AMERICAN WAGERING INC, 10-K, 2000-05-01

AMERICAN WAGERING INC
10-K, 2000-05-01
MISCELLANEOUS AMUSEMENT & RECREATION

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
=========================

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000.

Commission File No. 000-20685

AMERICAN WAGERING, INC.
(Name of Small Business Issuer in its Charter)

Nevada 88-0344658
- ------------------------------ -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

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

(702) 735-0101
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(Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Title of Class
----------------------------
Common Stock, $.01 par value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
--------- ----------

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

The issuer's revenues for the fiscal year ended January 31, 2000 were
$13,172,181.

The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the issuer as of April 21, 2000
computed by reference to the closing price for the registrant's Common Stock as
quoted by the National Market System of NASDAQ on such date, was approximately
$29,906,982. The number of shares of the issuer's Common Stock outstanding as of
April 21, 2000 was 7,836,840.

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PART I

Item 1. Business

In August 1995, American Wagering, Inc., a Nevada corporation (the
"Company"), was formed as the holding company for Leroy's Horse and Sports Place
("Leroy's") and Leroy's Hotel Corporation ("LHC"). Leroy's was incorporated
under the laws of the State of Nevada on November 14, 1977. Leroy's, through a
central computer system located at its Las Vegas headquarters, operates a
statewide network of sports and race wagering facilities in 47 casinos. Leroy's
offers a "turn-key" sports wagering operation that allows casinos to satisfy
their patrons' desires for sports wagering without bearing the risk and overhead
associated with running the operation. By combining volume from a number of
locations, the Company believes that Leroy's more effectively hedges risks and
more efficiently covers fixed overhead. In addition, since its sports book
operation is its primary business, the Company believes that Leroy's is capable
of responding more quickly to customer needs, such as providing faster pay off
on winning tickets presented other than in person, than do many casinos, which
operate sports books as an ancillary part of their businesses.

The Company also owns and operates Mega$ports (ACT) Pty Ltd.
("Mega$ports (ACT)") located in Canberra, Australia. Mega$ports (ACT) is the
Company's international wagering hub licensed to accept both fixed odds and
pari-mutuel interactive wagers on the Internet from patrons around the world
with the exception of those located in the United States. In November 1998,
Mega$ports ACT was issued a fifteen year Sports Betting license from the
Bookmakers Licensing Committee in the Australian Capital Territory . Mega$ports
(ACT) began accepting wagers from non-Internet patrons within Australia in
January 1999. Mega$ports (ACT) received regulatory approval for its Internet
operations from the Australian Capital Territory and began accepting wagers on
the Internet in March 1999. The Company believes it is the first Nevada-licensed
company to start an online gaming site. The Company's internet operations are
currently the subject of a Nevada Gaming Commission inquiry. See "Legal
Proceedings".

The Company owns AWI Keno, Inc. ("AWIK") which designs, installs,
operates and maintains computerized keno systems and plans to offer keno players
the first state wide keno game with a progressive jackpot. On November 11, 1999
AWIK received final liscensing approval from the Nevada Gaming Commission. AWIK
is currently operating at eight locations.

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ended, January 31, 2000 and 1999 the results of the hotel, food and beverage
operations have been accounted for as discontinued operations (See Note 5).
Until June 30, 1999, LHC owned and operated the 150 room Howard Johnson's hotel
(the "Hotel") located in Las Vegas, Nevada and through its wholly owned
subsidiary B-P Food Corporation, an International House of Pancakes restaurant
adjacent to the Hotel. Pursuant to the terms of a purchase agreement, LHC sold
the hotel and food operations to "Goldrush Hotel and Casino" and leases and
operates the casino portion of the facility for a term of up to two years. The
Casino facility is the 5,600 square foot area adjacent to the Hotel and contains
approximately 65 electronic gaming devices, including slot machines, video poker
machines and multi-game video machines. The ground lease between the Company and
the owner of the land underlying the Hotel/Casino was the subject of certain
litigation. See "Hotel/Casino Operation," and "Legal Proceedings."

In October 1996, the Company acquired from Autotote Corporation, all of
the shares of capital stock of Autotote CBS, Inc. (which was subsequently
renamed Computerized Bookmaking Systems, Inc. ("CBS")), along with certain
software and licensing rights pursuant to a stock transfer agreement between the
Company and Autotote Corporation. The Company paid $3 million in cash to
Autotote Corporation and guaranteed CBS's obligation under its mortgage (in the
principal amount of approximately $2 million as of such date). The mortgage is
on the real estate and building located at 675 Grier Drive, Las Vegas, Nevada
where the Company currently maintains its corporate offices. CBS designs, sells,
installs and maintains sports and race book equipment, software and computer
systems for the sports betting industry. The use of the CBS software is subject
to certain litigation. See "Legal Proceedings."

In 1994, CBS signed a joint venture agreement with IGT-North America, a
subsidiary of International Game Technology ("IGT"), for the purpose of
developing and marketing a pari-mutuel sports system, known as MEGA$PORTS(R) .
MEGA$PORTS(R) offered opportunities to wager on the outcome of individual sports
contests, events occurring within or during the contests, and outcomes of groups
of sports contests. Mega$ports, Inc. the entity formed to give effect to the
joint venture, received its license from the Nevada Gaming Commission in June
1997 and began operation in July 1997. In December 1998, the Company entered
into an agreement with IGT to terminate the Mega$ports joint venture agreement.
The termination agreement allows the Company to receive IGT's 50% interest in
the joint venture and the Mega$ports(R) trademark. The Company has agreed to
indemnify IGT for all presently due or future obligations of Mega$ports, Inc.
The transfer of IGT's shares in the joint venture is subject to the approval of
the Nevada Gaming Commission. In March 2000, the Company decided to cease
operations of Mega$ports, Inc. but will continue to recognize current
liabilities and commitments. The Company has notified the Nevada Gaming Control
Board of its intent to let expire in July, 2000 the Mega$ports, Inc. gaming
license.

On July 28, 1998, the Company through two newly formed subsidiaries,
acquired certain assets from Advanced Computer Services, Inc. ("ACS") including
software and customer lists pursuant to an asset purchase agreement between the
Company and ACS. The Company paid ACS $500,000 in cash and $250,000 in the
Company's common stock. The Company's two new subsidiaries, AWI Sports Systems,

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Inc. ("AWISSI") and AWI Hotel Systems, Inc. ("AWIHSI") acquired the Nevada
Sports wagering software and Hotel systems software, respectively from ACS. The
Company owns 80% of AWISSI and 51% of AWIHSI. The sole shareholder of ACS owns
the remaining 20% of AWISSI and 49% of AWIHSI. The Company and ACS also settled
certain litigation between them. AWISSI and AWIHSI assumed certain contractual
obligations of ACS, including all customer contracts. Under the terms of a
consulting agreement between the Company and the former shareholder of ACS, the
Company will, upon successful completion of the engagement, transfer 31% of the
outstanding shares of AWIHSI as part of the compensation for his services.

In November, 1999 the Company formed Secured Telephone Operating, Inc
("STOP") which designs, installs, and operates a telephone call identification
system for its customers. The system determines the origin of a telephone call
and accepts or rejects a call based on its origination. The system is used in
conjunction with telephone account wagering within the State of Nevada.

Las Vegas Metropolitan Market

The Company's primary market for sports books, as that term is defined
below, and its casino and keno operations is the Las Vegas metropolitan area
(hereinafter, "Las Vegas"). Currently, the Las Vegas gaming market is comprised
of 158 casinos with an aggregate of approximately 152 sports books, 115 race
books and 126 keno parlors. Leroy's currently operates 22 of its 47 sports books
in the Las Vegas area. The Las Vegas gaming market attracts both local residents
and Las Vegas visitors. Las Vegas' population was approximately 1.3 million in
1999, an increase of 4% from the prior year. Las Vegas is Nevada's principal
tourist destination. Gaming and entertainment are the major attractions,
complemented by warm weather and the availability of many year-round
recreational activities. The number of visitors traveling to Las Vegas has
increased by 9.5% from approximately 30.6 million in 1989 to approximately 33.5
million in 1999. Las Vegas' principal tourist market is the western region of
the United States, most significantly Southern California and Arizona. Las Vegas
is also among the nation's most popular convention sites, having hosted
approximately 4000 conventions in 1999, which were attended by more than 3.8
million people who, it is estimated, spent $4.0 billion, excluding gaming
activity.

From 1989 to 1999, gaming revenues for Clark County (which consists
principally of Las Vegas) have increased 114.7% from approximately $3.4 billion
to approximately $7.3 billion. During the twelve months ended December 31, 1999
gaming revenues generated from race and sports books and keno parlors in Clark
County were approximately $161 million and $58 million, respectively. The Clark
County gaming market has historically achieved significant growth despite
adverse economic, regulatory and competitive events during the past decade,
including the expansion of gaming in other jurisdictions across the United
States.

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Reno Area Market

The market for fifteen of the Leroy's sports books, is the Reno area
gaming market. AWIK also plans on operating its inter-casino linked keno system
at selected casino locations in the Reno area. Reno is the second largest city
in Nevada with an area population of approximately 324,000 in 1999. Reno is
located at the base of the Sierra Nevada Mountains along Interstate 80,
approximately 135 miles east of Sacramento, California. The Reno area is a
popular resort spot, which attracts tourists by offering gaming as well as
numerous other summer and winter recreational activities. The greater Reno area
attracted a total of 5.1 million visitors in 1999. Currently, the Reno area
gaming market is comprised of 43 casinos with an aggregate of approximately 21
sports books, 16 race books and 15 keno parlors.

World-Wide Market

Mega$ports (ACT) operates from Canberra, Australia and, through the
Internet, is accepting wagers from patrons in every country in the world with
the exception of those in the United States. There are currently over 700 web
sites that offer some type of online gambling. With the popularity of online
gambling increasing, the Company believes it may be able to access a larger
wagering market through the more cost efficient Internet. The convenience of
placing wagers using one's personal computer may allow sports books to tap into
the traditional gambling market. Industry estimates for online gambling revenues
of all types exceeded $955 million in 1999 and are expected to reach $2 billion
in 2000 and $10 billion by 2002. The Company's Internet operations are currently
the subject of a Nevada Gaming Commission inquiry. See "Legal Proceedings."

Sports Wagering

Sports wagering is legal in the State of Nevada and in numerous foreign
countries, including Canada, Mexico and Australia. Sports wagering at Nevada's
race and sports books increased from approximately $290 million in 1980 to $3.1
billion in 1999. During that same period, the number of sports books increased
from 24 to 152 in Nevada. With the advent of cable and satellite television,
both commercially and privately, viewing access to sporting events has increased
significantly. When sporting events are televised, there is wider recognition of
the sports and the teams involved and increased excitement, which the Company
believes, leads to more interest in sports betting. With the popularity and
accessibility of computers, bettors in locations where such betting is permitted
now have an additional medium from which to wager on sporting events. Online
sports betting has existed for approximately 20 years, but until more recently
few people had access to a computer or the Internet. The Company believes that
the dynamic growth in home computing combined with the convenience of betting
online will enhance continued growth of the sports betting industry.

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A sports wagering facility, or "sports book", is a gambling
establishment that sets odds and point spreads and accepts bets on the outcome
of sporting events such as football, basketball, baseball and hockey games.
Sports books set odds and point spreads aiming not to reflect the final result,
but to maintain a "balanced book" by offering odds or point spreads that will
attract equal amounts of bets on each side of a particular event. As a general
matter, a customer's odds or point spread (the "line") are fixed at the time he
or she makes his or her bet, regardless of any subsequent movement in the line.
Under this system, a sports book operator attracts bets by changing or "moving"
the line up or down to encourage wagering on a specific team. To the extent that
a book on a particular event is not balanced, the book-making operation takes a
risk on the outcome of the event.

Profits from bookmaking, table games, keno and slot machines are the
result of steady play against a statistical advantage that the gambling
operator, or the "house" possesses. The house advantage in bookmaking, however,
is fundamentally different from other gambling games. There are mathematical
advantages to table games and slot machines in favor of the casino. While there
are exceptions (for instance, card counters), statistically all pit players
exhaust their bankroll after an indefinite period of play. In pari-mutuel
wagering which is used by major North American horse racing tracks and jai alai
establishments, and was offered by Mega$ports(R), a wager is pooled with all
other wagers, the house receives a percentage for operating expenses, profit and
taxes and the remainder is distributed to the winners. Therefore, the gross
revenues are directly related to the amount wagered (the "handle").

For each type of sports bet there is a "theoretical percentage," which
is the advantage a bookmaker would have if the odds guaranteed it a constant
commission regardless of the outcome. For example, for a straight football bet
involving the outcome of one game, it is common practice that the customer
wagers $11 to win $10. Accordingly, if the book was evenly balanced, the sports
book would earn $1 for each $22 wagered, or 4.55% (the winner would receive $21)
of the handle, before expenses. The sports book, however, does not have a built
in statistical edge as do the betting tables, slot machines or the racetrack.
The fundamental difference is part of the appeal for many sports customers, but
it also creates risk for the sports book. A bookmaker operates in a system that
is interrelated with oddsmakers and customers. Bookmakers collect bets, adjust
odds to account for the preferences of their patrons and pay the winners.

Customers have opinions concerning the posted odds and bet into the
odds accordingly. Oddsmakers (whose services are purchased by the bookmakers)
ideally make the lines that will split the bets evenly between the participants
in the sporting event so that the bookmaker will realize profits over time.

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In practice, however, a sports book is rarely perfectly balanced. The
sports book's profit depends upon the reliability of the oddsmaker and its
acumen at adjusting the odds when required. Because customers are betting on
propositions of uncertain probability and are paid according to the line at
which they make their bets rather than the closing odds (as in a pari-mutuel
system), the sports book is not assured of a constant profit over time, let
alone for a single event.

A sports book attempts to limit the liability it incurs on an event
against potential flaws in the oddsmaker's setting of the line and the
integrity of the games. Limiting liability is accomplished by two principal
means, the game limit and line movement. For example, the opening line for a
football game ideally would split the bets from the time it was posted until
kick-off. However, the opening line generally is unbalanced. Because a sports
book does not want to take the risk of accepting unlimited bets on one side of a
game, it creates a game limit -- the maximum amount of money that will be
accepted at the posted line. When the game limit is reached, the line is
changed, or "moved," to attract action on the "other" side. Movement in a line,
however, does not eliminate a bookmaker's risk.

The game limit is established by the sports book based upon the "earn"
in a sport, which is a function of the amount the sports book would earn if the
odds guaranteed it a constant commission regardless of the outcome (the
"theoretical hold percentage"), the quality of the line and the customer mix.
For example, when the sports book anticipates that the majority of the bets will
come from sophisticated customers who know as much as, or more than, the
oddsmaker, the limit will be relatively low. The Company believes that events
with the highest fan popularity and media coverage, such as professional
football's Super Bowl, have a relatively small proportion of sophisticated
customers. Accordingly, the sports book's expected earn on such an event would
be higher and would justify a higher game limit.

In order to effectively balance its books, a bookmaking operation must
take a sufficient volume of wagers to offset large wagers on any given event.
While many of the large casinos in Las Vegas have sufficient customer traffic to
underwrite the risks inherent in a sports book, some large and smaller casinos
typically do not. Sports books have been computerized and automated in order to
severely curtail fraud and to provide for more sophisticated analysis and
up-to-date information. Some larger casinos are not interested in operating
their own sports book because of the associated overhead. As a result, the
Company believes that many casinos cannot profitably operate a sports gambling
operation and, if they do, they are exposed to significant financial risks
associated with an "unbalanced book." Nevertheless, many of these casinos
believe that they need to offer their customers a sports book to remain
competitive with other casinos. The Company has attempted to fill this need.

Wagering - Sports Book Operation

Leroy's retains its main sports book license at their Casino leased at
Howard Johnson's Hotel, 3111 West Tropicana Boulevard in Las Vegas, Nevada.
Leroy's operates 46 other sports books in major metropolitan areas in Nevada (of
which 22 are located in the Las Vegas area and 15 in the Reno area with 10
others located throughout the State of Nevada, including the cities of Laughlin,
Mesquite, Elko, Winnemucca and Pahrump). Leroy's operates sports books in hotels
and casinos, including the Riviera Hotel and Casino, the Tropicana Hotel and
Casino, the Four Queens Hotel and Casino, in the Las Vegas area, the Carson
Valley Inn and Casino, the Bonanza Hotel and Casino and the Rail City Hotel and
Casino in the Reno area. Under Nevada gaming law, Leroy's is permitted to own
and operate sports books located on the premises of other non-restricted gaming
operations. Leroy's currently owns and operates 47 sports books out of a total
of 152 sports books operating in Nevada. The remaining sports books in the state
are operated primarily by the casinos in which they reside.

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When Leroy's began operations in 1978, it was one of only seven sports
and race books in Las Vegas. Currently, virtually every major casino in Nevada
offers its patrons a sports and race book. Generally, at its sports book
locations Leroy's pays the casinos a flat monthly rental for casino space,
although in some instances there are participation agreements with the casinos.

