UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

For the quarterly period ended: April 30, 2011

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

For the quarterly period ended: October 31, 2010

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

For the transition period from: to

Commission file number: 000-20685

AMERICAN WAGERING, INC.

(Exact name of registrant as specified in its charter)

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

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

702-735-0101

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated 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 the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

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

Indicate by check mark whether the registrant is a shell company (as defined 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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of ~~December~~June 2014, ~~2010~~2011, there were 8,404,879 shares of common stock, par value $0.01, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 2 Balance Sheets as of October 31, 2010 (Unaudited) and January 31, 2010 2 Statements of Operations for the Three and Nine Months Ended October 31, 2010 (Unaudited) 3 Statements of Cash Flows for the Nine Months Ended October 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 19 Item 4T. Controls and Procedures 19 PART II — OTHER INFORMATION Item 1. Legal Proceedings 21 Item 1A. Risk Factors 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Reserved 21 Item 5. Other Information 21 Item 6. Exhibits 21

		Page

PART I — FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements	1

	BALANCE SHEETS AS OF APRIL 30, 2011 (UNAUDITED) AND JANUARY 31, 2011	1

	STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2011 AND 2010 (UNAUDITED)	2

	STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 2011 AND 2010 (UNAUDITED)	3

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14

Item 4	Controls and Procedures	14

PART II — OTHER INFORMATION		14

Item 1.	Legal Proceedings	14

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 3.	Defaults Upon Senior Securities	15

Item 4.	Reserved	15

Item 5.	Other Information	15

Item 6.	Exhibits	15

1Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. ~~Consolidated~~ Financial Statements.

AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	October 31, 2010			January 31, 2010
	April 30, 2011 (Unaudited)			January 31, 2011
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Equivalents	$	2,~~259~~660,~~679~~732		$	21,~~084~~485,~~268~~148
Restricted Cash	1,~~762~~262,~~357~~408			1,~~729~~762,~~209~~396
Accounts Receivable	18303,~~355~~026			~~204~~209,~~706~~737
Inventories	80120,~~046~~146			~~143~~122,~~913~~228
Deferred Tax Assets, net of allowance	369,000			369,000
Prepaid Expenses	332,491			359,758
Prepaid Expenses	377,819			364,207
	4,678,803			3,939,267
	4,867,256			4,895,303
Property and Equipment, net of accumulated depreciation and amortization	2,271,486			2,454,488
Property and Equipment, net of accumulated depreciation and amortization	2,658,044			3,301,180
Goodwill	103,725			103,725
Other	~~208~~187,~~997~~008			~~221~~200,~~291~~049
	$	7,~~838~~241,022		$	86,~~521~~697,~~499~~529
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Short-term Debt	$	419,475		$	—
Short-Term Debt, net of amortized discount of $47,889	$	—		$	452,111
Current Portion of Long-term Debt	162,520			441,781
Current Portion of Long-Term Debt	1,176,839			170,604
Accounts Payable	1549,~~121,968~~454			1,~~217~~624,~~409~~448
Accrued Expenses	~~511~~474,~~162~~392			~~613~~607,~~320~~081
Unpaid Winning Tickets	1378,~~107,138~~144			1604,~~021,229~~053
Customer Deposits and Other	1,~~363~~058,~~146~~619			~~850~~1,~~075~~382,553
	4,685,409			4,143,814
	3,637,448			4,840,850
Long-term Debt, less current portion	2,737,363			2,530,778
Long-Term Debt, less current portion	5,774,437			2,793,749
Warrant Liability	403,884			250,294
Redeemable Series A Preferred Stock (3,238 shares)	323,800			323,800
Warranty Liability	296,026			—
Other	401,726			242,127
Other	242,122			242,111
	10,541,295			8,450,820
	8,284,720			7,240,503
STOCKHOLDERS’ EQUITY (DEFICIENCY)
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
Common Stock - $0.01 par value; 25,000,000 shares authorized; 8,404,879 shares issued and outstanding	84,049			84,049
Additional Paid-in Capital	12,775,371			12,589,318
Additional Paid-In Capital	13,146,032			13,010,578
Deficit	(1417,~~071~~295,~~025~~261		)	(1215,~~154~~612,~~528~~825		)
Treasury Stock, at cost (61,100 common shares)	(327,493		)	(327,493		)
Treasury Stock, at cost (61,100 common shares at cost)	(327,493		)	(327,493		)
	(446,698		)	1,280,996
	(3,300,273		)	(1,753,291		)
	$	7,~~838~~241,022		$	86,~~521~~697,~~499~~529

See Notes to Consolidated Financial Statements

~~AMERICAN~~Table ~~WAGERING, INC.~~of ~~AND SUBSIDIARIES~~Contents

~~STATEMENTS~~AMERICAN OFWAGERING, INC. ~~OPERATIONS~~AND SUBSIDIARIES

~~(UNAUDITED)~~CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended October 31,						For the Nine Months Ended October 31,
	2010			2009			2010			2009
REVENUES:
Wagering	$	2,382,578		$	1,937,282		$	5,068,794		$	5,834,061
Hotel Casino	618,311			620,185			1,670,512			1,849,359
Systems	635,536			681,910			2,240,377			2,251,715
	3,636,425			3,239,377			8,979,683			9,935,135
OPERATING COSTS AND EXPENSES:
Direct Costs:
Wagering	1,653,595			1,754,040			4,554,750			4,749,657
Hotel Casino	520,392			471,365			1,470,191			1,393,431
Systems	199,783			214,425			626,951			599,563
	2,373,770			2,439,830			6,651,892			6,742,651
Operating Expenses:
Research and Development	175,439			216,902			521,757			487,812
Selling, General and Administrative	772,768			698,507			2,453,639			2,066,423
Depreciation and Amortization	214,459			243,398			674,151			740,503
	1,162,666			1,158,807			3,649,547			3,294,738
	3,536,436			3,598,637			10,301,439			10,037,389
OPERATING INCOME (LOSS)	99,989			(359,260		)	(1,321,756		)	(102,254		)
OTHER INCOME (EXPENSE):
Interest Income	657			1,320			4,722			8,362
Interest Expense	(124,969		)	(74,692		)	(305,793		)	(214,033		)
Change in Estimated Fair Value of Warrant Liability	(201,547		)	—			(166,547		)	—
Litigation Expense	(2,928		)	(16,866		)	(13,614		)	(43,283		)
Other	2,482			80			(7,586		)	65,336
	(326,305		)	(90,158		)	(488,818		)	(183,618		)
NET LOSS	$	(226,316	)	$	(449,418	)	$	(1,810,574	)	$	(285,872	)
NET LOSS PER COMMON SHARE — BASIC AND DILUTED	$	(0.03	)	$	(0.06	)	$	(0.23	)	$	(0.05	)

(Unaudited)

See Notes to Consolidated Financial Statements

	For the Three Months Ended April 30,
	2011			2010
REVENUES:
Wagering	$	1,693,148		$	1,499,992
Hotel/Casino	469,460			457,459
Systems	699,233			905,382
	2,861,841			2,862,833
OPERATING COSTS AND EXPENSES:
Direct Costs:
Wagering	1,386,163			1,442,797
Hotel/Casino	392,107			434,090
Systems	198,899			247,349
	1,977,169			2,124,236
Operating Expenses:
Research and Development	199,082			161,082
Selling, General and Administrative	1,749,655			840,047
Depreciation and Amortization	188,257			234,575
	2,136,994			1,235,704

	4,114,163			3,359,940

OPERATING LOSS	(1,252,322		)	(497,107		)

OTHER INCOME (EXPENSE):
Interest Expense	(147,053		)	(79,420		)
Loss on Debt Extinguishment	(126,960		)	—
Change in Estimated Fair Value of Warrant Liability	(153,590		)	—
Litigation Expense	(42		)	(6,137		)
Interest and Other Income	32,064			4,850

NET LOSS	$	(1,647,903	)	$	(577,814	)

NET LOSS PER COMMON SHARE —
BASIC AND DILUTED	$	(0.20	)	$	(0.07	)

3See Notes to Consolidated Financial Statements

~~AMERICAN WAGERING, INC. AND SUBSIDIARIES~~2

~~STATEMENTS~~Table OFof ~~CASH FLOWS~~Contents

~~(UNAUDITED)~~AMERICAN WAGERING, INC. AND SUBSIDIARIES

	For the Nine Months Ended October 31,
	2010			2009
Operating Activities
Net cash provided by (used in) operating activities	$	(323,225	)	$	229,751
Investing Activities
Increases in restricted cash	(80,000		)	(188,169		)
Withdrawals of restricted cash	46,852			28,761
Proceeds from the sale of property and equipment	3,885			—
Purchase of property and equipment	(10,188		)	(119,160		)
Net cash used in investing activities	(39,451		)	(278,568		)
Financing Activities
Repayment of borrowings	(105,989		)	(563,740		)
Proceeds from borrowings	750,000			705
Dividends on preferred stock	(105,924		)	(105,959		)
Net cash provided by (used in) financing activities	538,087			(668,994		)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS	175,411			(717,811		)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD	2,084,268			3,357,978
CASH AND EQUIVALENTS, END OF PERIOD	$	2,259,679		$	2,640,167

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~See Notes to Consolidated Financial Statements~~(Unaudited)

	For the Three Months Ended April 30,
	2011			2010

Operating Activities
Net cash used in operating activities	$	(2,788,909	)	$	(803,577	)

Investing Activities
Withdrawal of restricted cash	500,000			46,194
Purchase of property and equipment	(4,039		)	(3,058		)
Net cash provided by investing activities	495,961			43,136

Financing Activities
Repayment of borrowings	(770,224		)	(33,658		)
Proceeds from borrowings	4,273,288			—
Dividends on preferred stock	(34,532		)	(34,532		)
Net cash provided by (used in) financing activities	3,468,532			(68,190		)

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS	1,175,584			(828,631		)

CASH AND EQUIVALENTS, BEGINNING OF PERIOD	1,485,148			2,084,268

CASH AND EQUIVALENTS, END OF PERIOD	$	2,660,732		$	1,255,637

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	250,767		$	85,557
Issuance of common stock for services	$	—		$	37,500

~~AMERICAN~~See ~~WAGERING, INC.~~Notes ~~AND~~to ~~SUBSIDIARIES~~Consolidated Financial Statements

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~3

~~(Unaudited)~~Table of Contents

~~Nine~~AMERICAN ~~Months October 31~~WAGERING, INC. ~~2010~~AND SUBSIDIARIES

~~1. Basis~~NOTES ofTO ~~Presentation~~CONSOLIDATED FINANCIAL STATEMENTS

~~The~~THREE ~~accompanying~~MONTHS ~~unaudited~~ENDED ~~interim~~APRIL ~~consolidated financial statements of American Wagering~~30, ~~Inc.~~ and its subsidiaries (collectively, the “Company” or “AWI”) have been prepared in accordance with the instructions to Form 10-Q as published by the Securities and Exchange Commission (“SEC”). The financial statements do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation have been included. Due to seasonality and other factors, results of operations for any interim period are not necessarily indicative of expected annual results. These unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company, and the related notes, included in the Company’s Annual Report on Form 10-K filed on May 7, 2010, with the SEC, from which the balance sheet information as of January 31, 2010 was derived.2011

~~2. Net Loss Per Common Share~~(Unaudited)

~~Basic~~1. ~~net~~Basis ~~loss per common share is calculated based on the weighted-average number~~ of ~~shares~~Presentation; of common stock outstanding during the reporting period. Diluted net income per common share is ordinarily calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. However, the calculation for diluted net loss per common share for loss periods, excludes the potentially dilutive common shares because inclusion would have an anti-dilutive effect. The ~~amount~~Merger ofand ~~potentially~~Bridge ~~anti-dilutive~~Facility; ~~common shares that have been excluded from basic net income (loss) per share was 616,100~~ and ~~646,099~~Related atRisks ~~October 31, 2010~~ and ~~2009, respectively.~~Uncertainties

~~Following~~The isaccompanying aunaudited ~~reconciliation~~interim consolidated financial statements of American Wagering, Inc. and its subsidiaries (collectively “the ~~numerators~~Company” or “AWI”) have been prepared in accordance with the instructions to Form 10-Q as published by the Securities and ~~denominators~~Exchange Commission (“SEC”). The financial statements do not include all of the ~~net~~information ~~loss~~and ~~per~~disclosures ~~common~~required ~~share~~by ~~computations~~generally accepted accounting principles for annual financial statements. All significant inter-company accounts and transactions have been eliminated in consolidation. In the ~~three~~opinion ~~months~~of ~~ended~~management, ~~October~~all adjustments necessary for a fair presentation have been included. Due to seasonality and other factors, results of operations for any interim period are not necessarily indicative of expected annual results. These unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company, and the related notes, included in the Company’s Annual Report on Form 10-K filed on May 18, 2011, with the SEC, from which the balance sheet information as of January 31:, 2011 was derived.

