                                                                      |       | 89,858                  |          | 143,913                    |       |
| Deferred Tax Assets, net of allowance                                                                                                            |       | 369,000                 |          | 369,000                    |       |
| Prepaid Expenses                                                                                                                                 |       | 259,404                 |          | 364,207                    |       |
| ** **                                                                                                                                       | ** ** | **3,618,230**           | ** **    | **4,895,303**              | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| Property and Equipment, net of accumulated  depreciation and amortization                                                                        |       | 2,869,296               |          | 3,301,180                  |       |
| Goodwill                                                                                                                                         |       | 103,725                 |          | 103,725                    |       |
| Other                                                                                                                                            |       | 219,386                 |          | 221,291                    |       |
| ** **                                                                                                                                       | ** ** | **$**                   | **6,810,637** | ** **                 | **$**      | **8,521,499** | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                   | ** ** | ** **              | ** **    | ** **                 | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                    |          |                       |       |
|                                                                                                                                             |       |                    |          |                       |       |
| Short-Term Debt                                                                                                                                  |       | $                       | 286,840       |                       | $          | — |   |
| Current Portion of Long-Term Debt                                                                                                                |       | 270,195                 |          | 441,781                    |       |
| Accounts Payable                                                                                                                                 |       | 1,484,433               |          | 1,217,409                  |       |
| Accrued Expenses                                                                                                                                 |       | 361,487                 |          | 613,320                    |       |
| Unpaid Winning Tickets                                                                                                                           |       | 591,576                 |          | 1,021,229                  |       |
| Customer Deposits and Other                                                                                                                      |       | 623,954                 |          | 850,075                    |       |
| ** **                                                                                                                                       | ** ** | **3,618,485**           | ** **    | **4,143,814**              | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| Long-Term Debt, less current portion                                                                                                             |       | 2,753,397               |          | 2,530,778                  |       |
| Redeemable Series A Preferred Stock (3,238  shares)                                                                                         |       | 323,800                 |          | 323,800                    |       |
| Warranty Liability                                                                                                                               |       | 94,478                  |          | —                     |       |
| Other                                                                                                                                            |       | 242,115                 |          | 242,111                    |       |
|                                                                                                                                             |       | 7,032,275               |          | 7,240,503                  |       |
|                                                                                                                                             |       |                    |          |                       |       |
| 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 - $0.01 par value; 25,000,000 shares  authorized; 8,404,879 and 8,129,879 shares issued                                             |       | 84,049                  |          | 81,299                     |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,738,419              |          | 12,589,318                 |       |
| Deficit                                                                                                                                          |       | (13,809,013             | )             | (12,154,528                | )          |
| Treasury Stock, at cost (61,100 common shares)                                                                                                   |       | (327,493                | )             | (327,493                   | )          |
| ** **                                                                                                                                       | ** ** | **(221,638**            | **)**         | **1,280,996**              | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                   | **6,810,637** | ** **                 | **$**      | **8,521,499** | ** ** |

 

**See Notes to Consolidated Financial Statements**

 

2

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**AMERICANWAGERING, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

 
| ** **                                          | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Six Months Ended  July 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2010**                                                          | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **REVENUES:**                                       |       |                                                              |       |                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                                            |       | $                                                                 | 1,186,224  |                                                            | $          | 1,890,533 |   | $ | 2,686,216 |   | $ | 3,896,778 |   |
| Hotel Casino                                        |       | 594,742                                                           |       | 665,827                                                         |       | 1,052,201 |   | 1,229,174 |   |
| Systems                                             |       | 699,459                                                           |       | 806,608                                                         |       | 1,604,841 |   | 1,569,805 |   |
| ** **                                          |       | 2,480,425                                                         |       | 3,362,968                                                       |       | 5,343,258 |   | 6,695,757 |   |
| **OPERATING COSTS AND EXPENSES:**                   |       |                                                              |       |                                                            |       |   |   |   |   |
| **Direct Costs:**                                   |       |                                                              |       |                                                            |       |   |   |   |   |
| Wagering                                            |       | 1,458,358                                                         |       | 1,381,826                                                       |       | 2,901,155 |   | 2,995,617 |   |
| Hotel Casino                                        |       | 515,709                                                           |       | 477,275                                                         |       | 949,799 |   | 922,066 |   |
| Systems                                             |       | 179,819                                                           |       | 187,748                                                         |       | 427,168 |   | 385,138 |   |
| ** **                                          |       | 2,153,886                                                         |       | 2,046,849                                                       |       | 4,278,122 |   | 4,302,821 |   |
| **Operating Expenses:**                             |       |                                                              |       |                                                            | ** ** | ** ** |   |   |   |
| Research and Development                            |       | 185,236                                                           |       | 132,065                                                         |       | 346,318 |   | 270,910 |   |
| Selling, General and Administrative                 |       | 840,823                                                           |       | 744,167                                                         |       | 1,680,870 |   | 1,367,916 |   |
| Depreciation and Amortization                       |       | 225,117                                                           |       | 245,615                                                         |       | 459,692 |   | 497,105 |   |
| ** **                                          |       | 1,251,176                                                         |       | 1,121,847                                                       |       | 2,486,880 |   | 2,135,931 |   |
|                                                |       | 3,405,062                                                         |       | 3,168,696                                                       |       | 6,765,002 |   | 6,438,752 |   |
| **OPERATING INCOME (LOSS)**                         |       | (924,637                                                          | )          | 194,272                                                         |       | (1,421,744 | ) | 257,005 |   |
|                                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **OTHER INCOME (EXPENSE):**                         |       |                                                              |       |                                                            | ** ** | ** ** |   |   |   |
| Interest Income                                     |       | 1,397                                                             |       | 1,429                                                           |       | 4,065 |   | 7,042 |   |
| Interest Expense                                    |       | (101,404                                                          | )          | (69,581                                                         | )          | (180,824 | ) | (139,341 | ) |
| Change in Estimated Fair Value of Warrant Liability |       | 35,000                                                            |       | —                                                          |       | 35,000 |   | — |   |
| Litigation Expense                                  |       | (4,549                                                            | )          | (16,815                                                         | )          | (10,686 | ) | (26,417 | ) |
| Other                                               |       | (12,250                                                           | )          | 17,732                                                          |       | (10,068 | ) | 65,257 |   |
|                                                |       | (81,806                                                           | )          | (67,235                                                         | )          | (162,513 | ) | (93,459 | ) |
|                                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **NET INCOME (LOSS)**                               |       | $                                                                 | (1,006,443 | )                                                               | $          | 127,037 |   | $ | (1,584,257 | ) | $ | 163,546 |   |
|                                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **NET INCOME (LOSS) PER COMMON  SHARE -**           |       |                                                              |       |                                                            |       |   |   |   |   |   |   |   |   |
| **BASIC**                                           |       | $                                                                 | (0.13      | )                                                               | $          | 0.01 |   | $ | (0.18 | ) | $ | 0.01 |   |
| **DILUTED**                                         |       | $                                                                 | (0.12      | )                                                               | $          | 0.01 |   | $ | (0.20 | ) | $ | 0.01 |   |

 

**See Notes to Consolidated Financial Statements**

 