The typical Leroy's sports book location encompasses approximately 300
square feet, contains a board displaying the odds, television monitors showing
sporting events, betting stations, ticket sellers and cashiers. As a bet is
placed, the wagering data is entered into a computer terminal which is connected
via a dedicated phone line to Leroy's centralized computer system which confirms
the line, determines that the bet is within the limits set for the particular
event, records the information on a central data base and issues a ticket
evidencing the bet. The ticket is then distributed to the customer with Leroy's
simultaneously recording the wager. Personnel at Leroy's main office monitor all
bets and adjust the odds as necessary to reflect the various bets throughout all
of Leroy's locations.

The Company believes that Leroy's has lower maximum betting limits than
many sports books, which operate at large casinos. It has established these
lower limits in an effort to limit bets from the more sophisticated customers
who often place larger bets. In addition, in order to limit the more
sophisticated bettors from utilizing strategies that would provide an advantage,
the Company sets even lower limits for bets placed over the telephone, which are
currently accepted only from within the State of Nevada. The Company believes
that the geographic spread of Leroy's locations to various parts of the State of
Nevada is more likely to attract bets from customers on both sides of a line,
thereby further limiting its risk.

Professional and college football games currently comprise about 34% of
the amount bet at the Leroy's locations with professional and college basketball
games and professional baseball games next at about 29% each. Leroy's business
historically has been seasonal in nature with approximately 52% of its handle
arising during the months of September through January. Leroy's handle for the
season consisted of football game wagering of 62%, basketball wagering of 19%
and baseball wagering of 9%, with the remaining 10% representing all other
sports wagering, including such sports as hockey and boxing. Leroy's race books
utilize the same personnel and facilities as its sports books, but Leroy's does
not set its own odds for race wagering. Leroy's accepts wagers for races by
offering race patrons the same odds as the racetracks at which the races occur.
Leroy's has only offered race wagering for a few major events, such as, the
Triple Crown and the Breeders Cup.

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In December 1997, Leroy's joined the Nevada Pari-mutuel Association
to allow pari-mutuel race wagering at its Hotel/Casino location. Leroy's, in
association with a disseminator, currently offers pari-mutuel wagering on events
at racetracks throughout the country including Santa Anita in California and
Aqueduct in New York.

Wagering - Internet Operations

In November 1998, Mega$ports (ACT) was issued a fifteen-year Sports
Betting license from the Australian Capital Territory Bookmakers Licensing
Committee. Mega$ports (ACT) began accepting wagers from non-Internet patrons
within Australia in January 1999. Mega$ports (ACT) received regulatory approval
for its Internet operations from the Australian Capital Territory and began
accepting wagers on the Internet in March 1999. The Company believes that it is
the first Nevada-licensed company to start an online gaming site. The Company is
now able to bring its over 20 years of bookmaking expertise to the international
market through the Internet. Mega$ports (ACT) utilizes an accessible network
with a user-friendly sports betting software system to allow Internet wagering
by patrons. The online system permits high-speed access with secure, encrypted
technology and allows instantaneously updated betting lines and account
information seven days a week, 24 hours a day. The system was designed to ensure
various patron safeguards that are required by Australian Capital Territory
regulations. The Company anticipated that customers could begin wagering through
Mega$ports (ACT) only after meeting registration and login requirements which
verify the patron's country of residence and age and confirm the physical
location of the transmission of the wager. The system is designed not to accept
any wagers from jurisdictions that prohibit sports betting or Internet wagering,
such as the United States. Once bettors meet registration requirements and
establish an account they can begin wagering immediately using their computers.
Patrons can wager on all authorized events, including all professional and
college sports, golf, auto racing, International and World Cup Soccer, Formula
One Racing, the Academy Awards and other various events. In March 1999,
Mega$ports (ACT) was approved to provide exclusive sports betting services at
Bruce Stadium in Canberra Australia for the subsequent three years. Mega$ports
(ACT) will be the sole bookmaker at the stadium for all events conducted there,
including the Sydney 2000 Olympics.

Wagering - Pari-mutuel Sports Operations

In December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. The termination agreement
allows for the Company to receive IGT's 50% interest in the joint venture and
the Mega$ports(R) trademark. The Company has agreed to indemnify IGT for all
presently due or future obligations of Mega$ports, Inc. The transfer of IGT's
shares in the joint venture is subject to the approval of the Nevada Gaming
Commission. The Mega$ports(R) product was offered at 65 sports books throughout
Nevada, including 47 Leroy's locations. In March 2000, the Company decided to
cease the ongoing operations of Mega$ports, Inc. but will recognize its current
liabilities and commitments. The Company has notified the Nevada Gaming Control
Board of its intent to let expire in July, 2000 the Mega$ports Inc. gaming
license.

Systems Operations

CBS designs, installs and maintains computerized sports and race
wagering. CBS also installs and maintains race and sports wagering systems and
hotel systems on behalf of AWISSI and AWIHSI (CBS, AWISSI and AWIHSI are
collectively know as "Systems"). Systems is the leading provider of race and
sports wagering systems in the State of Nevada, including major casinos along
the Las Vegas Strip.

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Systems provides sports wagering systems and services to virtually all
of the sports and race books in Nevada that are not operated by Leroy's or at
Leroy's sports books. Casinos and other sports wagering facilities generally
purchase the computerized wagering system and enter into an agreement for repair
and maintenance of the system and software support. Operating revenues mainly
consist of sports wagering equipment sales and maintenance contract revenues
from wagering systems contracts. Systems sells its sports wagering systems to
casinos under purchase agreements and provides training for the system operators
and sell/cash terminal clerks. Systems does not provide the operations and
supervisory personnel necessary to operate the system.

In October 1996, when the Company acquired all of the outstanding
shares of CBS from Autotote Corporation and the right to use certain software
owned by Autotote Corporation and Autotote Systems, Inc., certain agreements
were executed. These agreements were the subject of certain litigation between
the Company and Autotote Corporation and Autotote Systems Inc. See "Legal
Proceedings"

STOP designs, installs, and operates a telephone call identification
system for its customers. The system determines the origin of a telephone call
and accepts or rejects a call based on its origination. The system is used in
conjunction with telephone account wagering within the State of Nevada.

Casino Operations

Leroy's operate the Casino within the Hotel facility pursuant to a two
year lease agreement which commenced July 1, 1999. The Casino consists of
approximately 5,600 square feet of space containing 65 electronic gaming
devices, including 18 slot machines, 35 video poker machines and 12 multi-game
video machines.

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Keno Operations

AWIK was formed during the second quarter of fiscal 1999. AWIK designs,
installs, operates and maintains computerized keno systems. On April 29, 1999,
AWIK received preliminary licensing approval from the Nevada Gaming Commission
to operate a statewide inter-casino linked system keno game. THE GAME(TM) is an
interactive system with high-tech video graphics and animation that links
casinos throughout the State of Nevada. THE GAME(TM) is a state-of-the-art
UNIX-based computer system that is already being used to link over 1000
terminals in Australia. AWIK anticipates that THE GAME(TM) eventually will offer
a progressive jackpot starting at $1 million. AWIK offers casinos a risk-free
keno operation as AWIK operates the keno game for the casino and the casino
receives a percentage of the play from AWIK. AWIK received final licensing
approval from the Nevada Gaming Commission on November 11, 1999. AWIK is
currently operating the keno game at eight locations throughout the State of
Nevada.

Hotel, Food and Beverage Operations

Until June 30, 1999 LHC owned and operated the Hotel and restaurant
located at 3111 W. Tropicana Avenue, Las Vegas, Nevada. In conjunction with the
sale of the Hotel facility and under the terms of a purchase agreement, Leroy's
operates the Casino and a race and sports book on the premises. The Hotel/Casino
is located approximately one-half mile west of the Las Vegas Strip and is
adjacent to a major exit from Interstate 15, the freeway linking Las Vegas with
Southern California. In the Company's consolidated financial statements as of
and for fiscal years ended January 31, 2000 and 1999, the results of the hotel,
food and beverage operations have been accounted for as discontinued operations.

Strategy

Wagering - Sports Book Operations

In Nevada, the Company's strategy in the operation of Leroy's sports
books is to continue to expand upon its current base of 47 locations. CBS is
developing a new self-service sports wagering terminal. This new terminal would
allow patrons to place wagers on their own without the assistance of an
employee. Patrons will be able to wager 24 hours a day on all available events.
This terminal would allow Leroy's to enter into the smaller casino market where
the labor costs are currently prohibitive. Leroy's would also be able to achieve
improved efficiency at larger casinos by installing the new terminal.

The Company intends to continue to present casinos with a "turn key"
sports book operation that allows the casinos to satisfy their patrons' desires
for sports gaming without bearing the risk and overhead associated with
operating the books themselves. Leroy's anticipates continuing to utilize its
computer and communication expertise and equipment, by operating its satellite
locations from one central hub, thereby reducing the overhead that each
individual location would have in personnel and equipment. The Company believes
that as televised sporting events continue to proliferate, sports betting will
continue to grow and the Company expects that it can capitalize on such growth.
On March 22, 2000 legislation entitled Amateur Sports Integrity Act was
introduced in Congress. The general purpose of the proposed legislation is to
prohibit wagering on games and performances at the Summer and Winter Olympics
and on high school and college games. Leroy's currently accepts wagers on the
Olympic and college games. Leroy's estimates that wagering on college sports
represents approximately 26% of its revenues.

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Wagering - Internet Operations

Outside of the United States, the Company is marketing through
Mega$ports (ACT) fixed odds Internet wagering. With the continued growth of
online gambling, the Company believes Mega$ports (ACT) is well positioned to
take advantage of a larger wagering market with lower operating costs. The
Company believes that the Internet offers new wagering markets and allows
Mega$ports (ACT) to offer events such as International and World Cup Soccer,
Formula One Racing, the Olympics, Rugby, Cricket, Academy Awards and others. The
Company's Internet operations are currently the subject of a Nevada Gaming
Commission inquiry. See "Legal Proceedings."

The Company maintains a website at http://www.americanwagering.com.
Mega$ports (ACT) accepts wagers through the Internet, exclusively from outside
the United States, at http://www.megasports.com.au.

In December, 1999 The Australian Government released its Productivity
Commissions Report on Australia's Gambling Industries. The Report made certain
recommendations including regulation of online casinos. Following this Report,
the Senate Select Committee on Information Technologies issued a report entitled
"NETBETS" a review of online gambling in Australia. The Committee came up with a
series of proposals to cut online gambling. One of which was to limit the
expansion of online casinos with a moratorium on the issuance of online gaming
licenses until consumer protection policies are implemented. The Federal
Government is pursuing a total ban on internet gambling. However the States and
Territories in Australia are opposed to any limitations on issuing new online
gaming licenses

At this time, the Company is unable to determine the effect, if any, of
the outcome of the implementation of the recommendations made in these reports
or whether the government will be successful in banning online gaming. If the
Federal government is successful in banning online gaming, such ban may have a
material adverse effect on the operations of Mega$ports (ACT).

Wagering - Pari-mutuel Sports Operations

Keno Operations

AWIK's business strategy is to offer a wide area inter-casino linked
keno system in the State of Nevada known as THE GAME(TM). The GAME(TM) is an
interactive system with high-tech video graphics and animation. AWIK offers
casinos a risk-free keno operation as AWIK operates the keno game for the casino
and the casino receives a percentage of the play from AWIK.

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On November 11, 1999, AWIK received final liscensing approval from the
Nevada Gaming Commission to operate the statewide system. AWIK is currently
operating at eight locations.

Systems Operations

The Company's business strategy is to continue to develop, distribute,
and support state of the art race and sports wagering systems to its customers.
In addition to CBS's new self-service sports wagering terminal, CBS, upon
regulatory approval, intends to distribute a self-service terminal station that
would allow players to place wagers on race and sports events, watch live videos
of race and sporting events and to play any one of a number of video slot games,
keno or other games. This new terminal would allow race and sports books to be
open 24 hours a day, seven days a week. CBS's products are capable of
concurrently operating race and sports books and MEGA$PORTS(R) from a single
system. The advantages of such terminals include multiple data applications over
a single communication line and lower overall costs for each product.

In December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. The termination agreement
allows the Company to receive IGT's 50% interest in the joint venture and the
Mega$ports(R) trademark. The Company has agreed to indemnify IGT for all
presently due or future obligations of Mega$ports, Inc. The transfer of IGT's
shares in the joint venture is subject to the approval of the Nevada Gaming
Commission. Upon approval, Mega$ports, Inc. will become a wholly owned
subsidiary of the Company.

In the past, pari-mutuel wagering systems have been used exclusively
for race wagering. For sports bettors, the concept of pari-mutuel sports
wagering is vastly different when compared to types of wagers offered by
traditional sports books. In March, 2000, the Company ceased ongoing operations
of Mega$ports, Inc, because the acceptance, by bettors, of pari-mutuel sports
wagering in the state of Nevada has been slower than anticipated. Mega$ports,
Inc. will continue to recognize its current liabilities and commitments.
Mega$ports, Inc. has notified the Nevada Gaming Control Board of its intent to
let expire in July, 2000, the Mega$ports, Inc. gaming license.

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Casino Operations

In conjunction with the sale of the Hotel in June, 1999, Leroy's
leased back and continues to operate the Casino portion of the Hotel facility
for up to two years. The Casino serves as Leroy's principal gaming location due
to licensing requirements. The Casino will continue to offer promotions in an
attempt to gain increased play of customers.

Discontinued Operations

On April 22, 1998, the Company determined it would concentrate its
business efforts on its core competency, sports wagering, and began seeking a
qualified buyer for the hotel, food and beverage segment of the Company. On June
30, 1999 the Company's LHC subsidiary sold the Hotel to a third party, and in
conjunction with such sale, leased back the Casino portion of the Hotel
facility. In the Company's accompanying consolidated financial statements as of
and for the fiscal years ended January 31, 2000 and 1999, the results of the
hotel and food and beverage operations have been accounted for as discontinued
operations. The ground lease between the Company and the owner of the land
underlying the Hotel/Casino was the subject of certain litigation. See "Legal
Proceedings".

Regulation and Licensing

The ownership and operation of casino gaming facilities, including race
and sports books, in Nevada are subject to extensive state and local regulation.
The Company's gaming operations are subject to the Nevada Gaming Control Act and
the regulations promulgated thereunder (hereinafter collectively referred to as
the "Nevada Act") and various local regulations. The Company's gaming operations
also are subject to the licensing and regulatory control of the Nevada Gaming
Commission ( the "Commission"), the Nevada State Gaming Control Board (the
"Board"), the Clark County Liquor Gaming Licensing Board, the City of Las Vegas
and smaller local jurisdictions. The Commission, the Board, the Clark County
Liquor Gaming Licensing Board, the City of Las Vegas and such smaller local
jurisdictions are hereinafter collectively referred to as the "Nevada Gaming
Authorities."

The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities have their genesis in various declarations of public policy which
are concerned with, among other things: (1) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (2) the establishment and maintenance of
responsible accounting practices and procedures; (3) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities; (4)
the prevention of cheating and fraudulent practices; and (5) the creation of a
source of state and local revenues though taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on the
Company's gaming operations.

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Leroy's is currently licensed by the Nevada Gaming Authorities. Leroy's
holds 47 non-restricted sports book gaming licenses. Gaming licenses require the
periodic payment of fees and taxes. Furthermore, gaming licenses are not
transferable.

The Company is registered in Nevada as a publicly traded corporation
and, as such, is required to submit, on a periodic basis, detailed financial and
operating reports to the Commission. Additionally, the Company may be required
to furnish any other information requested by the Commission. No person may
become a stockholder of, or receive any percentage of profits from Leroy's
without first obtaining licenses and approvals from the appropriate Nevada
Gaming Authorities. The Company, Leroy's, Casino and AWIK have received, from
the Nevada Gaming Authorities, the various registrations, approvals, permits and
licenses required to engage in gaming activities in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a
material relationship, or involvement with the Company in order to determine
whether such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and certain key employees of
Leroy's must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company who are actively and
directly involved in the gaming activities of Leroy's may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application of licensing for any cause deemed
reasonable. A finding of suitability is comparable to licensing, and both
require the submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or a finding of
suitability must pay all of the costs of the investigation. Changes in licensed
positions with the Company or Leroy's must be reported to the Nevada Gaming
Authorities. In addition to their authority to deny an application for a finding
of suitability or licensure, the Nevada Gaming Authorities also have
jurisdiction to disapprove a change in a corporate position. The officers and
directors of the Company and its subsidiaries have been found suitable by the
Nevada Gaming Authorities.

If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or Leroy's, the companies involved would be
required to sever all relationships with such a person. Additionally, the
Commission may require the Company or Leroy's to terminate the employment of any
person who refuses to file appropriate applications. Determinations of
suitability or questions pertaining to licensing are not subject to judicial
review in Nevada.

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If it were determined that the Nevada Act was violated by the Company
or it's subsidiaries the gaming licenses or registration held by the Company and
it subsidiaries could be limited, conditioned, suspended or revoked subject to
compliance with certain statutory and regulatory procedures. However, at the
discretion of the Commission, the Company and Leroy's and any person involved
could be subject to substantial fines for each separate violation of the Nevada
Act. Furthermore, a supervisor could be appointed by the Commission to operate
the Company's gaming properties and, under certain circumstances, earnings
generated during the supervisor's appointment (except for the reasonable rental
value of the Company's gaming properties) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could, and certainly the revocation of any gaming
license would, materially adversely affect the Company's gaming operations.

A beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his or her suitability as a beneficial holder of the
Company's voting securities be determined if the Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of the
investigation incurred by the Nevada Gaming Authorities in conducting such an
investigation. In addition, the Clark County Liquor Gaming Licensing Board has
taken the position that it has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.

The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Commission. The
Nevada Act requires that beneficial owners of more 10% of the Company's voting
securities apply to the Commission for a finding of suitability within 30 days
after the Chairman of the Board mails written notice requiring such a filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of the
Company's voting securities may apply to the Commission for a waiver of such a
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investment shall not
be deemed to hold the voting securities for investment purposes only unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the Board of Directors
of the Company, any change in the Company's corporate charter, bylaws,
management, policies or operations of the Company, or any of its gaming
affiliates, or any other action which the Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (1) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Commission may determine to be consistent with such
investment intent. If the Commission grants a waiver to an "institutional
investor" the waiver does not include a waiver or exemption from the requirement
for prior approval to "acquire control" of a registered corporation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information, including a list of the beneficial owners. The applicant
is required to pay all costs of investigation.

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Any person who fails or refuses to apply for a finding of suitability
or a license within 30 days after being ordered to do so by the Commission, or
the Chairman of the Board may be found unsuitable. The same restrictions apply
to a record owner if the record owner, after request, fails to identify the
beneficial owners. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the common stock of a registered
corporation beyond such period of time as may be prescribed by the Commission
may be guilty of a criminal offense. The Company is subject to disciplinary
action if, after it receives notice that a person is unsuitable to be a
stockholder or to have any other relationship with the Company or its
Subsidiaries, the Company (1) pays that person any dividend or interest upon
voting securities of the Company, (2) allows that person to exercise, directly
or indirectly, any voting right conferred through securities held by that
person, (3) pays remuneration in any form to that person for services rendered
or otherwise, or (4) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities for cash at fair market
value.

The Company is required to maintain a current stock ledger in Nevada,
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such a disclosure may be grounds for
finding the record holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the beneficial owner. The
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Commission has not imposed such a requirement on the Company.

Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he or she obtains control, may not occur without the
prior approval of the Commission. Entities seeking to acquire control of a
registered corporation must satisfy the Board and the Commission in a variety of
stringent standards prior to assuming control of such registered corporation.
The Commission may also require controlling stockholders, officers, directors
and other persons having a material relationship or involvement with the entity
proposed to acquire control, to be investigated and licensed as part of the
approval process related to the transaction.

The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses, and registered corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (1) assure the
financial stability of corporate gaming operators and their affiliates; (2)
preserve the beneficial aspects of conducting business in the corporate form;
and (3) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Commission
before the Company can make exceptional repurchases of voting securities above
the current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by a company's board of directors in response
to a tender offer made directly to the registered company's stockholders for the
purposes of acquiring control of the registered corporation.

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License fees and taxes, computed in various ways depending upon the
type of gaming activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees
indicate taxes are payable either monthly, quarterly or annually and are based
upon either: (1) a percentage of gross revenues received; (2) the number of
gaming devices operated, or (3) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.

Any person who is licensed, required to be licensed, registered, or
required to be registered, or is under common control with such person
(hereinafter collectively referred to as "Licensees") and who propose to become
involved in a gaming venture outside the State of Nevada is required to deposit
with the Board, and thereafter maintain, a revolving fund to pay the expenses of
investigation by the Board of his or her participation in such foreign gaming.
Due to the Company's establishment of its Internet wagering operation in
Australia, the Company has filed the appropriate foreign gaming reports and has
established the required revolving fund. The revolving fund is subject to
increase or decrease in the discretion of the Commission. Thereafter, such
licensees are required to comply with certain reporting requirements imposed by
the Nevada Act. Licensees are also subject to disciplinary action by the
Commission if they knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation, fail to conduct the foreign gaming
operation in accordance with the standards of honesty and integrity required of
Nevada gaming operations, engage in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employ a person in
the foreign operation who has been denied a license or finding of suitability in
Nevada on the basis of personal unsuitability. Recent changes in the Nevada
Gaming Control Act would allow the Company to seek a determination of
suitability of any associate or activity associated with the foreign gaming
opportunity prior to engaging in that activity.

On March 22, 2000 legislation entitled Amateur Sports Integrity Act was
introduced in Congress. The general purpose of the proposed legislation is to
prohibit wagering on games and performances at the Summer and Winter Olympics
and on high school and college games. Leroy's currently accepts wagers on the
Olympic and college games. Leroy's estimates that wagering on college sports
represents approximately 26% of its revenues.

Interstate Sports Wagering

Sports wagering is legal in Nevada, and numerous foreign jurisdictions,
including Canada, Mexico and Australia. Pursuant to the Professional and Amateur
Sports Protection Act - (hereinafter referred to as the "Sports Protection
Act"), which was effective January 1, 1993, the proliferation of legalized
sports books and wagering was significantly curtailed. Although the Sports
Protection Act generally prohibits sports wagering in every jurisdiction,
including those jurisdictions subject to the Indian Gaming Regulatory Act, the
Sports Protection Act does permit sports wagering in those jurisdictions that
authorized sports wagering prior to the effective date of the Sports Protection
Act. Thus, sports books and wagering are permitted to continue to operate in
Nevada. Moreover, the Interstate Wire Act (hereinafter referred to as the "Wire
Act") also prohibits those in the business of betting and wagering from
utilizing a wire communication facility for the transmission in interstate or
foreign commerce any bets, wagers or information assisting in the placing of
such bets and wagers on any sporting event or contest unless such betting or
wagering activity is specifically authorized in each jurisdiction involved.

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Leroy's may not accept bets received by use of wire communications
facilities, including telephones and computers, unless such bets originated in
jurisdictions wherein such betting or wagering is legal. Nevada has amended the
Nevada Gaming Control Act to allow licensed race and sports books in Nevada to
accept interstate pari-mutuel wagers from other jurisdictions in which
pari-mutuel wagering is legal. However, the regulations of the Nevada Gaming
Commission currently prohibit any licensed race and sports book in the State of
Nevada from accepting any telephone wagers from interstate locations. In order
for Leroy's to take advantage of the business opportunities provided by the law,
the Nevada Gaming Commission must amend its regulatory restrictions ab initio or
Leroy's can petition the Commission to remove such regulatory restrictions in
whole or in part. There can be no assurance that any regulatory amendment will
be authorized, that any such amendment would be favorable to Leroy's, or that
any such amendment would not be burdensome to Leroy's.

On March 19, 1997 a bill entitled the "Internet Gambling Prohibition
Act of 1997" was introduced in Congress. Since its introduction, the original
draft of the bill has been amended several times. The general prohibitions of
the legislation would prohibit any person from engaging in the business of
betting or wagering via electronic communication facilities, including the
Internet, if the transmission is not legal in the state or foreign country in
which the transmission either originates or is received. If this bill becomes
law, the Company's ability to take advantage of interstate pari-mutuel wagering
opportunities would be adversely impacted. The Company and its subsidiaries
policy is not to accept wagers through the Internet from persons in the United
States. See "Legal Proceedings."

Australia

The Company's wholly owned subsidiary Mega$ports (ACT) is incorporated
in the Australian Capital Territory pursuant to the laws of Australia as a
company limited by shares. Mega$ports (ACT) is subject to the Corporations Law
of Australia (a federal law) and is regulated by the Australian Securities
Commission. The Bookmakers Act of the Australian Capital Territory provides the
regulatory regime for licensed bookmakers. Mega$ports (ACT) holds Sports Betting
license number 5 issued by the Bookmakers Licensing Committee . This Committee
is established and governed by Division 2 of Part II of the Bookmakers Act.
Sports betting is governed by Part IIIA of the Bookmakers Act. A Determination
is subordinate legislation, which is governed by the Subordinate Laws Act of the
Australian Capital Territory . The Committee is the authority, which issues
licenses. It must be satisfied that the directors and shareholders holding more
than 5% of the stock of Mega$ports (ACT) have satisfied the "Suitability
Requirements" specified in the Bookmakers Act. The directors of Mega$ports (ACT)
have satisfied the Committee of their suitability. They must, however continue
to satisfy these requirements. If not, the license may be cancelled. The
Bookmakers Act provides for the method of operations that a licensed bookmaker
must adhere to. These include: (1) the acceptance of wagers only in venues
approved by the Minister for Sport, (2) the Minister of Sport determines the
rules for sports betting,(3) the Minister of Sport determines the maximum number
of licenses to be issued, (4) a sports betting license may only be granted to a
company if one director holds a bookmakers license and (5) the period of the
license may not exceed 15 years.

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The Minister of Sport is empowered by the Bookmakers Act to make
Determinations, which have the status and force of law. Since the commencement
of the Act, the Minister has made a number of Determinations. Each Determination
made by the Minister has the status of subordinate legislation. A Determination
becomes law when it is published in the Government Gazette. A Determination is
subject to disallowance by the Assembly.

In December, 1999 The Australian Government released its Productivity
Commissions Report on Australia's Gambling Industries. The Report made certain
recommendations including regulation of online casinos. Following this Report,
the Senate Select Committee on Information Technologies issued a report entitled
"NETBETS", a review of online gambling in Australia. The Committee came up with
a series of proposals to cut online gambling. One of which was to limit the
expansion of online casinos with a moratorium on the issuance of online gaming
licenses until consumer protection policies are implemented. The Federal
Government is pursuing a total ban on internet gambling. However the States and
Territories within Australia are opposed to any limitations on issuing new
online gaming licenses.

Other Jurisdictions

All jurisdictions that have legalized gaming require various licenses,
permits and approvals for manufacturers and distributors of gaming devices and
equipment. In general, such requirements involve restrictions similar to those
of Nevada.

Competition

There is intense competition among companies in the gaming industry,
most of which have significantly greater financial, marketing, technical and
other resources than the Company. Leroy's faces competition from all other
sports and race wagering operations in the Las Vegas area and throughout Nevada.
There are currently 152 sports books in Nevada, of which the Company owns and
operates 47. Virtually all of the major casinos in Nevada have sports and race
books and keno parlors, some of which are larger and offer more amenities than
the Company's locations and some casinos operate sports books at other casinos.
There are currently approximately 126 keno parlor locations throughout the
State. The Company's inter-casino linked keno system competes with other
distributors of keno systems in Nevada, other keno system games and other
casino-linked games, including progressive slot machines. Some of these
competitors are larger and have greater access to capital resources than the
Company. In the international market, there are over 700 web sites that offer
some type of gambling. Mega$ports (ACT) competes for sports wagers with many of
them. Online sports wagering has been in existence for over 20 years in Europe,
the Caribbean, Australia and other jurisdictions outside the United States. The
Casino faces competition from all other casinos in the Las Vegas area, including
competitors located on the Las Vegas Strip, west of the Las Vegas Strip and in
downtown Las Vegas. The Casino directly competes with a number of other
operations targeted to local residents as well as with gaming facilities not
related to hotels.

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Gaming has become more accepted by society in recent years. However,
the gaming industry is subject to shifting consumer preferences and perceptions.
A dramatic shift in consumer acceptance or interest in gaming could adversely
affect the Company. In addition, the Company's operations compete with gaming
operations in other parts of the State of Nevada, such as Reno, Laughlin and
Mesquite, with facilities in other parts of the United States and the world and
with state-sponsored lotteries, on and off-track wagering, card parlors, river
boat and Native American gaming ventures and other forms of legalized gaming.
While the Las Vegas market is continuing to offer expanded tourist attractions,
such as theme parks being developed by other casinos, there can be no assurance
that this market will be able to sustain its current growth or current levels of
tourism. Legalized casino gaming in other states and on Native American
reservations will provide strong competition to the Company and could adversely
affect the Company's operations, particularly if such gaming were to occur in
areas close to the Company's operations.

Future operating results of the Company are subject to significant
business, economic, regulatory and competitive uncertainties and contingencies,
many of which are beyond the control of the Company. There can be no assurance
that the Company's overall business strategy will be successful in achieving the
Company's goal of attracting additional customers to the Company or increasing
the Company's gaming revenues and operating profits.

Employees

The Company, and its subsidiaries have approximately 258 full and
part-time domestic employees, 161 are employed by Leroy's, 42 are employed by
CBS, 26 employed by AWI Keno, 12 employed by the Casino, 15 employed by the
Company and 2 employed by Mega$ports, Inc. There are no employees of the
Company, and its subsidiaries currently represented by a labor union. The
Company, and its subsidiaries do not currently know whether or to what extent,
if any, its employees will, in the future, be governed by collective bargaining
agreements.

The continuing proliferation of legalized gaming in the United States
and the resulting increase in the number of casinos have created a competitive
environment for qualified casino management personnel and other experienced
casino employees on a national basis. Management believes that this
industry-wide factor will make it more difficult for the Company to attract and
retain a trained labor force, which may adversely affect the business of the
Company. If the Company is unable to attract and retain qualified management
personnel, the growth and profitability of the Company may be adversely
affected.

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Item 2. Properties

The Company's corporate offices, central computer operations and
systems operations are located in a facility of 29,250 square feet at 675 Grier
Drive, Las Vegas, Nevada, which is owned by the Company's subsidiary, CBS. CBS
is a debtor under a loan of which approximately $1.8 million is outstanding as
of January 31, 2000. The loan, which accrues interest of 8% annually, is due in
full in September 2015 and is secured by a deed of trust, assignment of leases
and rents in favor of the lender. The Company has guaranteed CBS' obligations
under the loan.

Leroy's retains its main sports and race book license at the Casino and
operates 46 other sports books at locations in major metropolitan areas in
Nevada (21 are located in the Las Vegas area, 15 in the Reno area, and 10 others
located in cities throughout the State of Nevada, including Mesquite, Laughlin,
Elko, Pahrump and Winnemucca). Leroy's is a lessee at each location.

At its satellite sports book locations, Leroy's leases between 80 to
1,000 square feet from the casinos in which it operates for monthly fees.
Satellite location leases vary from one to six-year terms with automatic
one-year extensions unless either party gives ninety days prior notice of
termination. Total rental expense under the leases was approximately $629,000
and $426,000 for the years ended January 31, 2000 and 1999, respectively.

AWIK leases a minimum of 10 square feet of space from the casinos in
which it operates. Agreements vary from one to three year terms with automatic
one year extensions unless either party gives ninety days prior notice of
termination.

Until June 30, 1999 LHC leased the real property on which the
Hotel/Casino is located pursuant to an 80-year ground lease of which 60 years
are remaining. The method of calculation of percentage rent with respect to
gross gaming revenues under the lease was the subject of certain litigation. See
"Legal Proceedings."

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Item 3. Legal Proceedings

Racusin

On August 23, 1995, Leroy's filed a Complaint for Declaratory Relief in
the District Court of Clark County, Nevada, requesting that the Court declare
that two written agreements between Leroy's and Michael Racusin, d.b.a. M.
Racusin & Company ("Racusin"), are vague, ambiguous and unenforceable contracts.
Racusin had introduced certain underwriters, including Equity Securities Trading
Co., Inc. (one of the underwriters of the Company's initial public offering) to
Leroy's and provided Leroy's certain advisory services. The specific language of
the alleged unenforceable agreements provided that Leroy's would pay to Racusin
(1) a commission equal to 5% of the purchase price of Leroy's in the event
Racusin brings in a buyer for Leroy's and (2) compensation equal to 4.5% of the
"final evaluation in the form of Leroy's common stock plus $150,000 in cash upon
completion of common offering or IPO."

Racusin's position is that Racusin is entitled to either 4.5% of the
stock of Leroy's or 4.5% of the Company's common stock and $150,000 in cash as a
result of the completion of the Company's initial public offering of its common
stock in May 1996. The Company believes that the agreements are unenforceable
contracts.

On August 1, 1997, the U.S. District Court of Nevada orally issued a
declaratory judgement with respect to the lawsuit. The District Court held that
pursuant to the terms of the agreements, Racusin was entitled to receive from
the Company a commission, as adjusted, of $648,375, plus prejudgment interest of
$87,535 through September 5, 1997. On September 5, 1997, the Company tendered
the entire judgement of $735,910, which included interest, to Racusin. As the
payment to Racusin represented a cost of the Company's initial public offering,
the entire amount paid to Racusin reduced its paid-in capital. On September 19,
1997, Racusin filed a Notice of Appeal with the Court of Appeals. On March 16,
1999, the Court of Appeals vacated the District Court's decision and ordered
that a jury trial be conducted. A jury trial subsequently took place. In
February, 2000 a jury verdict was rendered. The jury found that (1) Leroy's
breached its contract with Racusin, (2) as a result of that breach, Racusin is
entitled to receive stock in Leroy's in the amount equal to 4.5% of $45,000,000
plus $150,000 in cash and (3) American Wagering is the alter ego of Leroy's. Any
judgment will be reduced by the $735,910 previously paid to Racusin under the
contract. The Company has reserved 337,500 shares of Common Stock to be issued
to Racusin in satisfaction of the jury's verdict.

Ground Lease

On March 31, 1997, James A. Rissler and Patricia R. Rissler
("Landlord") filed a Complaint for Declaratory Relief in the District Court of
Clark County, Nevada. The Landlord claimed that the amounts paid to Jackpot for
its operation of the slot machines in the Hotel/Casino must be included in
calculation of the gross gaming revenues owed Landlord under the Lease.