	Numerator
	2010			2009
Three Months Ended October 31,
Net loss	$	(226,316	)	$	(449,418	)
Less preferred stock dividends	(35,696		)	(35,696		)
Net loss available to common shares	$	(262,012	)	$	(485,114	)

On April 13, 2011, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with a foreign privately held company (the “Purchaser”). At the effective time of the merger, each holder of outstanding shares of the Company’s common stock (other than participants in the merger and dissenters) will be entitled to receive $0.90 in cash for each such share. All of the outstanding shares of the Company’s common stock (other than participants in the merger) will be automatically cancelled at the effective time of the merger. Contemporaneous with the closing (as defined in the Merger Agreement), the purchaser shall pay the Company $1,416,200 and all of the additional accrued but unpaid interest on each share of preferred stock which will be used at the closing to redeem the preferred stock issued and outstanding, and to pay the related accrued interest. At the closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger shall be cancelled and, in exchange therefor, the former holder shall receive an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share under such stock warrant or option, and (ii) the number of shares subject to such stock warrant or option.

	Denominator
	2010	2009
Weighted-average common shares outstanding, basic	8,343,779	8,068,779
Effect of dilutive stock options	200,691	—
Weighted-average common shares outstanding, diluted	8,544,470	8,068,779

The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, (i) the adoption of the Merger Agreement by our stockholders, which was effected on April 13, 2011, (ii) the absence of any injunction or applicable law preventing consummation of the merger, (iii) receipt of any required consents, approvals and licenses under the Nevada Gaming Control Act and the rules and regulations promulgated thereunder and applicable local gaming and liquor laws, ordinances and regulations, (iv) verification of the accuracy of the representations and warranties made by the parties, and (v) the performance, in all material respects, of all obligations, agreements and covenants under the Merger Agreement.

Additionally, on April 13, 2011, the Company and the Purchaser entered into a bridge loan agreement (the “Bridge Loan Agreement”) pursuant to which the Purchaser loaned the Company $4.25 million and, at the Purchaser’s sole discretion, may loan up to an additional $3.0 million (collectively, the “Bridge Facility”). The Bridge Facility matures upon the earlier of (i) consummation of the Merger, (ii) termination of the Merger Agreement and (iii) December 31, 2013, subject to certain extension mechanisms. Loans outstanding under the Bridge Facility accrue interest at an annual rate equal to 12.5%, which compounds on a quarterly basis in arrears on March 31, June 30, September 30, and December 31 of each year, and shall be paid in kind by adding the accrued interest to the balance of the loan. During the existence of an event of default under the Bridge Facility, an additional 2% per annum is imposed.

	Numerator
	2010			2009
Nine Months Ended October 31,
Net loss	$	(1,810,574	)	$	(285,872	)
Less preferred stock dividends	(105,924		)	(105,959		)
Net loss available to common shares, basic and diluted	$	(1,916,498	)	$	(391,831	)

The terms of the Merger Agreement and the Bridge Loan Agreement limit the Company’s ability to engage in certain business activities without the prior consent of the Purchaser. The most significant of these restrictions limit the Company’s ability to pay dividends, issue or repurchase shares of our common stock, incur new indebtedness, enter into or modify material contracts, grant liens on the Company’s assets, and effect any significant change in the Company’s corporate structure or the nature of its business.

	Denominator
	2010	2009
Weighted-average common shares outstanding, basic	8,295,153	8,068,779
Effect of dilutive stock options	48,905	—
Weighted-average common shares outstanding, diluted	8,344,058	8,068,779

The Merger Agreement contains certain termination rights and reimbursement obligations. If the Merger Agreement is terminated, the principal amount and all accrued interest under the Bridge Facility will become due and payable, and, in certain circumstances, (a) the Company may be required to reimburse the Purchaser and its affiliates for all of their reasonable out-of-pocket expenses up to $250,000 and (b) the Purchaser may be required to pay the Company a termination fee of $1.5 million, which amount shall be subject to offset to any amounts owed by the Company in connection with the Bridge Loan Agreement. If the Merger Agreement is not consummated, the Company may not be able to pay its debts as they come due, including the Bridge Facility and / or execute its business plans, possibly leading to the financial and operational failure of the Company.

~~3. Income Taxes~~4

AtTable ~~October 31, 2010, the Company had federal tax net operating loss (“NOL”) carry-forwards available to potentially reduce future tax obligations in the aggregate amount~~ of approximately $7.0 million, of which approximately $1.3 million expires in 2019. In assessing the realizability of deferred tax assets, which resulted primarily from the NOLs, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.Contents

Management believes that, with the football season underway, the unusually low hold percentage experienced in the first six months of fiscal 2011 is not expected to continue, the regulatory approval of the Company’s mobile betting application, and the development of the mobile application on additional devices and service providers, the Company will be profitable for at least the next twelve months2. Net ~~Accordingly,~~Income ~~management~~(Loss) ~~also~~Per ~~believes~~Common ~~it is more likely than not that the Company’s deferred tax asset of $369,000, net of the valuation allowance provided, will be realized.~~Share

~~The~~Basic ~~Company’s~~net ~~estimated~~income ~~annual~~(loss) ~~effective~~per ~~tax~~common ~~rate~~share is calculated based on the weighted-average number of ~~zero~~shares ~~for~~of common stock outstanding during the ~~interim~~reporting ~~periods~~period. ~~presented~~Diluted ~~differs~~net ~~from~~income ~~statutory~~per ~~tax~~common ~~rates~~share ~~primarily~~is ~~due~~ordinarily calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the ~~expected~~reporting ~~utilization~~period. ofFor ~~NOL~~loss ~~carry-forwards~~periods, ~~and/or~~such ~~changes~~potentially indilutive common shares are excluded from the ~~valuation~~calculation ~~allowance~~to ~~for~~avoid ~~deferred~~an ~~tax~~anti-dilutive ~~assets~~effect.

~~4. Litigation~~Following is a reconciliation of the numerators and ~~Other~~denominators ~~Contingencies~~of the net income (loss) per common share computations for the three months ended April 30 (unaudited):

For the third quarter of fiscal years 2011 and 2010, litigation expense of $2,928 and $16,866, respectively, is included in other income (expense) and consists of judgment interest incurred on our previously recorded obligation due to Michael Racusin.

	Numerator
	2011			2010

Net loss	$	(1,647,903	)	$	(577,814	)
Less preferred stock dividends	(34,532		)	(34,532		)
Net loss available to common shares, basic and diluted	$	(1,682,435	)	$	(612,346	)

As of October 31, 2010 and 2009, respectively, the aggregate recorded liability for the estimated probable loss associated with litigation or other disputes, as discussed below, was $89,471 and $532,642, excluding future legal and related defense costs and judgment interest.

	Denominator
	2011	2010
Weighted-average common shares outstanding, basic	8,343,779	8,209,228
Effect of dilutive stock options	1,158,641	316
Weighted-average common shares outstanding, diluted	9,502,420	8,209,544

~~Racusin.~~The Onnumber ~~July 25, 2003, AWI and a wholly-owned subsidiary (Leroy’s) filed voluntary petitions for relief (“Chapter 11 Petitions”) under Chapter 11~~ of ~~the~~potentially ~~United States~~dilutive ~~Bankruptcy~~common ~~Code~~shares ~~(“Chapter 11”)~~that inhave ~~the~~been ~~United States~~excluded ~~Bankruptcy~~from ~~Court for~~ the ~~District~~denominator ofusing ~~Nevada (~~the ~~“Bankruptcy~~ ~~Court”).~~treasury ~~The~~stock ~~Company~~method ~~and~~was ~~Racusin entered into the Settlement Agreement on September 3~~165,300 ~~2004. On~~and ~~February 28~~646,100 ~~2005,~~at ~~the Bankruptcy Court confirmed the Restated Amended Joint Plan of Reorganization (the~~April ~~“Plan”) of AWI and Leroy’s. On March 11~~30, ~~2005,~~2011 ~~AWI~~ and ~~Leroy’s consummated the Plan and formally emerged from Chapter 11 proceedings after completing all required actions and all remaining conditions. On September 26~~2010, ~~2005, the Bankruptcy Court issued an order closing the Chapter 11 cases of AWI and~~respectively.

63. Income Taxes

~~Leroy~~At April 30, 2011, the Company had federal tax net operating loss (“NOL”) carryforwards available to potentially reduce future tax obligations in the aggregate amount of approximately $9.7 million, of which approximately $1.1 million expires in 2019. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes that the Company’s. ~~All~~history ~~required~~of ~~distributions~~net ~~have~~losses ~~been~~in ~~made~~three of the last four years makes it more likely than not that the Company’s net deferred tax assets will not be fully realized and, ~~except~~accordingly, ~~with~~has ~~respect~~established toa 100% allowance. In addition, in the ~~Racusin~~event ~~matter~~of a change in control (~~“Racusin~~such ~~Claim”~~as the pending Merger), realization of federal income tax benefits from NOLs may also be limited under Section 382 of the Internal Revenue Service Code.

~~Racusin~~The filed a claim for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment to accelerate amounts due, with penalty interest, on February 24, 2009. A hearing was held on May 8, 2009, regarding the motion for summary judgment, and the Bankruptcy Court granted the motion for summary judgment on August 18, 2009. AWI and LeroyCompany’s ~~moved~~estimated ~~the~~annual ~~Bankruptcy~~effective ~~Court~~tax ~~for~~rate ~~reconsideration~~ of ~~its~~zero ~~grant~~for ~~of summary judgment; on April 2, 2010, a hearing was held. The Bankruptcy Court verbally indicated an intent to vacate~~ the ~~August 18,~~interim ~~2009~~periods ~~order~~presented ~~granting~~differs ~~summary~~from ~~judgment~~statutory intax ~~favor~~rates ofprimarily ~~Racusin that would have accelerated amounts~~ due and imposed penalty interest at 12% per annum because a material issue of fact remained regarding whether the Company breached the Settlement Agreement, and whether the acceleration clause of the Settlement Agreement was triggered. Arguments as to ~~the~~changes ~~potential effects of a prior ruling (the Stay Order on the Interpleader) and the resulting calculation of amounts due may be considered later~~ in the ~~litigation,~~valuation ~~including,~~allowance ~~but not limited to, at trial. Racusin’s claim~~ for ~~breach~~deferred oftax ~~the Settlement Agreement remains pending but no trial date has been set in this case as of yet~~assets.

~~Accordingly, as of October 31, 2010, we believe that the principal balance owed to Racusin is $89,471, with $83,333 due in fiscal 2011 and the balance in 2012, plus interest at 8% per annum~~4. If arguments regarding the effects of the Stay Order on the Interpleader are heard and the Bankruptcy Court were to rule that the Stay Order did not effect the Interpleader Order and did not result in an off-set in the calculation of the accrued interest, then we believe the amount due as of October 31, 2010 would be approximately $512,266 assuming an 8% interest rate. ~~For~~Litigation ~~the third quarter of the fiscal year ending January 31, 2011, the Company paid $86,070, including interest, into the Bankruptcy Court’s Registry in settlement of the Racusin Claim~~ and ~~certain other lien-holders of Racusin.~~Contingencies

Racusin. For 2011 and 2010, litigation expense of $42 and $6,137, respectively, is included in other income (expense) and consists of judgment interest incurred on our previously recorded obligation due to Michael Racusin. There have been no material legal changes for this matter during the quarter ended ~~October~~April 30, 2011, from the fiscal year ended January 31, ~~2010~~2011. Accordingly, as of April 30, 2011, we believe that the balance owed to Racusin has been fully paid. If arguments regarding the effects of the Stay Order on the Interpleader are heard and the Court were to rule that the Stay Order did not effect the Interpleader Order and did not result in an off-set in the calculation of the accrued interest, then we believe the amount due would be approximately $347,738 as of April 30, 2011, assuming an 8% interest rate. A history of the various proceedings in connection with this matter follows:

~~Internet~~The ~~Sports~~Company ~~International, Ltd.~~and ~~(ISI)~~Racusin ~~This~~entered ~~case~~into isa ~~currently~~Settlement inAgreement ~~the~~on ~~discovery~~September 3, ~~phase~~2004. ~~and~~On ~~pending~~or inabout March 11, 2005, the ~~District~~Company ~~Court~~consummated its Plan of ~~Clark~~Reorganization ~~County,~~and ~~Nevada,~~emerged ~~case~~from noBankruptcy. ~~A567638~~On May 13, ~~and~~2005, ~~involves~~ the Company commenced an adversary proceeding in its bankruptcy case against Racusin and ~~certain~~various other ~~Defendants~~competing claimants to Racusin’s claim which action sought to interplead any distribution on the Racusin Claim into the Bankruptcy Court (the “~~Defendants~~Interpleader Adversary”). ~~The~~ ~~Court~~On ~~recently~~or ~~granted~~about August 2, 2005, the ~~Parties’~~Bankruptcy ~~Joint~~Court ~~Motion~~entered toan ~~Extend~~order ~~Discovery~~approving ~~until~~the ~~May~~interpleader ~~2011. A~~(the ~~judicial~~“Interpleader ~~mediation~~Order”), iswhereby ~~tentatively~~the ~~set~~Company ~~for~~placed ~~January~~250,000 ~~2011. The~~shares ~~trial~~of ~~date~~common stock with the clerk of ~~November 2010~~the ~~has~~court ~~been~~as ~~vacated~~payment ~~and~~of the ~~Court~~Racusin ~~has~~Claim ~~yet~~while toRacusin ~~set~~pursued ahis ~~new~~appeal ~~trial~~of ~~date~~the ~~for~~Bankruptcy ~~2011. There~~Appellate ~~have~~Panel’s ~~been~~decision noin ~~material~~our ~~legal~~favor ~~changes~~subordinating ~~for~~Racusin’s ~~this~~claim ~~matter~~pursuant ~~during~~to Section 510(b) of the ~~quarter~~Bankruptcy ~~ended~~Code ~~October~~to the 9th ~~31,~~Circuit ~~2010~~Court of Appeals. The Interpleader Order further stated that the Company’s stock would be substituted with

Economic Conditions and Related Risks and Uncertainties Our customer base is segmented into two categories: Contract Customers, the Casinos to whom we are vendors, either as system suppliers or sportsbook operators, and the Bettors, the individual race and sports bettors who place their wagers with us at out our sportsbooks. The global macroeconomic factors that have affected our country for the past three years and resulted in a 14.2% unemployment rate in Nevada as of October 31, 2010, resulted in (i) our Contract Customers remaining conservative in their capital spending, (ii) intense competition among suppliers and sportsbook operators, and (iii) more conservative betting patterns by Bettors because of job uncertainty or reduced discretionary income. This slowdown in global economies, tightened credit markets and reduced consumer spending, and the lower than historical trend for the domestic gaming and leisure industry are likely to continue to have far-reaching effects on the local and national economy, the Company’s business, and our principal officer’s ability to continue to provide financial support to the Company, as in the past, for an indeterminate period. For example, material negative short-term swings in the Company’s wagering win percentage, such as those experienced during the first nine months of fiscal 2011, magnify the Company’s need for financing at a time when credit availability is reduced. The reduced availability of bonding for and possible increases to reserves established at the discretion of regulatory agencies also add to the Company’s need for alternative sources of financing, which may not be available at acceptable terms.5

InTable ~~addition, the Company often carries cash and equivalents on deposit with financial institutions substantially in excess~~ of federally-insured limits. The extent of any loss that might be incurred as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions, if any, is not subject to estimation.Contents

7cash payment in the event that the 9th Circuit reverses the Bankruptcy Appellate Panel. On August 31, 2005, the Court entered an order staying the interpleader (the “Stay Order”) pending a decision from the 9th Circuit Court of Appeals.

5On June 28, 2007, the 9th Circuit Court of Appeals entered its final opinion, which reversed the Bankruptcy Appellate Panel’s decision, thus holding that Racusin’s claim was not to be subordinated pursuant to Section 510(b) of the Bankruptcy Code. ~~Stock~~ ~~Options~~The Company filed a Form 8-K on July 6, ~~Other~~2007, ~~Equity~~in ~~and~~response ~~Related~~to ~~Party~~the ~~Transactions~~9th Circuit’s reversal of the Bankruptcy Appellate Panel.

~~Activity~~On ~~related~~November 2, 2007, the Bankruptcy Court heard an argument to ~~both~~determine whether the ~~employees~~Company could withdraw its 250,000 shares of common stock and ~~director~~whether it could begin depositing funds pursuant to the Settlement Agreement attached to the Company’s ~~stock~~motion ~~option~~(the ~~plan~~“Revised ~~for~~Payment Schedule”). The Revised Payment Schedule estimated post-judgment interest at 8% per annum, compounded, from March 11, 2005, without taking into consideration the ~~nine~~Interpleader ~~months~~Order ~~ended~~of ~~October~~July 3127, ~~2010~~2005 ~~and~~or ~~2009~~the ~~was~~Stay asOrder ~~follows:~~of August 31, 2005.

	Option Shares		Weighted- Average Exercise Price
Balance at February 1, 2010	647,299		$	1.83
Granted	1
Exercised	—
Forfeited or canceled	(30,000	)	(.96		)
Balance at October 31, 2010	617,300		$	1.87
Balance at February 1, 2009	709,299		$	1.78
Granted	—
Exercised	—
Forfeited or canceled	(62,000	)	(1.27		)
Balance at October 31, 2009	647,299		$	1.83

The Company and Racusin entered into the Settlement Agreement on September 3, 2004. Racusin filed a claim for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment to accelerate amounts due, with penalty interest, on February 24, 2009. On August 18, 2009, the Court entered an order granting summary judgment in favor of Racusin that would have accelerated amounts due and imposed penalty interest at 12% per annum. We moved for rehearing in spring 2010 and at the hearing the Court verbally indicated an intent to vacate an August 18, 2009 order granting summary judgment in favor of Racusin, with the order subsequently entered on December 23, 2010. Based upon the Court’s December 23, 2010, wherein the Court found that an issue of material fact existed as to the potential effect on the Settlement Agreement as a result of events that occurred in the Interpleader Adversary during the period between the Bankruptcy Appellate Panel’s subordination decision and the Ninth Circuit Court of Appeal’s decision to reverse the Bankruptcy Appellate Panel, we filed a motion for summary judgment seeking dismissal of Racusin’s still pending complaint of breach of the Settlement Agreement, and further relief on and discharge pursuant to the Interpleader Action. With respect to our claim for relief on the Interpleader action we contend that Racusin is not entitled to recover interest that allegedly accrued during the time when we previously deposited with the Court the 250,000 shares of AWI common stock through the date of entry of the Deposit Order on November 5, 2007, when the stock was exchanged for cash (i.e., “Gap Period”) and the interest that allegedly accrued during that period (“Gap Interest”). It is our position that if the Court disallows Gap Interest, or allows for an equivalent offset in restitution, we would have satisfied our entire obligation in full under the Settlement Agreement as of November 2010, and we would therefore be entitled to a refund of overpayments it made into the Court after November 2010. In the event the Court disagrees with our position, we argue in the alternative that we are current in our payments, and that we will pay off our entire remaining obligation in full under the Settlement Agreement in June 2012. There is no assurance that the Court will agree with our position. If the Court disagrees with us, it could have a material adverse affect on our business, results of operations and financial condition.

AsInternet Sports International, Ltd. On July 17, 2008, Internet Sports International, Ltd. (“ISI”) filed a complaint against three of ~~October~~our subsidiaries, AWI Manufacturing, 31Inc. (“AWIM”), ~~2010~~AWI Gaming, Inc. ~~stock~~(“AWIG”) ~~options~~and ~~exercisable~~Computerized Bookmaking Systems, Inc. (“CBS”), and ~~available~~our ~~for~~General ~~future~~Counsel ~~grants~~(collectively, ~~for~~“the ~~both~~Defendants”). ~~current~~On ~~stock~~February 3, ~~option~~2011, ~~plans~~the ~~are~~Defendants asand ~~follows:~~ISI engaged in consensual mediation, which resulted in a global settlement. The parties subsequently entered into a Settlement Agreement whereby AWIM agreed to pay to ISI the total sum $170,000 in exchange for a mutual release of all claims.

	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Life
Exercisable	617,300	$	1.87	2.62 years
Available for future grants	340,767	—		—

Economic Conditions and Related Risks and Uncertainties Because the Company operates primarily in the larger metropolitan areas of Nevada in the highly regulated gaming industry, realization of its receivables and its future operations could be affected by adverse economic conditions in Nevada and its key feeder markets in the western United States, and by possible future anti-wagering legislation and regulatory limitations on the scope of wagering. All of the Company’s wagering revenue comes from its Nevada race and sports books, of which nearly 19% is derived from professional football events. If the professional football season were to be interrupted, for example, as a result of the current NFL lockout, this could have a significant adverse impact on future operations. Management also estimates that a significant portion the Company’s wagering revenue relates to college sports and, therefore, the passage of any amateur sports anti-wagering legislation could have a material adverse impact on future operations. In addition, because the Company generates substantial revenue from system sales and maintenance to a relatively small population of potential customers, a decline in the size, demand or number of these contracts could also adversely affect future operations.

~~Non-cash~~Though ~~stock-based~~there ~~compensation~~are ~~expense~~signs ~~recorded~~of ineconomic improvement, lingering markers of the ~~line~~downturn ~~item~~still ~~“Selling,~~affect ~~General~~Nevada with restricted credit markets and ~~Administrative~~reduced ~~Expenses”~~consumer onspending, particularly in the ~~consolidated~~domestic ~~statements~~gaming ofand ~~operations~~leisure ~~for~~industries, and the ~~three~~Company’s ~~and~~business ~~nine~~for ~~months~~an ~~ended~~indeterminate ~~October 31~~period. We are also hopeful, ~~2010~~but ~~and~~there ~~2009~~is ~~was~~no ~~$10~~assurance that,~~000~~ ~~and~~the $5Company’s average wagering win percentage,~~961~~ ~~and~~which ~~$40~~has recently been significantly lower than historical levels due to unpredictable swings in customer betting success,~~972~~ will increase and ~~$43~~also,~~683,~~ ~~respectively~~have a positive impact on our cash flow from operating activities.

~~Also,~~The ~~services~~Company ~~contributed~~often bycarries ~~Victor~~cash and ~~Terina~~cash ~~Salerno~~equivalents, ~~and~~including ~~credited~~statutorily torestricted ~~additional~~amounts, ~~paid-in~~on ~~capital~~deposit ~~during~~with ~~the~~financial ~~three~~institutions ~~and~~substantially ~~nine~~in ~~months~~excess ~~ended~~of ~~October 31,~~federally-insured ~~2010 and 2009 totaled $26~~limits,~~952~~ and ~~$43,629 and $106,581 and $146,877, respectively. Mr. Salerno also provided~~ the ~~Company~~risk ~~with a $250,000 interest free revolving line~~ of ~~credit~~losses onrelated ~~May~~to ~~17,~~such ~~2010,~~concentrations ~~which~~may ~~was~~be ~~fully~~increasing ~~drawn~~ as ~~of October 31, 2010.~~

In addition, during the quarter ended April 30, 2010, 250,000 shares of common stock were issued to the principal of Alpine Advisors, LLC (“Alpine”) as a non-refundable fee for financial advisory services, plus 25,000 shares effectively issued during the quarter ended July 31, 2010 as a one-time payment of additional compensation for a late filing. The shares were valued at $0.15 per share ($41,250) based on the trading price of the Company’s common stock on the date of grant. Additional fees may be due to Alpine upon the successful 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 of its business or assets are combined with or transferred to another company and (2) any offering of debt, equity or equity-linked securities either individually or in combination. The additional fee is calculated generally at 3-3.5% of the “equity value” of the transaction, as defined, or the amount of the proceeds from the financing.6

InTable ~~June 2010, the Company borrowed $195,000 from and entered into an agreement with Alpine that entitled but did not obligate Alpine to purchase 600,000 shares~~ of the Company’s common stock at an exercise price of $0.22 per share through June 11, 2015. The principal amount of the loan plus interest at 15% was due June 17, 2010 (six days following the issuance) and then on demand with weekly interestContents

8result of economic uncertainties discussed in the foregoing paragraphs. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institution, if any, is not subject to estimation at this time.