3

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**CONDOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

 
| ** **                                                         | ** ** | **For the Six Months Ended  July 31,** | ** **     |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------|----------------|
| ** **                                                         | ** ** | **2010**                                                        | ** **     | **2009** | ** ** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Operating Activities**                                           | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Net cash used in operating  activities**                         | ** ** | **$**                                                           | **(1,487,011** | **)** | **$** | **(1,720,468** | **)** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Investing Activities**                                           | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Gross increases in restricted cash                                 |       | (80,000                                                         | )              | (6,846 | ) |
| Withdrawal of restricted cash                                      |       | 46,170                                                          |           | 28,761 |   |
| Proceeds from the sale of property and equipment                   |       | 3,885                                                           |           | — |   |
| Purchase of property and equipment                                 |       | (8,242                                                          | )              | (27,877 | ) |
| **Net cash used in investing  activities**                         | ** ** | **(38,187**                                                     | **)**          | **(5,962** | **)** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Financing Activities**                                           |       |                                                            |           |   |   |
| Repayment of borrowings                                            |       | (65,422                                                         | )              | (338,531 | ) |
| Proceeds from borrowings                                           |       | 650,000                                                         |           | 705 |   |
| Dividends on preferred stock                                       |       | (70,228                                                         | )              | (70,263 | ) |
| **Net cash provided by (used in)  financing activities**           | ** ** | **514,350**                                                     | ** **     | **(408,089** | **)** |
|                                                               |       |                                                            |           |   |   |
| **NET DECREASE IN CASH AND  EQUIVALENTS**                          | ** ** | **(1,010,848**                                                  | **)**          | **(2,134,519** | **)** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, BEGINNING  OF PERIOD**                     | ** ** | **2,084,268**                                                   | ** **     | **3,357,978** | ** ** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **CASH AND EQUIVALENTS, END OF  PERIOD**                           | ** ** | **$**                                                           | **1,073,420**  | ** ** | **$** | **1,223,459** | ** ** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                           | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Cash paid for interest                                             | ** ** | **$**                                                           | **169,973**    | ** ** | **$** | **85,565** | ** ** |
| ** **                                                         | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **NON-CASH FINANCING AND INVESTING  ACTIVITIES:**                  | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Property and equipment acquired with bank and/or  vendor financing | ** ** | **$**                                                           | **32,694**     | ** ** | **$** | **—** | ** ** |
| Repayment of borrowing with new debt                               | ** ** | **$**                                                           | **195,000**    | ** ** | **$** | **—** | ** ** |
| Common Stock Issued for Services                                   | ** ** | **$**                                                           | 3,750          | ** ** | **$** | **—** | ** ** |
| Issuance of Warrants to Purchase Common Stock                      | ** ** | **$**                                                           | 129,478        | ** ** | **$** | **—** | ** ** |

 

**See Notes to Consolidated Financial Statements**

 

4

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Six Months July 31, 2010**

 

**1.  Basis of Presentation**

 

Theaccompanying unaudited interim consolidated financial statements of AmericanWagering, Inc. and its subsidiaries (collectively, the “Company” or “AWI”)have been prepared in accordance with the instructions to Form 10-Q aspublished by the Securities and Exchange Commission (“SEC”).  Thefinancial statements do not include all of the information and disclosuresrequired by generally accepted accounting principles for annual financialstatements.  All significant inter-company accounts and transactions havebeen 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.  These unauditedinterim consolidated financial statements should be read in conjunction withthe audited annual consolidated financial statements of the Company, and therelated notes, included in the Company’s Annual Report on Form 10-K filedon May 7, 2010, with the SEC, from which the balance sheet information asof January 31, 2010 was derived.

 

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

 

Basicnet income (loss) per common share is calculated based on the weighted-averagenumber of shares of common stock outstanding during the reporting period.Diluted net income per common share is ordinarily calculated giving effect toall potentially dilutive common shares, assuming such shares were outstandingduring the reporting period. However, the calculation for diluted net loss percommon share for loss periods, excludes the potentially dilutive common sharesbecause inclusion would have an anti-dilutive effect. The amount of potentiallyanti-dilutive common shares that have been excluded from basic net income(loss) per share was 617,299 and 647,299 at July 31, 2010 and 2009,respectively.

 

Followingis a reconciliation of the numerators and denominators of the net income (loss)per common share computations for the three months ended July 31:

 
| ** **                                   | ** ** | **Numerator** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| ** **                                   | ** ** | **2010**      | ** ** | **2009** | ** ** |
| **Three Months Ended  July 31,**        |       |          |       |   |   |
|                                         |       |          |       |   |   |   |   |
| Net income (loss)                            |       | $             | (1,006,443 | ) | $ | 127,037 |   |
| Less preferred stock dividends               |       | (35,696       | )          | (35,830 | ) |
| Net income (loss) available to common shares |       | $             | (1,042,139 | ) | $ | 91,207 |   |

 
| ** **                                           | ** ** | **Denominator** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2010**        | ** ** | **2009** | ** ** |
| Weighted-average common shares outstanding, basic    |       | 8,329,649       |       | 8,068,779 |   |
| Effect of dilutive stock options                     |       | 51,724          |       | 80 |   |
| Weighted-average common shares outstanding,  diluted |       | 8,381,373       |       | 8,068,859 |   |

 

5

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| ** **                                                       | ** ** | **Numerator** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                       | ** ** | **2010**      | ** ** | **2009** | ** ** |
| **Six Months Ended July 31,**                               |       |          |       |   |   |
|                                                             |       |          |       |   |   |
| Net income (loss)                                                |       | $             | (1,584,257 | ) | $ | 163,546 | ) |
| Less preferred stock dividends                                   |       | (70,228       | )          | (70,263 | ) |
| Net income (loss) available to common shares,  basic and diluted |       | $             | (1,654,485 | ) | $ | 93,283 |   |

 
| ** **                                           | ** ** | **Denominator** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2010**        | ** ** | **2009** | ** ** |
| Weighted average common shares outstanding, basic    |       | 8,270,436       |       | 8,068,779 |   |
| Effect of dilutive stock options                     |       | 436             |       | 150 |   |
| Weighted average common shares outstanding,  diluted |       | 8,270,872       |       | 8,068,929 |   |

 

**3.  Income Taxes**

 

AtApril 30, 2010, the Company had federal tax net operating loss (“NOL”)carry-forwards available to potentially reduce future tax obligations in theaggregate amount of approximately $7.0 million, of which approximately $1.3million expires in 2019.  In assessing the realizability of deferred taxassets, which resulted primarily from the NOLs, the Company considers whetherit is more likely than not that some portion or all of the deferred tax assetswill not be realized.  The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible.

 

Managementbelieves that with the onset of the football season and the regulatory approvalof the Company’s mobile betting application, the Company will be profitable forat least the next twelve months and that it is therefore more likely than notthat the Company’s deferred tax asset of $369,000, net of the valuationallowance provided, will be realized, despite atypically low hold percentageduring the six months ending July 31, 2010, which had a significant negativeeffect on the results of operations and cash flows for the period, and subjectto the effect, if any, of the Racusin uncertainty (Note 4).

 

TheCompany’s estimated annual effective tax rate of zero for the interim periodspresented differs from statutory tax rates primarily due to the expectedutilization of NOL carry-forwards or changes in the valuation allowance fordeferred tax assets.

 

**4.  Litigation and Contingencies**

 

Forthe second quarter of fiscal years 2011 and 2010, litigation expense of $10,686and $26,417, respectively, is included in other income (expense) and consistsof judgment interest incurred on our previously recorded obligation due toMichael Racusin.

 

Asof July 31, 2010 and 2009, respectively, the aggregate recorded liabilityfor the estimated probable loss associated with litigation or other disputes, asdiscussed below, was $172,612 and $607,642, excluding future legal and related defensecosts and judgment interest.

 

**Racusin**. On July 25, 2003, AWI and awholly-owned subsidiary (Leroy’s) filed voluntary petitions for relief (“Chapter 11Petitions”) under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”)in the United States Bankruptcy Court for the District of Nevada (the “BankruptcyCourt”). The Company and Racusin entered into the Settlement Agreement onSeptember 3, 2004.  On February 28, 2005, the Bankruptcy Courtconfirmed the Restated Amended Joint Plan of Reorganization (the “Plan”)of AWI and Leroy’s. On March 11, 2005, AWI and Leroy’s consummated thePlan and formally emerged from Chapter 11 proceedings after completing allrequired actions and all remaining conditions.  On September 26,2005, the Bankruptcy Court issued an order closing the Chapter 11 cases ofAWI and Leroy’s. All required distributions have been made, except with respectto the Racusin matter (“Racusin Claim”).

