<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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

                 For the quarterly period ended October 31, 1998

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

           For the transition period from ___________ to _____________

                        Commission file number: 000-20685
                       -----------------------------------

                             American Wagering, Inc.
       ------------------------------------------------------------------
        (Exact name of small business issuer as specified 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
          -------------------------------------------------------------
                     (Address of principal executive office)


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

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

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

         The number of shares of Common Stock outstanding as of December 4, 1998
was 1,779,733.

<PAGE>

PART I- FINANCIAL INFORMATION
ITEM1 - FINANCIAL STATEMENTS
                           AMERICAN WAGERING, INC.
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                  Unaudited
      ASSETS                                                                     October 31,       January 31,
CURRENT ASSETS:                                                                      1998              1998
                                                                                     ----              ----
<S>                                                                             <C>               <C>         
    Cash                                                                        $  2,060,615      $  2,092,894
    Short-term investments                                                           547,640         5,409,723
    Accounts receivable, net of allowance for doubtful accounts
     of $56,311 and $69,736                                                          358,346           333,660
    Inventories, net of obsolescence reserve of $188,225 and $188,225                488,036           557,439
    Prepaid expenses and other current assets                                        568,348           451,347
                                                                                ------------       -----------

TOTAL CURRENT ASSETS                                                               4,022,985         8,845,063

PROPERTY AND EQUIPMENT, net                                                        3,995,395         3,885,390

INTANGIBLE ASSETS, net                                                             1,285,736           628,184

DEPOSITS AND OTHER ASSETS                                                            341,100           280,157

NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS                                    1,139,874         1,153,146
                                                                                ------------       -----------

TOTAL ASSETS                                                                    $ 10,785,090      $ 14,791,940
                                                                                ============       ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Current portion of long-term debt                                           $     56,760      $    549,254
    Accounts payable                                                                 839,949         1,476,892
    Accrued expenses                                                                 610,678           860,710
    Unpaid winning tickets                                                         1,126,314         1,441,041
    Shareholder notes payable                                                      1,892,424         1,486,912
    Other current liabilities                                                      1,427,255           583,090
    Net current liabilities of discontinued operations                               612,884         1,158,649
                                                                                ------------       -----------
TOTAL CURRENT LIABILITIES                                                          6,566,264         7,556,548

 LONG-TERM DEBT:
    Shareholder notes payable                                                           --             946,212
    Long-term debt, less current portion                                           1,894,180         1,942,239
                                                                                ------------       -----------

TOTAL LONG-TERM DEBT                                                               1,894,180         2,888,451

MINORITY INTEREST                                                                      4,018                --   

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value; authorized 25,000,000 shares; issued and
      outstanding: none                                                                   --                --   
Common stock -- $.01 par value; authorized 25,000,000 shares; issued and
      outstanding: 7,841,033 and 7,840,833                                            78,410            78,408
    Additional paid-in capital                                                    14,047,296        14,047,296
    Accumulated deficit                                                          (11,477,585)       (9,778,763)
      Less:  treasury stock; at cost: 61,100 shares and 0 shares                    (327,493)               --
                                                                                ------------       -----------  
TOTAL STOCKHOLDERS' EQUITY                                                         2,320,628         4,346,941
                                                                                ------------       -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $ 10,785,090      $ 14,791,940
                                                                                ============       ===========
</TABLE>

            Note: The consolidated balance sheet at January 31, 1998
      has been derived from the audited financial statements at that date.
              The accompanying notes are an integral part of these
                       consolidated financial statements.
<PAGE>

                             AMERICAN WAGERING, INC

                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                            1998             1997
                                                                            ----             ----
<S>                                                                     <C>              <C>        
REVENUES                                                                $ 2,633,333      $ 3,286,246

OPERATING COSTS AND EXPENSES:
         Direct costs                                                     1,880,120        2,089,477
         Research and development                                           148,072          128,793
         Selling, general and administrative                                872,731          594,356
         Depreciation and amortization                                      219,523          167,329
                                                                        -----------      -----------

TOTAL OPERATING COSTS AND EXPENSES                                        3,120,446        2,979,955
                                                                        -----------      -----------

OPERATING INCOME (LOSS)                                                    (487,113)         306,291

OTHER INCOME (EXPENSE):
         Interest income                                                     12,822          106,151
         Other income                                                        77,395           37,743
         Equity in loss from investment in joint venture                   (196,638)        (639,015)
         Minority interest                                                   (4,018)            --   
         Interest expense                                                   (79,413)        (202,740)
                                                                        -----------      -----------

TOTAL OTHER EXPENSE                                                        (189,852)        (697,861)
                                                                        -----------      -----------

LOSS FROM CONTINUING OPERATIONS
      BEFORE PROVISION (BENEFIT) FOR INCOME TAXES                          (676,965)        (391,570)

PROVISION (BENEFIT) FOR INCOME TAXES                                             --               --
                                                                        -----------      -----------  

LOSS FROM CONTINUING OPERATIONS                                            (676,965)        (391,570)

LOSS FROM DISCONTINUED OPERATIONS                                                --         (216,933)
                                                                        -----------      -----------

NET LOSS                                                                $  (676,965)     $  (608,503)
                                                                        ===========      ===========
LOSS PER SHARE OF COMMON STOCK

    Loss from continuing operations                                     $     (0.09)     $     (0.05)

    Loss from discontinued operations                                   $        --      $     (0.03)
                                                                        -----------      ----------- 
    Net loss                                                            $    (0. 09)     $     (0.08)
                                                                        ===========      ===========

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
                             AMERICAN WAGERING, INC

                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

               FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                            1998                 1997
                                                            ----                 ----
<S>                                                      <C>                 <C>        
REVENUES                                                 $ 6,602,114         $ 6,972,626

OPERATING COSTS AND EXPENSES:
         Direct costs                                      4,514,542           5,012,865
         Research and development                            426,732             389,720
         Selling, general and administrative               2,500,430           1,637,890
         Depreciation and amortization                       551,080             462,823
                                                         -----------         -----------

TOTAL OPERATING COSTS AND EXPENSES                         7,992,784           7,503,298
                                                         -----------         -----------

OPERATING LOSS                                            (1,390,670)           (530,672)

OTHER INCOME (EXPENSE):
         Interest income                                     119,642             314,168
         Other income                                        232,720             107,726
         Equity in loss from investment in joint venture    (393,819)           (640,900)
         Minority interest                                    (4,018)                 --   
         Interest expense                                   (262,677)           (415,205)
                                                         -----------         -----------

TOTAL OTHER EXPENSE                                         (308,152)           (634,211)
                                                         -----------         -----------
LOSS FROM CONTINUING OPERATIONS
      BEFORE PROVISION (BENEFIT) FOR INCOME TAXES         (1,698,822)         (1,164,883)

PROVISION (BENEFIT) FOR INCOME TAXES                              --                  --
                                                         -----------         -----------   