~~payments calculated at 22% per annum~~5. On June 22, 2010 the parties entered into a financing agreement that allowed 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 of CBS, which was fully drawn as of October 31, 2010. ~~Proceeds~~Stock ~~from the agreement were used~~Options, inOther ~~part,~~Equity ~~to refinance the June 11th loan for $195~~Transactions,~~000. The~~ ~~previously executed warrant agreement was also amended to provide Alpine with registration rights~~ and ~~the~~Subsequent appointment of two persons to the Company’s board of directors, which would expand from five to seven members, should the Company default in its financing or collateralization obligations. Using the Black-Scholes valuation model and “Level 2” measurement inputs as defined in general accepted accounting principals, including a risk-free interest rate of 4%, expected warrant life of five years, and a stock price volatility factor of 206%, the warrants were originally valued at $129,478 and recorded as a warrant liability. The resultant liability is revalued at each balance sheet with the change charged or credited to earnings and debt discount, which is amortized as interest expense over the repayment term of the loan using the effective interest method.Events

~~6. Business~~For ~~Segments~~the three months ended April 30, 2011 and 2010, activity related to both the employee and directors’ stock option plans was as follows:

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

	Option Shares		Weighted- Average Exercise Price
Balance at February 1, 2011	2,661,480		$	0.51
Granted	—
Exercised	—
Forfeited or canceled	(200,000	)	2.00
Balance at April 30, 2011	2,461,480		$	0.39

Balance at February 1, 2010	647,299		$	1.83
Granted	—
Exercised	—
Forfeited or canceled	—
Balance at April 30, 2010	647,299		$	1.83

	For the Three Months Ended October 31,						For the Nine Months Ended October 31,
	2010			2009			2010			2009
Revenues:
Wagering	$	2,382,578		$	1,937,282		$	5,068,794		$	5,834,061
Hotel Casino	618,311			620,185			1,670,512			1,849,359
Systems	635,536			681,910			2,240,377			2,251,715
	$	3,636,425		$	3,239,377		$	8,979,683		9,935,135
Operating Income (Loss):
Wagering	$	379,905		$	(180,885	)	$	(605,531	)	$	10,468
Hotel Casino	(44,418		)	1,498			(246,223		)	28,919
Systems	(235,498		)	(179,873		)	(470,002		)	(141,641		)
	99,989			(359,260		)	(1,321,756		)	(102,254		)
Other Expense, net	(326,305		)	(90,158		)	(488,818		)	(183,618		)
Net (Loss)	$	(226,316	)	$	(449,418	)	$	(1,810,574	)	$	(285,872	)

As of April 30, 2011, stock options exercisable and available for future grants for both current stock option plans are as follows:

Additional information for the Hotel Casino segment follows:

	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Life
Exercisable	737,436	$	0.62	7.80 years
Available for future grants	1,221,567	—		—

	For the Three Months Ended October 31,					For the Nine Months Ended October 31,
	2010			2009		2010			2009
Revenues:
Casino	$	239,181		$	284,358	$	697,715		$	884,632
Hotel	156,702			145,146		382,649			417,366
Food and Beverage	222,428			190,681		590,148			547,361
	$	618,311		$	620,185	$	1,670,512		$	1,849,359
Direct Costs and Expenses:
Casino	137,558			126,737		399,653			380,008
Hotel	60,046			46,194		158,696			133,378
Food and Beverage	249,645			200,646		663,946			578,280
Unallocated	73,143			97,788		247,896			301,764
	520,392			471,365		1,470,191			1,393,430
Selling, General and Administrative	80,670			83,956		260,610			235,134
Depreciation and Amortization	61,667			63,366		185,934			191,876
	662,729			618,687		1,916,735			1,820,440
Operating Income (Loss)	$	(44,418	)	$	1,498	$	(246,223	)	$	28,919

Services contributed by Victor and Terina Salerno and credited to additional paid-in capital for the quarters ended April 30, 2011 and 2010, totaled $8,326 and $42,813, respectively. Mr. Salerno also provided the Company with a $250,000 interest free revolving line of credit on May 17, 2010, which was fully drawn and repaid from the proceeds of the Bridge Facility as of April 30, 2011.

9In addition, during the quarter ended April 30, 2010, 250,000 shares of common stock were issued to the principal of Alpine Advisors, LLC (“Alpine”) as a non-refundable fee for financial advisory services, plus 25,000 shares effectively issued during the quarter ended July 31, 2010, as a one-time payment of additional compensation for a late filing. The shares were valued at $0.15 per share (or $41,250 in the aggregate) based on the trading price of the Company’s common stock on the date of grant. Additional fees are due Alpine upon the successful 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 of its business or assets are combined with or transferred to another company and (2) any offering of debt, equity or equity-linked securities either individually or in combination. The success fee is calculated generally at 3-3.5% of the “equity value” of the transaction, as defined, or the amount of the proceeds from the financing

In June 2010, the Company borrowed $195,000 from and entered into an agreement with Alpine that entitled but did not obligate Alpine to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.22 per share through June 11, 2015. The principal amount of the loan plus interest 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 that allowed the Company to borrow up to $500,000, at 15% per annum, due on June 10, 2011, and was collateralized by the Company’s stock in CBS and the receivables of CBS. Proceeds from the June 22nd financing agreement were used, in part, to refinance the June 11th loan for $195,000. The Company borrowed $500,000 which was repaid from the proceeds of the Bridge Facility. The warrant agreement was also amended to provide Alpine with registration rights and, the appointment of two persons to the Company’s board of directors, which would expand from five to seven members, should the Company default in its financing or collateralization obligations. Using the Black-Scholes valuation model and “Level 2” fair value measurement inputs as defined in GAAP including a risk-free interest rate of 4%, expected warrant life of five years, and its internal stock price volatility factor of 206% initially (approximately 1.5% risk-free interest rate and an internal stock price volatility of 231% as of April 30, 2011), the warrants were valued at $403,884 and recorded as a warrant liability.

Table of Contents

For the three months ended April 30, 2011 and 2010, non-cash stock-based compensation expense recorded in the line item “Selling, General and Administrative Expenses” was $127,128 and $41,442, respectively.

6. Business Segments

The Company reports the results of operations through three operating segments as follows: [this should change for debt extinguishment]

	Three Months Ended April 30,
	2011			2010
Revenues
Wagering	$	1,693,148		$	1,499,992
Hotel/Casino	469,460			457,459
Systems	699,233			905,382
	$	2,861,841		$	2,862,833
Operating (loss)
Wagering	$	(587,397	)	$	(328,257	)
Hotel/Casino	(38,340		)	(129,357		)
Systems	(626,585		)	(39,493		)
	(1,252,322		)	(497,107		)
Other expense, net	(395,581		)	(80,707		)
Net (Loss)	$	(1,647,903	)	$	(577,814	)

Additional information for the Hotel/Casino segment follows:

	Three Months Ended April 30,
	2011			2010
Revenue
Casino	$	243,094		$	219,958
Hotel	98,362			86,088
Food/Beverage	128,004			151,413
	469,460			457,459
Direct Costs and Expenses
Casino	101,192			127,150
Hotel	45,717			40,041
Food/Beverage	154,420			179,042
Unallocated	90,778			87,857
	392,107			434,090

Selling, General and Administrative	62,511			89,140
Depreciation and Amortization	53,182			63,586
	507,800			586,816
Operating Loss	$	(38,340	)	$	(129,357	)

Table of Contents

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

The following discussion and analysis should be read together with our unaudited consolidated financial statements and the accompanying notes. This discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. Some of the forward-looking statements 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 statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statement, including those discussed herein and elsewhere in our Form 10-K for the year ended January 31, ~~2010~~2011, particularly under the heading “Risk Factors.” We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We do not intend, and undertake no obligation to update our forward-looking statements to reflect future events or circumstances.

Definitions. For the purposes of this report, 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.

“Bettors” means the individual race and sports bettors who place their wagers with us at out our sportsbooks.

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

“~~Contract~~ExactGeo ~~Customers~~Media” means ~~the~~ExactGeo ~~Casinos~~Media, ~~to whom we are vendors~~LLC, ~~either~~a aswholly-owned ~~system~~subsidiary ~~suppliers~~of ~~or sportsbook operators~~AWI.

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

“PlayBETM” means Mobile Sports Fantasy, LLC dba PlayBETM, a wholly-owned subsidiary of AWI.

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

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

Overview. ~~American~~AWI ~~Wagering, Inc.~~ is a leader in the design, development, and marketing of sportsbook accounting systems (equipment and software) as well as ~~the~~a leading independent sportsbook operator in Nevada. Our business operations involve many aspects of the race and sports book industry operated by our subsidiaries, Leroy’s, CBS, and ~~Sturgeon’s~~AWIM. Our customer base is segmented into two categories: the Contract Customers and the Bettors.

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) providing self-service products such as AWIM’s kiosk and the LEROY’S® APP©, which are 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 existing locations or 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 depending on its market acceptance.

10CBS 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 also markets, distributes, installs, and maintains AWIM’s kiosks, which assists the Company in controlling personnel costs by eliminating duplicate job positions. AWIM has the following three models of kiosk.

(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 depending on its market acceptance.

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. AWIM has the following three models of 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.

· Carrel kiosk is designed for the race bettor who never wants to leave his race carousel. The carrel 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.9

~~· Wall-Mount~~Table ~~kiosk~~of 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.Contents

~~Finally,~~· Carrel ~~CBS~~kiosk ~~seeks~~is ~~strategic~~designed ~~international~~for ~~alliances~~the ~~with~~race ~~third~~bettor ~~party~~who ~~gaming~~never ~~suppliers~~wants ~~and/or~~to ~~gaming~~leave ~~operators~~his ~~that~~race ~~desire~~carrel. toThe ~~utilize~~carrel ~~our~~kiosk ~~expertise~~allows inhim ~~the~~to place race and sports ~~industry. There~~bets isfrom nothe ~~assurance~~comfort ~~that~~of ~~CBS~~his ~~will~~race becarrel, ~~successful~~watch inthe ~~obtaining~~races ~~any~~(or ~~strategic~~sporting ~~alliances.~~events), ~~We strive to provide our Contract Customer~~ and~~/or~~ ~~the~~check ~~Bettor a well-rounded betting experience~~results.

~~Sturgeon’s~~· Wall-mount ~~operates~~kiosk ~~the~~is ~~hotel/casino~~designed infor ~~Northern~~space ~~Nevada~~conscious environments and iscan ~~heavily~~be ~~dependent~~mounted on ~~the~~or ~~drive-through~~built ~~market~~into ona ~~I-80. Sturgeon’s~~wall ~~continuously~~to ~~reviews~~give ~~and~~a ~~modifies~~seamless, ~~existing~~integrated ~~procedures~~look. ~~and~~Demand ~~personnel~~for tothe ~~increase~~wall-mount ~~efficiency,~~kiosk ~~reduce~~is ~~expenses,~~greatest by Leroy’s locations a bars and ~~strengthen~~taverns. ~~the~~These ~~financials~~Leroy’s aslocations ~~Nevada,~~utilize ~~both~~the ~~Northern~~wall-mount ~~and~~kiosk ~~Southern,~~in ~~continues~~conjunction towith ~~experience~~telephone ~~high~~account ~~unemployment~~wagering, ~~high~~where ~~foreclosures~~the ~~for~~Bettor ~~residential~~establishes ~~homes~~a ~~and~~wagering ~~business~~account ~~failures,~~ and ~~reduced~~then ~~spending~~can onbet ~~gaming~~from ~~and~~his ~~leisure. Accordingly,~~account ~~these~~while ~~factors~~watching ~~will~~the ~~likely~~sporting ~~continue~~event toat ~~have~~his anfavorite ~~adverse~~bar ~~affect~~or ontavern ~~our~~that ~~future~~has ~~business~~a ~~conditions~~Leroy’s ~~and~~wall-mount ~~financial performance~~kiosk.

~~Other~~The ~~strategic focuses~~LEROY’S® APP©. WeOn ~~continue~~August 31, to2010, ~~evaluate~~we ~~and~~announced ~~closely~~the ~~monitor~~introduction ~~costs~~of the LEROY’S® APP©, ~~looking~~a mobile device application for ~~additional~~smartphones ~~efficiencies~~that ~~and~~permits ~~improvements~~a ~~during~~Bettor, atwith ~~least~~a pre-established telephone wagering account, to bet from his approved mobile device anywhere within the ~~remainder~~state of ~~fiscal~~Nevada, ~~2011~~assuming his wireless carrier provides coverage. ~~Subject~~The toLEROY’S® APP© ~~our~~received ~~cost~~final ~~constraints,~~approval ~~where~~by ~~appropriate,~~the weNevada ~~will~~Gaming ~~continue~~Control toBoard ~~explore~~at ~~possible~~the ~~new~~conclusion ~~locations~~of its successful field trial. The LEROY’S® APP© was developed for ~~our~~Leroy’s ~~products,~~by ~~including~~CBS ~~foreign~~and ~~jurisdictions. As~~we have a ~~result,~~patent ~~our~~pending ~~concentrated~~on ~~efforts~~the ~~remain~~intellectual ~~focused~~property. We have been approved by the Nevada Gaming Control Board to make the application available on ~~making~~Research ~~American~~In ~~Wagering, Inc.~~Motion®’s ~~financially~~BlackBerry® devices and ~~operationally~~Google®’s ~~stronger~~Android® operating system v. 2.1 and ~~more~~newer. ~~efficient~~Additionally, we have been approved for use on the Samsung® Galaxy® Tablet, which uses Google® Android® operating system.(1)

~~Recent~~Sturgeon’s ~~Developments. We~~operates ~~recently~~the ~~expanded~~hotel/casino in Northern Nevada and is heavily dependent on the ~~reach~~drive-through ofmarket ~~our~~on ~~sportsbook~~I-80. ~~accounting~~Sturgeon’s ~~software~~continuously reviews and ~~increased~~modifies ~~the~~existing ~~critical~~procedures ~~mass~~and ofpersonnel ~~our~~to ~~sportsbook~~increase ~~Bettors~~efficiency, ~~with~~reduce ~~the~~expenses, ~~introduction~~and ofstrengthen the ~~LEROY’S® APP©~~financials as Nevada, ~~our~~both ~~sports~~Northern ~~wagering~~and ~~application~~Southern, ~~for~~continues ~~mobile~~to ~~devices.~~experience ~~Additionally~~high unemployment, inhigh ~~anticipation~~foreclosures offor ~~the~~residential ~~advertisement~~homes ~~revenue~~and webusiness ~~expect~~failures. ~~to derive~~Accordingly, wethese factors will likely continue to have ~~established~~an aaffect ~~new~~on our business ~~segment~~conditions inand ~~the~~financial ~~third quarter~~performance.