22
<PAGE>

The Landlord requested approximately $12,500 of additional rent that is
due from July 1996 through December 1997 and future additional rent as it may
come due pursuant to the Landlord's calculation. The Landlord further claimed
that additional rent of $7,624 was owed related to hotel room sales revenues
from non-taxed entities. The Landlord also sought reimbursement of approximately
$16,500 for the Landlord's attorney's fees related to its efforts to obtain
approval from Nevada Gaming Authorities to share in a percentage of gaming
revenues from the Casino. The Company disputed that it was required to reimburse
the Landlord for such fees.

On March 17, 1998 the District Court ruled in favor of Landlord on all
three issues. The Company filed an appeal to this order with the Nevada Supreme
Court.

On June 30, 1999 pursuant to the sale of the hotel, food and beverage
segment, the Company entered into a settlement agreement with Landlord pursuant
to which the Company dismissed its Appeal of the Civil Action. The Company also
agreed to pay the Landlord $135,680, which included the rents claimed under the
Lease which were in dispute and license fees, interest and attorney's fees
incurred by the Landlord. The payment of the sums pursuant to the settlement
agreement was not an admission of liability by the Company for the Lease Claims
asserted against the Company in the Civil Action. The Landlord fully released
and discharged the Company of any litigation or action or claim against it. In
addition, the Landlord waived its rights of first refusal contained in the Lease
and fully released the Company from any or all obligations as tenant under the
Lease.

Autotote Systems, Inc.

On March 3, 1998, the Company and CBS filed a Complaint in the United
States District Court for the District of Nevada, against Autotote Corporation
and Autotote Systems, Inc. (collectively "Autotote") seeking to enjoin certain
actions of Autotote and asking for monetary damages for the alleged breach by
Autotote of certain provisions of a Stock Transfer Agreement, a Technology Cross
License Agreement, a Distributorship Agreement, and the International
Cooperation Agreement, all of which were executed by the parties on October 25,
1996 (collectively the "Agreements"), and for the infringement by Autotote of
CBS' copyright interest in, and the misappropriation and conversion of, CBS'
race and sports book software.

23
<PAGE>

On April 15, 1998, Autotote filed a counterclaim against the Company
and CBS with the United States District Court for the District of Nevada, asking
that the Agreements be rescinded and for an award of compensatory damages in
excess of $75,000 plus interest, and punitive damages. The parties have reached
agreement (the "Settlement Agreement") under which the Company and CBS would
receive $540,000 in settlement of their claims against Autotote and the
counterclaim of Autotote would be dismissed with prejudice. This litigation has
been suspended pending review of the appropriate application filed by the
Company and CBS requesting the review of the Settlement Agreement and approval
of the application by the Nevada Gaming Commission.

Imagineering Systems, Inc.

In September 1997, the Company and the individual shareholders of
Imagineering Systems, Inc. ("ISI") entered into a purchase agreement pursuant to
which the Company would acquire all of the shares of ISI. While the Company was
conducting its due diligence investigation on the proposed transaction, the
Company loaned ISI $76,583 to fund cash shortfalls of ISI. The Company did not
complete the acquisition of ISI because it believed the shareholders of ISI had
made material misrepresentations and omissions of facts. Subsequently, ISI
failed to repay the loans made by the Company. On October 21, 1998, ISI filed a
civil complaint against the Company in the Second Judicial District in Washoe
County, Nevada, claiming, among other things, breach of contract, breach of
prospective economic advantage, and breach of fiduciary duty. On November 9,
1998, the Company brought an action in Clark County Court against ISI to recover
on the loans it made to ISI. The Second Judicial District granted the demand of
the Company for venue to be transferred to Clark County, and the parties agreed
that the Washoe matter would be dismissed and those causes asserted as a
counterclaim to the Company's complaint. ISI served its Answer and Counterclaim
and discovery has been completed. No trial date has been set.

24
<PAGE>

Internet Operations Investigation

On December 16, 1999, the Nevada State Gaming Control Board ("Board")
filed a complaint for disciplinary action against American Wagering, Inc.,
referred to as State Gaming Control Board v. American Wagering, Inc., d.b.a.
Mega$ports PTY, LTD., Case No. 99-27 ("Complaint"), related to the operation of
Mega$ports PTY., LTD., ("Mega$ports (ACT)"). The Complaint contains thirteen
(13) separate counts against the Company. The Complaint alleges the Company, as
a company registered with the Nevada Gaming Commission, engaged in an unsuitable
method of operation due to the fact that Mega$ports (ACT) accepted a series of
wagers from a patron who was physically located in Las Vegas, Nevada. The patron
was an undercover agent of the Board. The Board further alleges that the
acceptance of these wagers is a violation of both federal and Nevada state laws
that prohibit Internet sports wagering. However, The Company believes a number
of factual and legal defenses may be asserted against the claims contained in
the Complaint including, the strong company policy against accepting wagering
from patrons physically located within Nevada or the United States, and the fact
that had the patron not utilized a Canada Internet server, he would have more
than likely been identified and his account would have been rejected. The
Company has also asserted that it has not engaged in an unsuitable method of
operation because it never knowingly accepted wagers from the United States or
Nevada.

The Company has not yet filed an Answer to the Complaint. The Board and
the Company have agreed to a number of extensions in the Answer period in order
to pursue settlement of this matter. The Company and the Board have been
actively pursuing a settlement of the Complaint, and it is hoped that the
parties will reach a settlement to the Complaint in the near future. If the
parties can not reach a settlement in this matter, the Company is currently
required to file an answer to the Complaint on or before May 8, 2000. However,
the parties may agree to additional extensions of time to the answer period
should settlement discussions continue. Should the parties be unable to settle
the Complaint, a hearing will be held before the Nevada Gaming Commission
("Commission") to determine both the factual and legal issues presented. Should
such a hearing be held and the Company be unsuccessful in defending the
Complaint, the Commission could take disciplinary action against the Company
including, but not limited to, the imposition of an administrative fine. The
Company in connection with the settlement discussion with the Board is
considering various alternatives that would be acceptable to the Board.

25
<PAGE>

Other

The Company or any subsidiary, is not a party to any other material
pending legal proceeding, nor, to the Company's knowledge, is any other material
legal proceeding threatened against it or any of its subsidiaries. The Company
maintains insurance coverage, including property, workers' compensation and
general liability insurance which it considers adequate for the size of the
Company and the nature of its business. Management does not believe the outcome
of the above described proceedings may have a material adverse effect on the
Company's financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

26
<PAGE>
PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's Common Stock is reported by the NASDAQ National Market
System under the symbol "BETM". The following table sets forth the range of high
and low bid quotations for the Company's Common Stock for each of the periods
indicated as reported by the NASDAQ National Market System. Bid quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.

Quarter Ended High Low
------------- ---- ---
April 30, 1999 8 3/8 5
July 31, 1999 7 1/4 3 1/2
October 31, 1999 6 2/3 4 7/8
January 31, 2000 9 7/8 4 7/8

Quarter Ended High Low
------------- ---- ---
April 30, 1998 7 1/4 4 7/8
July 31, 1998 7 1/4 4 1/2
October 31, 1998 5 7/16 3 3/4
January 31, 1999 10 1/2 4 1/4

The approximate number of record holders of shares of the Common Stock
of the Company outstanding as of April 28, 2000 was 37. No cash dividends have
been declared or paid on the Company's Common Stock.

On July 28, 1998, the Company acquired certain assets from Advanced
Computer Services, Inc. ("ACS") including software and customer lists pursuant
to an asset purchase agreement between the Company and ACS. The Company paid
$500,000 in cash to ACS and agreed to pay the remaining purchase price of
$250,000 in the form of the Company's Common Stock upon satisfaction of certain
conditions. On December 30, 1998, the Company issued 44,780 shares of the
Company's Common Stock to the principal of ACS at a price of $5.58 per share in
satisfaction of the $250,000 obligation. This sale of Common Stock was exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
because the Common Stock was sold to a single person whom the Company believed
was a accredited investor and who was purchasing the stock for investment
purposes without a view to further distribution.

The Company has reserved 337,500 shares of Common Stock to be issued to
Racusin in satisfaction of the outcome of the jury's verdict in the Racusin
case. See "Legal Proceedings".

On December 9, 1998, the Company sold an aggregate of 18,924 shares of
its Series A Preferred Stock at $100 per share to Victor Salerno, the President,
Chief Executive Officer and a director of the Company, and Judith Salerno in
full payment of $1,892,400 of the Company's outstanding shareholder notes. See
"Certain Transactions." Such sale of Preferred Stock was exempt from
registration under Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended, because the Preferred Stock was sold to two accredited
investors who purchased the stock for investment purposes in a transaction which
otherwise satisfied the requirements of Rule 506.

27
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operation

Results of Operations

Fiscal Year ended January 31, 2000 compared to the Fiscal Year ended January 31,
1999.

Revenues for the Fiscal Year ended January 31, 2000, were $13,379,000,
an increase of $3,487,000 or 35.3% from revenues of $9,892,000 for the Fiscal
Year ended January 31, 1999. The increase was principally attributed to
additional Systems revenues of $1,772,000, additional Wagering revenues of
$1,644,000, Keno revenues of $38,000 and additional Casino revenues of $33,000.
Operating loss before depreciation and amortization was $508,000 which increased
by $681,000 or 393.6% for the Fiscal Year ended January 31, 2000 compared to
income of $173,000 for the Fiscal Year ended January 31, 1999. The decrease was
primarily due to an increase in operating costs of $4,168,000 or 42.9% over
operating costs of $9,719,000 for Fiscal Year ended January 31, 1999.

Wagering Operations

Revenues from Wagering were $7,734,000 for the Fiscal Year ended
January 31, 2000, an increase of $1,644,000 or 27.0% from revenues of $6,090,000
for the Fiscal Year ended January 31, 1999. The increase was primarily due to a
11.0% increase in Handle (the total amount wagered at the Company's sports and
race books) and an increase in the Company's overall net win percentage
(revenues divided by handle). Handle of $120,305,000 for the Fiscal Year ended
January 31, 2000 increased by $11,893,000 from Handle of $108,412,000 for the
Fiscal Year ended January 31, 1999. The Company's net win percentage was 6.1% in
Fiscal Year 2000 an increase of 13.0% from 5.4% in Fiscal Year 1999. The
increase in Handle was primarily attributed to Mega$ports Australia which was in
operation for the full year of Fiscal 2000 and increased its customer base. An
increase or decrease in Handle is not necessarily indicative of an increase or
decrease in revenues or profits. The increase in Handle was offset by a negative
net win percentage experienced by Mega$ports Australia on Sports betting for
Fiscal Year 2000. Race pari-mutuel wagering revenues decreased $85,000 or 43.1%
from $197,000 in Fiscal year 1999 due to decreased volume of race betting.
Pari-mutuel sports wagering, which was discontinued by the Company in March
2000, increased by $219,000 from the prior fiscal year. Wagering segment
operating costs of $6,211,000 for the twelve months ended January 31, 2000
increased $1,580,000 or 34.1% from operating costs of $4,631,000 for the Fiscal
Year ended January 31, 1999. Operating costs increased primarily due to the full
year operation of Mega$ports Australia and the inclusion of Mega$ports, Inc. on
a consolidated basis for Fiscal year 2000.

Revenues from U.S. wagering operations were $8,140,000 for the Fiscal
Year ended January 31, 2000, an increase of $2,054,000 or 33.7% from revenues of
$6,086,000 for the Fiscal Year ended January 31, 1999. The increase is primarily
attributed to a 28.6% increase in the U.S. net win percentage (revenues divided
by Handle) which was 7.2% for Fiscal year ended January 31, 2000 as compared to
5.6% for Fiscal year ended January 31, 1999 and increased parimutuel sports
wagering.

Mega$ports (ACT) experienced a negative net win percentage during
Fiscal year 2000 principally due to unfavorable results of sports wagering.

28
<PAGE>

Casino Operations

Revenues from Casino operations were $677,000 for the Fiscal Year ended
January 31, 2000, an increase of $33,000 or 5.1% from revenues of $644,000 for
the Fiscal Year ended January 31, 1999. The increase was principally attributed
to increased slot play. Operating costs were $576,000 for Fiscal Year 2000, an
increase of $71,000 or 14.1% from costs of $505,000 for Fiscal Year ended
January 31, 1999. The increase is mainly due to certain previously shared costs
with the Hotel operations which are now fully incurred by the Casino.

Systems Operations

Revenues from Systems operations were $4,930,000 for the Fiscal Year
ended January 31, 2000, an increase of $1,772,000 or 56.1% from revenues of
$3,158,000 for the Fiscal Year ended January 31, 1999. The increase was
principally attributed to increased equipment sales. CBS operations revenues of
$4,624,000 for the Twelve months ended January 31, 2000 increased by $1,693,000
or 57.8% from revenues of $2,931,000 for the Twelve months ended January 31,
1999. The increase was attributed to increased equipment and ticket paper sales
due to new casino openings. Sports Systems and Hotel Systems, which are partly
owned, generated revenues of $273,000 an increase of $46,000 over Fiscal year
ended January 31, 1999 from monthly maintenance billings.

Operating costs for Systems operations of $4,182,000 for the Twelve
months ended January 31, 2000 increased by $1,506,000 or 56.3% from $2,676,000
for the Twelve months ended January 31, 1999. The increase is principally
attributed to cost of sales associated with the increase in System equipment
sales.

Keno Operations

Keno was formed in June 1998 and began operations in August 1999. Keno
generated revenue of $38,000 for the Fiscal Year ended January 31, 2000.
Operating costs incurred were $870,000, an increase of $653,000 or 300.9% during
the Fiscal Year ended January 31, 2000 as compared to $217,000 during Fiscal
Year ended January 31, 1999. The increase is primarily attributed to Keno
operating for the entire Fiscal Year 2000 and costs incurred associated with
opening the new locations.

Direct Costs

Direct costs of $9,884,000 for the Fiscal Year ended January 31, 2000
increased by $3,566,000 or 56.4% from direct costs of $6,318,000 for the Fiscal
Year ended January 31, 1999. The increase is due principally to equipment costs
associated with the increase in system equipment sales and the expenses
associated with the new companies which were not operating during the Fiscal
Year ended January 31, 1999.

Research and Development Costs

Research and development costs of $833,000 for the Fiscal Year ended
January 31, 2000 increased by $258,000 or 44.9% from research and development
costs of $575,000 for the Fiscal Year ended January 31, 1999 due to increased
labor costs associated with new product development.

Selling, General and Administrative Costs

Selling, general and administrative costs of $3,170,000 for the Fiscal
Year ended January 31, 2000 increased by $343,000 or 12.1% from selling, general
and administrative costs of $2,827,000 for the Fiscal Year ended January 31,
1999. The increase is due principally to higher labor related costs and costs
associated with the new companies which were not operating in Fiscal Year ended
January 31, 1999.

Depreciation and Amortization

Depreciation and amortization was $815,000 for the Fiscal Year ended
2000, an increase of $49,000 or 6.4% from depreciation and amortization of
$766,000 for the Fiscal Year ended January 31, 1999. The increase was attributed
to new asset purchases.

29
<PAGE>

Other Income and Expense

Net other expense of $384 for the Fiscal Year ended January 31, 2000
decreased by $977,000 or approximately 100% from Fiscal Year ended January 31,
1999. The decrease is principally attributed to Mega$ports, Inc. being
consolidated as a wholly owned subsidiary in Fiscal Year ended January 31, 2000
and a decrease in interest expense of $165,000 over Fiscal Year ended January
31, 1999.

Interest Expense

Interest Expense of $157,000 for Fiscal Year ended 2000 decreased by
$165,000 or 51.2% from interest expense of $322,000 in the Fiscal Year ended
1999. The decrease is principally due to the interest paid in connection with
the Hotel which was sold on June 30, 1999.

Net loss from Continuing Operations

The net loss from continuing operations of $1,324,000 for Fiscal Year
ended 2000, decreased by $247,000 or 15.7% from $1,571,000 in the Fiscal Year
ended 1999. The decrease between fiscal years was principally due to increased
earnings from higher equipment sales and increased revenues from the increased
wagering operations.

Discontinued Operations

Hotel, Food and Beverage Operations

On April 22, 1998, the Company determined it would concentrate its
business efforts on its core competency, sports wagering, and began seeking a
qualified buyer for the hotel, food and beverage segment of American Wagering,
Inc. In conjunction with the sale of the Hotel, the Company has leased back and
intends to continue to operate the casino for up to two years. In the Company's
accompanying consolidated financial statements for and as of the fiscal years
ended January 31, 2000 and 1999, the results of the hotel, food and beverage
operations have been accounted for as discontinued operations.

Cumulative Effect of Change in Accounting Principle

Organization costs incurred by the Company prior to February 1, 1999
were capitalized and charged to income over a period of five years upon
commencement of operations. In April 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-5 entitled "Reporting on the
Costs of Start-up Activities" ("SOP 98-5") which requires companies to expense
costs of start-up activities as they are incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. Accordingly, the Company adopted
the statement on February 1, 1999. Upon adoption, the Company reported the
initial adoption as a cumulative effect of a change in accounting principle of
$45,000.