LOSS FROM CONTINUING OPERATIONS                           (1,698,822)         (1,164,883)

LOSS FROM DISCONTINUED OPERATIONS                                 --            (568,734)
                                                         -----------         -----------

NET LOSS                                                 $(1,698,822)        $(1,733,617)
                                                         ===========         =========== 

LOSS PER SHARE OF COMMON STOCK

    Loss from continuing operations                      $     (0.22)        $     (0.15)

    Loss from discontinued operations                    $        --         $     (0.07)
                                                         -----------         -----------

    Net loss                                             $     (0.22)        $     (0.22)
                                                         ===========         ===========
</TABLE>

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

                             AMERICAN WAGERING, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                         1998                 1997
                                                                                         ----                 ----
<S>                                                                                   <C>                 <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:     
Net loss                                                                              $(1,698,822)        $(1,733,617)
                                                                                      -----------         -----------
     Adjustments to reconcile net loss to cash provided by (used in) operating
          activities:
     Depreciation and amortization                                                        645,758             711,199
     Equity in (earnings) loss from investment in joint venture                           393,819             639,015
     Minority interest                                                                      4,018                --   
     Provision (benefit) for doubtful accounts                                            330,708             (57,237)
     Changes in assets and liabilities:
     Decrease (increase) in assets:
           Accounts receivable                                                            (45,076)            205,205
           Inventory                                                                       71,808             (90,397)
           Net receivable from joint venture partner                                         --              (503,387)
           Prepaid expenses and other current assets                                     (137,185)            (28,315)
     Increase (decrease) in liabilities:
           Accounts payable                                                              (923,624)            551,431
           Accrued expenses                                                              (746,817)           (128,551)
           Unpaid winning tickets                                                        (314,726)            119,832
           Other current liabilities                                                      862,167             716,403
                                                                                      -----------         -----------

     Total adjustments                                                                   (140,852)          2,135,199
                                                                                      -----------         -----------

         Net cash provided by (used in) operating activities                           (1,557,970)            401,582

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                                (541,526)           (969,392)
     Purchased assets of ACS                                                             (524,404)                 --   
     Expenditures capitalized as intangible assets                                        (12,650)            (42,439)
     Increase in investment in joint venture                                             (637,308)           (778,853)
     Proceeds from joint venture partner                                                       --             774,555
     (Increase) decrease in short-term investments                                      4,862,084             627,672
     Deposits and other assets                                                           (161,112)            139,857
                                                                                      -----------         -----------

         Net cash provided by (used in) investing activities                            2,985,084            (248,600)
                                                                                      -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Repayments of long-term debt                                                    (1,131,900)           (225,333)
       Net proceeds from issuance of common stock                                              --              27,496
       Cost of prior year initial public offering                                              --            (666,375)
       Purchase of treasury stock                                                        (327,493)                 --
                                                                                      -----------         ----------- 

         Net cash used in financing activities                                         (1,459,393)           (864,212)
                                                                                      -----------         -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                             $   (32,279)        $  (711,230)
                                                                                      ===========         ===========

CASH AND CASH EQUIVALENTS, beginning of period                                        $ 2,092,894         $ 3,276,641
                                                                                      ===========         ===========

CASH AND CASH EQUIVALENTS, end of period                                              $ 2,060,615         $ 2,565,411
                                                                                      ===========         ===========

SUPPLEMENTAL CASH FLOW DISCLOSURE:

        Cash paid for interest                                                        $   451,803         $   606,194
                                                                                      ===========         ===========
         Cash paid (recovered) for income taxes                                       $  (136,000)        $   136,000
                                                                                      ===========         ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>

                            AMERICAN WAGERING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997

1.   Summary of Business and Significant Accounting Policies

         The accompanying unaudited consolidated financial statements do not
         include all information and disclosures required under generally
         accepted accounting principles. However, in the opinion of management,
         the accompanying financial statements contain all adjustments
         (consisting only of normal recurring adjustments) considered necessary
         to present fairly the financial position, results of operations and
         cash flows of the Company for the periods presented under generally
         accepted accounting principles. The financial statements as of and for
         the years ended January 31, 1998 and 1997 and the notes thereto
         included in the Company's Annual Report on Form 10-KSB should be read
         in conjunction with these interim financial statements.

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

         LHSP was incorporated under the laws of the State of Nevada on November
         14, 1977. The Company operates its main race and sports book located on
         the premises of LHC in Las Vegas, Nevada. In addition, LHSP operates
         sports books throughout the state of Nevada in licensed gaming
         establishments not owned by LHSP. The Company leases the square footage
         necessary to conduct its operations at the non-Company owned gaming
         establishments. As of October 31, 1998 and 1997 the Company had 43 and
         41 locations, respectively.

         LHC owns and operates a 150 room Howard Johnson's hotel (the "Hotel")
         and, through its wholly owned subsidiary B-P Food Corporation, an
         International House of Pancakes restaurant located in Las Vegas,
         Nevada. Additionally, LHSP operates a 5,600 square foot casino
         containing approximately 68 electronic gaming devices including slot
         machines, video poker machines and multi-game video machines adjacent
         to the Hotel and restaurant (collectively the "Hotel/Casino").

         In March 1995, LHC purchased fifty-percent interests in certain
         entities, which owned and operated the Hotel/Casino, located in Las
         Vegas, Nevada. The related entities were BSRB Resort Hotels (a Nevada
         general partnership) and B-P Food Corporation (a Nevada corporation
         which was wholly-owned by BSRB Resort Hotels). The purchase was
         financed by a bank note executed by LHSP for approximately $1.1
         million.

         In February 1996, the stockholders of LHSP purchased a fifty-percent
         interest in the stock of B-P Gaming Corporation (a Nevada corporation
         which was contributed to the Company in connection with the
         Reorganization). 

<PAGE>


         On May 15, 1996, the Company purchased the remaining fifty-percent
         interests in BSRB Resort Hotels and B-P-Gaming Corporation ("B-P") for
         $3,601,000 in cash and the assumption of certain liabilities and B-P
         Gaming was subsequently dissolved.

         On October 25, 1996, the Company acquired from Autotote Corporation
         ("AC"), all of the shares of capital stock of Autotote CBS, Inc.
         (subsequently renamed Computerized Bookmaking Systems, Inc. ("CBS")),
         along with certain software and licensing rights pursuant to a Stock
         Transfer Agreement between the Company and AC. In consideration the
         Company paid $3 million in cash to AC and agreed to guarantee, pursuant
         to a Guaranty Agreement, CBS's obligation under its current mortgage of
         approximately $2 million on the real estate and building in Las Vegas,
         Nevada where the Company currently maintains its corporate offices.