~~The~~ExactGeo ~~LEROY’S® APP©. On~~Media ~~August 31,~~is ~~2010,~~an weadvertising ~~announced~~company ~~the~~established ~~introduction~~to ofpurchase ~~the~~and ~~LEROY’S® APP©,~~sell aadvertising in connection with our mobile ~~device~~betting application. PlayBETM designs and hosts play-for-fun, ~~smartphones~~contest ~~that~~versions ~~permits~~of aour ~~Bettor~~mobile sports application, ~~with~~which awe ~~pre-established~~anticipate ~~telephone~~will ~~wagering~~generate ~~account~~revenue through advertising. ExactGeo Media and PlayBETM are not revenue generating entities as of yet. Nonetheless, toif ~~bet~~and ~~from~~when ~~his~~these ~~approved~~two ~~mobile~~entities ~~device~~generate ~~(currently~~material ~~only~~amounts ~~for~~of ~~use~~revenue ~~with~~from aadvertising ~~BlackBerry®~~ sales and services leveraged from ~~Research~~our Inmobile ~~Motion)~~application, ~~anywhere~~we ~~within~~intend to report the ~~state~~entities’ ofoperating ~~Nevada,~~results ~~assuming~~as ~~his~~a ~~wireless~~fourth segment, “Advertising.”

carrier provides coverage. The LEROY’S® APP© recently received final approval by the Nevada Gaming Control Board at the conclusion of its successful field trial. 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.

Liquidity and Capital Resources.

~~The~~On ~~global~~April 13, ~~macroeconomic~~2011, ~~factors~~we ~~that~~entered ~~have~~into ~~affected our country for~~ the ~~past~~Merger ~~three~~Agreement ~~years~~ and ~~resulted~~the inBridge aLoan 14Agreement.2% ~~unemployment~~If ~~rate~~the inMerger ~~Nevada~~Agreement asis ~~of October 31~~terminated, ~~2010,~~the ~~resulted~~principal inamount ~~(i) our~~and ~~Contract~~all ~~Customers~~accrued ~~remaining~~interest ~~conservative~~under inthe ~~their~~Bridge ~~capital~~Facility ~~spending,~~will ~~(ii) intense~~become ~~competition~~due ~~among~~and ~~suppliers~~payable, and, ~~sportsbook~~in ~~operators~~certain circumstances, ~~and~~ (~~iii~~a) ~~more~~we ~~conservative~~may ~~betting~~be ~~patterns~~required byto ~~Bettors~~reimburse ~~because~~the ofPurchaser ~~job uncertainty~~ and~~/or~~ ~~reduced~~its ~~discretionary~~affiliates ~~income. This~~for ~~slowdown~~all inof ~~global~~their ~~economies,~~reasonable ~~tightened~~out-of-pocket ~~credit~~fees ~~markets,~~and ~~reduced~~expenses ~~consumer~~up ~~spending~~to $250,000 and (b) the ~~lower~~Purchaser ~~than~~may ~~historical~~be ~~trend~~required ~~for the domestic gaming and leisure industry are likely~~ to ~~continue~~pay tous ~~have~~a ~~far-reaching~~termination ~~effects~~fee onof ~~the local and national economy~~$1.5 million, ~~the~~which ~~Company’s~~amount ~~business,~~shall ~~and~~be ~~our~~subject ~~principal officer’s ability~~ to ~~continue~~offset to ~~provide~~any ~~financial~~amounts ~~support~~owed toby ~~the~~us ~~Company,~~in asconnection inwith the ~~past,~~Bridge ~~for~~Loan ~~an indeterminate period~~Agreement. ~~For~~If ~~example, material negative short-term swings in~~ the ~~Company’s~~Merger ~~wagering~~Agreement ~~win~~is ~~percentage~~not consummated, ~~such~~we asmay ~~those~~not ~~experienced~~be ~~during~~able ~~the~~to ~~first~~pay ~~nine~~our ~~months~~debts ofas ~~fiscal~~they ~~2011~~come due, ~~magnify~~including the ~~Company’s~~Bridge ~~need~~Facility ~~for~~and ~~financing~~/ ator amay ~~time~~be ~~when~~unable ~~credit~~to ~~availability~~execute isour ~~reduced.~~business ~~The~~plan, ~~reduced~~possibly ~~availability~~resulting ofin ~~bonding~~the ~~for~~financial and ~~possible~~operational ~~increases~~failure toof ~~reserves~~the ~~required~~Company. byUpon ~~and~~a atdefault under the ~~discretion~~Bridge ofFacility, ~~regulatory~~the ~~agencies~~Purchaser ~~also~~may ~~add~~foreclose toon the ~~Company’s~~collateral ~~need~~securing ~~for~~our ~~alternative~~obligations, ~~sources~~which ofincludes ~~financing,~~all ~~which~~of ~~may~~the ~~not~~equity beinterests ~~available~~in atour ~~acceptable~~wholly-owned ~~terms~~subsidiaries.

AsIn ofrecent ~~October 31,~~years ~~2010,~~for wereasons ~~had~~discussed ~~working~~in ~~capital~~the offollowing ~~$181~~paragraph,~~847~~ ~~compared~~our tocash ~~working~~flows ~~capital~~from ~~deficit~~operating ofactivities have been insufficient to satisfy our obligations (~~$798,694~~including legal contingencies) when due and to fund cash reserves required by Nevada Gaming regulations. Such cash requirements have been funded largely with borrowings from and/or collateral arrangements with the Company’s principal officers. Recently the Company entered into the Bridge Loan Agreement that should satisfy the Company’s need for liquidity at ~~October~~least through the next year. More specifically, in April 312011, ~~2009~~we borrowed $4.25 million under the Bridge Loan Agreement and used approximately $2.3 million of the proceeds to pay vendors (~~Also~~$750,000), ~~see~~for ~~Restricted~~rank ~~Cash~~and ~~Requirements~~file employees (~~Regulation~~$260,000), ~~22.040~~other lenders ($850,000), and transaction fees ($450,000) leaving approximately $1. 95 million available for future cash flow requirements. The ~~increase~~Bride inLoan ~~working~~Agreement ~~capital~~also isreduces ~~primarily~~the ~~due~~Company’s todependence aon ~~significant~~its ~~reduction~~principal inofficer’s ~~unpaid~~ability ~~winning~~to ~~tickets~~continue ~~and~~to ~~customer~~provide ~~deposits~~financial ~~during~~support. ~~the~~There ~~first~~is ~~nine~~no ~~months~~assurance ofthat ~~this~~we ~~fiscal~~will ~~year~~be ~~compared~~able to borrow additional funds under the ~~same~~Bridge ~~period~~Loan Agreement, as any additional advances are in the ~~prior~~Purchaser’s ~~year~~sole discretion.

~~Our~~In ~~principal~~addition, ~~cash~~we ~~requirements~~see ~~relate~~signs ~~primarily~~of toslight ~~operation~~improvements ~~activities~~in ~~associated~~the ~~with~~global ~~our~~macroeconomic ~~core~~factors ~~businesses.~~that ~~For~~have ~~the~~negatively ~~first~~affected ~~nine~~our ~~months~~country, ~~of fiscal 2011~~Nevada, ~~cash~~and ~~used~~the inCompany ~~operating~~for ~~activities~~the ~~totaled~~past ~~approximately~~three ~~$323,000~~years. asWe ~~compared~~continue to ~~cash~~monitor ~~provided~~these bysigns ~~operating activities~~ of ~~approximately~~improvement ~~$230,000~~such ~~for~~as ~~the~~lower ~~same~~unemployment ~~period~~and ofincreased ~~fiscal~~passenger ~~2010,~~traffic ~~which~~at isMcCarran ~~primarily~~International ~~due~~Airport tothat ~~the~~may ~~results~~provide ofnew ~~operations~~opportunities ~~between~~for ~~the~~our ~~periods.~~self-

Significant cost reduction efforts resulted in improved operating performance for fiscal year 2010. The focus for fiscal 2011 was cost containment and deployment of new products. We incurred higher research and development costs during the nine months of fiscal 2011 as compared to the first nine months(1) ofEach ~~fiscal~~registered ~~2010,~~trademark ~~with~~is ~~respect to launching~~ the ~~LEROY’S® APP©~~property ~~and expect to continue to incur additional expenses related to expanding the scope~~ of ~~this~~its ~~product~~respective ~~for the remainder of this fiscal year~~owner. ~~However, the~~

1210

~~timing~~Table of ~~spending required to develop the product is flexible and can be accelerated or deferred depending on the availability of funds.~~Contents

~~The~~service ~~Company~~kiosks ~~anticipated~~and amobile ~~short~~technologies ~~term~~as ~~liquidity~~our ~~issue~~Contract ~~during~~Customers ~~the~~remain ~~summer~~conservative ~~months~~in ~~and~~their ~~was~~capital ~~successful~~spending inbut ~~arranging~~are ~~$750,000~~seeking inmeaningful ~~loans~~ways ~~from~~to ~~two~~bring ~~sources.~~innovative ~~Victor~~betting ~~Salerno,~~technology ~~President~~to ~~and~~their ~~Chief~~casino ~~Executive~~floor. ~~Officer,~~We ~~provided~~cannot anbe ~~interest~~certain ~~free~~as ~~revolving~~to ~~line~~the oftiming ~~credit~~or to the ~~Company~~scope of ~~$250,000~~such onopportunities ~~May 17,~~in ~~2010~~light (of ~~which~~ (i) the ~~full~~ongoing ~~amount~~restricted ~~has~~credit ~~been~~market ~~drawn~~facing ~~down),~~certain of our Contract Customers and the ~~Company~~risk ~~borrowed~~of ~~$500,000~~the ~~from~~gaming ~~Alpine~~industry ~~Advisors,~~impact ~~LLC~~of continued economic uncertainty; (~~Alpine~~ii) intense competition among suppliers, anand ~~unrelated~~(iii) more ~~party~~conservative onbetting apatterns ~~one~~by ~~year~~Bettors ~~note~~because ~~with~~of ajob ~~maximum~~uncertainty ~~loan~~and/or ~~amount~~reduced ofdiscretionary ~~$500,000~~income. atThough anthere ~~annual~~are ~~interest~~signs ~~rate~~of improvement, lingering markers of ~~15%.~~the Indownturn ~~connection~~still affects Nevada with ~~the~~restricted ~~latter~~credit markets and reduced consumer spending, weparticularly ~~issued~~in ~~warrants~~the todomestic ~~purchase~~gaming ~~600,000~~and ~~shares~~leisure ofindustries, and the Company’s ~~common~~business ~~stock~~for ~~with~~ an ~~exercise~~indeterminate ~~price~~period. ofWe ~~$0.22~~are ~~through~~also ~~June 10~~hopeful, ~~2015.~~but ~~The~~there ~~warrants~~is ~~were~~no ~~valued~~assurance ~~at $129~~that,~~478~~ ~~and~~the ~~recorded~~Company’s asaverage awagering ~~warrant~~win ~~liability~~percentage, ~~net~~which ofhas arecently ~~debt~~been ~~discount~~significantly tolower bethan ~~amortized~~historical aslevels ~~interest~~due ~~expense~~to ~~over~~unpredictable ~~the~~swings ~~repayment~~in ~~term~~customer ofbetting ~~the~~success, ~~loan~~will ~~using~~increase ~~the~~and ~~effective~~also ~~interest~~have ~~rate~~a ~~method.~~positive ~~These~~impact ~~financing~~on ~~agreements~~our ~~provided the necessary~~ cash toflow ~~overcome~~from ~~the~~operating ~~short term liquidity issue~~activities.