Liquidity and Capital Resources

As of January 31, 2000, there was a decrease in working capital of
$622,000. Cash provided by operating activities was $680,000 for the Fiscal Year
ended 2000 compared to cash used in operating activities of $201,000 for the
Fiscal Year ended 1999. Net cash provided by investing activities was $3,042,000
for the Fiscal Year ended 2000 compared to cash provided by investing activities
of $2,682,000 for the Fiscal Year ended 1999. The increase is principally
attributed to the sale of the Hotel. Net cash used in financing activities
amounted to $2,970,000 for the Fiscal Year ended January 31, 2000 compared to
net cash used in financing activities of $1,497,000 for the Fiscal Year ended
January 31, 1999. This increase is principally due to the repayment of long-term
debt.

30
<PAGE>

Prior to the Company's initial public offering, Leroy's was an S
Corporation under the Internal Revenue Code. On March 21, 1996 Leroy's made cash
distributions to the original stockholders in the aggregate amount of $3.0
million representing undistributed income through January 31, 1996 on which such
stockholders had previously paid federal income taxes. Of the $3.0 million
distributed, $2,433,000 was loaned back to Leroy's by the original stockholders
and $558,000 was contributed as capital to Leroy's by such stockholders. Of the
$2,433,000 outstanding, $541,000 in the aggregate was repayable to Michael
Merillat, Robert Ciunci, Robert Barengo, and Michael Roxborough pursuant to
restated stockholder notes maturing on May 1, 1998 and bearing interest at an
annual rate of prime plus 1/2%. Of the remaining balance, $946,000 was due and
payable to Victor Salerno on November 1, 1998 and $946,000 to Judith Salerno on
May 1, 1999 pursuant to restated stockholder notes bearing interest at an annual
rate of prime plus 1/2%. On May 1, 1998, $541,000 in the aggregate was paid by
the Company to Michael Merillat, Robert Ciunci, Robert Barengo, and Michael
Roxborough pursuant to the restated stockholder notes. On December 9, 1998, the
Company redeemed its shareholder notes of $1,892,000 in the aggregate for 18,924
shares of Series A Preferred Stock at $100 per share. The holders of the Series
A Preferred Stock are entitled to receive, upon declaration by the Board of
Directors, cumulative cash dividends at the annual rate per share of 10%. Such
dividends are payable in equal quarterly installments on each March 31, June 30,
September 30 and December 31, commencing with December 31, 1998. The Series A
Preferred Stock is not convertible but is redeemable, in whole or (on a pro rata
basis) in part, at any time at the option of the Company, by resolution of the
Board of Directors. During Fiscal year ended January 31, 2000, 3,500 shares of
Series A Preferred Stock were redeemed. The holders of Series A Preferred Stock
are not entitled to vote (on a cumulative basis or otherwise) as a class or with
the Common Stock upon any matters submitted to shareholders for a vote, except
as otherwise mandated under Nevada law.

In March 1995 Leroy's borrowed approximately $1,200,000 from Pioneer
Citizen's Bank of Nevada, which was loaned to LHC to acquire the initial 50% in
the Hotel/Casino. The loan was repaid on March 31, 1998.

LHC, reported as part of the discontinued operations, was a debtor
under a loan (outstanding principal of $2,364,000 as of January 31, 1999) from
American Bank of Commerce ("Bank") secured by a deed of trust, assignment of
rents and security agreement with respect to the Hotel/Casino. The loan bears a
variable annual interest rate and was paid in full June 30, 1999.

CBS is a debtor under a loan (outstanding principal of $1,878,000 as of
January 31, 2000) from Standard Life and Accident Insurance Company secured by a
deed of trust and assignment of rents and leases with respect to the Company's
corporate office building. The loan bears interest at an annual rate of 8% and
is due September 2015. The Company has guaranteed CBS' obligations under the
loan.

31
<PAGE>

On March 17, 1998, the Company's Board of Directors approved a program
to repurchase up to 250,000 shares of the Company's common stock from time to
time in the open market. As at January 31, 2000, 61,100 shares had been
repurchased pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors, including market
conditions, available alternative investments and the Company's financial
position.

Management believes that the Company will be able to satisfy its
operating cash requirements for at least the next twelve months from existing
cash balances and anticipated cash flows. The Company will initiate various
programs in fiscal year 2001 aimed at building cash liquidity which can be used
to fund new product development efforts. The uncertainty created by proposed
legislation which could ban wagering on amateur athletic events requires the
Company to reassess the sources of its future revenue growth.

The Company has expanded its sports wagering activities to Australia
and is exploring other jurisdictions to expand its keno business lines. The
level of customer acceptance for the Company's keno products in these new
jurisdictions is undetermined. Establishing these operations may require initial
investments of several hundred thousand dollars. If the required investments
cannot be funded through current operations, the Company would have to obtain
additional debt or equity funding. There can be no assurance that the Company
would be able to complete such debt or equity funding or do so on terms
satisfactory to the Company.

National Gambling Impact Study Commission

Congress has created the National Gambling Impact Study Commission
comprised of nine individuals appointed by the President. The general duty of
the Commission is to conduct a comprehensive legal and factual study of the
gambling industry in the United States, to review existing Federal, State and
local policy and practices with respect to the legalization or prohibition of
gambling activities, to formulate and propose changes in such policies and
practices and to recommend legislation and administrative actions for such
changes. It is not possible to predict the future impact of the Commission on
the Company and its operations as the Commission could propose legislation and
actions that may materially adversely affect the Company's business.

Amateur Sports Integrity Act

32
<PAGE>
Australian Gaming Studies

In December, 1999 The Australian Government released its Productivity
Commissions Report on Australia's Gambling Industries. The Report made certain
recommendations including regulation of online casinos. Following this Report,
the Senate Select Committee on Information Technologies issued a Report entitled
"NETBETS," a review of online gambling in Australia. The Committee made a series
of proposals to reduce online gambling. One such proposal was to limit the
expansion of online casinos with a moratorium on the issuance of online gaming
licenses until consumer protection policies are implemented. The Federal
Government is pursuing a total ban on internet gambling. However the States and
Territories of Australia are opposed to any limitations on issuing new online
gaming licenses.

Recently Issued Accounting Standards

The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." ("SFAS 131")

Forward-Looking Statements

Certain information included in this report and other materials filed
or to be filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or written statements made or to
be made by the Company) contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. Such statements include information
relating to current expansion projects, plans for future expansion projects and
other business development activities as well as other capital spending,
financing sources and the effects of regulations (including gaming and tax
regulations) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
the Company taking financial risks on the outcome of sports events as a
principal betting against its patrons, domestic or global economic conditions,
changes in federal or state tax laws or the administration of such laws, changes
in gaming laws or regulations (including the legalization of gaming in certain
jurisdictions) and applications for licenses and approvals under applicable laws
and regulations (including gaming laws and regulations).

33
<PAGE>
Item 7. Financial Statements

Report of Independent Public Accountants. 40

Consolidated Balance Sheets as of January 31, 2000 and 1999. 41

Consolidated Statements of Operations for the fiscal years
ended January 31, 2000 and 1999. 42

Consolidated Statements of Stockholders' Equity for the fiscal
years ended January 31, 2000 and 1999. 43

Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2000 and 1999. 44

Notes to Consolidated Financial Statements. 46

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

34
<PAGE>
Part III

Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act

The directors and executive officers of the Company are as
follows:

Name Age Position
- ----------------- --- --------
Victor J. Salerno 56 President, Chief Executive Officer and Director

Robert D. Ciunci 53 Chief Operating Officer, Chief Financial
Officer, Executive Vice President and
Director

Michael Merillat 49 Vice President, Secretary and Director

Philip P. Hannifin 65 Director

W. Larry Swecker 55 Director

Victor J. Salerno has been President, Chief Executive Officer and a
director of the Company since its inception. Mr. Salerno has been the President,
Chief Executive Officer and a director of Leroy's since September 1979. Mr.
Salerno served as an Executive Vice President and director of Autotote CBS
Corporation, a company that designs and installs computer systems for the sports
betting business, from April 1989 until March 1, 1996. He is a past president of
the Nevada Association of Race and Sports Operators. Mr. Salerno is the former
brother in-law of Mr. Merillat.

Robert D. Ciunci has been Executive Vice President, Chief Financial
Officer and a director of the Company since its inception and became the Chief
Operating Officer of the Company on March 7, 1997. Mr. Ciunci has been the Chief
Financial Officer of Leroy's since August 1, 1995. From 1981 to June 1995 he was
employed by Autotote Corporation, a company that provides computerized wagering
systems to racetracks and off-track race wagering establishments, as its Vice
President Finance, Secretary and Treasurer. He holds a masters degree in
business administration and is a Certified Public Accountant.

Michael Merillat has been Vice President, Secretary and a director of
the Company since its inception. Mr. Merillat has been employed by Leroy's since
September 1978, currently as Vice President, Secretary, and a director. Mr.
Merillat is the former brother-in-law of Mr. Salerno.

Philip P. Hannifin has been a director of the Company since June 24,
1998. Mr. Hannifin was a director of the Riviera Holdings Corporation and the
Riviera Operating Company from February 1993 until June 1998. Mr. Hannifin was a
director from 1986 to 1995 and since 1991 has been an Executive Vice-President
of Fitzgerald's Reno, Inc. a hotel and casino operator). From 1987 to 1990, Mr.
Hannifin was a director and Executive Vice-President of MGM Grand, Inc., also a
hotel and casino operator. From January 1971 to September 1977, Mr. Hannifin was
chairman of the Nevada Gaming Control Board. Mr. Hannifin is a member of the
Audit, Compensation and Stock Option Committees of the Company's Board of
Directors.

35
<PAGE>

W. Larry Swecker became a director of the Company in April, 2000. Mr.
Swecker has been President of Swecker & Company. Ltd. Certified Public
Accountants since January, 1979. Prior to that he was a partner in the Firm of
Keltner Milam & Co. Certified Public Accountants from 1975 to 1979.Mr. Swecker
was employed as a revenue agent with the Internal Revenue Service from 1972 to
1975. He has a Bachelor of Science in Business Administration from the
University of Nevada-Reno. Mr. Swecker is a member of the Audit, Compensation,
Stock Option and Compliance Committees of the Board of Directors.

Item 10. Executive Compensation

The following table sets forth certain information covering the
compensation paid or accrued by the Company during the fiscal years indicated to
its Chief Executive Officer and to its most highly compensated executive officer
whose annual salary and bonus exceeded $100,000 during the fiscal year ended
January 31, 2000 (these individuals may be referred to as "named executive
officers"):

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long term
Compensation
Awards
------
Number of
Annual Compensation Securities
Name and Fiscal Year Ended ------------------- Underlying
Principal Position January 31 Salary Bonus ($) Options(1)
- ------------------ ---------- ------ --------- ----------
<S> <C> <C> <C> <C>
Victor J. Salerno 2000 $200,000 0 0
President and Chief 1999 $200,000 9,391 0
Executive Officer 1998 $200,000 39,604 0

Robert D. Ciunci 2000 $150,000 0 0
Executive Vice President 1999 $134,154 6,261 0
Chief Operating Officer & 1998 $110,000 31,262 50,000
Chief Financial Officer
</TABLE>

(1) Represents options granted under the Company's 1995 Stock Option Plan. Mr.
Salerno and Mr. Ciunci were not granted options during the fiscal years
ended January 31, 2000 and January 31, 1999.

The following table sets forth the number of exercisable and
unexercisable options as of January 31,2000 and the value of such options for
the Chief Executive Officer and the named Executive Officer.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Shares Unexercised Options In-The-Money
Acquired or Value At Fiscal Year end (#) Options at FY End ($)
Name Exercised (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Victor J. Salerno 0 0 0/0 0/0

Robert D. Ciunci 0 0 50,000(1)/0 $157,600/0
</TABLE>
- ------------
(1) Options become exercisable on August 22, 1999 and expire on August 22, 2004.

36
<PAGE>

Compensation of Directors

Directors who are not employees or consultants of the Company receive a
fee of $2,000 plus travel expenses for each Board meeting they attend. Committee
chairman receives $3,000 per month plus travel expenses.

During the fiscal year ended January 31, 2000, pursuant to the
Company's Directors' Stock Option Plan, options to purchase 400 and 300 shares,
respectively of the Company's Common Stock at an exercise price of $8.88 per
share were granted to Mr. Barengo, a former director of the Company, and Mr.
Hannifin. These options become fully exercisable on January 31, 2001 and expire
on January 31, 2010. On January 31, 1999 Mr. Barengo and Mr. Hannifin were
granted options to purchase 400 and 300 shares, respectively of the Company's
Common Stock at an exercise price of $6.56 per share and were fully exercisable
on January 31, 2000, and expire on Janury 31, 2009. On June 24, 1998, as
compensation for services as a director to be performed for the Company for the
year ended January 31, 2000, the Company granted Mr. Hannifin options to
purchase 2,000 shares of the Company's Common Stock, at an exercise price of
$5.89 per share. These options were fully exercisable on June 24, 1999 and
expire June 24, 2008.

Employment Agreements

On May 10, 1996, the Company entered into employment agreements with
Victor Salerno and Robert Ciunci. Each agreement has a five-year initial term
and automatically renews for one-year periods unless either party gives the
other 60 days written notice to terminate prior to the expiration of the current
term. On June 11, 1998, Mr. Ciunci's employment agreement was amended to
increase his base salary.

37
<PAGE>
Pursuant to his employment agreement, Mr. Salerno is employed as the
President and Chief Executive Officer of the Company at a base salary of
$200,000 per year. In addition, Mr. Salerno is entitled to receive a performance
bonus each calendar year equal to 5% of the Company's pre-tax earnings (as
defined in the employment agreement) for the prior fiscal year. In the event the
agreement is terminated by the Company in violation thereof, the Company has
agreed to pay as termination benefits to Mr. Salerno a continuation of his base
salary, performance bonus and all other benefits under the agreement for the
remainder of the then outstanding term. In the event Mr. Salerno dies or becomes
disabled (as defined in the agreement), the Company has agreed to pay the
termination benefits for up to one year. Mr. Salerno is entitled to participate
in the Company's benefit plans available to the Company's officers and employees
generally.

Pursuant to his employment agreement, Mr. Ciunci is employed as the
Chief Financial Officer and Executive Vice President of the Company for a base
salary ("Base Salary") of $150,000 per year plus a performance bonus each
calendar year equal to 3% of the Company's pre-tax earnings (as defined in the
agreement) for the prior fiscal year. In the event the agreement is terminated
by the Company in violation thereof or there is a "change of control" or
"constructive termination," (as those terms are defined below) the Company has
agreed to pay to Mr. Ciunci, as termination benefits, a continuation of his base
salary, performance bonus and all other benefits under the agreement for the
remainder of the then outstanding term. A change of control occurs when a
substantial portion of the assets of the Company is transferred, exchanged or
sold to a non-affiliated third party or any person other than Mr. Salerno
becomes the owner of securities of the Company representing 35% or more of the
combined voting power of the Company's securities then outstanding. A
constructive termination occurs when Mr. Ciunci is not re-appointed or
re-elected to the position of Executive Vice President and Chief Financial
Officer or if there is a change of his duties inconsistent with such offices. In
the event Mr. Ciunci dies or becomes disabled (as defined in the employment
agreement), the Company has agreed to pay the termination benefits for up to one
year. Mr. Ciunci is entitled to participate in the Company's benefit plans
available to the Company's officers and employees generally.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of April 30, 2000 the number and
percentage of shares of Common Stock, which according to information supplied to
the Company, are beneficially owned by:

(1) each person who is a beneficial owner of more than 5% of the
Common Stock;

(2) each of the directors, and named executive officers of the Company
individually;

(3) all current directors and executive officers of the Company as a
group.

Under rules adopted by the Securities and Exchange Commission, a person
is deemed to be a beneficial owner of common stock with respect to which he or
she has or shares voting power (which includes the power to vote or to direct
the voting of the security), or investment power (which includes the power to
dispose of, or to direct the disposition of, the security). A person is also
deemed to be the beneficial owner of shares with respect to which he or she
could obtain voting or investment power within 60 days of April 30, 2000, such
as upon the exercise of options or warrants.

38
<PAGE>

Except as otherwise indicated below, the persons named in the table
have sole voting and investment power with respect to all shares of Common Stock
held by them. Unless otherwise indicated the principal address of each person
named in the table is c/o American Wagering, Inc., 675 Grier Drive, Las Vegas,
Nevada 89119.

Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Victor J. Salerno 1,949,600 24.88%

Robert D. Ciunci 159,600(1) 2.04%
Michael Merillat 260,000(1) 3.32%
Robert Barengo 526,200(2) 6.71%

Philip Hannifin 2,300(3) .03%
W. Larry Swecker -- --
Judy Salerno 1,942,500 24.79%

All directors and executive officers 2,897,700 36.98%
as a group (4 persons)

- ----------
(1) Includes 50,000 shares which may only be issued upon exercise of stock
options after August 22, 1999.
(2) Includes 526,200 shares held jointly with Mr. Barengo's wife. Includes 400
shares which may only be issued upon the exercise of stock options after
January 31, 1998, 400 shares which may only be issued upon the exercise of
stock options after January 31, 1999 and 400 shares which may be issued upon
the exercise of stock options after January 31, 2000 but does not include
400 shares which may only be issued upon the exercise of stock options after
January 31, 2001.
(3) Includes 2,000 shares which may only be issued upon exercise of stock
options after June 24, 1999, includes 300 shares which may only be issued
upon the exercise of stock options after January 31, 2000, but does not
include 300 which may only be issued upon the exercise of stock options
after January 31, 2001.