         CBS designs, installs and maintains sports and race book equipment,
         software and computer systems for the sports betting industry. CBS is
         also 50% partner in a joint venture that owns and operates Mega$ports,
         Inc. ("Mega$ports") which offers a pari-mutuel sports wagering system.
         The Mega$ports joint venture began full operations in July 1997. CBS
         recorded an equity in loss in joint venture of $394,000 for the nine
         months ended October 31, 1998.

         On April 22, 1998, the Company determined it would concentrate its
         business efforts on its core competency, sports wagering, and is
         currently seeking a qualified buyer for the hotel, food and beverage
         segment of American Wagering, Inc. In the accompanying consolidated
         financial statements as of and for the three and nine months ended
         October 31, 1998 and 1997 the results of the hotel, food and beverage
         operations have been accounted for as discontinued operations (See Note
         2).

         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. In
         consideration the Company paid $500,000 in cash to ACS and agreed to
         pay the remaining purchase price of $250,000 in the Company's common
         stock upon satisfaction of certain conditions. The Company's two new
         subsidiaries, AWI Sports Systems, 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 will own the
         remaining 20% of AWISSI and 49% of AWIHSI. Pursuant to a Settlement
         Agreement between the Company and ACS, the litigation between the
         parties was settled as part of this transaction. AWISSI and AWIHSI will
         assume certain contractual obligations of ACS, including all customer
         contracts. AWISSI and AWIHSI sells and services sports and race book
         computer systems and hotel computer systems, respectively.

         Significant Accounting Policies

         Short-Term Investments

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

<PAGE>


         Inventories

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

         Depreciation and Amortization

         Property and equipment are depreciated by use of both the straight line
         and accelerated methods over their estimated useful lives.

         Intangible Assets

         Intangible assets, which are principally attributed to the Systems
         segment, include software, customer lists and rights for manufacturing
         and distribution which are being amortized over 7 years and the excess
         of the cost over the fair market value of net assets of acquired
         companies which are being amortized over the periods expected to be
         benefited or approximately 25 years. The intangible assets balance on
         October 31, 1998 includes software of $739,000, customer lists of
         $434,000, covenant not to compete of $24,000 and goodwill of $89,000.
         Accumulated amortization was $325,000 and $195,000 at October 31, 1998
         and January 31, 1998, respectively.

         The realizability of intangible assets is evaluated periodically as
         events or circumstances warrant based on various analyses, including
         cash flow and profitability projections. While the Systems segment has
         generated operating losses in fiscal 1999, cash flows are positive and
         management believes that the benefits of these assets will be realized
         in future periods through system sales and synergy of operations
         between CBS and the newly-formed AWISSI and AWIHSI businesses. The
         Company believes at this time there is no impairment of its intangible
         assets.

         Period Results Not Indicative of the Full Year

         The results of operations for the nine months ended October 31, 1998
         and 1997 are not necessarily indicative of the results to be expected
         for the full fiscal year.

         Revenue Recognition

         With respect to the horse and sports wagering segment, in accordance
         with industry practice, the Company recognizes 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. Sports wagering
         revenues are recognized based on the results of a completed sporting
         event. With respect to the Systems segment, the Company recognizes
         revenue when the software and hardware are installed at the customer
         location. Maintenance fee revenue is recognized periodically based on
         agreements with customers or as the services are provided.

         Research and Development

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

         Advertising

         The Company expenses all costs associated with advertising as incurred.

<PAGE>
         Earnings Per Share

         The Financial Accounting Standards Board issued Statement of Financial
         Accounting Standards No. 128 -"Earnings Per Share", ("SFAS No. 12811")
         which became effective for periods ending after December 15, 1997 and
         replaces historically reported earnings per share with "basic" 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, except that in the event of losses
         from continuing operations, no effect is given to potentially issuable
         securities as effects of this issuance would be anti-dilutive.

         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:
<TABLE>
<CAPTION>
                                                  Three Months Ended          Nine Months Ended
                                                       October 31,                October 31,
                                                  1998           1997         1998          1997
                                                  ----           ----         ----          ----
<S>                                            <C>             <C>          <C>           <C>      
         Weighted-average common
         shares outstanding (used in the       7,781,690       7,840,833    7,802,148     7,838,623
         computation of earnings per share)    =========       =========    =========     =========    
</TABLE>

         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 accompanying consolidated financial statements include the accounts
         of the Company, its wholly owned subsidiaries and majority interests.
         All significant inter-company 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.
<PAGE>

         Reclassification

         Certain amounts in the 1997 consolidated financial statements have been
         reclassified to conform to the 1998 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.

         Due to the Company's loss there was no provision for income taxes
         recorded. On January 31, 1998 the Company had $2,029,132 of operation
         loss carryforwards available to reduce future taxable income, which
         will expire in 2013.


2.       Discontinued Operations

         On April 22, 1998, the Company determined it would concentrate its
         business efforts on its core competency, sports wagering, and is
         currently seeking a qualified buyer for the hotel, food and beverage
         segment of American Wagering, Inc. In the accompanying consolidated
         financial statements as of, and for the three and nine months ended
         October 31, 1998 and 1997 the results of the hotel, food and beverage
         operations have been accounted for as discontinued operations.

         The estimated loss on the disposal of this segment is $862,000
         consisting of an estimated loss on disposal of the business of $246,000
         and a provision of $616,000 for anticipated operating losses during the
         phase out period.

         These operations had operating revenues of $850,000 and $793,000 for
         the three months ended October 31, 1998 and 1997, respectively, with
         operating income and loss for the same periods of $5,000 and $127,000,
         respectively. Identifiable assets of the hotel, food and beverage
         operations were $3.7 million as of October 31, 1998 and January 31,
         1998. These operations had operating revenues of $2,502,000 and
         $2,538,000 for the nine months ended October 31, 1998 and 1997,
         respectively, with operating losses for the same periods of $99,000 and
         $285,000, respectively.

<PAGE>
         The components of assets and liabilities of discontinued operations
         included in the accompanying consolidated balance sheets are as
         follows:
<TABLE>
<CAPTION>

                                                        October 31,            January 31
                                                           1998                  1998
                                                           ----                  ----
<S>                                                   <C>                     <C>                                       
Current assets                                        $   195,413             $   162,878                               
Accounts payable, accrued expenses and other             (808,297)             (1,321,527)
                                                      -----------             -----------

Net current liabilities                               $  (612,884)            $(1,158,649)
                                                      ===========             ===========

Property, plant and equipment, net                    $ 3,473,847             $ 3,546,725
Other non-current assets                                       --                      --
Non-current liabilities                                (2,333,973)             (2,393,579)
                                                      -----------             ----------- 

Net long-term assets                                  $ 1,139,874             $ 1,153,146                        
                                                      ===========             ===========
</TABLE>


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

<TABLE>
<CAPTION>
                                                   Three Months Ended                       Nine Months Ended
                                                        October 31,                             October 31,
                                                1998                1997                1998                1997
                                                ----                ----                ----                ----
<S>                                         <C>                 <C>                 <C>                 <C>        
Revenues                                    $   849,746         $   793,354         $ 2,501,605         $ 2,538,211
Costs and Expenses                              979,218           1,010,287           3,022,171           3,106,945
                                            -----------         -----------         -----------         -----------
Loss before income taxes                       (129,472)           (216,933)           (520,566)           (568,734)
Provision (benefit) for income taxes               --                  --                  --                  --   
                                            -----------         -----------         -----------         -----------
Net loss                                    $  (129,472)        $  (216,933)        $  (520,566)        $  (568,734)
                                            ===========         ===========         ===========         ===========

</TABLE>


         The loss from discontinued operations for the nine months ended October
         31, 1998 of $520,566 has been charged against the aforementioned
         provision. In conjunction with the proposed sale of the hotel facility,
         the Company intends to negotiate a leaseback of, and continue to
         operate, the casino, which will serve as the Company's principal gaming
         location.