 

6

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Racusinfiled a claim for breach of the Settlement Agreement on January 14, 2009,and motion for summary judgment to accelerate amounts due, with penaltyinterest, on February 24, 2009. A hearing was held on May 8, 2009,regarding the motion for summary judgment, and the Bankruptcy Court granted themotion for summary judgment on August 18, 2009.  On April 2,2010, a hearing was held where the Bankruptcy Court verbally indicated anintent to vacate the August 18, 2009 order granting summary judgment infavor of Racusin that would have accelerated amounts due and imposed penaltyinterest at 12% per annum because a material issue of fact remained regardingwhether the Company breached the Settlement Agreement, and whether theacceleration clause of the Settlement Agreement was triggered.  Argumentsas to the potential effects of a prior ruling (the Stay Order on theInterpleader) and the resulting calculation of amounts due may be consideredlater in the litigation, including, but not limited to, at trial. Racusin’sclaim for breach of the Settlement Agreement remains pending but no trial datehas been set in this case as of yet.

 

Accordingly,as of July 31, 2010, we believe that the principal balance owed to Racusinis $172,612, with $166,471 due in fiscal 2011 and the balance in 2012, plusinterest at 8% per annum. If arguments regarding the effects of the Stay Orderon the Interpleader are heard and the Bankruptcy Court were to rule thatthe Stay Order did not effect the Interpleader Order and did not result in anoff-set in the calculation of the accrued interest, then we believe the amountdue as of July 31, 2010 would be approximately $594,586 assuming an 8%interest rate.  For the second quarter of the fiscal year endingJanuary 31, 2011, the Company paid $88,064, including interest, into theBankruptcy Court’s Registry in settlement of the Racusin Claim and certainother lien-holders of Racusin.

 

Therehave been no material legal changes for this matter during the quarter ended July 31,2010.

 

**Internet Sports International, Ltd. (ISI)** This case is currently in the discoveryphase and pending in the District Court of Clark County, Nevada, case no.A567638, and involves the Company and certain other Defendants (the “Defendants). The Court recently granted the Parties’ Joint Motion to Extend Discovery untilApril, 2011.  The trial date of November 2010 has been vacated andthe Court has yet to set a new trial date for 2011.  There have been nomaterial legal changes for this matter during the quarter ended July 31,2010*.*

 

EconomicConditions and Related Risks and Uncertainties

 

Ourcustomer base may be segmented into two categories: Contract Customers, theCasinos to whom we are vendors, either as system suppliers or sportsbookoperators, and the Bettors, the individual race and sports bettors who placetheir wagers with us at out our sportsbooks. The global macroeconomic factors that have affected our country for thepast three years and resulted in a 14.3% unemployment rate in Nevada as of July 31,2010, resulted in (i) our Contract Customers remaining conservative intheir capital spending, (ii) intense competition among suppliers andsportsbook operators, and (iii) more conservative betting patterns byBettors because of job uncertainty or reduced discretionary income.  This slowdown in global economies, contractedcredit markets and reduced consumer spending, and the lower than historicaltrend for the domestic gaming and leisure industry are likely to continue tohave far-reaching effects on the local and national economy, the Company’sbusiness, and our principal officer’s ability to continue to provide financialsupport to the Company, as in the past, for an indeterminate period. Forexample, material negative short-term swings in the Company’s wagering winpercentage, such as those experienced during the first half of fiscal 2011,magnify the Company’s need for financing at a time when credit availability isreduced. The reduced availability of bonding for and possible increases toreserves established at the discretion of regulatory agencies also add to theCompany’s need for alternative sources of financing.

 

Inaddition, the Company often carries cash and equivalents on deposit withfinancial institutions substantially in excess of federally-insuredlimits.  The extent of any loss that might be incurred as a result ofuninsured deposits in the event of a future failure of a bank or otherfinancial institutions, if any, is not subject to estimation.

 

7

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**5.  Stock Options and Other Equity and Related PartyTransactions**

 

Activityrelated to both the employees and director’s stock option plan for the sixmonths ended July 31, 2010 and 2009 was as follows:

 
| ** **                       | ** ** | **Option Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Balance at February 1, 2010 |       | 647,299                |       | $                                           | 1.83       |   |
| Granted                          |       | —                 |       |                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | (30,000                | )          | (.96                                        | )          |
| Balance at July 31, 2010    |       | 617,299                |       | $                                           | $1.87      |   |
|                             |       |                   |       |                                        |       |
| Balance at February 1, 2009 |       | 709,299                |       | $                                           | 1.78       |   |
| Granted                          |       | —                 |       |                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | (62,000                | )          | (1.27                                       | )          |
| Balance at July 31, 2009    |       | 647,299                |       | $                                           | 1.83       |   |

 

Asof July 31, 2010, stock options exercisable and available for futuregrants for both current stock option plans are as follows:

 
| ** **                  | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Life** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Exercisable                 |       | 617,299    |       | $                                       | 1.87       |                                    | 2.73 years |   |
| Available for future grants |       | 340,767    |       | —                                  |       | —                                  |       |
|                             |            |            |            |                                         |            |                                         |            |  |

 

Non-cashstock-based compensation expense recorded in the line item “Selling, Generaland Administrative Expenses” on the consolidated income statements for the threemonths ended July 31, 2010 and 2009 was $27,029 and $28,913. respectively.Non-cash stock-based compensation expense recorded in “Selling, General andAdministrative Expenses” for the six months ended July 31, 2010 and 2009was $30,972 and $37,722, respectively.

 

Also,services contributed by Victor and Terina Salerno and credited to additionalpaid-in capital during the three and six months ended July 31, 2010 and2009 totaled $36,816 and $51,624 and $79,629 and $103,246, respectively.  Mr. Salerno also provided the Company with a$250,000 interest free revolving line of credit on May 17, 2010, which wasfully drawn as of July 31, 2010.

 

Inaddition, during the quarter ended April 30, 2010, 250,000 shares ofcommon stock were issued to the principal of Alpine Advisors, LLC (“Alpine”) asa non-refundable fee for financial advisory services, plus 25,000 shareseffectively issued during the quarter ended July 31, 2010 as a one-time paymentof additional compensation for a late filing. The shares were valued at $0.15per share ($41,250) based on the trading price of the Company’s common stock onthe date of grant. Additional fees are due Alpine upon the successfulcompletion of (1) a single or a series of transactions in which 50% ormore of the voting power of the Company or all or a substantial portion of itsbusiness or assets are combined with or transferred to another company and (2) anyoffering of debt, equity or equity-linked securities either individually or incombination. The success fee is calculated generally at 3-3.5% of the “equityvalue” of the transaction, as defined, or the amount of the proceeds from thefinancing

 

InJune 2010, the Company borrowed $195,000 from and entered into anagreement with Alpine that entitled but did not obligate Alpine to purchase600,000 shares of the Company’s common stock at an exercise price of $0.22 pershare through June 11, 2015. The principal amount of the loan plusinterest at 15% was due June 17, 2010 (six days following the issuance)and then on demand with weekly interest payments calculated at 22% per annum.On June 22, 2010 the parties entered into a financing agreement thatallowed the Company to borrow up to $500,000, at 15% per annum, due on June 10,2011, and collateralized by the Company’s stock in CBS and the receivables ofCBS.  Proceeds from the June 22nd financing agreement were used, in part, torefinance the June 11th loan for $195,000.  We have borrowed $500,000 to date.  The warrant agreement was also amended toprovide Alpine with registration rights and, the appointment two persons to theCompany’s board of directors, which would expand from five to seven members,should the Company default in its financing or collateralization obligations. Usingthe Black-Scholes valuation model and “Level 2” measurement inputs as definedin general accepted accounting principals including a risk-free interest rateof 4%, expected warrant life of five years, and a stock price volatility factorof 206%, the warrants were valued at $129,478 with all treated as a warrantliability to be revalued at each balance sheet with the change charged orcredited to earnings and debt discount to be amortized as interest expense overthe repayment term of the loan using the effective interest method.