Item 12. Certain Transactions

Prior to the Company's initial public offering, Leroy's was an S
Corporation under the Internal Revenue Code. On March 21, 1996 Leroy's made cash
distributions to the original stockholders in the aggregate amount of $3.0
million representing undistributed income through January 31, 1996 on which such
stockholders had previously paid federal income taxes. Of the $3.0 million
distributed, $2,433,124 was loaned back to Leroy's by the original stockholders
and $558,000 was contributed as capital to Leroy's by such stockholders. Of the
$2,433,124 outstanding, $540,700 in the aggregate was repayable to Michael
Merillat, Robert Ciunci, Robert Barengo, a former director of the Company, and
Michael Roxborough pursuant to restated stockholder notes maturing on May 1,
1998 and bearing interest at an annual rate of prime plus 1/2%. Of the remaining
balance, $946,212 was due and payable to Victor Salerno on November 1, 1998 and
$946,212 to Judith Salerno on May 1,1999 pursuant to restated stockholder notes
bearing interest at an annual rate of prime plus 1/2%. On May 1, 1998, $540,700
in the aggregate was paid by the Company to Michael Merillat, Robert Ciunci,
Robert Barengo, and Michael Roxborough pursuant to the restated stockholder
notes. On December 9, 1998, the Company redeemed its shareholder notes of
$1,892,424 in the aggregate for 18,924 shares of Series A Preferred Stock at
$100 per share. The holders of the Series A Preferred Stock are entitled to
receive, upon declaration by the Board of Directors, cumulative cash dividends
at the annual rate per share of 10%. Such dividends are payable in equal
quarterly installments on each March 31, June 30, September 30 and December 31,
commencing with December 31, 1998. The Series A Preferred Stock is not
convertible but is redeemable, in whole or (on a pro rata basis) in part, at any
time at the option of the Company, by resolution of the Board of Directors. The
holders of Series A Preferred Stock are not entitled to vote (on a cumulative
basis or otherwise) as a class or with the common stock upon any matters
submitted to shareholders for a vote, except as otherwise mandated under Nevada
law.

Mr. Barengo is a former director of the Company and a director of the
Riviera Hotel and Casino at which the Company maintains one of its satellite
sports book operations pursuant to a renewable one month lease for which the
Company leases 200 square feet. The Company paid the Riviera rent of $246,275
and $211,259 for the years ended January 31, 2000 and 1999, respectively.

39
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Board of Directors and
Stockholders of American Wagering, Inc.:

We have audited the accompanying consolidated balance sheets of
AMERICAN WAGERING, INC. (a Nevada corporation) and subsidiaries (the "Company")
as of January 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Wagering,
Inc. and subsidiaries as of January 31, 2000, and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

As explained in Note 1 of the notes to the consolidated financial
statements, effective February 1, 1999, American Wagering, Inc. changed its
method of accounting for start-up activities in accordance with the American
Institute of Certified Public Accountants' Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities."

ARTHUR ANDERSEN LLP

Las Vegas, Nevada
April 7, 2000

40
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>

ASSETS

2000 1999
------ ------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,415,793 $ 3,076,563
Short-term investments -- 483,671
Accounts receivable, net of allowance for doubtful accounts
of $188,624 and $78,295 686,418 172,046
Inventories, net of obsolescence reserve of $161,370 and $56,825 436,947 724,386
Prepaid expenses and other current assets 309,951 544,212
------------ ------------
TOTAL CURRENT ASSETS 4,849,109 5,000,878

PROPERTY AND EQUIPMENT, net 4,098,355 4,063,042

INTANGIBLE ASSETS, net 984,321 1,387,823

DEPOSITS AND OTHER ASSETS 797,271 239,832

NET LONG-TERM ASSETS OF DISCONTINUED
OPERATIONS -- 1,074,295
------------ ------------
TOTAL ASSETS $ 10,729,056 $ 11,765,870
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt $ 61,892 $ 57,913
Accounts payable 1,703,476 678,067
Accrued expenses 988,398 718,932
Unpaid winning tickets 1,888,424 2,548,181
Other current liabilities 1,154,995 707,612
Net current liabilities of discontinued operations -- 616,644
------------ ------------
TOTAL CURRENT LIABILITIES 5,797,185 5,327,349
------------ ------------
LONG-TERM DEBT, less current portion 1,816,517 1,879,237
------------ ------------
MINORITY INTEREST (105,801) (3,380)

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Series A Preferred stock - 10% cumulative; $.01 par value;
authorized: 25,000,000 shares; issued and
outstanding: 15,424 and 18,924 shares 1,542,400 1,892,400
Common stock - $.01 par value; authorized: 25,000,000 shares;
issued and outstanding: 7,885,613 shares 78,857 78,857
Shares to be issued in settlement of litigation - 337,500 shares 3,587,625 --
Additional paid-in capital 10,709,223 14,296,848
Accumulated deficit (12,369,457) (11,377,948)
Less: treasury stock; at cost: 61,100 shares (327,493) (327,493)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,221,155 4,562,664
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,729,056 $ 11,765,870
============ ============

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

<PAGE>

AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999

2000 1999
------ ------

<S> <C> <C>
REVENUES $13,378,981 $ 9,891,818

OPERATING COSTS AND EXPENSES:
Direct costs 9,884,270 6,317,843
Research and development 832,778 574,524
Selling, general and administrative 3,170,112 2,826,672
Depreciation and amortization 815,407 765,889
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 14,702,567 10,484,928
----------- -----------
OPERATING LOSS (1,323,586) (593,110)

OTHER INCOME (EXPENSE):
Interest income 57,106 125,281
Other income (2,730) 700
Minority interest 102,421 3,380
Equity in loss from investment in joint venture -- (785,516)
Interest expense (157,181) (321,533)
----------- -----------
TOTAL OTHER EXPENSE (384) (977,688)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (1,323,970) (1,570,798)

DISCONTINUED OPERATIONS:
GAIN ON SALE OF HOTEL, FOOD AND
BEVERAGE OPERATIONS, NET OF INCOME TAX 341,403 --
EXCESS RESERVE - LOSS ON DISPOSAL 213,465 --
----------- -----------
INCOME FROM DISCONTINUED OPERATIONS 554,868 --
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (769,102) (1,570,798)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (45,429) --
----------- -----------
NET LOSS (814,531) (1,570,798)

PREFERRED STOCK DIVIDEND REQUIREMENTS (179,994) (28,387)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (994,525) $(1,599,185)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.19) $ (0.21)
Income from discontinued operations $ 0.07 $ --
Cumulative effect of change in
accounting principle $ (.01) $ --
Net loss $ (0.13) $ (0.21)

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

42
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
--------------- ------------ -------------- Shares to be
issued in Additional
No. of No. of No. of Settlement Paid-in Accumulated Total
Shares Balance Shares Balance Shares Balance of litigation Capital Deficit Equity
------ ------- ------ ------- ------ ------- ------------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 31, 1998 -- $ -- 7,840,833 $78,408 -- $ -- -- $14,047,296 $(9,778,763) $4,346,941
Issuance of
Preferred stock 18,924 1,892,400 -- -- -- -- -- -- -- 1,892,400
Purchase of
Treasury stock -- -- -- -- (61,100) (327,493) -- -- -- (327,493)
Stock Issued
in Connection
with Acquisition -- -- 44,780 449 -- -- -- 249,552 -- 250,001
Net Loss -- -- -- -- -- -- -- -- (1,599,185) (1,599,185)
------ ---------- --------- ------- ------- --------- ---------- ----------- ----------- ----------
Balance,
January 31, 1999 18,924 $1,892,400 7,885,613 $78,857 (61,100) $(327,493) -- $14,296,848 (11,377,948) $4,562,664
Preferred Stock
Dividends -- -- -- -- -- -- -- -- (176,978) (176,978)
Purchase of
Treasury stock -- -- -- -- -- -- -- -- -- --
Redemption of
Preferred Stock (3,500) (350,000) -- -- -- -- -- -- -- (350,000)
337,500 Shares to
be issued in
Settlement of
litigation -- -- -- -- -- -- 3,587,625 (3,587,625) -- --
Net Loss -- -- -- -- -- -- -- -- (814,531) (814,531)
------ ---------- --------- ------- ------- --------- ---------- ----------- ----------- ----------
Balance,
January 31, 2000 15,424 $1,542,400 7,885,613 $78,857 (61,100) $(327,493) $3,587,625 $10,709,223 ($12,369,457) $3,221,155
====== ========== ========= ======= ======= ========= ========== =========== =========== ==========

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>
43
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>

2000 1999
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(814,531) $(1,599,185)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 815,407 955,734
Equity in loss from investment in joint venture -- 785,516
Gain on sale of discontinued operations (341,403) --
Discontinued operations - Excess Reserve (213,465) --
Minority interest (102,421) (3,380)
Impairment of long-lived assets 201,341 --
Provision for doubtful accounts 110,329 39,838
Change in reserve for inventory obsolesence 104,545 (131,400)
Cumulative effect of change in accounting principle 45,429 --
Decrease (increase) in assets:
Accounts receivable (624,701) 111,756
Inventories 182,894 (31,150)
Prepaid expenses and other current assets 234,261 124,235
Increase (decrease) in liabilities:
Accounts payable 1,025,409 (1,068,442)
Accrued expenses 269,466 (628,965)
Unpaid winning tickets (659,757) 1,107,140
Other current liabilities 447,383 137,062
---------- ----------
Total adjustments 1,494,717 1,397,944
---------- ----------
Net cash provided by (used in) operating activities 680,186 (201,241)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (693,988) (777,849)
Deposits and other assets (557,439) (143,397)
Proceeds from sale of assets 3,809,392 --
Increase in investment in joint venture -- (785,517)
Decrease in short-term investments 483,671 4,926,053
Purchase assets of ACS -- (537,053)
---------- ----------
Net cash provided by investing activities 3,041,636 2,682,237
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,442,769) (1,169,834)
Redemption of preferred stock (350,000) --
Dividends (176,978) --
Purchase of treasury stock -- (327,493)
---------- ----------
Net cash used in financing activities (2,969,747) (1,497,327)
---------- ----------
CASH USED IN DISCONTINUED OPERATIONS (412,845) --

NET INCREASE IN CASH AND CASH EQUIVALENTS 339,230 983,669

CASH, beginning of period $3,076,563 $2,092,894
---------- ----------
CASH, end of period $3,415,793 $3,076,563
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 157,181 $ 594,826
========== ==========
Cash (refunded) for income taxes $ -- $ (136,000)
========== ==========

The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>
44
<PAGE>

AMERICAN WAGERING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999

(Continued)

SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:

Fiscal Year ended January 31, 2000 Transactions--

During 1999, the Company reserved 337,500 Shares of Common Stock in settlement
of litigation.

Fiscal Year ended January 31, 1999 Transactions--

Issuance of $250,000 in Common Stock for ACS acquisition

Redemption of shareholder notes totaling $1,892,424 for 18,924 shares of Series
A Preferred Stock.

The accompanying notes are an integral part of these consolidated
financial statements.

45
<PAGE>
AMERICAN WAGERING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2000

1. Summary of Business and Significant Accounting Policies

Summary of Business

In August 1995, American Wagering, Inc., a Nevada corporation, (the
"Company") was formed as the holding company for Leroy's Horse and Sports
Place ("Leroy's") and Leroy's Hotel Corporation ("LHC"). Immediately prior to
the closing of the initial public offering by the Company, the stockholders
of Leroy's and LHC exchanged their shares in those companies for shares of
the Company. These transactions are referred to as the "Reorganization."

Leroy's was incorporated under the laws of the State of Nevada on November
14, 1977. Through a central computer system located at its Las Vegas
headquarters, Leroy's operates a statewide network of race and sports
wagering facilities in 47 casinos. Leroy's leases the square footage
necessary to conduct its operations at the non-Company owned gaming
establishments. Leroy's operates its main race and sports book and a 5,600
square foot casino with approximately 65 electronic gaming devices including
slot machines, video poker machines and multi-game video machines at the
Howard Johnson Hotel on 3111 West Tropicana Boulevard in Las Vegas, Nevada.

The Company also owns and operates Mega$ports (ACT) Pty Ltd. ("Mega$ports
(ACT)") located in Canberra, Australia. Mega$ports (ACT) is the Company's
international wagering hub licensed to accept fixed odds and pari-mutuel
interactive wagers on the Internet from around the world except patrons
located in the United States. In November 1998, Mega$ports (ACT) was issued a
fifteen year Sports Betting license from the Bookmakers Licensing Committee
("BLC") in the Australian Capital Territory ("ACT"). Mega$ports (ACT) began
accepting wagers from non-Internet patrons within Australia in January 1999.
Mega$ports (ACT) received regulatory approval for its Internet operations
from the ACT and began accepting wagers on the Internet in March 1999.

The Company owns AWI Keno, Inc. ("AWIK") which designs, installs, operates
and maintains computerized keno systems and eventually will offer a
progressive jackpot starting at $1 million. On April 29, 1999 the Company
received preliminary licensing approval from the Nevada Gaming Commission to
operate a statewide inter-casino linked system keno game. AWIK received final
approval from the Nevada Gaming Commission on November 11, 1999. AWIK is
currently operating the keno game at eight locations throughout the State of
Nevada.

The Company also owns and operates Computerized Bookmaking Systems, Inc.
("CBS"). CBS designs, installs and maintains sports and race book equipment,
software and computer systems for the sports betting industry. In 1994, CBS
signed a joint venture agreement with IGT for the purpose of developing and
marketing a pari-mutuel sports system, known as MEGA$PORTS(R). MEGA$PORTS(R)
offered opportunities to wager on the outcome of individual sports contests,
events occurring within or during the contests, and outcomes of groups of
sports contests On February 1, 1999, the Mega$ports joint venture agreement
was terminated. (See Note 4). In March, 2000, the Company ceased ongoing
operations of Mega$ports, Inc. and has notified the Nevada Gaming Control
Board of its intent to let expire in July, 2000, the Mega$ports, Inc. gaming
license.

On July 28, 1998, the Company acquired certain assets from Advanced Computer
Services, Inc. ("ACS"). Two new subsidiaries, AWI Sports Systems, Inc. and
AWI Hotel Systems, Inc. were formed to hold the assets acquired from ACS.

46
<PAGE>

In November 1999, the Company formed Secured Telephone Operating Platform,
Inc. ("STOP") which designs, installs, and operates a telephone call
identification system for its customers. The system determines the origin of
a telephone call and accepts or rejects a call based on its origination. The
system is used in conjunction with telephone account wagering within the
State of Nevada.

On April 22, 1998, the Company determined it would concentrate its business
efforts on its core competency, sports wagering, and began seeking a
qualified buyer for the hotel, food and beverage segment of the Company. On
June 30, 1999, the Company finalized the sale of these operations and has
entered into a lease with the new owner to continue to operate the casino for
up to two years. The casino serves as the Company's principal gaming
location. In the accompanying consolidated financial statements as of, and
for the Fiscal Years ended January 31, 2000 and 1999, the results of the
hotel, food and beverage operations have been accounted for as discontinued
operations. The Company recognized a gain on the sale of these operations of
$341,403 and an excess reserve - loss on disposal of $213,465 during the
Second Quarter of Fiscal 2000. (See Note 5)

Restricted Cash and Short-Term Investments

As of January 31, 2000 the Company has segregated approximately $250,000 in
cash to meet certain domestic regulatory requirements and $100,000 in cash to
meet certain foreign regulatory requirements.

Short-term investments consist of liquid investments such as treasury bills
with a maturity of six months or less and are carried at cost and adjusted
for discount amortization.

Inventories

Inventories are stated at the lower of cost (based on the first-in, first-out
method) or market.

Depreciation

Property and equipment are depreciated by use of the straight-line method
over their estimated useful lives. The Company recorded a charge for
depreciation expense of $590,075 and $573,699 for the fiscal years ended
January 31, 2000 and 1999, respectively.

Intangible Assets

Intangible assets include the excess of the cost over the fair market value
of net assets of acquired companies. Such costs are being amortized over the
periods expected to be benefited of approximately 25 years. Other intangible
assets acquired including software and rights for manufacturing and
distribution are being amortized over 7 years. The Company recorded a charge
for amortization expense of $225,332 and $192,190 for the fiscal years ended
January 31, 2000 and 1999 respectively. Accumulated amortization was $426,942
and $371,407 at January 31, 2000 and 1999, respectively.

The realizability of intangible assets is evaluated periodically as events or
circumstances warrant. Such evaluations are based on various analyses,
including cash flow and profitability projections that incorporate, as
applicable, the impact on existing Company business. The analyses necessarily
involve significant management judgment to evaluate the capacity of an
acquired business to perform within projections.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") requires that long-lived assets and certain identifiable
intangibles, including goodwill, to be held and used by an entity, be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset(s) may not be recoverable. This review
resulted in an impairment write-down of the Hotel Systems operations of
$132,741 and Mega$ports, Inc. of $68,600 due to the closure of its operations
in March 2000. These losses are included in direct costs in the Consolidated
Statement of Operations.