3.       Capital Stock

         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 October 31, 1998, 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. The terms of the Company's Series A Preferred Stock
         restrict the repurchase of the Company's Common Stock (See Note 5).

<PAGE>
4.       Business Segments

         The Company's primary operations are reported in the following four
         segments: Horse and Sports Wagering, Casino, Computerized Bookmaking
         Systems, AWI Sports Systems and AWI Hotel Systems ("Systems"), and AWI
         Keno ("Keno"). The Hotel, Food and Beverage business segment has been
         presented as discontinued operations in the accompanying consolidated
         financial statements (See Note 2).

         The Horse and Sports Wagering segment consists of licensed bookmaking
         operations with the largest number of sports books in the state of
         Nevada. As at October 31, 1998, in addition to its main location, the
         Company operated 42 race and sports books located within licensed
         gaming establishments owned by other companies throughout the state of
         Nevada. The Horse and Sports wagering segment leases the square footage
         necessary to conduct its operations at these non-company owned
         establishments.

         The Casino segment includes a 5,600 square foot casino within the
         Howard Johnson Hotel containing approximately 68 electronic gaming
         devices including slot machines, video poker machines and multi-game
         video machines.

         The Systems segment designs, installs and maintains race and sports
         book equipment, software and computer systems to the sports betting and
         hotel industries. Computerized Bookmaking Systems is a 50% partner in
         the joint venture, Mega$ports. Mega$ports offers a pari-mutuel sports 
         wagering system.

         The Keno segment develops, sells 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.

<PAGE>

         The following summarizes the segment information for the Company:
<TABLE>
<CAPTION>
                       Three
                       Months           Horse and
                       Ended              Sports
                      October            Wagering        Casino        Systems       Keno       Corporate       Total
                        31,
                      --------------------------------------------------------------------------------------------------

<S>                     <C>             <C>             <C>          <C>         <C>        <C>                       
Revenues                1998            $1,481,791      $157,535     $ 994,007   $       -    $        -    $2,633,333
                        1997             2,493,624       131,879       660,743           -             -     3,286,246

Operating               1998               112,437        28,723       (69,255)   (137,127)     (421,891)     (487,113)
Income (loss)*          1997               679,799         3,635        54,418           -      (431,561)      306,291

Capital                 1998                24,625             -        93,443     230,879        30,679       379,626
Expenditures            1997               100,511             -         5,113           -       124,477       230,101

Depreciation and        1998                85,063         5,624       111,439           -        17,397       219,523
Amortization            1997                82,218         4,001        73,206           -         7,904       167,329

Identifiable            1998             3,000,531       359,667     5,188,489     304,579       791,950     9,645,216
Assets     January 31,  1998             2,974,576       336,910     4,564,546           -     5,762,762    13,638,794

                        Nine
                       Months           Horse and
                       Ended              Sports
                      October            Wagering        Casino       Systems       Keno       Corporate       Total
                        31,
                      --------------------------------------------------------------------------------------------------

Revenues                1998            $3,606,610      $458,170    $2,537,334   $       -    $        -    $6,602,114
                        1997             4,316,910       421,833     2,233,883           -             -     6,972,626

Operating               1998               170,663        78,561      (178,552)   (137,127)   (1,324,215)   (1,390,670)
Income (loss)*          1997               230,125        39,935       262,853           -    (1,063,585)     (530,672)

Capital                 1998                120,653            -       106,895     230,879        61,302       519,729
Expenditures            1997               589,608             -        43,423           -       162,993       796,024

Depreciation and        1998               237,190        16,873       255,332           -        41,685       551,080
Amortization            1997               178,755        12,004       255,803           -        16,261       462,823

Identifiable            1998             3,000,531       359,667     5,188,489     304,579       791,950     9,645,216
Assets      January 31, 1998             2,974,576       336,910     4,564,546           -     5,762,762    13,638,794

</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.


<PAGE>

         Comparative financial data for the hotel, food and beverage operations,
         reported as discontinued operations, is as follows:

         Revenues were $850,000 and $793,000 for the three months ended October
         31, 1998 and 1997, respectively. Operating income and loss were $5,000
         and $127,000 for the three months ended October 31,1998 and 1997,
         respectively. Capital Expenditures were $2,024 and $(9,631) for the
         three months ended October 31, 1998 and 1997, respectively.
         Depreciation and Amortization was $1,636 and $87,806 for the three
         months ended October 31, 1998 and 1997, respectively. Identifiable
         assets were $3,669,000 and $3,710,000 as at October 31, 1998 and
         January 31, 1998, respectively. Revenues were $2,502,000 and $2,538,000
         for the nine months ended October 31, 1998 and 1997, respectively.
         Operating losses were $99,262 and $284,619, for the nine months ended
         October 31, 1998 and 1997, respectively. Capital Expenditures were
         $21,797 and $175,254 for the nine months ended October 31, 1998 and
         1997, respectively. Depreciation and Amortization was $94,675 and
         $248,377 for the nine months ended October 31, 1998 and 1997,
         respectively.

5.       Subsequent Event

         On December 8, 1998, the Company has agreed to sell 9,462 shares of an
         aggregate of 18,924 shares of Series A Preferred Stock $.01 par vaule
         of the Company (the "Shares") to each of Victor J. Salerno and Judith
         Salerno in consideration of the cancellation of indebtedness owed by
         the Company to each of Victor J. Salerno and Judith Salerno in an
         outstanding amount of $946,212 to each. The Shares entitle the holders
         to receive cumulative quarterly cash dividends at the annual rate per
         share of 10% of the original consideration price per Share of $100. The
         Series A Preferred Stock is redeemable, in whole or (on a pro rata
         basis) in part, at any time at the option of the Corporation. The
         Company has filed the Certificate of Designations setting forth the
         terms of the Series A Preferred Stock with the Secretary of State of
         the State of Nevada. The Company believes it will have approval from
         the Secretary of State and consummate the transaction on December 9,
         1998.