 

8

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**6.  Business Segments**

 

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

 
| ** **                   | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Six Months Ended  July 31,** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                   | ** ** | **2010**                                                          | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues:**                |       |                                                              |       |                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Wagering                     |       | $                                                                 | 1,186,224  |                                                            | $          | 1,890,533 |   | $ | 2,686,216 |   | $ | 3,896,778 |   |
| Hotel Casino                 |       | 594,742                                                           |       | 665,827                                                         |       | 1,052,201 |   | 1,229,174 |   |
| Systems                      |       | 699,459                                                           |       | 806,608                                                         |       | 1,604,841 |   | 1,569,805 |   |
| ** **                   |       | $                                                                 | 2,480,425  |                                                            | $          | 3,362,968 |   | $ | 5,343,258 |   | 6,695,757 |   |
| **Operating income (loss):** |       |                                                              |       |                                                            |       |   |   |   |   |
| Wagering                     |       | $                                                                 | (657,179   | )                                                               | $          | 121,773 |   | $ | (985,436 | ) | $ | 191,352 |   |
| Hotel Casino                 |       | (72,448                                                           | )          | 47,797                                                          |       | (201,805 | ) | 27,421 |   |
| Systems                      |       | (195,010                                                          | )          | 24,702                                                          |       | (234,503 | ) | 38,232 |   |
|                         |       | (924,637                                                          | )          | 194,272                                                         |       | (1,421,744 | ) | 257,005 |   |
| **Other expense, net**       |       | (81,806                                                           | )          | (67,235                                                         | )          | (162,513 | ) | (93,459 | ) |
| **Net Income (Loss)**        |       | $                                                                 | (1,006,443 | )                                                               | $          | 127,037 |   | $ | (1,584,257 | ) | $ | 163,546 |   |

 

Additional information for the Hotel Casino segmentfollows:

 
| ** **                          | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Six Months Ended  July 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                                          | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues:**                       |       |                                                              |       |                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                              |       | $                                                                 | 238,576    |                                                            | $          | 293,495 |   | $ | 458,534 |   | $ | 600,274 |   |
| Hotel                               |       | 139,859                                                           |       | 170,433                                                         |       | 225,947 |   | 272,220 |   |
| Food/Beverage                       |       | 216,307                                                           |       | 201,899                                                         |       | 367,720 |   | 356,680 |   |
| ** **                          |       | $                                                                 | 594,742    |                                                            | $          | 665,827 |   | $ | 1,052,201 |   | $ | 1,229,174 |   |
| **Direct Costs and Expenses:**      |       |                                                              |       |                                                            |       |   |   |   |   |
| Casino                              |       | 134,945                                                           |       | 127,740                                                         |       | 262,095 |   | 253,271 |   |
| Hotel                               |       | 58,609                                                            |       | 49,839                                                          |       | 98,650 |   | 87,184 |   |
| Food/Beverage                       |       | 235,259                                                           |       | 199,138                                                         |       | 414,301 |   | 377,635 |   |
| Unallocated                         |       | 86,896                                                            |       | 100,558                                                         |       | 174,753 |   | 203,976 |   |
|                                |       | 515,709                                                           |       | 477,275                                                         |       | 949,799 |   | 922,066 |   |
| Selling, General and Administrative |       | 90,800                                                            |       | 77,656                                                          |       | 179,940 |   | 151,177 |   |
| Depreciation and Amortization       |       | 60,681                                                            |       | 63,099                                                          |       | 124,267 |   | 128,510 |   |
|                                |       | 667,190                                                           |       | 618,030                                                         |       | 1,254,006 |   | 1,201,753 |   |
| **Operating Income**                |       | $                                                                 | (72,448    | )                                                               | $          | 47,797 |   | $ | (201,805 | ) | $ | 27,421 |   |

 

9

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**Item 2.  Management’s Discussion and Analysis orPlan of Operation.**

 

Thefollowing discussion and analysis should be read together with our unauditedconsolidated financial statements and the accompanying notes.  Thisdiscussion contains forward-looking statements, within the meaning ofSection 27A of the Securities Act of 1933, as amended, Section 21E ofthe Securities Exchange Act of 1934, as amended, and the Private SecuritiesLitigation Reform Act of 1995, including statements regarding our expected financialposition, business and financing plans.  Some of the forward-lookingstatements can be identified by the use of forward-looking terms such as “believes,”“expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,”“anticipates,” or other comparable terms.  Forward-looking statementsinvolve inherent risks and uncertainties which could cause actual results todiffer materially from those in the forward-looking statement including thosediscussed herein and elsewhere in our Form 10-K for the year endedJanuary 31, 2010, particularly under the heading “Risk Factors.”  Wecaution readers not to place undue reliance upon any such forward-lookingstatements, which speak only as of the date made.  We do not intend, andundertake no obligation to update our forward-looking statements to reflectfuture events or circumstances.

 

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

 

“Company”means American Wagering, Inc. and its subsidiaries collectively.

 

“AWI”means American Wagering, Inc.

 

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

 

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

 

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

 

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

 

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

 

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

 

**Overview. **American Wagering, Inc. is aleader in the design, development, and marketing of sportsbook accountingsystems (equipment and software) as well as the leading independent sportsbookoperator in Nevada.  Our business operationsinvolve many aspects of the race and sports book industry.

 

Ourcore businesses are operated by the following subsidiaries which have thefollowing strategic plans:

 
| · |   | Leroy’s |   | Provides  a turn-key race and sports book solution to our Contract Customers who do not  desire to operate a book on their own. Leroy’s operates a network of 57  sportsbooks, generating revenue from Bettors’ wagers less pay outs.  We grow our business and increase our  efficiencies by, (i) adding new books where and when appropriate, (ii)  introducing new convenience-driven products for the Bettors, and (iii)  continuing to increase efficiencies through self-service products such as  AWIM’s kiosk and the new LEROY’S® APP©, which is described  below.  Based on our strategy, the  number of race and sports books operated by Leroy’s may increase or decrease  in the future, due to the closure of unprofitable locations or host  properties, closures due to other factors beyond our control and/or the  possible opening of new locations with greater potential for  profitability.  There is no assurance that Leroy’s will be able to add  new locations and/or that any new locations so added will be profitable, and  the release of the LEROY’S® APP© may limit our aggressiveness in adding  locations particularly in Las Vegas. |
|--------|--------|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | CBS          |   | Develops,  sells and maintains computerized race and sports wagering systems for the  gaming industry, namely our Contract Customers who want to operate their own  race and sports book.  CBS markets,  distributes, installs, and maintains AWIM’s kiosks, which assists the Company  in controlling personnel costs by eliminating duplicate job positions.  Finally, CBS seeks strategic international  alliances with third party gaming suppliers and/or gaming operators that desire  to utilize our expertise in the race and sports industry.  There is no  assurance that CBS will be successful in obtaining any strategic alliances.  We strive to provide our Contract Customer and/or the Bettor a well-rounded  betting experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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| · |   | AWIM                      |   | Develops  several models of self-service wagering kiosk.

 

·                  Upright kiosk, which was  jointly developed with a third party, is a free standing wagering kiosk and  most frequently used by Leroy’s and our Contract Customers to expand the  reach of the race and sports book throughout the casino floor.