47
<PAGE>
Revenue Recognition

With respect to the Wagering segment, which includes race and sports book and
Internet operations, in accordance with industry practice, the Company
recognizes fixed odds race and sports wagering revenues as the net win from
such wagering activities, which is the difference between gaming wins and
losses. Wagers received on future race and sporting events are reflected as a
liability and are not recognized as revenues until the event has taken place.
The Company recognizes pari-mutuel race and sports wagering revenues and Keno
revenues as commissions earned as a percentage of the total amount wagered.
Wagering revenues are recognized based on the results of a completed event.
With respect to the Systems segment, the Company recognizes revenue when the
software and hardware are installed at the customer location. Maintenance
contracts include a provision to allow the Company to increase maintenance
fees annually over the term of the contract. Maintenance fee revenue is
recognized over the term of the contract.

Research and Development

The Company expenses all costs associated with the research and development
of computerized software as incurred.

Start-up Costs

Organization costs incurred by the Company prior to February 1, 1999 were
capitalized and charged to income over a period of five years upon
commencement of operations. In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5 entitled
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"), which requires
companies to expense costs of start-up activities as they are incurred. SOP
98-5 is effective for fiscal years beginning after December 15, 1998.
Accordingly, the Company adopted the statement on February 1, 1999. Upon
adoption, the Company reported the initial adoption as a cumulative effect of
a change in accounting principle of $45,429.

Advertising

The Company expenses all costs associated with advertising as incurred.

Foreign Currency Translation

Assets and liabilities of foreign operations are translated into U.S. dollars
using rates of exchange in effect at the end of the year. Income and expense
accounts are translated into U.S. dollars using average rates of exchange.
The net gain or loss resulting from translation is shown as a component of
comprehensive income. Gains and losses from foreign currency transactions are
included in direct costs as a component of operating expenses. The Company
has adopted the provisions of the Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). Gains and losses from
both foreign currency translation and foreign currency transactions for the
fiscal years ending January 31, 2000 and 1999, were not material.

48
<PAGE>

Earnings per Share

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 -"Earnings Per Share" ("SFAS No. 128") which
became effective for periods ending after December 15, 1997 and replaces
historically reported earnings per share with "basic", or undiluted, earnings
per share and "diluted" earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding during the period, while diluted earnings per share reflects the
additional dilution for all potentially dilutive securities, such as stock
options.

In accordance with SFAS No. 128, if potential shares outstanding would have
an anti-dilutive effect on the diluted earnings per share calculation, then
the shares are not included in the diluted earnings per share calculation.
Options outstanding during the fiscal years ending January 31, 2000 and 1999
under the Company's Employee stock option plan and its Directors stock option
plan were not included in the computation of diluted earnings per share
because they were anti-dilutive with regard to the losses incurred by the
Company in Fiscal 2000 and 1999.

The weighted-average number of common and common equivalent shares used in
the calculation of basic and diluted earnings per share consisted of the
following:

Fiscal Year ended January 31,
-----------------------------
2000 1999
----- ----
Weighted-average common shares
outstanding (used in the computation
of basic earnings per share).......... 7,824,513 7,800,002

Potential dilution from the assumed
exercise of common stock options...... -- --
--------- ---------
Weighted-average common and common
stock equivalent shares (used in the
computation of diluted earnings per
share)................................ 7,824,513 7,800,002
========= =========

49
<PAGE>
Financial Instruments

The Company's financial instruments consist of cash, short-term investments,
accounts and notes receivable, accounts payable, accrued expenses, unpaid
winning tickets, advance deposits, and long-term debt. The Company's cash and
short-term investments are diversified among security types and issuers, and
approximate fair value. The fair value of financial instruments that are
short-term and/or that have little or no risk are considered to have a fair
value equal to book value. Assets and liabilities that are included in this
category are accounts receivable, accounts payable, accrued expenses, unpaid
winning tickets and advance deposits. The Company believes the fair values
and the carrying value of notes receivable and long-term debt would not be
materially different due to the instruments' interest rates approximating
market rates for similar borrowings at January 31, 2000, and 1999.

Use of Estimates

Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates. The most
significant estimates with regard to these financial statements relate to
setting and adjusting lines on sporting events. The sports book operator is
betting as a principal against its patrons. Therefore, if the "book" of
wagers placed on an event is not balanced the sports book operator is
significantly at risk for the outcome of a sporting event. Although sports
book operators attempt to keep the book in balance by adjusting the betting
line, the risk of a non-balanced book is inherent in the operation of a
sports book. To the extent that a book on a particular event is not balanced,
the book-making operation, like its patrons, is gambling on the outcome of an
event.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated. The financial results for acquisitions are included in the
consolidated financial statements from the date of acquisition. Investments
in 50% or less owned joint ventures are accounted for under the equity
method.

Reclassifications

Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation. These reclassifications
had no effect on the Company's net loss.

Income Taxes

The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred income taxes are calculated using the
asset and liability method. Under the asset and liability method, deferred
income taxes are measured using enacted statutory tax rates expected to apply
to taxable income in the years in which these temporary differences are
expected to be recovered or settled.

Concentration of Risk

The Company derives a substantial portion of its revenues from a limited
number of licensed race and sports books in the State of Nevada. Limitations
on the scope of operations at such licensed race and sports books due to
statutory or regulatory changes or deterioration in the general economic
conditions which impact the gaming industry in Nevada could adversely affect
the Company's operating results. The Company also derives a portion of its
revenues from its Internet operations in Australia, which is susceptible to
regulatory or economic changes, which may impact the Internet or the gaming
industry outside of the United States.

Approximately 34% and 37% of total handle (total amount wagered in race and
sports events) and 32% and 37% of Leroy's total revenues is related to
professional football for the years ending January 31,2000 and 1999,
respectively. If the professional football season was interrupted due to
strikes or other factors this may have a significant impact on the financial
results of the Company.

The Company has expanded its sports wagering activities to Australia and is
exploring other jurisdictions outside of the United States to expand its
sports wagering and keno business lines. The level of customer acceptance for
the Company's sports wagering and keno products in these new jurisdictions is
undetermined. Establishing these operations may require initial investments
of several hundred thousand dollars. If the required investments cannot be
funded through current operations, the Company would have to obtain
additional debt or equity funding. There can be no assurance that the Company
would be able to complete such debt or equity funding or do so on terms
satisfactory to the Company.

50
<PAGE>

The ownership and operation of casino gaming facilities, including race and
sports books, in Nevada are subject to extensive state and local regulation.
The Company's gaming operations are subject to the Nevada Gaming Control Act
and the regulations promulgated thereunder, (hereinafter collectively
referred to as the "Nevada Act") and various local regulations. If it were
determined that the Nevada Act was violated by the Company or its
subsidiaries the gaming licenses or registration held by the Company and it
subsidiaries could be limited, conditioned, suspended or revoked subject to
compliance with certain statutory and regulatory procedures. Limitation,
conditioning or suspension or revocation of any gaming liscense may have a
material effect on the Company's gaming operations.

On March 22, 2000 legislation entitled the "Amateur Sports Integrity Act" was
introduced in Congress. The general purpose of the proposed legislation is to
prohibit wagering on games and performances at the Summer and Winter Olympics
and on high school and college games. Leroy's currently accepts wagers on the
Olympic and college games. Leroy's estimates that wagering on college sports
represents approximately 26% of its revenues and therefore the passage of
such legislation could have a material adverse impact upon the Company's
wagering operations.

In December, 1999 The Australian Government released its Productivity
Commissions Report on Australia's Gambling Industries. The Report made
certain recommendations including regulation of online casinos. Following
this Report, the Senate Select Committee on Information Technologies issued a
report entitled "NETBETS" a review of online gambling in Australia. The
Committee made a series of proposals to reduce online gambling. One such
proposal was to limit the expansion of online casinos with a moratorium on
the issuance of online gaming licenses until consumer protection policies are
implemented. The Federal Government is pursuing a total ban on internet
gambling. However the States and Territories in Australia are opposed to any
limitations on issuing new online gaming licenses.

At this time, the Company is unable to determine the effect, if any, of the
outcome of the implementation of the recommendations made in these reports or
whether the government will be successful in banning online gaming. If the
Federal government is successful in banning online gaming, such ban may have
a material adverse effect on the operations of Mega$ports (ACT).

Management believes that the Company will be able to satsify its operating
cash requirements for at least the next twelve months from existing cash
balances and anticipated cash flows. The Company will initiate various
programs in fiscal year 2001 aimed at building cash liquidity which can be
used to fund new product development efforts. The uncertainty created by
proposed legislation which could ban wagering on amateur athletic events
requires the Company to research the sources of its future revenue growth.

51
<PAGE>

2. Inventories

Inventories consist of the following as of January 31, 2000 and 1999:

2000 1999
---- ----
Raw materials and spare parts $ -- $ 61,391
Work in process 209,220 220,365
Finished goods 389,097 499,455
---------- ----------
598,317 781,211

Less: Obsolescence reserve (161,370) (56,825)
---------- ----------
$ 436,947 $ 724,386
========== ==========

3. Property and Equipment

Property and equipment are stated at cost and consist of the following as of
January 31, 2000 and 1999:

Estimated
2000 1999 Useful Life
---- ---- -----------
Land $ 575,000 $ 575,000
Building/Improvements 2,139,919 2,139,919 39 years
Furniture/Fixtures 300,442 300,442 5-10 years
Equipment 3,425,324 2,768,784 5-20 years
Other 156,884 149,293 5-10 years
----------- -----------
6,597,569 5,933,438
Less: Accumulated depreciation (2,499,214) (1,870,396)
----------- -----------
$ 4,098,355 $ 4,063,042
=========== ===========

4. Investment in Joint Venture

The Company, through its wholly-owned subsidiary CBS, was involved in a joint
venture with IGT. CBS and IGT each own a fifty percent interest in the joint
venture company named Mega$ports, Inc., a Nevada corporation ("Mega$ports,
Inc."). In December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. The termination agreement
allows the Company to receive IGT's 50% interest in the joint venture and the
Mega$ports(R) trademark. The Company has agreed to indemnify IGT for all
presently due or future obligations of Mega$ports, Inc. The transfer of IGT's
shares in the joint venture is subject to the approval of the Nevada Gaming
Commission. Mega$ports, Inc., an enterprise which began operations in July
1997, is engaged in the design, manufacture and distribution of a pari-mutuel
sport wagering system. The Company's original investment in the joint venture
balance consisted of contributions of property and equipment, programming
services and cash contributions for operations. Due to the equity in losses
from the joint venture the investment balance has been reduced to zero. The
equity in loss from the investment in joint venture was $785,516 for the
fiscal year ended January 31, 1999. As of January 31, 2000 Mega$ports U.S.
was accounted for on a consolidated basis. In March 2000, Mega$ports, Inc.
ceased operations. In March, 2000 the Company ceased operations of
Mega$ports, Inc. Mega$ports, Inc.

52
<PAGE>

5. Discontinued Operations

On April 22, 1998, the Company determined it would concentrate its business
efforts on its core competency, sports wagering, and began seeking a
qualified buyer for the hotel, food and beverage segment of the Company. In
the Company's accompanying consolidated financial statements for and as of
the fiscal years ended January 31, 2000 and 1999, the results of the hotel,
food and beverage operations have been accounted for as discontinued
operations. In conjunction with the sale of the Hotel, the Company has leased
back and continued to operate the casino and intends to continue to do so for
up to two years. The Casino will serve as the Company's principal gaming
location.

The Company recorded a reserve during fiscal year ended January 31, 1998 for
the estimated losses on the disposal of this segment, which was comprised of
an estimated loss on the sale of the hotel of $246,000 and a provision for
anticipated losses during the phase out period of $616,000.

The components of assets and liabilities of discontinued operations included
in the accompanying consolidated balance sheets are as follows:

January, 31
1999
----
Current assets .................................... $ 274,119
Accounts payable, accrued expenses and other ...... (890,763)
----------
Net current liabilities ........................... $ (616,644)
==========

Property, plant and equipment, net ................ $3,383,376
Non-current liabilities ........................... (2,309,081)
----------
Net long term assets .............................. $1,074,295
==========

The condensed statements of operation relating to the discontinued operations
is presented below:

January, 31
1999
----
Revenues........................................... $3,303,859
Costs and expenses................................. (3,732,391)
----------
Loss before income taxes........................... (428,532)
Provision (benefit) for income taxes............... --
----------
Net (loss)......................................... $ (428,532)
==========

Losses incurred in the fiscal years ended January 31, 2000 and 1999,
respectively were charged against previously established reserves.

53
<PAGE>

On June 30, 1999, the Company realized a gain on sale of $341,403 from the
sale of this segment. Additionally, the Company no longer required the
initial estimated loss from discontinued operations of $616,000 and recorded
a gain of $213,465 for excess reserves.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses consist of the following at January 31, 2000 and 1999:

2000 1999
---- ----
Payroll and vacation $448,695 $271,391
Royalty 319,128 126,350
Legal and accounting 103,661 244,661
Other 116,914 76,530
-------- --------
$988,398 $718,932
======== ========

Other current liabilities consist of the following at January 31, 2000 and
1999:

2000 1999
---- ----
Due to telephone accounts $ 386,634 $401,957
Jackpots and futures 273,944 199,047
Advance deposits 221,559 99,306
Other 272,858 7,302
---------- --------
$1,154,995 $707,612
========== ========

7. Shareholder Notes Payable

On December 9, 1998, the Company redeemed its shareholder notes of $1,892,424
in the aggregate for 18,924 shares of Series A Preferred Stock at $100 per
share. The holders of the Series A Preferred Stock are entitled to receive,
upon declaration by the Board of Directors, cumulative cash dividends at the
annual rate per share of 10%. Such dividends are payable in equal quarterly
installments on each March 31, June 30, September 30 and December 31,
commencing with December 31, 1998. The Series A Preferred Stock is not
convertible but is redeemable, in whole or (on a pro rata basis) in part, at
any time at the option of the Company, by resolution of the Board of
Directors. The holders of Series A Preferred Stock are not entitled to vote
(on a cumulative basis or otherwise) as a class or with the Common Stock upon
any matters submitted to shareholders for a vote, except as otherwise
mandated under Nevada law.

8. Long-term Debt

Long term debt consist of the following at January 31, 2000 and 1999:

2000 1999
---- ----
Mortgage payable, monthly payments
of principal and interest of $17,565,
interest is at 8%, secured by land
and building, maturing September
2015 $ 1,878,409 $ 1,937,150

Less: current portion (61,892) (57,913)
----------- -----------
$ 1,816,517 $ 1,879,237
=========== ===========

54
<PAGE>

As of January 31, 2000, annual maturities of total long-term debt are as
follows:

Year Ending
January 31,
-----------
2001 61,892
2002 62,706
2003 67,911
2004 73,548
2005 79,652
Thereafter 1,532,700
-----------
$ 1,878,409
===========

Interest expense recognized on the above mortgage was $152,196 and $157,298
for the fiscal years ended January 31, 2000 and 1999, respectively.

9. Income Taxes

The Company did not provide for current or deferred income taxes for the
Fiscal Years ended January 31, 2000 and 1999.

The tax effect of significant temporary differences representing deferred tax
assets and liabilities for the Company is as follows:

January 31, January 31,
2000 1999
---- ----
Deferred Tax Assets
Current:
Net operating loss carryforward $1,909,813 $ 826,783
Write down of investment 1,143,862 2,016,525
Restructuring charges 156,755 468,778
Bad debt reserve 39,152 73,990
Amortization 8,211 20,091
Vacation 68,555 33,932
Inventory 54,866 --
Other 20,945 16,950
--------- ----------
Total Current 3,402,159 3,457,049

Deferred Tax Liabilities - Long-term:
Depreciation -- (24,217)
--------- ----------
$3,402,159 $3,432,832
Valuation allowance (3,402,159) (3,432,832)
---------- ----------
$ -- $ --
========== ==========

55
<PAGE>

On January 31, 2000 and 1999, the Company recorded a valuation allowance of
$3,402,159 and $3,432,832 respectively. The provisions for income taxes
differs from that computed at the federal statutory corporate tax rate as
follows:

January 31, January 31,
2000 1999
---- ----
Federal Statutory rate 34% 34%
Valuation allowance 34% 34%
--- ---
Effective tax rate --% --%
=== ===

At January 31, 2000 the Company had tax net operating loss carryforwards of
$5,617,095, of which $2,044,735 will expire in 2013 and $1,057,179 will
expire in 2019, and $2,515,181 will expire in 2020.

Included in the Company's net loss is a loss of $850,616 related to
Mega$ports (ACT).

10. Commitments and Contingencies

Leases

The Company leases a 5,969 square feet of the building where its principal
offices are located to a non-affiliated company. The lease has a five-year
term and expires on February 28, 2002. Rental revenue recognized under this
lease was $101,890 and $116,972 for the fiscal years ended January 31, 2000
and 1999, respectively.