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

Results of Operations

Continuing Operations

Fiscal Quarter ended October 31,1998 compared to the Fiscal Quarter ended
October 31, 1997

Revenues for the Fiscal Quarter ended October 31,1998 ("Third Quarter of Fiscal
1999"), were $2,633,000, a decrease of $653,000 or 19.9% from revenues of
$3,286,000 for the Fiscal Quarter ended October 31,1997 ("Third Quarter of
Fiscal 1998"). The decrease in revenues was primarily attributed to the Horse
and Sports Wagering operation.

Revenues from horse and sports wagering were approximately $1,482,000 for the
Third Quarter of Fiscal 1999, a decrease of $1,012,000 or 40.6% from revenues of
$2,494,000 for the Third Quarter of Fiscal 1998. The decrease in horse
and sports wagering revenues between quarters was attributed to unfavorable
variances of sports book locations operating in both periods ("same 

<PAGE>

store") impacted by the success of bettors in football wagering. Revenues of
$1,104,000 for the Third Quarter of Fiscal 1999 at same store locations
decreased $855,000 or 43.6% from revenues of $1,959,000 for the Third Quarter of
Fiscal 1998. Revenues from football wagering at all sport book locations
combined of $543,000 varied unfavorably between quarters by approximately
$879,000 or 61.8% compared to $1,422,000 for the same period last year. Handle
(the total amount wagered at the Company's sports and race books) for the Third
Quarter of Fiscal 1999 was $32,729,000, an increase of $8,426,000 or 34.7% from
the handle of $24,303,000 for the Third Quarter of Fiscal 1998. The increase in
handle was principally due to a higher volume of wagering at same store
locations and a net increase of two sports book locations operating during the
Third Quarter of Fiscal 1999 than were operating during Third Quarter of Fiscal
1998. Handle of $26,123,000 for the Third Quarter of Fiscal 1999 at same store
locations increased $4,996,000 or 23.6% over the handle of $21,127,000 for the
Third Quarter of Fiscal 1998. Handle of $6,606,000 for the Third Quarter of
Fiscal 1999 at the locations that were not operating in both periods increased
$3,433,000 or 108.1% from the handle of $3,176,000 for the Third Quarter of
Fiscal 1998. The overall increase in handle was additionally impacted by an
increase in baseball and football wagering between fiscal quarters. An increase
or decrease in handle is not necessarily indicative of an increase or decrease
in revenues or profits. Net win percentage (revenues divided by handle) for all
race and sports wagering was 4.5% for the Third Quarter of Fiscal 1997, a
decrease of 56.3% compared to a net win percentage for all race and sports
wagering of 10.3% for the Third Quarter of Fiscal 1998. Net win percentage
fluctuates depending on the outcome of various sporting events within the
reporting period. The decrease in the net win percentage between the fiscal
quarters was primarily attributed to unfavorable results in football. Revenues
from the Systems segment were approximately $994,000 for the Third Quarter of
Fiscal 1999, an increase of $333,000 or 50.4% from revenues of $661,000 for the
Third Quarter of Fiscal 1998. The favorable variance between fiscal quarters was
principally attributed to increased equipment sales. Revenues from Casino
operations of $158,000 for the Third Quarter of Fiscal 1999 increased by $26,000
or 19.7% as compared to revenues of $132,000 for the Third Quarter of Fiscal
1998. The increase in casino operations revenues between fiscal quarters was
attributed to marketing efforts to increase play by local customers.

Direct costs were $1,880,000 for the Third Quarter of Fiscal 1999, a decrease of
$209,000 or 10.0% from direct costs of $2,089,000 for the Third Quarter of
Fiscal 1998. Direct costs include product and installation cost of sales, labor
costs, gaming taxes and supplies, rent, advertising, franchise fees, and other
costs. Direct costs associated with horse and sports wagering were $1,232,000
for the Third Quarter of Fiscal 1999, a decrease of $432,000 or 26.0% as
compared to direct costs of $1,664,000 for the Third Quarter of Fiscal 1998. The
decrease in direct costs associated with horse and sports wagering was primarily
due to lower marketing, rent, gaming taxes and other expenses associated with
the sports book operations. Direct costs of the Systems segment were $493,000
for the Third quarter of Fiscal 1999, an increase of $192,000 or 63.8% as
compared to direct costs of $301,000 for the Third Quarter of Fiscal 1998. The
increase is principally attributed to greater equipment costs associated with
higher equipment sales. AWI Sports Systems and AWI Hotel Systems, which began
operations during the Second Quarter of Fiscal 1999, contributed $88,000 to the
increase in direct costs of the Systems segment. Direct costs associated with
Casino operations of $123,000 for the Third Quarter of Fiscal 1999 were equal to
direct costs of $123,000 for the Third Quarter of Fiscal 1998. Direct costs as a
percentage of revenues was 71.4% for the Third Quarter of Fiscal 1999, an
increase of 12.3% as compared to direct costs as a percentage of revenues of
63.6% for the Third Quarter of Fiscal 1998. The increase is principally due to
lower revenues of the horse and sports wagering segment.
<PAGE>

Research and Development expenses were $148,000 for the Third Quarter of Fiscal
1999, an increase of $19,000 or 14.7%, as compared to research and development
expenses of $129,000 for the Third Quarter of Fiscal 1999. These expenses relate
exclusively to CBS and are attributed to the support of current products and
development of new products.

Selling, general and administrative expenses were $873,000 for the Third Quarter
of Fiscal 1999, an increase of $279,000 or 47.0% from selling, general and
administrative expenses of $594,000 for the Third Quarter of Fiscal 1998. The
increase in selling, general and administrative expenses was attributed to the
Systems operations, primarily CBS. CBS administrative expenses were $307,000 for
the Third Quarter of Fiscal 1999, an increase of $203,000 or 195.2% compared to
$104,000 for the Third Quarter of Fiscal 1998. The unfavorable variance was
principally due to additional reserves associated with the Mega$ports joint
venture, legal costs associated with litigation and marketing expenses. Selling,
general and administrative costs associated with the horse and sports wagering
were $52,000 for the Third Quarter of Fiscal 1999, a decrease of $16,000 or
23.5%, from selling, general and administrative costs of $68,000 for the Third
Quarter of Fiscal 1998. The decrease between fiscal quarters is primarily
attributed to lower outside services, repairs and legal expenses, in addition
to, the expiration of a non-compete agreement during the Second Quarter of
Fiscal 1999. Selling, general and administrative expenses at the corporate level
were $402,000 for the Third Quarter of Fiscal 1999, a decrease of $19,000 or
4.5%, as compared to selling, general and administrative expenses of $421,000
for the Third Quarter of Fiscal 1998. The favorable variance between the fiscal
quarters was principally due to a reduction in professional services and travel
expenses. The Keno segment, which was formed during the Second Quarter of Fiscal
1999, contributed $107,000 to the aggregate increase in selling, general and
administrative expenses between fiscal quarters. Selling, general and
administrative expenses were 33.1% of revenues for the Third Quarter of Fiscal
1999, an increase of 82.9% compared to 18.1% for the Third Quarter of Fiscal
1998. The unfavorable variance in selling, general and administrative expenses
as a percentage of revenue between the fiscal quarters was principally due to
increased expenses at CBS.