AsCash we are in the football season, we believe the cash flow generated through operations will be sufficient for the remainder of the fiscal year. Management is also investigating more comprehensive, long-term refinancing and capital raising alternatives and has engaged Alpine on an exclusive basis to provide advisory services to assist us with these efforts. In addition to an initial retainer consisting of 250,000 shares of the Company’s common stock, plus 25,000 shares effectively issued during the quarter ended July 31, 2010 as a one-time payment of additional compensation for a late filing, which were valued at $0.15 per share ($41,250), additional fees may be due to Alpine upon the successful 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 of its business or assets are combined with or transferred to another company and (2) any offering of debt, equity or equity-linked securities either individually or in combination. There is no assurance that such objectives can be accomplished with acceptable terms. If we are unable to secure long-term financing or other capital successful raising efforts, we may not be able to satisfy our obligations as they come due.Flow

~~Net~~As ~~cash~~of ~~used~~April 30, in2011, ~~investing~~we ~~activities~~had ~~was~~working ~~approximately~~capital of $401,~~000~~041,355, ~~during~~compared ~~the~~to ~~first~~working ~~nine~~capital ~~months~~deficit of ~~fiscal 2011~~$(901,583) ~~due~~at toJanuary 31, a2011. ~~net~~The increase in ~~our~~working ~~reserve~~capital ~~deposits~~is ~~with~~primarily ~~the~~due ~~Nevada~~to ~~Gaming~~the ~~Control~~proceeds ~~Board~~of $4.25 Inmillion under the ~~same~~Bridge ~~period~~Facility. ofThis was partially offset by the ~~prior~~net ~~year,~~loss wefor ~~used~~the ~~approximately~~current ~~$278,000~~year’s inquarter. ~~investing~~The ~~activities~~short-term debt obligation to ~~increase~~Alpine ~~our~~Advisors, ~~reserve~~LLC. ~~cash~~was ~~with~~paid from the ~~Nevada~~proceeds ~~Gaming~~of ~~Control~~the ~~Board~~Bridge ~~and~~Facility ~~equipment~~as ~~purchases~~well.

~~Net~~Additionally, ~~cash~~due ~~provided~~to bythe ~~financing~~negative ~~activities~~economic ~~for~~environment, the ~~first~~Company ~~nine~~previously ~~months~~took ofadditional ~~fiscal~~measures ~~2011~~to ~~was~~conserve ~~approximately~~cash. Upon ~~$538~~funding of the Bridge Facility,~~000,~~ ~~relating~~the ~~primarily~~restrictive measures concerning the salaries were addressed. The Company was able to reinstate the ~~proceeds~~partial salary reductions of the ~~loans~~employees, ~~from~~who ~~Victor~~had ~~Salerno~~previously ~~and~~had ~~Alpine~~their ~~Advisors~~salaries reduced by 5% to 15%. The executive management group, ~~LLC~~including ~~totaling~~the ~~$750~~CEO,~~000~~ asCOO, Sr. ~~compared~~Vice toPresident ~~net~~of ~~cash~~Business ~~used~~Development, and the in-house ~~financing~~General ~~activities~~Counsel, ofhad ~~approximately~~agreed ~~$669,000~~to ~~for~~reduce their annual base salaries to the ~~same~~amount ~~period~~sufficient ofto ~~fiscal~~cover payroll deductions for benefits through October 2010. ~~primarily~~In ~~due~~November 2010, tothe executive management group began receiving pay at a ~~net~~level ~~increase~~of in50%. Upon funding of the ~~Regulation~~Bridge ~~22.040~~Facility, ~~cash~~the ~~reserve~~full salaries of the executive management group were reinstated and the ~~purchase~~salaries deferrals which began in November 2010 for the CEO, COO, and Sr. Vice President of ~~fixed~~Business ~~assets~~Development were paid. The Company no longer matches the employees’ 401(k) contributions.

~~Restricted~~In ~~Cash~~fiscal ~~Requirements~~2011, ~~(Regulation~~the 22Company borrowed $500,000 from Alpine Advisors, LLC, and Victor Salerno, CEO, provided the Company with a $250,000 credit line.~~040)~~ The proceeds of both loans were fully used during the year to alleviate a difficult cash position, and from the proceeds of the Bridge Facility, the Company paid to Alpine Advisors, LLC $600,417 in full and final payment of its loan and a prepayment penalty, and paid to Mr. Salerno $250,000 in full and final payment of his line of credit. In addition, upon funding of the Bridge Loan, the Company paid Alpine $175,000 for advisory services in connection with negotiating and structuring the Merger Agreement with the Purchaser. If the Merger is consummated, an additional fee of $625,000 will be due.

~~Nevada~~In ~~Gaming~~addition ~~Commission~~to ~~Regulation 22.040~~borrowings ~~(“Regulation 22.040”)~~under ~~requires~~the usBridge toLoan ~~maintain~~Agreement ~~reserves~~as previously discussed and reduced payment requirements to Racusin (~~cash,~~see ~~surety~~Note ~~bonds,~~4 ~~irrevocable~~— ~~standby~~Litigation ~~letter~~and ofContingencies), ~~credit~~we believe, ~~etc.)~~ ~~sufficient~~but tothere ~~cover~~is ~~any~~no ~~outstanding~~assurance ~~wagering~~that, ~~liability~~our ~~including~~working ~~unpaid~~capital ~~winning~~position ~~tickets,~~will ~~future~~also ~~tickets~~improve ~~and~~in ~~telephone~~fiscal ~~account~~2012 ~~deposits.~~due ~~The~~to: ~~amount~~(a) normalization of the ~~reserve~~win ispercentage ~~determined~~in ~~largely~~sports atbook ~~the~~wagering; ~~discretion~~(b) an ofincreased ~~the~~demand ~~regulatory~~in ~~authority~~fiscal ~~but~~2012 isfor ~~intended~~our CBS equipment due to ~~represent~~certain customers’ desire to obtain new equipment, who are themselves recovering from the ~~authority’s~~economy; ~~expectation~~(c) deployment of ~~the~~new ~~Company’s~~products ~~highest~~and ~~liability~~services ~~for~~anticipated ain ~~single~~fiscal ~~day~~2012; ~~which~~and ~~typically~~(d) additional ~~occurs~~or ~~during~~expanded ~~football~~sports ~~season~~book locations in fiscal 2012. ~~Although~~Based ~~our~~on ~~wagering~~the ~~volume~~foregoing, subject to the economy and ~~liability~~the ~~are~~timely ~~lower~~closing ~~than~~of ~~past~~the ~~levels~~merger, we believe we will be able to satisfy our ~~current~~cash ~~reserve~~requirements isfor ~~higher.~~at ~~However~~least the next year from existing cash balances, anticipated cash flows and potential borrowings under the ~~regulatory~~Bridge ~~authority~~Facility. ~~may~~Some ~~require~~of the ~~Company~~above tostatements ~~set~~are ~~aside~~forward-looking ~~additional~~in ~~reserves~~nature. toNo ~~protect~~assurance can be given as to the ~~betting~~ultimate ~~public,~~outcome ~~even~~of ~~though~~any ~~there~~forward-looking ~~has~~statement ~~never~~because ~~been~~such aoutcome ~~call~~is ondependent ~~our~~upon ~~reserve~~unknown evolving events.

~~As of October 31, 2010 the Company has $1.8 million on deposit at Nevada State Bank for purposes of meeting the~~ Regulation ~~22.040~~Regarding reserve requirement (Restricted Cash). In addition, Victor and Terina Salerno pledged a certificate of deposit for $200,000 and Robert and Tracey Kocienski pledged two certificates of deposit totaling $500,000 for the benefit of Leroy’s, creating a reserve of $2.5 million. The pledged certificate of deposit from Victor and Terina Salerno was renewed for one year until November 19, 2011, and Robert and Tracey Kocienski renewed their certificates of deposit for 60 days until January 18, 2011, at which time the funds securing the certificates of deposit would be released to the Kocienskis uponReserves

13Nevada Gaming Commission Regulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. We have historically funded this reserve requirement through restricted cash held at Nevada State Bank.

~~approval~~As of ~~the~~April 30, ~~Nevada~~2011, ~~Gaming~~we ~~Control~~had ~~Board~~cash reserves and pledge agreements totaling $1. We65 million ~~believe~~to ~~that~~satisfy the $2Regulation 22.5040 ~~million~~requirement ~~reserve~~in ~~coupled~~addition ~~with~~to a float amount of $600,000 ~~float~~ allowed by the Nevada Gaming Control Board ~~will~~to becover ~~adequate~~short ~~during~~term ~~football~~fluctuations ~~season based upon our twelve month history~~ in ~~which~~ the ~~reserve~~outstanding ~~requirement~~liability. ~~never~~The ~~exceeded~~ $21.5 65 million. Ifamount weconsisted ~~are~~of ~~required~~our toreserve ~~increase~~account ~~the~~of ~~Regulation 22~~$1.~~040~~2 million ~~reserve~~held ~~and~~at ~~are~~Nevada ~~unable~~State toBank doand ~~so,~~pledged itcertificates ~~would~~of ~~have~~deposit antotaling ~~adverse impact on us including~~$450,000. ~~but~~The ~~not~~pledged ~~limited~~certificates ~~to,~~initially ~~requiring~~expired ~~a significant reduction~~ in ~~the number of race/sports locations operated by Leroy’s~~October 2010, orbut ~~reduction~~the ofparties ~~telephone~~agreed ~~wagering~~to ~~accounts~~extend ~~that~~their ~~may~~respective ~~have~~pledges ~~increased~~without asdesignating a ~~result~~specific ofexpiration ~~the~~date. ~~introduction~~On ~~of the LEROY’S®~~April ~~APP© resulting~~13, in2011 anthe ~~adverse~~Nevada ~~change~~Gaming inControl ~~our~~Board ~~operating~~allowed ~~results.~~us ~~Although~~to wereduce ~~have~~our ~~experienced~~reserve ~~some~~balance ~~renewed~~by ~~interest~~$750,000 ~~from~~during ~~insurance companies with respect to a surety bond for~~ the ~~Regulation~~off-peak 22season.~~040~~ ~~reserve~~The ~~requirement,~~Company wereduced ~~have~~its ~~not~~cash ~~found~~deposit ~~terms~~at ~~that are acceptable to us nor is there any assurance that an agreement will be forthcoming.~~Nevada

Table of Contents

State Bank by $500,000 and reduced the pledge from Robert and Tracey Kocienski by $250,000 as of April 19, 2011. We will likely have to increase our reserve in August 2011, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose.

Other

~~The~~As ~~Company~~of ~~has~~April 30, an2011, ~~off-balance~~we ~~sheet~~had ~~arrangement~~approximately ~~whereby~~$1.2 million ~~Leroy’s~~in ~~has~~cash ~~received~~and ~~the~~cash ~~benefit~~equivalents and $450,000 in pledged certificates of deposit, the ~~pledges~~majority ~~made~~of bywhich ~~Victor~~is held to fund winning tickets and ~~Terina~~future ~~Salerno~~bets ~~for~~as ~~$200~~required by Nevada gaming regulations. In April 2011,~~000~~ we borrowed $4.25 million under the Bridge Loan Agreement to satisfy outstanding obligations and ~~Robert~~transaction costs (approximately $2.3 million) and ~~Tracey~~to ~~Kocienski~~provide ~~for~~additional working capital (approximately $~~500~~1.95 million). Based upon our anticipated operations,~~000~~ towe believe that cash on hand, including borrowed funds, operating cash flows, and potential borrowing under the ~~Nevada~~Bridge ~~Gaming~~Facility ~~Control~~will ~~Board~~be adequate to meet ~~its~~our ~~reserve~~anticipated working capital requirements, ~~under~~capital ~~Regulation~~expenditures, 22and scheduled payments for indebtedness for the remainder of fiscal 2012.~~040. The~~ ~~pledges~~Our operations are ~~treated~~affected asby ~~off-balance~~seasonality. ~~sheet~~Typically, ~~financing~~we ~~although~~anticipate the ~~Company~~need ~~agreed~~for ~~with~~liquidity during the ~~pledgors~~second toquarter ~~repay~~of each fiscal year which lessens during the ~~pledges~~third orquarter ~~increase~~with the ~~reserve~~commencement ~~deposits~~of infootball ~~order~~season. toHowever, ~~release~~with the ~~pledges~~current NFL lockout in effect, liquidity during football season may be negatively affected. ~~Interest~~However, ~~accrues~~even onif ~~the~~there ~~pledges~~is atno 1%or ~~per~~a ~~month~~reduced ~~and~~NFL ~~the~~schedule ~~interest~~during fiscal 2012, we believe, but there is ~~payable~~no onassurance ~~the~~that, ~~first~~our ~~day~~cash ofliquidity ~~every~~position ~~month.~~will ~~Victor~~be ~~and~~sufficient ~~Terina~~to ~~Salerno~~meet ~~renewed~~our ~~their~~operating ~~certificate~~needs, ~~for~~including ~~one~~new ~~year~~business ~~and~~development ~~Robert~~activities ~~and~~or ~~Tracey~~unforeseen ~~renewed~~events ~~their~~including ~~certificates~~the ~~for~~outcome 60of ~~days~~litigation through fiscal 2012.