·                  Carousel kiosk is designed  for the race bettor who never wants to leave his race carousel.  The Carousel kiosk allows him to place race  and sports bets from the comfort of his race carousel, watch the races (or  sporting events), and check results.

·                  Wall-Mount kiosk is  designed for space conscious environments and can be mounted to the wall or  built into wall to give a seamless, integrated look.  Demand for the Wall-Mount kiosk is greatest  by Leroy’s locations in bars and taverns.   These Leroy’s locations utilize the Wall-Mount kiosk in conjunction  with telephone account wagering, where the Bettor establishes a wagering  account and then can bet from his account while watching the sporting event  at his favorite bar or tavern that has a Leroy’s Wall-Mount kiosk.                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|---------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | Sturgeon’s           |   | Operates  the hotel/casino in Northern Nevada while reviewing and modifying existing  procedures and personnel to increase efficiency, reduce expenses, and  increase the financials. However, Sturgeon’s is heavily dependent on the  drive-through market and Nevada, Northern and Southern, continues to  experience high unemployment, high foreclosures for residential homes and  business failures, and reduced spending on gaming and leisure.  Accordingly, these factors will likely have  an adverse affect on our business conditions and financial performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | **Recent  Developments**. |
|   |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | Mobile Wagering           |   | On  August 31, 2010, we announced the introduction of the LEROY’S® APP©, a mobile device  application for smartphones that permits a Bettor, with a pre-established  telephone wagering account, to bet from his approved mobile device (currently  a BlackBerry® from Research In Motion) anywhere within the  state of Nevada where his wireless carrier provides coverage.  The LEROY’S® APP© received approval from the  Nevada Gaming Control Board to conduct a field test.  The LEROY’S® APP© was developed for Leroy’s  by CBS and the Company has a patent pending on the intellectual  property.  We intend to make the  application available on other mobile platforms.

 

The  LEROY’S® APP© has the potential to  strengthen the Wagering Segment of the Company in the following manner:

 

·                  The Bettor provides the  mobile device, so there is no equipment cost to us.

·                  The Bettor makes his own  bets, so there is no labor cost to us.

·                  The Bettor can make his  bets anywhere in the state of Nevada (depending on wireless carrier  coverage), which ultimately would reduce the capital expenditures required to  open new Leroy’s locations.

·                  We can provide rewards to  our Bettors that may be redeemed at the host casinos of our Leroy’s location  for cross-promotional incentives. |
|   |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | Advertising               |   | Following  the development of the LEROY’S® APP©  we launched a public relations, marketing,  and advertising campaign to introduce the LEROY’S® APP© to the marketplace.  In addition to the direct financial impact  that the LEROY’S® APP© may have on the Wagering  Segment, we anticipate that we will have a new business segment in the third  quarter of fiscal year 2011 for advertisement revenue that will be derived  from advertisement sales on the LEROY’S® APP©.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | Cost                      |   | We  continue to evaluate and closely monitor costs, looking for additional  efficiencies and improvements during at least the remainder of fiscal 2011.  Subject to our cost constraints, where appropriate, we will continue to  explore possible new locations for our products, including foreign  jurisdictions.  As a result, our  concentrated efforts remain focused on making American Wagering, Inc.  financially and operationally stronger and more efficient.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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**Liquidity and Capital Resources.**

 

Theglobal macroeconomic factors that have affected our country for the past threeyears and resulted in a 14.3% unemployment rate in Nevada as of July 31, 2010,resulted in (i) our Contract Customers remaining conservative in their capitalspending, (ii) intense competition among suppliers and sportsbook operators,and (iii) more conservative betting patterns by Bettors because of jobuncertainty and/or reduced discretionary income.  This slowdown in global economies, contractedcredit markets (See Restricted Cash Requirements (Regulation 22.040)) andreduced consumer spending, and the lower than historical trend for the domesticgaming and leisure industry are likely to continue to have far-reaching effectson the local and national economy, the Company’s business, and our principalofficer’s ability to continue to provide financial support to the Company, asin the past, for an indeterminate period. For example, material negativeshort-term swings in the Company’s wagering win percentage, such as thoseexperienced during the first half of fiscal 2011, magnify the Company’s needfor financing at a time when credit availability is reduced. The reducedavailability of bonding for and possible increases to reserves required by and atthe discretion of regulatory agencies also add to the Company’s need foralternative sources of financing.

 

Asof July 31, 2010, we had working capital deficit of ($255) compared to workingcapital deficit of $(242,034) at July 31, 2010. (Also see Restricted CashRequirements (Regulation 22.040)).The decrease in working capital is primarilydue to a significant reduction in revenue during the first half of this fiscalyear primarily due to a lower than historical average win percentage on sportswagers and an increase in short term debt due the loan provided AlpineAdvisors, LLC.

 

Ourprincipal cash requirements relate primarily to operation activities associatedwith our core businesses. For the first two quarters of fiscal 2011, cash usedin operating activities totaled approximately $1.5 million as compared to $1.7million for the same period of fiscal 2010 which is primarily due to the timingof wagers placed on the Super Bowl. In addition to a lower win percentage of3.92% during the first six months of this fiscal year as compared to 5.54% for thefirst six months of the prior year, which had a significant negative effect onthe earnings as explained below under Results of Operations, the reduction ofaccrued expenses, customer deposits and unpaid winning tickets (as a result ofthe timing of bets placed on the Super Bowl, which occurred onFebruary 7, 2010) also required the use of cash.

 

Significantcost reduction efforts resulted in improved operating performance for fiscalyear 2010. The focus for fiscal 2011 will be cost containment and deployment ofnew products. We incurred higher research and development costs during thesecond quarter of the fiscal 2011as compared to the second quarter of fiscal2010 with respect to launching the LEROY’S® APP© and expect to continue toincur additional expenses related to expanding the scope of this product forthe remainder of this fiscal year. However, the timing of spending required todevelop the product is flexible and can be accelerated or deferred depending onthe availability of funds.

 

TheCompany anticipated a short term liquidity issue during the summer months andwas successful in arranging $750,000 in loans from two sources. Victor Salerno,President and Chief Executive Officer, provided an interest free revolving lineof credit to the Company of $250,000 on May 17, 2010 (of which the fullamount has been drawn down), and the Company borrowed $400,000 from AlpineAdvisors, LLC (Alpine), an unrelated party on a one year note with a maximumloan amount of $500,000 at an annual interest rate of 15%. In connection withthe latter, we issued warrants to purchase 600,000 shares of the Company’scommon stock with an exercise price of $0.22 through June 10, 2105. Thewarrants were valued at $129,478 with all treated as additional paid-in capitaland debt discount to be amortized as interest expense over the repayment termof the loan using the effective interest rate method. The balance was notrecorded because it is related to the prospective sale of stock. Thesefinancing agreements provided the necessary cash to overcome the short termliquidity issue.

 

Aswe enter the football season, we believe the cash flow generated throughoperations will be sufficient for the remainder of the fiscal year. Managementis also investigating more comprehensive, long-term refinancing and capitalraising alternatives and has engaged Alpine on an exclusive basis to provideadvisory services to assist us with these efforts. In addition to an initialretainer consisting of 250,000 shares of the Company’s common stock, plus25,000 shares effectively issued during the quarter ended July 31, 2010 as aone-time payment of additional compensation for a late filing, which werevalued at $0.15 per share ($41,250), additional fees are due Alpine upon thesuccessful completion of (1) a single or a series of transactions in which 50%or more of the voting power of the Company or all or a substantial portion ofits business or assets are combined with or transferred to another company and(2) any offering of debt, equity or equity-linked securities eitherindividually or in combination. There is no assurance that such objective canbe accomplished with acceptable terms. If we are unable to secure long-termfinancing or other capital successful raising efforts, we may not be able tosatisfy our obligations as they come due.