Depreciation and amortization was $220,000 for the Third Quarter of Fiscal 1999,
an increase of $53,000 or 31.7% from depreciation and amortization of $167,000
for the Third Quarter of Fiscal 1998. Depreciation expense increased by $12,000
between fiscal quarters due to capital expenditures attributed to the corporate
entities. Amortization expense increased by $41,000 between fiscal quarters due
primarily to the acquisition of assets from ACS.

Other expense of $190,000 for Third Quarter of Fiscal 1999, varied favorably by
$508,000 or 72.8%, from other expense of $698,000 in the Third Quarter of Fiscal
1998. The favorable variance in other expense between fiscal quarters
principally due to a reduction of equity in loss from the Mega$ports joint
venture of $442,000.

Net loss from continuing operations of $677,000 for the Third Quarter of Fiscal
1999 varied unfavorably by $285,000 compared to the net loss from continuing
operations of $392,000 for Third Quarter of Fiscal 1998. Net income from horse
and sports wagering operations of $73,000 for the Third Quarter of Fiscal 1999
varied unfavorably by approximately $548,000 as compared to the net income of
$621,000 for the Third Quarter of Fiscal 1998 due to lower revenues. The net
income from the Casino operations of $29,000 for the Third Quarter of Fiscal
1999 varied favorably by $25,000 as compared to the net income of $4,000 for the
Third Quarter of Fiscal 1998 due to increased revenues. The net loss from CBS
operations for the Third Quarter of 

<PAGE>

Fiscal 1999 of $341,000 varied favorably by $279,000 compared to a net loss of
$620,000 for the Third Quarter of Fiscal 1998 principally due to the reduction
of the equity in loss from the Mega Sports joint venture. The net loss from the
Corporate Entities of $203,000 for the Third Quarter of Fiscal 1999 varied
favorably by $66,000 as compared to net loss of $137,000 for the Third Quarter
of Fiscal 1998.

Discontinued Operations

On April 22, 1998, the Company determined to concentrate its business efforts on
its core competency, sports wagering, and is seeking a qualified buyer from the
Hotel, food and beverage operations ("discontinued operations"). In the
Company's consolidated financial statements for and as of the Third Quarter of
Fiscal 1999 and 1998, the results of the hotel, food and beverage operation have
been accounted for as discontinued operations.

Revenues from discontinued operations were $850,000 for the Third Quarter of
Fiscal 1999, an increase of $57,000 or 7.2%, as compared to revenues of $793,000
for the Third Quarter of Fiscal 1998 due primarily to greater food sales.

Direct costs associated with discontinued operations were $614,000 for the Third
Quarter of Fiscal 1999, a decrease of $76,000 or 11.0%, as compared to direct
costs of $690,000 for the Third Quarter of Fiscal 1998. The decrease in direct
costs is primarily due to reduction in advertising, repairs and housekeeping
expenses.

Selling, general, and administration expenses associated with discontinued
operations were $230,000 for the Third Quarter of Fiscal 1999, an increase of
$87,000 or 60.8%, as compared to selling, general and administration expenses of
$143,000 for the Third Quarter of Fiscal 1998 due principally to reduced legal
expenses.

The net loss from discontinued operations of $129,000 for the Third Quarter of
Fiscal 1999 varied favorably by $88,000 or 40.6% from the net loss of $217,000
for the Third Quarter of Fiscal 1998. The net loss from discontinued operations
was charged against a provision of $616,000, established in fiscal year 1998,
for anticipated losses during the phase out period.

Nine Months Ended October 31, 1998 Compared to the Nine Months Ended 
October 31, 1997

Continuing Operations

Revenues for the nine months ended October 31,1998 were $6,602,000, a decrease
of $371,000 or 5.3% from revenues of $6,973,000 for the nine months ended
October 31,1997. The decrease in revenues was primarily attributed to the horse
and sports operation.

Revenues from horse and sports wagering was approximately $3,607,000 for the
nine months ended October 31, 1998, a decrease of $710,000 or 16.4%, from
revenues of $4,317,000 for the nine months ended October 31, 1997. The decrease
in horse and sports wagering revenues is attributed to unfavorable variances at
same store locations impacted by the success of bettors in football wagering.
Revenues of $2,941,000 for the nine months ended October 31, 1998 at same store
locations decreased by $543,000 or 15.6% from revenues of $3,484,000 for the
nine months ended October 31, 1997. Revenues from football wagering at all sport
book locations combined of $681,000 for the nine months ended October 31, 1998
varied unfavorably by approximately $743,000 or 52.2% compared to $1,424,000 for
the same period last year. Handle (the total amount wagered at the Company's
sports and race books) for the nine months ended 
<PAGE>

October 31, 1998 was $74,102,000, an increase of $13,837,000 or 23.0% from the
handle of $60,265,000 for the nine months ended October 31, 1997. The increase
in handle is principally due to the favorable performance of same store
locations. Handle of $59,727,000 for nine months ended October 31, 1998 at same
store locations increased $9,707,000 or 19.4% over the handle of $50,020,000 for
the nine months ended October 31, 1997. The increase in handle was additionally
attributed to a net increase of four sports book locations, in addition to an
increase in baseball, football and basketball wagering between periods. An
increase or decrease in handle is not necessarily indicative of an increase or
decrease in revenues or profits. Net win percentage (revenues divided by handle)
for all race and sports wagering was 4.9% for the nine months ended October 31,
1998, a decrease of 31.9% compared to a net win percentage for all race and
sports wagering of 7.2% for the nine months ended October 31, 1997. Net win
percentage fluctuates depending on the outcome of various sporting events within
the reporting period. The decrease in the net win percentage between periods was
primarily attributed to unfavorable results in football. Revenues from the
Systems operations were approximately $2,537,000 for the nine months ended
October 31, 1998, an increase of $303,000 or 13.6% as compared to revenues of
$2,234,000 for the nine months ended October 31, 1997. AWI Sports Systems and
AWI Hotel Systems, which began operations during the Second Quarter of Fiscal
1999, contributed $169,000 to the increase in Systems revenues for the nine
months ended October 31, 1998. CBS revenues were $2,368,000 for the nine months
ended October 31, 1998, an increase of $134,000 or 6.0% compared to revenues of
$2,234,000 for the nine months ended October 31, 1997. The CBS increase is
principally attributed to equipment sales. Revenues from the Casino operation
were approximately $458,000 for the nine months ended October 31, 1998, an
increase of $36,000 or 8.5% as compared to revenues of $422,000 for the nine
months ended October 31, 1997 principally due to increased play by local
customers.