We may, from time to time, seek additional capital to fund our operations, reduce our liabilities, or fund our expansion plans (including acquisitions). The Company engaged Alpine Advisors, LLC on an exclusive basis to provide advisory services to the Company, including the identification of potential investors in an offering of debt, equity, or equity linked securities of the Company, or a strategic based transaction involving the Company. The sale of additional equity or convertible securities would result in dilution to our shareholders.

Results of Operations

We report our results of operations through three operating segments: Wagering, Hotel/Casino and Systems. The Wagering Segment includes the operating results of the sports gaming wagers, including the mobile betting application, net of payouts and expenses. The Hotel/Casino Segment includes the casino, hotel, and food and beverage outlets operating results for Sturgeon’s Hotel / Casino. The Systems Segment includes the operating results of our system sales, installations, and maintenance activities.Overview

We report our results of operations through three operating segments: Wagering, Hotel/Casino and Systems. Although numerous factors are taken into consideration, the operating income (loss) of the segment ~~(the difference between revenues and costs and expenses)~~ represents a significant profitability measure that is used by us in allocating the appropriate level of resources and assessing performance of each segment. The following table summarizes ~~our~~the ~~comparative~~consolidated ~~operating~~ results ~~for~~of ~~the~~our ~~three and nine month periods:~~segments

	Three Months Ended October 31,											Nine Months Ended October 31,
Summary	2010			2009			$ Change			% Change		2010			2009			$ Change			% Change
Revenues	$	3,636,425		$	3,239,377		$	397,048		12.26		$	8,979,683		$	9,935,135		$	(955,452	)	(9.62	)
Costs and Expenses	3,536,436			3,598,637			(62,201		)	(1.73	)	10,301,439			10,037,389			264,050			2.63
Other Expense	(326,305		)	(90,158		)	236,147			261.93		(488,818		)	(183,618		)	305,200			166.21
Loss Before Income Taxes	$	(226,316	)	$	(449,418	)	$	223,102		49.64		$	(1,810,574	)	$	(285,872	)	$	(1,524,702	)	(533.35	)

Summary

	Three Months Ended April 30,
	2011			2010			$ Change			% Change
Revenues	$	2,861,841		$	2,862,833		$	(992	)	0.0	%
Costs and Expenses	4,114,163			3,359,940			754,223			22.4	%
Other Expense, net	395,581			80,707			314,874			390.1	%
(Loss) Before Income Taxes	$	(1,647,903	)	$	(577,814	)	$	(1,070,089	)	(185.2	)%

~~For~~Revenues ~~the~~and ~~Three~~Direct ~~Months Ended October 31, 2010 Compared to the Three Months Ended October 31, 2009~~Costs

~~Revenues~~The following table summarizes changes in our revenues and direct costs of our operating segments:

Wagering Segment revenues for the three months ended October 31, 2010 increased $445,296 (23%) over the three months ended October 31, 2009. The increase is attributed to a higher than average win percentage of 7.2%, compared to 4.8% in the prior year’s quarter, partially offset by a $95,179 (-28%) decrease in race commissions mirroring the industry trend in the popularity of race wagering. During the quarter we launched the LEROY’S® APP© mobile phone betting application, and we believe that the initial launch has been well received by the market. As a result of this new product, our phone account wagering handle for the quarter has increased 58.2% with an average phone account wager nearly five times greater than our average wager. As we expand to new operating systems and carriers providing the application, we expect that our phone account wagering should continue to increase; however, no assurances can be given that there will be commercial acceptances of the LEROY’S® APP© or that other competing mobile applications will not be developed that adversely offset the commercial acceptance of our mobile application.

	Three Months Ended April 30,
	2011		2010		$ Change			% Change
Revenues
Wagering	$	1,693,148	$	1,499,992	$	193,156		12.9	%
Hotel/Casino	469,460		457,459		12,001			2.6	%
Systems	699,233		905,382		(206,149		)	(22.8	)%
	$	2,861,841	$	2,862,833	$	(992	)	0.0	%
Direct costs
Wagering	$	1,386,163	$	1,442,797	$	(56,634	)	(3.9	)%
Hotel/Casino	392,107		434,090		(41,983		)	(9.7	)%
Systems	198,899		247,349		(48,450		)	(19.6	)%
	$	1,977,169	$	2,124,236	$	(147,067	)	(6.9	)%

~~The~~Please ~~Hotel/Casino~~refer ~~Segment revenues decreased by $1,874 compared~~ to the ~~prior~~discussions ~~year’s~~below ~~quarter~~(“Wagering ~~with a decrease in casino revenues of $45~~Segment,~~178~~” ~~(-16%) offset by increase in hotel and food and beverage revenues.~~ “Hotel/Casino ~~revenues~~Segment,” ~~and~~“Systems ~~handle decreased due to lower customer spending caused by the current economic conditions in the area. Hotel revenues increased $11~~Segment,~~557~~” ~~(8%) due to higher occupancy consistent with area~~ and ~~national~~“Other ~~trends.~~Income ~~Food~~ and ~~beverage revenues increased $31,747 (17%~~Expense”) asfor ~~a result of special promotions offered to generate~~ additional ~~customer~~information, ~~visits~~discussion ~~to the property from local residents~~ and ~~truckers traveling along I-80 corridor~~analysis.

Systems Segment revenues for the three months ended October 31, 2010 decreased by $46,374 (7%) over the three months ended October 31, 2009. The decrease is attributable to reduced equipment and software license sales, and a reduction in maintenance fees. Typically, maintenance fees account for more than 90% of the revenues of this segment.12

~~Costs~~Table ~~and~~of ~~Expenses~~Contents

Wagering Segment total costs and expenses for the three months ended October 31, 2010 decreased $115,494 (-6%) over the three months ended October 31, 2009. This decrease is attributed primarily to staff reductions and lower costs per wagering transaction ($98,803), fewer leased locations ($19,906), and lower track fees and programs related to horse racing. These cost reductions were partially offset by higher taxes related to the increase in sports revenue and advertising and marketing expenses related to the launch of the LEROY’S® APP©. Our transaction costs related to phone account wagering are substantially less than a transaction conducted at one of our physical locations which contributed to lower payroll and rent expense for the quarter ended October 31, 2010 as compared to the prior year’s quarter. Selling, general and administrative costs increased slightly by $3,600. Depreciation and amortization expense decreased by $17,068 as certain fixed assets became fully depreciated.

~~Hotel/Casino~~The Wagering Segment ~~total~~includes ~~costs~~the ~~and~~operating ~~expenses~~results ~~for~~of the ~~three~~sports ~~months~~gaming ~~ended October 31~~wagers, ~~2010~~net ~~increased~~of bypayouts ~~$44,042 (7%) primarily due an increase in food~~ and ~~beverage costs related to the increase in food and beverage revenues and an increase in payroll expense~~expenses.

~~Systems~~Wagering Segment ~~costs~~revenues ~~and expenses for the three months ended October 31, 2010~~ increased ~~$9,251 (1%) over the three months ended October 31, 2009,~~ due to ~~an increase in net rent expense resulting from~~ the ~~loss~~following ~~of a sublease, partially offset by reductions in payroll expense and research and development costs. The cost of systems sales in total and by component is not significant.~~factors:

~~Other~~During ~~income~~the three months ended April 30, 2011, our amount of sports handle decreased by 11.4%, compared to the same period in the prior year, primarily due to the economic conditions as the average wager per ticket has trended downward. However, an increase or decrease in handle is not necessarily indicative of an increase or decrease in revenues or profits due to the volatility of the win percentages. Elimination of unprofitable locations, closures of host properties, changes in state and/or federal regulations, and other factors beyond our control may result in declines in handle. We experienced a higher win percentage of 5.53% compared to 4.08% in the prior year’s quarter. Our race commissions were down $49,758 (~~expense~~-17.8%) from the prior year’s quarter as we continue to experience the downward trend in race wagering.

~~The~~Direct ~~other~~costs ~~income~~decreased ~~and~~primarily ~~(expense)~~due ~~categories~~to ~~are~~reductions ~~primarily administrative~~ in ~~nature~~payroll costs and, aslower ~~such,~~contingent ~~are~~rent ~~not~~expense ~~directly~~for ~~attributable~~locations tothat ~~any~~did ~~operating segment. Accordingly, these items are generally~~ not ~~taken~~achieve ~~into~~volume ~~consideration by us when we allocate resources to the segments or assess the performance of the segments~~incentives.

~~Interest~~As ~~Income~~the isopportunity ~~primarily~~may ~~attributable~~arise, we intend to ~~interest~~continue ~~earned~~to onopen ~~restricted~~new ~~cash~~locations ~~deposits~~and ~~required~~to ~~for~~continue ~~the~~our ~~Regulation~~periodic 22review of existing locations in order to close those locations that are not operating efficiently.~~040~~ There ~~reserve~~is no assurance that the number of race and issports ~~immaterial~~books operated by us will not decrease in the future due to elimination of unprofitable locations, closure of host properties, changes in state and/ or federal regulations and other factors beyond our control, that we will be able to add new locations, or that any new locations so added will be profitable.

15Hotel/Casino Segment

~~Interest~~The ~~Expense~~Hotel/Casino ~~increased~~Segment ~~$50,277~~includes ~~due~~the tooperating ~~interest~~results ~~paid~~of onSturgeon’s ~~pledged deposits and the Alpine loan~~Hotel/Casino.

~~The~~Revenues ~~estimated~~include ~~fair~~primarily ~~value~~the ofnet ~~the~~win ~~Warrant~~from ~~Liability~~casino ~~increased~~gaming ~~because~~activities, the ~~trading~~rental ~~price~~ of hotel rooms, and the ~~Company’s~~sale ~~common~~of ~~stock~~food and beverages. Casino revenues increased ~~substantially~~by $23,136 (10.5%) as ~~compared~~a result of handle and wagering activities due to ~~the~~a ~~price~~modification atin the ~~grant~~slot ~~date~~floor theoretical win percentage. Hotel revenues increased $12,274 ~~resulting~~(14.3%) indue ato ~~loss~~slightly ofhigher occupancy and average room rate. Food and beverage revenues declined by $~~201~~23,~~547~~409 ~~for~~(-15.5%) ~~the~~due ~~current~~modification ~~quarter~~in food product and self service.

~~Litigation~~Direct ~~expense~~costs ~~includes~~decreased ~~$2,928~~due ofto ~~settlement~~“across ~~interest for~~ the ~~third~~board” ~~quarter~~cost ofreductions, ~~fiscal~~primarily ~~2011~~payroll and ~~$16,866 for the same three month period of the prior fiscal year~~ related ~~to the Racusin matter~~($39,000). ~~This is considered a non-operating expense because this settlement related to a capital raising activity.~~

~~Income~~Systems tax expense (benefit). The Company’s effective tax rate of zero for the interim periods presented differs from statutory tax rates primarily due to the utilization of NOL carry-forwards and changes in deferred tax activity.Segment

~~For~~Systems ~~the~~Segment ~~Nine~~revenues ~~Months~~decreased ~~Ended~~due ~~October 31~~to fewer equipment sales ($132,000) ~~2010~~because ~~Compared~~no new casinos commenced operations and a reduction in maintenance fees ($74,000) due primarily to the ~~Nine~~loss ~~Months~~of ~~Ended~~a ~~October 31,~~multiple ~~2009~~location contract.

~~Revenues~~Direct costs decreased in relation to the lower sales volume.

~~Wagering~~Research Segment revenues for the nine months ended October 31, 2010 decreased $765,267 (-13%) as compared to the nine months ended October 31, 2009. This decrease is attributed to a decrease in sports wagering handle of $5,403,673 (-6%), not necessarily indicative of change in revenues or profits due to the volatility of the win percentages, and ~~an average win percentage of 5.07% compared to 5.26% in the prior year’s period. The significant factors contributing to the changes in the win percentage are:~~Development

~~· The~~Research ~~Major~~and ~~League~~development ~~Baseball~~costs ~~Season~~increased ~~was bettor-favorable~~$38,000 due to activities associated with ~~stronger~~expanding ~~pitching~~the ~~and~~capability aof ~~decline~~our inmobile ~~home-runs~~wagering application.