 

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Netcash provided by financing activities for the first half of fiscal 2011 wasapproximately $514,000 compared to net cash used in financing activities ofapproximately $408,000 for the same period of fiscal 2010 primarily due to anet increase in the Regulation 22.040 cash reserve and the purchase of fixedassets.

 

**Restricted Cash Requirements (Regulation 22.040)**

 

NevadaGaming Commission Regulation 22.040 (“Regulation 22.040”) requires usto maintain reserves (cash, surety bonds, irrevocable standby letter ofcredit, etc.) sufficient to cover any outstanding wagering liabilityincluding unpaid winning tickets, future tickets and telephone accountdeposits. The amount of the reserve is determined largely at the discretion ofthe regulatory authority but is intended to represent the authority’sexpectation of the Company’s highest liability for a single day which typicallyoccurs during football season. Although our wagering volume and liability arelower than past levels, our current reserve is higher. However, the regulatoryauthority may require the Company to set aside additional reserves to protectthe betting public, even though there has never been a call on or reserve.

 

Asof July 31, 2010 the Company has $1.7 million on deposit at Nevada State Bankfor purposes of meeting the Regulation 22.040 reserve requirement. In addition,Victor and Terina Salerno pledged a certificate of deposit for $200,000 andRobert and Tracey Kocienski pledged two certificates of deposit totaling$500,000 for the benefit of Leroy’s creating a reserve of $2.4 million. Thepledged certificates of deposit expire in November 2010 and unless thepledge is renewed we may be required to make additional reserve deposits duringfootball season. We believe that the $2.4 million reserve coupled with a$600,000 float allowed by the Nevada Gaming Control Board will be adequate duringfootball season based upon our prior year’s history in which the reserverequirement never exceeded $3 million. If we are required to increase theRegulation 22.040 reserve and are unable to do so, it would have anadverse impact on us including, but not limited to, requiring a significantreduction in the number of race/sports locations operated by Leroy’s, or anelimination or reduction of telephone wagering accounts that may have increasedas a result of the introduction of the LEROY’S® APP© resulting in an adverse change in ouroperating results. We have experienced some renewed interest from insurancecompanies with respect to a surety bond for the Regulation 22.040 reserverequirement but have not found terms that are acceptable to us nor is there anyassurance that an agreement will be forthcoming.

 

**Other**

 

TheCompany has an off-balance sheet arrangement whereby Leroy’s has received thebenefit of the pledges made by Victor and Terina Salerno for $200,000 andRobert and Tracey Kocienski for $500,000 to the Nevada Gaming Control Board tomeet its reserve requirements under Regulation 22.040.  The pledges aretreated as off-balance sheet financing although the Company agreed with thepledgors to repay the pledges or increase the reserve deposits in order torelease the pledges. Interest accrues on the pledges at 1% per month and theinterest is payable on the first day of every month. The pledges will expire inNovember 2010.

 

Wemay, from time to time, seek additional capital to fund our operations, reduceour liabilities, or fund our expansion plans (including acquisitions). TheCompany engaged Alpine Advisors, LLC on an exclusive basis to provide advisoryservices to the Company, including the identification of potential investors inan offering of debt, equity, or equity linked securities of the Company, or astrategic based transaction involving the Company. The sale of additionalequity or convertible securities would result in dilution to our shareholders.

 

**Results of Operations**

 

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

 

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| ** **                         | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Summary**                        | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenues                           |       | $                                                   | 2,480,425  |                                              | $          | 3,362,968 |   | $ | (882,543 | ) | (26.24 | ) | $ | 5,343,258 |   | $ | 6,695,757 |   | $ | (1,352,499 | ) | (20.20 | ) |
|                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs  and Expenses                |       | 3,405,062                                           |       | 3,168,696                                         |       | 236,366 |   | 7.46 |   | 6,765,002 |   | 6,438,752 |   | 326,250 |   | 5.07 |   |
| Other  Income and (Expense)        |       | (81,806                                             | )          | (67,235                                           | )          | 14,571 |   | 21.67 |   | (162,513 | ) | (93,459 | ) | 69,054 |   | 74.69 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (Loss) Before Income Taxes |       | $                                                   | (1,006,443 | )                                                 | $          | 127,037 |   | $ | (1,133,480 | ) | (892.24 | ) | $ | (1,584,257 | ) | $ | 163,546 |   | $ | (1,747,803 | ) | (1,068.69 | ) |

 

Pleaserefer to the discussions below (“Wagering Segment,” “Hotel/Casino Segment,” “SystemsSegment,” and “Other Income and Expense”) for additional information, discussionand analysis.

 

**For theThree Months Ended July 31, 2010 Compared to the Three Months Ended July 31,2009**

 

**Wagering Segment**.

 

TheWagering Segment includes the operating results of the sports gaming wagers,net of payouts and expenses.

 

WageringSegment revenues for the three months ended July 31, 2010 decreased$704,309 (-37.25%) over the three months ended July 31, 2009.  Thisdecrease is attributed to the following factors:

 

Duringthe three months ended July 31, 2010, the amount of sports handle remained flatcompared to the same period in the prior year. However, consistency in handleis not necessarily indicative of consistency in revenues or profits due to thevolatility of the win percentages. During the second quarter we experienced a lower than average winpercentage of 3.44% compared to 6.02% in the prior year’s quarter whichaccounts for the deficiency in sports revenue. A change in the wageringpatterns of our patrons continues a trend toward more conservative wagers,which are less profitable to the Company, also contributing to the lower winpercentage. Our race commissions were down $113,603 (-27.53%) from the prioryear’s quarter with same store commissions off by $46,240 (-13.39%) as wecontinue to experience the downward trend in race wagering.

 

WageringSegment total costs and expenses for the three months endedJuly 31, 2010 increased $74,643 (4.22%) over the three months ended July 31,2009. This increase is attributed to the following factors:

 

Directcosts increased by $76,532 (5.54%) primarily due increased rents paid toleased locations.

 

Selling,general and administrative costs increased slightly by $8,518.

 

Depreciationand amortization expense decreased by $10,407 as certain fixed assetsbecame fully depreciated.

 

Asthe opportunity may arise, we may continue to open new locations, however, therelease of LEROY’S® APP© may limit ouraggressiveness in adding locations particularly in Las Vegas. We will continueour periodic review of existing locations in order to close those locationsthat are not operating efficiently.  There is no assurance that the numberof race and 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, the impact of the LEROY’S® APP©, and other factors beyond our control, that we willbe able to add new locations, or that any new locations so added will beprofitable.

 

**Hotel/Casino Segment.**

 

TheHotel/Casino Segment includes the operating results of Sturgeon’s Hotel/Casino.Segment revenues, casino, hotel, and food and beverage for the three monthsended July 31, 2010 had a net decrease of $71,085 (-10.68%) compared to theprior year’s quarter as a result of the following factors:

 

Casinorevenues - decreased handle and wagering activities due todecreased customer spending caused by current economic conditions resulted in adecrease in casino revenues of $54,919 (-18.71%).

 

Hotelrevenues — lower occupancy, primarily due to generaleconomic conditions and decreased travel resulted in a decrease in hotelrevenues of $30,574 (-17.94%).

 

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Foodand beverage revenues — increased $14,408 (7.14%) as we attempt touse our restaurant to increase visitation from the local community and truckerstraveling along the I-80 corridor.

 

Hotel/CasinoSegment total costs and expenses for the three months ended July 31, 2010increased by $49,160 (7.95%) primarily due an increase in food and beveragecosts related to the increase in revenues, payroll, and repairs andmaintenance.

 

**Systems Segment.**

 

TheSystems Segment includes the operating results of our systems sales,installations and maintenance, less the related expenses.