Direct costs were $4,515,000 for nine months ended October 31, 1998, a decrease
of $498,000 or 9.9% from direct costs of $5,013,000 for the nine months ended
October 31, 1997. Direct costs include product and installation cost of sales,
labor costs, gaming taxes and supplies, rent, advertising, franchise fees, and
other costs. The decrease in direct costs was principally due to lower operating
costs of the horse and sports wagering segment. Direct costs associated with
horse and sports wagering were $3,096,000, a decrease of $629,000 or 16.9% as
compared to direct costs of $3,725,000 for the nine months ended October 31,
1997. The decrease in direct costs associated with horse and sports wagering was
primarily due to lower marketing, rent, gaming taxes and labor expenses partly
offset by increased event simulcasting expenses and costs related to pari-mutuel
race wagering. Direct costs associated with the Systems operations were
$1,019,000 for the nine months ended October 31, 1998, an increase of $99,000 or
10.8% as compared to direct costs of $920,000 for the nine months ended October
31, 1997. The increase in direct costs was attributed primarily to AWI Sports
Systems and AWI Hotel Systems, which began operations during the Second Quarter
of Fiscal 1999. Direct costs associated with the Casino operations were $363,000
for the nine months ended October 31, 1998, a decrease of $3,000 or .8% as
compared to direct costs of $366,000 for the nine months ended October 31, 1997.
Direct costs associated with the Keno segment were $30,000 for the nine months
ended October 31, 1998. Direct costs as a percentage of revenues was 68.4% for
the nine months ended October 31, 1998, a decrease of 4.9% as compared to direct
costs as a percentage of revenues of 71.9% for the nine months ended October 31,
1997. The decrease in direct costs as a percentage of revenues between fiscal
years is principally attributed to the Casino operations.

Research and Development expenses were $427,000 for the nine months ended
October 31, 1998, an increase of $37,000 or 9.5% for research and development
expenses of $390,000 for the nine months ended October 31, 1997. These expenses
relate exclusively to CBS and are attributed to the support of current products
and development of new products.
<PAGE>

Selling, general and administrative expenses were $2,500,000 for the nine months
ended October 31, 1998, an increase of $862,000 or 52.6% from selling, general
and administrative expenses of $1,638,000 for the nine months ended October 31,
1997. The increase in selling, general and administrative expenses was
principally attributed to the Systems operations. Selling, general and
administrative expenses from the Systems operations were $1,015,000 for the nine
months ended October 31, 1998, an increase of $609,000 or 150.0% as compared to
selling, general and administrative expenses of $406,000 for the nine months
ended October 31, 1997. The increase is attributed to additional reserves
associated with the Mega$ports joint venture and increased legal expenses
associated with CBS litigation. Corporate level selling, general and
administrative expenses were $1,275,000 for the nine months ended October 31,
1998, an increase of $230,000 or 22.0% compared to $1,045,000 for the nine
months ended October 31, 1997. The unfavorable variance was principally
attributed to increased labor costs due to additional personnel, costs
associated with the terminated acquisition of Imagineering Systems, Inc. and
higher marketing expenses. Selling, general and administrative expenses from
horse and sports wagering was $103,000 for the nine months ended October 31,
1998, a decrease of $80,000 or 43.7%, as compared to selling, general and
administrative expenses of $183,000 for the nine months ended October 31, 1997.
The favorable variance is principally attributed to reduced labor and legal
expenses. The Keno segment, which was formed during the Second Quarter of Fiscal
1999, contributed $107,000 to the aggregate increase in selling, general and
administrative expenses between periods. Selling, general and administrative
expenses were 37.9% of revenues for the nine months ended October 31, 1998, an
increase of 61.3% as compared to 23.5% for the nine months ended October 31,
1997. The unfavorable variance in selling, general and administrative expenses
as a percentage of revenue between periods was principally due to increased
expenses and reserves of the Systems operations.

Depreciation and amortization was $551,000 for the nine months ended October 31,
1998, an increase of $88,000 or 19.0% from depreciation and amortization of
$463,000 for the nine months ended October 31, 1997. Depreciation expense varied
unfavorably by $68,000 between periods principally due to capital equipment
acquisitions by the horse and sports operation. Amortization expense varied
unfavorably by $20,000 between periods, primarily due to the acquisition of
assets from ACS.

Other expense of $308,000 for the nine months ended October 31, 1998, varied
favorably by $326,000, or 51.4%, compared to other expense of $634,000 for the
nine months ended October 31, 1997. The favorable variance was principally due
to a reduction of the equity in loss from the Mega$ports Joint Venture of
$247,000, a decrease in interest expense of $153,000 and an increase in other
income of $125,000.

The net loss from continuing operations for the nine months ended October 31,
1998 of $1,699,000 varied unfavorably by $534,000 or 45.8% compared to the net
loss from continuing operations of $1,165,000 for nine months ended October 31,
1997. The net loss from the Corporate Entities of $654,000 for the nine months
ended October 31, 1998 varied unfavorably by $359,000 or 121.7% as compared to
net loss of $295,000 for the nine months ended October 31, 1997. The unfavorable
variance relates primarily to increased labor costs due to additional staff and
expenses associated with the terminated acquisition of Imagineering Systems,
Inc.. The net loss from the Systems operations of $683,000 for the nine months
ended October 31, 1998 varied unfavorably 
<PAGE>

by $202,000 or 42.0% as compared to the net loss of $481,000 for the nine months
ended October 31, 1997 due to increased expenditures. Net income from horse and
sports wagering operations of $36,000 for the nine months ended October 31, 1998
varied unfavorably by $72,000 or 66.7% as compared to the net income of $108,000
for the nine months ended October 31, 1997. The unfavorable variance was
principally due to decreased revenues. The net income from the Casino operations
for the nine months ended October 31, 1998 of $79,000 varied favorably by
$39,000 or 97.5% as compared to the net income of $40,000 for the nine months
ended October 31, 1997 due to increased revenues.

Discontinued Operations

On April 22, 1998, the Company determined to concentrate its business efforts on
its core competency, sports wagering, and is seeking a qualified buyer from the
Hotel, food and beverage operations ("discontinued operations"). In the
Company's consolidated financial statement for and as of the nine months ended
October 31, 1998 and 1997, the results of the Hotel, food and beverage operation
has been accounted for as discontinued operations.