At January 31, 2000 future minimum rental income payments under the
non-cancelable leases are as follows:

January 31,
-----------
2001 $101,890
2002 101,890
2003 8,490
2004 --
2005 --
Thereafter --
--------
$212,270
========

As of January 31, 2000, Leroy's had sports book operating leases at various
non-Company owned locations. Total rental expense for these leases was
approximately $629,000 and $426,000 for the years ended January 31, 2000 and
1999, respectively. These lease terms generally vary from one to six years
depending on the location, with one on a month-to-month basis. After the
initial lease term, the leases renew automatically at the discretion of both
parties. At certain of the Leroy's race and sports book locations the Company
is not required to pay rent. Under leases for some of the Leroy's operating
locations rent is based on a percentage of income above specified thresholds.
Rent expense for this location, which is included in the total rent expense
above, was $246,000 and $241,000 for the years ended January 31, 2000 and
1999, respectively.

At January 31, 2000, future minimum rental payments under non-cancelable
leases are as follows:

January 31,
-----------
2001 $225,488
2002 208,492
2003 185,196
2004 170,196
2005 3,600
Thereafter --
--------
$792,972
========

The above disclosure of future minimum lease payments under non-cancelable
leases exclude payments associated with the discontinued operations. (See
Note 5).

56
<PAGE>

Litigation

Racusin
On August 23, 1995, Leroy's filed a Complaint for Declaratory Relief in
the District Court of Clark County, Nevada, requesting that the Court declare
that two written agreements between Leroy's and Michael Racusin, d.b.a. M.
Racusin & Company ("Racusin"), are vague, ambiguous and unenforceable contracts.
Racusin had introduced certain underwriters, including Equity Securities Trading
Co., Inc. (one of the underwriters of the Company's initial public offering) to
Leroy's and provided Leroy's certain advisory services. The specific language of
the alleged unenforceable agreements provided that Leroy's would pay to Racusin
(1) a commission equal to 5% of the purchase price of Leroy's in the event
Racusin brings in a buyer for Leroy's and (2) compensation equal to 4.5% of the
"final evaluation in the form of Leroy's common stock plus $150,000 in cash upon
completion of common offering or IPO."

On August 1, 1997, the U.S. District Court of Nevada orally issued a
declaratory judgement with respect to the lawsuit. The District Court held that
pursuant to the terms of the agreements, Racusin was entitled to receive from
the Company a commission, as adjusted, of $648,375, plus prejudgment interest of
$87,535 through September 5, 1997. On September 5, 1997, the Company tendered
the entire judgement of $735,910, which included interest, to Racusin. As the
payment to Racusin represented a cost of the Company's initial public offering,
the entire amount paid to Racusin reduced its paid-in capital. On September 19,
1997, Racusin filed a Notice of Appeal with the Court of Appeals. On March 16,
1999, the Court of Appeals vacated the District Court's decision and ordered
that a jury trial be conducted. A jury trial subsequently took place. In
February 2000, a jury verdict was rendered. The jury found that (1) Leroy's
breached its contract with Racusin, (2) as a result of that breach, Racusin is
entitled to receive stock in Leroy's in the amount equal to 4.5% of $45,000,000
plus $150,000 in cash and (3) the Company is the alter ego of Leroy's. Any
judgment will be reduced by the $735,910 previously paid to Racusin under the
contract. The Company has reserved 337,500 shares of Common Stock to be issued
to Racusin in satisfaction of the verdict and has reflected the estimated amount
of the award in Stockholders' Equity at January 31, 2000.

Ground Lease

On March 31, 1997, James A. Rissler and Patricia R. Rissler
("Landlord") filed a Complaint for Declaratory Relief in the District Court of
Clark County, Nevada. The Landlord claimed that the amounts paid to Jackpot for
its operation of the slot machines in the Hotel/Casino must be included in the
calculation of the gross gaming revenues owed Landlord under the Lease.

57
<PAGE>

On March 17, 1998 the District Court ruled in favor of Landlord on all
three issues. The Company filed an appeal to this order with the Nevada Supreme
Court.

On June 30, 1999 pursuant to the sale of the Hotel, Food and Beverage
segment, the Company entered into a settlement agreement with Landlord pursuant
to which the Company dismissed its Appeal of the Civil Action. The Company also
agreed to pay the Landlord $135,680, which included the rents claimed under the
Lease which were in dispute and license fees, interest and attorney's fees
incurred by the Landlord. The payment of the sums pursuant to the settlement
agreement was not an admission of liability by the Company for the Lease Claims
asserted against the Company in the Civil Action. The Landlord fully released
and discharged the Company of any litigation or action or claim against it. In
addition, the Landlord waived its rights of first refusal contained in the Lease
and fully released the Company from any or all obligations as tenant under the
Lease.

Autotote Systems, Inc.

58
<PAGE>

On April 15, 1998, Autotote filed a counterclaim against the Company
and CBS with the United States District Court for the District of Nevada, asking
that the Agreements be rescinded on the grounds that there was a failure of
consideration, failure of meeting of the minds, mutual mistake, lack of an
intent to perform and impossibility of performance. In addition, Autotote and
ASI asked the Court to award damages for the Company and CBS' alleged breach of
certain of the Agreements, and for fraud, intentional interference with
contractual relations, negligent interference with contractual relations,
intentional interference with prospective economic advantage, false light and
libel. Autotote and ASI requested the Court to award compensatory damages in
excess of $75,000 plus interest, and punitive damages. This litigation is now in
the discovery phase. The parties have reached a tentative settlement agreement.
Settlement documents have been drafted, but have not yet been executed. This
litigation has been suspended pending the potential settlement of this matter.

Imagineering Systems, Inc.

Internet Operations Investigation

On December 16, 1999, the Nevada State Gaming Control Board ("Board")
filed a complaint for disciplinary action against the Company referred to as
State Gaming Control Board v. American Wagering, Inc., d.b.a. Mega$ports PTY,
LTD., Case No. 99-27 ("Complaint"), related to the operation of Mega$ports PTY.,
LTD., ("Mega$ports (ACT)"). The Complaint contains thirteen (13) separate counts
against the Company. The Complaint alleges the Company, as a company registered
with the Nevada Gaming Commission, engaged in an unsuitable method of operation
due to the fact that Mega$ports (ACT) accepted a series of wagers from a patron
who was physically located in Las Vegas, Nevada. The patron was an undercover
agent of the Board. The Board further alleges that the acceptance of these
wagers is a violation of both federal and Nevada state laws that prohibit
Internet sports wagering. However, the Company believes a number of factual and
legal defenses may be asserted against the claims contained in the Complaint
including, the strong Company policy against accepting wagering from patrons
physically located within Nevada or the United States, and the fact that had the
patron not utilized a Canada Internet server, he would have more than likely
been identified and his account would have been rejected. The Company has also
asserted that it has not engaged in an unsuitable method of operation because it
never knowingly accepted wagers from the United States or Nevada.

59
<PAGE>

Other

The Company or any subsidiary is not a party to any other material
pending legal proceeding, nor, to the Company's knowledge, is any other material
legal proceeding threatened against it or any of its subsidiaries. The Company
maintains insurance coverage, including property, workers' compensation and
general liability insurance which it considers adequate for the size of the
Company and the nature of its business. Management does not believe the outcome
of the above described proceedings will have a material adverse effect on the
Company's financial position or results of operations.

11. Capital Stock and Stock Options

The Company's Board of Directors approved a program to repurchase up to
250,000 shares of the Company's Common Stock from time to time in the open
market. As of January 31, 2000, 61,100 shares had been repurchased pursuant to
this program. The timing and amount of future share repurchases, if any, will
depend on various factors, including market conditions, available alternative
investments and the Company's financial position.

On December 9, 1998, the Company redeemed its shareholder notes of
$1,892,424 in the aggregate for Series A Preferred Stock. The Series A Preferred
Stock is fixed at 18,924 shares at $100 per share. The holders of the Series A
Preferred Stock shall be entitled to receive, upon declaration of the Board of
Directors, cumulative cash dividends at the annual rate per share of 10%. Such
dividends shall be payable in equal quarterly payments on each March 31, June
30, September 30 and December 31, commencing with December 31, 1998. The Series
A Preferred Stock shall be redeemable, in whole or (on a pro rata basis) in
part, at any time at the option of the Company, by resolution of the Board of
Directors. The holders of Series A Preferred Stock shall not be entitled to vote
(on a cumulative basis or otherwise) as a class or with the Common Stock upon
any matters submitted to shareholders for a vote, except as otherwise mandated
under Nevada law. During fiscal year ended January 31, 2000 3,500 shares were
redeemed for $350,000.

The Company has reserved 337,500 shares of Common Stock to be issued to
Racusin in satisfaction of the outcome of the verdict in the Racusin litigation.
(See Note 10).

60
<PAGE>
On January 31, 2000, the Company had in effect stock option plans under
which options may be granted to employees and directors of the Company. Under
these plans the Company has authorized 575,000 and 20,000 shares, respectively.
Options granted under the plans have an exercise price equal to the market price
of the Company's common stock on the date of grant and a term of 5 years for the
employees' plan and 10 years for the directors plan. Options granted under the
plans generally become exercisable on a single date from three to five years
from the date of grant.

Summarized information for the stock option plans is as follows:
<TABLE>
<CAPTION>
Employee Director
---------------------------------------- ------------------------------------------
2000 1999 2000 1999
-------- -------- -------- ---------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 248,867 $ 7.02 218,967 $ 7.95 4,100 $ 6.97 1,400 $ 8.72
Granted 1,000 5.00 66,400 5.06 700 8.88 2,700 6.06
Exercised -- -- -- -- -- -- -- --
Forfeited (40,900) 8.40 (36,500) 9.04 -- -- -- --
Expired -- -- -- -- -- -- -- --

Outstanding at the end of the year 208,967 6.74 248,867 $ 7.02 4,800 7.25 4,100 $ 6.97
======= ====== ======= ====== ====== ====== ===== ======

Exercisable at the end of the year 139,167 $7.22 116,445 $ 7.35 4,100 6.97 1,400 8.72
======= ====== ======= ====== ====== ====== ===== ======
Weighted average fair value of options
granted on grant date $4.82 $ 3.85 $8.85 $ 2.39
====== ====== ====== ======
Options available for grant at the end
of the year 366,033 326,133 15,200 15,900
======= ======= ====== ======

The following table summarizes information about stock options outstanding at January 31, 2000.

Detail composition of options outstanding
January 31, 2000

Average
Contractual
Options Exercise Life Remaining Options
Outstanding Price (YRS) Exercisable
----------- -------- -------------- -----------
1,000 $ 5.00 4.80 --
57,400 $ 5.13 3.49 --
700 $ 8.88 10.00 --
2,000 $ 5.89 8.42 2,000
700 $ 6.56 9.00 700
700 $ 6.69 8.00 700
102,500 $ 6.88 1.55 102,500
30,000 $ 8.13 1.45 30,000
6,667 $ 8.25 1.31 6,667
11,400 $ 9.25 2.09 --
700 $10.75 7.00 700
------- --------
213,767 143,267
======= ========

</TABLE>

61
<PAGE>

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 provides, among other things, that
companies may elect to account for employee stock options using a fair
value-based method or continue to apply the intrinsic value-based method
prescribed by Accounting Principal Board Opinion No. 25 ("APB 25").

Under SFAS No. 123, all employee stock option grants are considered
compensatory. Compensation cost is measured at the date of grant based on the
estimated fair value of the options determined using an option-pricing model.
The model takes into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the stock, expected
dividends on the stock and the risk-free interest rate over the expected life of
the option. Under APB 25, generally only stock options that have intrinsic value
at the date of grant are considered compensatory. Intrinsic value represents the
excess, if any, of the market price of the stock at the grant date over the
exercise price of the options. Under both methods, compensation cost is charged
to earnings over the period the options become exercisable.

The Company has elected to continue to account for employee stock
options under APB 25. Accordingly, no material compensation cost has been
recognized.

The following table discloses the Company's pro forma net loss and net
loss per share assuming compensation cost for employee stock options had been
determined consistent with SFAS No. 123. The table also discloses the
weighted-average assumptions used in estimating the fair value of each option
grant on the date of grant using the Black-Scholes option pricing model. The
model assumes no expected future dividend payments on the Company's common stock
for the options granted during the fiscal year ended January 31, 2000 and 1999.
<TABLE>
<CAPTION>
Year ended Year ended
January 31, 2000 January 31, 1999
----------------- ----------------
<S> <C> <C>
Net loss
As reported $ (994,525) $(1,599,185)
Pro forma (1,209,647) (1,914,126)
Net loss per share
Basic
As reported (.13) (0.21)
Pro forma (.16) (0.25)

Diluted
As reported (.13) (0.21)
Pro forma (.16) (0.25)
Weighted-average assumptions
Expected stock price volatility 181.17% 139.99%
Risk-free interest rate 6.30% 5.55%
Expected option lives 5 years 5 years
</TABLE>

12. Business Segments

The Company's primary operations are reported in the following four segments:
Wagering, Casino, Systems, and Keno. The Hotel, Food and Beverage business
segment has been presented as discontinued operations in the accompanying
consolidated financial statements (See Note 5).

62
<PAGE>

The Wagering segment consists of Leroy's, the licensed bookmaking
operations with the largest number of sports books in the state of Nevada. As
of January 31, 2000, in addition to its main location, the Company operated
46 race and sports books located within licensed gaming establishments owned
by other companies throughout the state of Nevada. Leroy's leases the square
footage necessary to conduct its operations at non-Company owned
establishments. Additionally, the Wagering segment consists of Mega$ports
U.S. and Mega$ports (ACT) operations. Mega$ports (ACT) is the Company's
international wagering hub for Internet sports wagering. The financial
records of Mega$ports (ACT) are maintained in Australia.

The Casino segment includes a 5,600 square foot casino within the
Howard Johnson Hotel containing approximately 65 electronic gaming devices
including slot machines, video poker machines and multi-game video machines.

The Systems segment, consisting of CBS, AWISSI and AWIHSI and STOP,
designs, sells, installs and maintains equipment, software and computer
systems to the sports betting and hotel industries. CBS is a 50% partner in
the joint venture, Mega$ports, a Nevada Corporation. Mega$ports offers a
pari-mutuel sports wagering system in the state of Nevada which ceased
operations in March 2000, and is included in the Wagering Agreement described
above.

The Keno segment develops, sells, operates and services stand alone
linked progressive keno games using state-of-the-art graphical interfaces.
Keno is currently in its startup phase and has primarily incurred labor and
marketing expenses.

In accordance with Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information," the
following summarizes the segment information for the Company:

<TABLE>
<CAPTION>
Years
Ended
January 31, Wagering Casino Systems Keno Corporate Total
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 2000 $7,734,379 $676,827 $4,929,953 $ 37,822 $ -- $13,378,981
1999 6,090,267 $643,711 $3,157,840 $ -- $ -- 9,891,818

Research and 2000 1,649 -- 807,961 23,168 -- 832,778
Development 1999 -- -- 574,524 -- -- 574,524

Operating 2000 1,211,187 92,611 318,750 (864,856) (2,081,278) (1,323,586)
Income (Loss)* 1999 1,134,483 116,499 127,429 (217,055) (1,754,466) (593,110)

Capital 2000 342,520 14,177 108,204 198,258 30,829 693,988
Expenditures 1999 355,152 -- 116,525 243,522 62,650 777,849

Depreciation and 2000 311,730 8,330 428,978 32,940 33,429 815,407
Amortization 1999 324,967 22,497 354,722 155 63,548 765,889

Identifiable 2000 3,943,317 277,607 5,070,162 931,046 506,924 10,729,056
Assets 1999 4,052,879 301,738 5,343,561 317,067 676,330 10,691,575
</TABLE>

* Operating income (loss) does not include the allocation of corporate
management fees. The management fees are equal to 9.5% of each operating
Company's gross operating revenues.

63
<PAGE>

13. Related Party Transactions

A shareholder and former board member of the Company, is also a board member
of a company which owns a gaming establishment in which LHSP leases space for
a sports book operation. Lease payments made to this establishment were
approximately $246,000 and $211,000 for the years ended January 31, 2000 and
1999, respectively. The Company believes these payments represent the fair
market value of the leased space.

64
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

The Exhibits are listed in the Index to Exhibits on
pages 52 through 54.

(b) Reports on Form 8-K

On December 22, 1999 the Company filed a Form 8-K
with respect to Items 1, 3, 6, 7 and 12.

65
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

AMERICAN WAGERING, INC.

By: /s/ Victor Salerno
---------------------------------------------
Victor Salerno, President and Chief Executive
Officer

In accordance with the requirements of the Exchange Act, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>

/s/ Victor Salerno President; Chief Executive April 30, 2000
- --------------------------------- Officer; Director
Victor Salerno

/s/ Robert D. Ciunci Chief Financial Officer April 30, 2000
- --------------------------------- (Principal Financial and
Robert D. Ciunci Accounting Officer);
Director

/s/ W. Larry Swecker Director April 30, 2000
- ---------------------------------
W. Larry Swecker

/s/ Michael S. Merillat Director April 30, 2000
- ---------------------------------
Michael S. Merillat

/s/ Philip P. Hannifin Director April 30, 2000
- ---------------------------------
Philip P. Hannifin

s</TABLE>

<PAGE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report dated April 7, 2000, included in this Annual Report on
Form 10-KSB, into the Company's previously filed registration statements on Form
S-8 (File No. 333-27395).

ARTHUR ANDERSEN LLP

Las Vegas, Nevada
May 1, 2000