 

SystemsSegment revenues for the three months ended July 31, 2010 decreased$107,149 (-13.28%) over the three months ended July 31, 2009.** **The decrease is attributable toreduced equipment and software license sales. Typically, maintenance feesaccount for more than 90% of the revenue of this segment.

 

SystemsSegment total costs and expenses for the three months endedJuly 31, 2010 increased $112,563 (14.40%) over the three months ended July 31,2009 due to increased research and development activities related to thedevelopment of LEROY’S® APP© and highernet rent expense due to the loss of sublease income. The cost of systems salesin total and by component is not significant.

 

**Other income and (expense). **The otherincome and (expense) categories are primarily administrative in nature and, assuch, are not directly attributable to any operating segment. Accordingly, these items are generally not taken into consideration by us whenwe allocate resources to the segments or assess the performance of the segments.

 

InterestIncome is primarily attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve was flat with the prioryear’s quarter. Interest Expense increased $31,823 due to interest paid onpledged deposits and the Alpine loan. The estimated fair value of the WarrantLiability decreased because the trading price of the Company’s common stockdeclined substantially to the grant date resulting in a gain.

 

Litigationexpense includes $4,459 of settlement interest for the second quarter offiscal 2011 and $16,816 for the same three month period of the prior fiscalyear related to the Racusin matter.  This is considered a non-operatingexpense because this settlement related to a capital raising activity.

 

OtherIncome and Expense decreased $29,982 due to a loss on the sale of slotparts and equipment coupled with a rent adjustment made in the prior year’squarter.

 

Incometax expense (benefit).  The Company’s effective tax rate ofzero for the interim periods presented differs from statutory tax ratesprimarily due to the utilization of NOL carry-forwards and changes in deferredtax activity.

 

**For theSix Months Ended July 31, 2010 Compared to the Six Months Ended July 31, 2009**

 

**Wagering Segment**.

 

TheWagering Segment includes the operating results of the sports gaming wagers,net of payouts and expenses.

 

WageringSegment revenues for the six months ended July 31, 2010 decreased$1,210,562 (-31.07%) over the six months ended July 31, 2009.  Thisdecrease is attributed to the following factors:

 

Duringthe six months ended July 31, 2010, the amount of sports handle decreased$2,086,960 (-3.73%) compared to the same period in the prior year. However, achange in handle is not necessarily indicative of change in revenues or profitsdue to the volatility of the win percentages. During the first half of fiscal 2011 we experienced a lower than averagewin percentage of 3.92% compared to 5.54% in the prior year’s period whichaccounts for the majority of the sports revenue decline with the remaining decreaseattributed to reduced handle. The significant factors contributing to thechanges in the win percentage are:

 

(i)                         The MajorLeague Baseball Season has been thus far Bettor-favorable, with strongerpitching and a decline in home-runs.

 

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(ii)                      A change in thewagering patterns of our patrons continues a trend toward more conservativewagers, which are less profitable to the Company, contributing to the lowerhold percentage.

(iii)                   Our race commissions weredown $221,657 (-27.72%) from the prior year’s first half with same storecommissions off by $84,808 as we continue to experience the downward trend inrace wagering.

 

WageringSegment total costs and expenses for the six months endedJuly 31, 2010 decreased $33,774 (-0.91%) over the six months ended July 31,2009. This decrease is attributed to the following factors:

 

Directcosts decreased $94,462 (-3.15%) primarily due to reduced payroll and taxesand licenses.

 

Selling,general and administrative costs increased $78,864 (14.24%)due to the corporate allocation related to increases in professional services.

 

Depreciationand amortization expense decreased by $18,176 as certain fixed assetsbecame fully depreciated.

 

Asthe opportunity may arise, we may continue to open new locations, however, therelease of LEROY’S® APP© may limit ouraggressiveness in adding locations particularly in Las Vegas. We will continueour periodic review of existing locations in order to close those locationsthat are not operating efficiently as we have done so over the past fewmonths.  There is no assurance that the number of race and sports booksoperated by us will not decrease in the future due to elimination ofunprofitable locations, closure of host properties, changes in state and/orfederal regulations, the impact of LEROY’S® APP©, and other factors beyondour control, that we will be able to add new locations, or that any new locationsso added will be profitable.

 

**Hotel/Casino Segment.**

 

TheHotel/Casino Segment includes the operating results of Sturgeon’s Hotel/CasinoSegment revenues, casino, hotel, and food and beverage for the six months endedJuly 31, 2010 had a net decrease of $176,973 (-14.40%) compared to the prioryear’s quarter as a result of the following factors:

 

Casinorevenues - decreased handle and wagering activities due todecreased customer spending caused by current economic conditions resulted in adecrease in casino revenues of $141,740 (-23.61%).

 

Hotelrevenues — lower occupancy, primarily due to generaleconomic conditions and decreased travel resulted in a decrease in hotelrevenues of $46,273 (-17.00%).

 

Foodand beverage revenues — increased $11,040 (3.10%) as we attempt touse our restaurant to increase visitation from the local community and truckerstraveling along the I-80 corridor.

 

Hotel/CasinoSegment total costs and expenses for the six months ended July 31, 2010increased by $52,253 (4.35%) primarily due an increase in food and beveragecosts related to the increase in revenues, payroll, and repairs andmaintenance.

 

**Systems Segment.**

 

TheSystems Segment includes the operating results of our systems sales,installations and maintenance, less the related expenses.

 

SystemsSegment revenues for the six months ended July 31, 2010 increased$35,036 (2.23%) over the six months ended July 31, 2009.** **The increase is attributable to asmall increase in sales of equipment and equipment rentals. Typically, maintenancefees account for more than 90% of the revenue for this segment.

 

SystemsSegment total costs and expenses for the six months endedJuly 31, 2010 increased $307,771 (20.10%) over the six months ended July 31,2009 due to increased research and development activities related to thedevelopment of LEROY’S® APP©, higher net rent expense due to the loss ofsublease income, and an increase in the corporate allocation related to anincrease in professional services. The cost of systems sales in total and bycomponent is not significant.

 

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**Other income and (expense). **The otherincome and (expense) categories are primarily administrative in nature and, assuch, are not directly attributable to any operating segment. Accordingly, these items are generally not taken into consideration by us whenwe allocate resources to the segments or assess the performance of thesegments.

 

InterestIncome is primarily attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve was flat with the prioryear’s quarter. Interest expense increased $41,483 (29.77%) due to interestpaid on pledged deposits and the Alpine loan. The estimated fair value of theWarrant Liability decreased because the trading price of the Company’s commonstock declined substantially to the grant date resulting in a gain.

 

Litigationexpense includes $10,686 of settlement interest for the first half of fiscal2011 and $26,417 for the same period of the prior fiscal year related to theRacusin matter.  This is considered a non-operating expense because thissettlement related to a capital raising activity.

 

OtherIncome and Expense decreased $75,325 due to a loss on the sale of slotparts and equipment coupled with a rent adjustment made in the prior year’sfirst half.

 

Incometax expense (benefit).  The Company’s effective tax rate ofzero for the interim periods presented differs from statutory tax ratesprimarily due to the utilization of NOL carry-forwards and changes in deferredtax activity.

 

**Critical accounting estimates and policies.**

 

Althoughour financial statements necessarily make use of certain accounting estimatesby our management, we believe that, except as discussed below, we do not employany critical accounting policies or estimates that are either selected fromamong available alternatives, or require the exercise of significant managementjudgment to apply, or that if changed are likely to affect future periodsexcept with regard to the estimated effects if any on estimated costsassociated with the Racusin litigation discussed elsewhere herein.  Thefollowing summarizes our critical estimates and policies.