Revenues from discontinued operations were $2,502,000 for the nine months ended
October 31, 1998, a decrease of $36,000 or 1.4%, as compared to revenues of
$2,538,000 for the nine months ended October 31, 1997. The decrease is
principally due to a decline in room revenues. The hotel's average occupancy
rate was 76% for the nine months ended October 31, 1998, an increase of 1.3%
from the average occupancy rate of 75% for the nine months ended October 31,
1997. The hotel's average daily room rate was approximately $40 for the nine
months ended October 31, 1998, a decrease of 11.1% from the average daily room
rate of $45 for the nine months ended October 31, 1997. The unfavorable variance
in average daily room rate is principally due to increased competition of new
hotels opening in the Las Vegas area.

Direct costs associated with discontinued operations were $1,861,000 for the
nine months ended October 31, 1998, a decrease of $208,000 or 10.1%, as compared
to direct costs of $2,069,000 from the nine months ended October 31, 1997. The
decrease in direct costs is principally due to lower housekeeping, labor and
repairs and maintenance costs.

Selling, general and administration expenses were $645,000, an increase of
$140,000 or 27.7%, as compared to selling, general and administration expenses
of $505,000 for the nine months ended October 31, 1997. The increase in selling,
general and administration expenses was primarily due to higher legal and
marketing expenses.

The net loss from discontinued operations of $521,000 for the nine months ended
October 31, 1998, was favorable by $48,000 or 8.4% as compared to a net loss of
$569,000 for the nine months ended October 31, 1997. The net loss from
discontinued operations for the nine months ended October 31, 1998 was charged
against a provision of $616,000, established in fiscal year 1998, for
anticipated losses during the phase out period.

Liquidity and Capital Resources

As of October 31, 1998, working capital was a negative $2,543,000 reflecting the
current maturation of shareholder notes payable and the liquidation of
short-term investments.

Cash used in operating activities was $1,558,000. Net cash provided by investing
activities amounted to $2,985,000 and is principally attributed to the
liquidation of short-term investments. Net cash used in financing activities
amounted to $1,459,000, representing repayments of long-term debt of $1,132,000
and the purchase of the 61,100 shares of the Company's common 
<PAGE>

stock for $327,000. During the nine months ended October 31, 1998, the Company
repaid $541,000 in shareholder notes and paid the balance of a note due to
Pioneer Citizens Bank of Nevada of $480,000 which was borrowed in March 1995 and
loaned to LHC to acquire the initial 50% interest in the Hotel/Casino.

On December 8, 1998, the Company has agreed to sell 9,462 shares of an aggregate
of 18,924 shares of Series A Preferred Stock, $.01 par value, of the Company in
consideration of the cancellation of indebtedness owed by the Company for $100
per share (See Note 5).

The Company has taken various steps to improve its profitability. In the event
these steps do not return the Company to profitability, management will seek
additional debt or equity financing. There can be no assurance the Company would
be able to complete such debt or equity financing or do so on terms satisfactory
to the Company. Management believes that the Company will be able to satisfy its
cash requirements for at least the next twelve months without having to raise
additional funds.

Year 2000

Background

In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the Year 2000 issue. If this
situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.

Risk Factors

The Company utilizes computer systems in virtually all aspects of its business.
In particular, Year 2000 problems in wagering systems at the properties in which
the Company or its customers utilize computer systems could disrupt operations
at the affected properties and may have a material adverse impact on the
Company's operating results. The Company is also exposed to the risk that one or
more of its suppliers could experience Year 2000 problems that impact the
ability of such suppliers to provide goods and services. Though this is not
considered as significant a risk with respect to the suppliers of goods, due the
availability of alternative suppliers, the disruption of certain services, such
as utilities or telephone communications, could, depending on the extent of the
disruption, have a material adverse impact on the Company's operations.
Computers on occasion fail, irrespective of the Year 2000 issue. For this
reason, where appropriate, the Company maintains paper and magnetic back-ups
daily and the Company's employees are trained in the restoration and use of
these back-ups.

Strategy

The Company has established a compliance program to assess the impact and
formulate corrective actions regarding the Year 2000 issue. Where important to
the Company's business, inquiries are being made of the third parties with whom
the Company does significant business, such as vendors and suppliers, as to
their Year 2000 readiness, and if a third party Year 2000 problem is detected,
alternatives are being developed. The Company believes that a substantial
majority of its currently offered systems are Year 2000 compliant. The Company
has completed approximately fifty percent of the process to assess both the
internal readiness of its computer systems and the compliance of its computer
products and software sold to customers for handling the year 2000. It is the
Company's goal to have all currently offered systems Year 2000 compliant by
mid-year 1999. The Company has not yet developed a comprehensive contingency
plan, although as previously mentioned all critical systems are currently backed
up daily and can be restored if necessary. The Company

<PAGE>

will continue to assess the need for a comprehensive contingency plan as
implementation of its corrective action plan continues.

Costs

The Company expects the entire process will cost no more than $100,000. The
Company does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition. However,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.



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, as amended. 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, Year 2000 compliance and the effects of regulation (including
gaming and tax regulation) 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 sporting 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).




<PAGE>



PART II           OTHER INFORMATION 

Item 1.           LEGAL PROCEEDINGS -- NON APPLICABLE

Item 2.           CHANGES IN SECURITIES -- NON APPLICABLE

Item 3.           DEFAULTS UPON SENIOR SECURITIES - NON APPLICABLE

Item 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
                  NON APPLICABLE

Item 5.           OTHER INFORMATION 
                  Discretionary Proxy Voting Authority/Stockholder Proposals

                  On May 21, 1998, the Securities and Exchange Commission
                  adopted an amendment to Rule 14a-4, as promulgated under the
                  Securities Exchange Act of 1934. The amendment to Rule
                  14a-4(c)(1) governs the Company's use of its discretionary
                  proxy voting authority with respect to a stockholder proposal
                  which the stockholder has not sought to include in the
                  Company's proxy statement. The new amendment provides that, if
                  a proponent of a proposal fails to notify the Company at least
                  45 days prior to the month and day of mailing of the prior
                  year's proxy statement, then the management proxies will be
                  allowed to use their discretionary voting authority when the
                  proposal is raised at the meeting, without any discussion of
                  the matter in the proxy statement.

                  With respect to the Company's 1999 Annual Meeting of
                  Stockholders, if the Company is not provided notice of a
                  stockholder proposal, which the stockholder has not previously
                  sought to include in the Company's proxy statement by May 26,
                  1999, the management proxies will be allowed to use their
                  discretionary authority as outlined above.

Item 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  Exhibits - Financial Data Schedule

Number                 Description                           Method of Filing
------                 -----------                           ----------------

27            Financial Data Schedule                         Filed Herewith

(b) The following report on form 8-K was filed during the quarter ended October
    31, 1998:

                  NONE

<PAGE>




                                   SIGNATURES


Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                                       AMERICAN WAGERING, INC.



                                                (Registrant)

Date:    December 8, 1998              By:      /s/ Robert D. Ciunci
                                       ------------------------------------
                                       Robert D. Ciunci
                                       Executive Vice President and
                                       Chief Financial Officer