~~· A change in the wagering patterns of Bettors continues a trend toward more conservative wagers~~Selling, ~~which are less profitable to the Company~~General, ~~contributing~~and ~~to the lower hold percentage.~~Administrative

~~· A~~Selling, ~~significant~~general, ~~increase~~and inadministrative ~~the~~expenses ~~win~~increased ~~percentage~~approximately ~~for~~$910,000 ~~football~~due ofto ~~6.6%~~non-recurring ~~compared~~costs toassociated ~~3.2%~~with inthe negotiating and structuring of the ~~prior~~Merger ~~year’s~~Agreement ~~period~~($450,000) and higher payroll and related costs primarily for executives ($487,000).

~~· Our~~Depreciation ~~race~~and ~~commissions for the nine month period were down $326,837 (-29%) from the prior year’s nine month period as we continue to experience the downward trend in race wagering.~~Amortization

~~The~~Depreciation ~~Hotel/Casino~~and ~~Segment~~amortization ~~revenues~~ decreased ~~$178,847~~approximately ~~(-10%), including a~~ $~~186~~47,~~917~~000 ~~(-21%)~~because ~~decline~~management inhas ~~casino~~deferred ~~revenue caused by lower wagering activity and customer spending, lower hotel occupancy for~~ the ~~nine~~routine ~~months~~replacement ~~ended October 31, 2010 as compared to the nine months end October 31, 2009, all~~ of ~~which~~operating ~~is primarily due to general economic conditions and decreased travel causing hotel revenues to decline $34,717 (-8%)~~equipment. These declines were partially offset by an increase in food and beverage revenues of $42,787 (8%), as we continue to market our restaurant to generate increased visitation from local residents and truckers traveling along I-80 corridor.

Systems Segment revenues for the nine months ended October 31, 2010 decreased $11,338 (0.5%) as compared to the nine months ended October 31, 2009. The decrease is attributable to a reduction in maintenance fees, which was offset by an increase in sales of equipment and equipment rentals. Typically, maintenance fees account for more than 90% of the revenue for this segment.13

~~Costs~~Table ~~and~~of ~~Expenses~~Contents

~~Wagering~~Other ~~Segment~~Income ~~costs and expenses for the nine months ended October 31, 2010 decreased $149,268~~ (~~-3%~~Expense) ~~over the nine months ended October 31~~, 2009. This decrease is attributed to staffing reductions $156,000, fewer location rentals $17,300, and lower pari-mutuel horse racing expenses, partially offset by increases in advertising and marketing expense ofnet ~~$45,301. Selling, general and~~

16The other income (expense), net increased approximately $315,000 due to cost associated with the early extinguishment of the Alpine Loan ($127,000, including a prepayment penalty of $100,000 and the write-off of the remaining debt discount), additional interest expense due to increased borrowings ($68,000), and an increase in the estimated fair value of the warrant liability ($154,000) due to an increase in the trading value of the Company’s common stock.

administrative costs increased $80,777 (10%), due to the corporate allocation related to increases in payroll, professional services, and insurance. Depreciation and amortization expense decreased by $35,244 as certain fixed assets became fully depreciated.

Hotel/Casino Segment costs and expenses for the nine months ended October 31, 2010 increased by $96,295 (5.29%) primarily due an increase in food and beverage costs related to the increase in revenues, payroll expense, and repairs and maintenance. Increases were partially offset by reductions in taxes and utilities.

Systems Segment costs and expenses for the nine months ended October 31, 2010 increased $317,023 (13%) over the nine months ended October 31, 2009, due to increased research and development activities related to the development of the LEROY’S® APP©, higher net rent expense due to the loss of sublease income, and an increase in the corporate allocation related to increases in payroll expense, professional services, and insurance. The cost of systems sales in total and by component is not significant.

Other income and (expense)

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

Interest Income is primarily attributable to interest earned on restricted cash deposits required for the Regulation 22.040 reserve was decreased by $3,640 for the nine months ended October 31, 2009 due to lower interest rates on depository accounts.

Interest Expense increased $91,760 (43%) due to interest paid on pledged deposits and the Alpine loan.

The estimated fair value of the Warrant Liability increased because the trading price of the Company’s common stock increased as compared to the price at the grant date, resulting in a loss of $166,547 for the nine months ended October 31, 2010.

Litigation expense includes $13,614 of settlement interest for the nine months ended October 31, 2010 and $43,283 for the nine months ended October 31, 2009 related to the Racusin matter. This is considered a non-operating expense because this settlement related to a capital raising activity.

Other Income and Expense decreased $72,922, as compared to the nine months ended October 31, 2009 due to a loss on the sale of slot parts and equipment coupled with a rent adjustment made in the prior nine months ended October 31, 2009.

Income tax expense (benefit). The Company’s effective tax rate of zero for the interim periods presented differs from statutory tax rates primarily due to the utilization of NOL carry-forwards and changes in deferred tax activity.

Critical accounting estimates and policies.

Although our financial statements necessarily make use of certain accounting estimates by our management, we believe that, except as discussed ~~below~~in our 2011 Form 10-K, we do not employ any critical accounting policies or estimates that are either selected from among available alternatives, or require the exercise of significant management judgment to apply, or that if changed are likely to affect future periods. On an ongoing basis, ~~except~~we ~~with~~evaluate ~~regard~~our estimates and judgments, including those related to revenue recognition, income taxes, estimating the ~~estimated~~fair ~~effects~~value ifof ~~any~~the warrant liability, loss contingencies, and stock-based compensation. We base our estimates and judgments on ~~estimated~~historical ~~costs~~experience ~~associated~~and ~~with~~on various other factors that we believe are reasonable under the ~~Racusin~~circumstances, ~~litigation~~the ~~discussed~~results ~~elsewhere~~of ~~herein~~which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. ~~The~~ ~~following~~There ~~summarizes~~have been no changes to our critical accounting policies, estimates, and estimate methodologies since the filing of our 2011 Form 10-K. See Note 1 to Consolidated Financial Statements in the Form 10-K for additional discussion of our significant accounting estimates and policies.

Wagering

We record wagering revenues in compliance with Nevada law and the regulations of the Nevada gaming regulators. For sports and non-pari-mutuel race, we use an accrual method whereby the handle (total amount wagered) is recognized on the day the event occurs (rather than the day the wager is accepted) decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning wagers that were not redeemed (cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same day as the wager. Other sources of revenue are relatively insignificant.

Hotel/Casino Revenue

We report the wagering revenues of Sturgeon’s, which is primarily comprised of slot revenue, hotel room revenue and food and beverage revenue, in compliance with Nevada law and the related regulations. These revenues are generally in the form of cash, personal checks, credit cards and gaming tokens, which do not require estimates. We do estimate certain liabilities with payment periods that extend for longer than several months. We believe these estimates are reasonable based on our assumptions related to possible outcomes in the future. Future actual results might differ materially from these estimates. Slot revenue is calculated by deducting the hopper fills and jackpot payouts from the slot drop which is the amount removed from the slot machine. For non-gaming revenues, such as food and beverage and hotel, we record revenues in compliance with generally accepted accounting principles, recognizing revenue when it is earned.

System

Software license fees represent revenues related to licenses for race/sports software delivered to customers for in house use. Revenues from software license agreements including any related training revenue and hardware sales are recognized upon installation. Revenue is not recognized until it is realized and earned. The Company recognizes revenue when related assets held are readily convertible to known amounts of cash or claims to cash and revenues are considered to have been earned when we have substantially accomplished what we must do to be entitled to the benefits represented by the revenues.

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

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

The only fees that are recognized over time are maintenance fees. Certain amounts in a few, but not all maintenance agreements, could under one very remote condition that has never occurred (an intellectual property infringement claim that required software to be taken out of service and which could not be replaced within a specific time period), be refundable. A customer may not unilaterally cancel its maintenance agreement at any time. Non-payment would result in a breach of the agreement and the Company may seek to enforce its legal and equitable contract rights.

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

Long-Lived Assets

Owned property and equipment are recorded at cost and depreciated to residual values over the estimated useful lives using the straight-line method. Leasehold improvements on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. The useful life, currently estimated, of our equipment generally ranges from 3 to 10 years. We test for impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired. An impairment loss is recognized if the carrying amount of the asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset.

Warrant Liability

In conjunction with the Alpine loan, the Company issued warrants to Alpine, which entitled but did not obligate Alpine to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.22 per share through June 15, 2015. Using the Black-Scholes valuation model and “Level 2” measurement inputs as defined in general accepted accounting principals, including a risk-free interest rate of 4%, expected warrant life of five years, and a stock price volatility factor of 206%, the warrants were originally valued at $129,478 and recorded as a warrant liability. The resultant liability is revalued at each balance sheet with the change charged or credited to earnings and debt discount, which is amortized as interest expense over the repayment term of the loan using the effective interest method.

Recent Accounting Pronouncements

No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our future financial position, results of operations, or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4T4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are intended to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management.

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has completed an evaluation of the effectiveness of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(c). Based on that evaluation, we concluded that the disclosure controls and procedures were not effective, ~~given~~due ~~a group of deficiencies collectively considered~~ to be a ~~material~~late ~~weakness~~Form in10-K ~~the~~filed ~~internal~~on ~~control~~May ~~over financial reporting that management and the Company’s independent registered accounting firm have identified as of January 31~~18, ~~2010~~2011, which should have ~~not~~ been ~~fully~~filed ~~mitigated~~by asMay ~~of October 31~~17, ~~2010~~2011.

19Changes in Internal Control over Financial Reporting

~~Changes~~During the quarter ended April 30, 2011, there were changes to our internal controls over financial reporting that improved the effectiveness of our review and approval of account analysis and journal entries associated with our periodic closing processes that have substantially mitigated a group of previously reported deficiencies. Such deficiencies were caused by the departure of our prior chief financial officer and certain accounting personnel in ~~Internal~~February and ~~Control~~March 2010 and the unusual time demands on our financial personnel related to the William Hill transactions. There were no other changes to our internal controls over ~~Financial~~financial ~~Reporting~~reporting during the quarter, that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

~~There were no changes in our internal controls over financial reporting that occurred during our last fiscal quarter, i.e., the quarter ended October~~PART ~~31,~~II ~~2010,~~— ~~that~~OTHER ~~have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.~~INFORMATION

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our Legal Proceedings, see Note 4 in the “Notes to Consolidated Financial Statements” of this Quarterly Report on Form 10-Q, which is incorporated by reference in response to this item.

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Item 1A. Risk Factors

A description of our risk factors can be found in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2010~~2011. There were no material changes to those risk factors during the ~~nine~~three months ended ~~October~~April 3130, ~~2010, except as discussed below:~~2011.

The market for downloadable applications permitting legal sports wagering from a mobile device is a new market in the United States. No assurances can be given that there will be commercial acceptances of the LEROY’S® APP©, that other competing mobile applications will not be developed that adversely affect the commercial acceptance of our mobile application, or that our ability to capitalize on any available growth opportunities will not be adversely affected by other risk factors previously discussed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Reserved.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

EXHIBIT NUMBER		DESCRIPTION
31.1		Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002.
2.1		Agreement and Plan of Merger, dated as of April 13, 2011, among William Hill Holdings Limited, AW Sub Co. and American Wagering, Inc. incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 14, 2011.
31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the Sarbanes-Oxley Act of 2002.
10.1		Termination of Employment Agreement and Waiver of Payment Agreement dated April 13, 2011 between Victor Salerno, American Wagering, Inc. and William Hill Holdings Limited (to be effective upon consummation of the merger with William Hill Holdings Limited) incorporated by reference to registrant’s Form 10-K, as filed with the Securities and Exchange Commission on May 18, 2011.
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.
10.2		Amended and Restated Employment Agreement between American Wagering, Inc. and John English, dated April 13, 2011 incorporated by reference to registrant’s Form 10-K, as filed with the Securities and Exchange Commission on May 18, 2011.
10.3		Bridge Loan Agreement, dated as of April 13, 2011, by and among American Wagering, Inc., the Guarantors (as defined therein) and William Hill Holdings Limited incorporated by reference to registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 14, 2011.
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 the undersigned, thereunto duly authorized.

AMERICAN WAGERING, INC.
Dated:	December 20, 2010
/s/ Victor J. Salerno
Victor J. Salerno
President, Chief Executive Officer, and
Chairman of the Board of Directors

AMERICAN WAGERING, INC.


Dated: June 14, 2011

/s/ Victor J. Salerno
Victor J. Salerno
President, Chief Executive Officer, and
Chairman of the Board of Directors

/s/ Robert Kocienski
Robert Kocienski
Chief Operating Officer, and
Principal Financial Officer

~~/s/ Robert Kocienski Robert Kocienski Chief Operating Officer, and Principal Financial Officer~~16

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