 

**Wagering**

 

Werecord wagering revenues in compliance with Nevada law and the regulations ofthe 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 grosscalculation (handle less payouts) is then adjusted upward to account for anywinning wagers that were not redeemed (cashed) within the specified timeperiod.  For pari-mutuel race, commission and breakage revenues are recordedwhen the wagers are settled, typically the same day as the wager.  Othersources of revenue are relatively insignificant.

 

**Hotel/Casino Revenue**

 

Wereport the wagering revenues of Sturgeon’s, which is primarily comprised of slotrevenue, hotel room revenue and food and beverage revenue, in compliance withNevada law and the related regulations. These revenues are generally in theform of cash, personal checks, credit cards and gaming tokens, which do notrequire estimates. We do estimate certain liabilities with payment periods thatextend for longer than several months. We believe these estimates arereasonable based on our assumptions related to possible outcomes in the future.Future actual results might differ materially from these estimates. Slotrevenue is calculated by deducting the hopper fills and jackpot payouts fromthe slot drop which is the amount removed from the slot machine. For non-gamingrevenues, such as food and beverage and hotel, we record revenues in compliancewith generally accepted accounting principles, recognizing revenue when it isearned.

 

**System**

 

Softwarelicense fees represent revenues related to licenses for race/sports softwaredelivered to customers for in house use. Revenues from software licenseagreements including any related training revenue and hardware sales arerecognized upon installation. Revenue is not recognized until it is realizedand earned. The Company recognizes revenue when related assets held are readilyconvertible to known amounts of cash or claims to cash and revenues areconsidered to have been earned when we have substantially accomplished what wemust do to be entitled to the benefits represented by the revenues.

 

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TheCompany’s software licensing agreements do not require significant production,modification, or customization of the software and, except for maintenanceservices consistently priced on a per terminal / license basis at a standardprice per unit across our entire customer base. The Company’s softwarearrangements do not provide licenses for any other software deliverables. Oncein use, changes to the software occur infrequently and typically consist ofonly minor debugging or patch fixes for a period contractually limited to 90days following the purchase. Subsequent minor and infrequent modifications areconsidered part of the support service and included in the maintenance fee. Inthe unlikely event of a major upgrade (modification) to the software isdeveloped, customers would be given the opportunity, but are not required, topurchase it separately and to enter into a new software license agreement.Occasionally, however, a customer will request a custom enhancement and suchenhancements are developed and billed separately and are accounted for as salesand recognized as revenue upon installation and acceptance by the customer.

 

TheCompany does not earn or collect the software and license fees over the life ofthe agreement or recognize revenue prior to inception of the license; rather,these fees are earned and paid upon installation, which coincides with thecommencement of the license.

 

Theonly fees that are recognized over time are maintenance fees. Certain amountsin a few, but not all maintenance agreements, could under one very remotecondition that has never occurred (an intellectual property infringement claimthat required software to be taken out of service and which could not bereplaced within a specific time period), be refundable. A customer may notunilaterally cancel its maintenance agreement at any time. Non-payment wouldresult in a breach of the agreement and the Company may seek to enforce itslegal and equitable contract rights.

 

Wenegotiate maintenance agreements with each of our customers to provide for thelong-term care of the software and hardware.  Pursuant to the terms of thevarious maintenance agreements, a fixed sum is due at the beginning of eachmonth regardless of whether the customer requires service during thatmonth.  We recognize maintenance revenue on the first day of each monthfor which the maintenance agreement is in place; we maintain an allowance fordoubtful accounts in the event that any such revenue recorded is not realized.

 

**Long-Lived Assets**

 

Ownedproperty and equipment are recorded at cost and depreciated to residual valuesover the estimated useful lives using the straight-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, currentlyestimated, of our equipment generally ranges from 3 to 10 years.  We testfor impairment losses on long-lived assets used in operations when events andcircumstances indicate that the assets might be impaired. An impairment loss isrecognized if the carrying amount of the asset is not recoverable from itsundiscounted cash flows and is measured as the difference between the carryingamount and fair value of the asset.

 

**Recent Accounting Pronouncements**

 

Norecently issued accounting pronouncements not yet adopted are expected to havea material impact on our future financial position, results of operations, orcash flows.

 

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

 

Notrequired.

 

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

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures that are intended to ensure thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended (Exchange Act), is recorded, processed,summarized and reported within the time period specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management.

 

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Ourmanagement, with the participation of our Chief Executive Officer and Interim PrincipalAccounting Officer, has completed an evaluation of the effectiveness of thedisclosure controls and procedures pursuant to Exchange ActRule 13a-15(c). Based on that evaluation, we concluded that the disclosurecontrols and procedures were not effective, given a group of deficienciescollectively considered to be a material weakness in the internal control overfinancial reporting that management and the Company’s independent registeredaccounting firm have identified as of January 31, 2010 which have not beenfully mitigated as of July 31, 2010.

 

**Changes in Internal Control over Financial Reporting**

 

Therewere no changes in our internal controls over financial reporting that occurredduring our last fiscal quarter, i.e., the quarter ended July 31, 2010, thathave materially affected or are reasonably likely to materially affect ourinternal controls over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Fora description of our Legal Proceedings, see Note 4 in the “Notes toConsolidated Financial Statements” of this Quarterly Report on Form 10-Q, whichis incorporated by reference in response to this item.

 

**Item 1A.  Risk Factors**

 

Adescription of our risk factors can be found in Item 1A. of our Annual Reporton Form 10-K for the fiscal year ended January 31, 2010. There wereno material changes to those risk factors during the six months ended July 31,2010.

 

**Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds.**

 

Weeffectively issued 25,000 shares of common stock to Alpine Advisors, LLC duringthe quarter ended July 31, 2010 as a one-time payment of additionalcompensation for a late filing.  Theseshares were issued in reliance on Section 4(2) of the Securities Act of 1933.  We have agreed to provide limited piggybackregistration rights with respect to these shares.

 

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

 

Notapplicable.

 

**Item 4.  Reserved.**

 

**Item 5.  Other Information.**

 

Notapplicable.

 

**Item 6.  Exhibits.**

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                             |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                    |       | Line  of Credit dated May 17, 2010 between the Company and Victor Salerno  incorporated by reference to registrant’s Current Report on Form 8-K, as  filed with the Securities and Exchange Commission on May 17, 2010. |
|                    |       |                                                                                                                                                                                                                                        |
| 10.2                    |       | Revolving  Line of Credit Promissory Note dated May 17, 2010 incorporated by  reference to registrant’s Current Report on Form 8-K, as filed with the  Security and Exchange Commission on May 17, 2010.                |
|                    |       |                                                                                                                                                                                                                                        |
| 10.3                    |       | Loan  Agreement dated June 22, 2010 between the Company and Alpine Advisors LLC.                                                                                                                                                            |
|                    |       |                                                                                                                                                                                                                                        |
| 10.4                    |       | Borrower  Pledge Agreement dated June 22, 2010 between the Company and Alpine Advisors  LLC.                                                                                                                                                |
|                    |       |                                                                                                                                                                                                                                        |
| 10.5                    |       | CBS  Security Agreement dated June 22, 2010 between the Company and Alpine  Advisors LLC.                                                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                        |
| 10.6                    |       | Amended  and Restated Warrant dated June 11, 2010 issued to Alpine Advisors LLC.                                                                                                                                                            |

 

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| 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 Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| **AMERICAN  WAGERING, INC.**                                                  |   |
|-------------------------------------------------------------------------------|--------|
|                                                                          |   |
|                                                                          |   |
| Dated:     September 20,  2010                  |   |
|                                                                          |   |
| /s/  Victor J. Salerno                                                        |   |
| Victor  J. Salerno                                                            |   |
| President, Chief Executive  Officer, Chief Operating Officer,                 |   |
| Chairman  of the Board of Directors, and Interim Principal Accounting Officer |   |

 

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