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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended: July 31, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from

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 incorporation or organization) |  | (I.R.S. Employer Identification No.)

675 Grier Drive, Las Vegas, Nevada 89119

(Address of principal executive offices)

702-735-0101

(Issuers telephone number)





---

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

Check
whether the issuer (1) filed all 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.    x  Yes ̈No

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.    Yes  x    No ̈

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 8,379,879 shares of Common Stock as of
September 8, 2006

Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



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##### Table of Contents

TABLE OF CONTENTS

PART I  FINANCIAL INFORMATION



|     |  |                                                             |  |     
|---- |  | ----------------------------------------------------------- |  | ----
|ITEM |  |                                                             |  | PAGE
|     |  |                                                            
|1    |  | Financial Statements                                        |  | 1   
|     |  |                                                            
|     |  | Consolidated Balance Sheets                                 |  | 1   
|     |  |                                                            
|     |  | Consolidated Statements of Operations (3 months)            |  | 2   
|     |  |                                                            
|     |  | Consolidated Statements of Operations (6 months)            |  | 3   
|     |  |                                                            
|     |  | Consolidated Statements of Cash Flows                       |  | 4   
|     |  |                                                            
|     |  | Notes to Consolidated Financial Statements                  |  | 5   
|     |  |                                                            
|2    |  | Managements Discussion and Analysis or Plan of Operation   |  | 14  
|     |  |                                                            
|3    |  | Controls and Procedures                                     |  | 22  
|     |  |                                                            
|     |  | PART II  OTHER INFORMATION                                 |  |     
|ITEM |  |                                                             |  | PAGE
|     |  |                                                            
|1    |  | Legal Proceedings                                           |  | 24  
|     |  |                                                            
|2    |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 24  
|     |  |                                                            
|3    |  | Defaults Upon Senior Securities                             |  | 24  
|     |  |                                                            
|4    |  | Submission of Matters to a Vote of Security Holders         |  | 24  
|     |  |                                                            
|5    |  | Other Information                                           |  | 24  
|     |  |                                                            
|6    |  | Exhibits                                                    |  | 24  



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##### Table of Contents

Part I  Financial Information



|Item 1. | Financial Statements.
|------- | ---------------------

AMERICAN WAGERING,
INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                 |  |                           |             |   |                  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                 |  | July 31, 2006 (Unaudited) |             |   | January 31, 2006 |  
|ASSETS                                                                                                           |  |                           |             |   |                  |   |             |  
|CURRENT ASSETS                                                                                                   |  |                           |             |   |                  |   |             |  
|Cash and Cash Equivalents                                                                                        |  | $                         | 2,576,790   |   |                  | $ | 2,221,445   |  
|Restricted Cash                                                                                                  |  |                           | 1,320,582   |   |                  |   | 1,296,204   |  
|Accounts Receivable, net of doubtful accounts allowance                                                          |  |                           | 491,421     |   |                  |   | 334,150     |  
|Inventories                                                                                                      |  |                           | 471,537     |   |                  |   | 702,591     |  
|Deferred Tax Assets, net                                                                                         |  |                           | 440,481     |   |                  |   | 440,481     |  
|Prepaid Expenses and Other Current Assets                                                                        |  |                           | 461,858     |   |                  |   | 407,696     |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL CURRENT ASSETS                                                                                             |  |                           | 5,762,669   |   |                  |   | 5,402,567   |  
|Property and Equipment, net                                                                                      |  |                           | 4,204,194   |   |                  |   | 2,047,840   |  
|Goodwill                                                                                                         |  |                           | 103,725     |   |                  |   | 103,725     |  
|Other Assets                                                                                                     |  |                           | 231,753     |   |                  |   | 295,367     |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL ASSETS                                                                                                     |  | $                         | 10,302,341  |   |                  | $ | 7,849,499   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                           |             |   |                  |   |             |  
|CURRENT LIABILITIES                                                                                              |  |                           |             |   |                  |   |             |  
|Current Portion of Long-Term Debt                                                                                |  | $                         | 511,455     |   |                  | $ | 208,400     |  
|Accounts Payable                                                                                                 |  |                           | 539,269     |   |                  |   | 483,852     |  
|Accrued Expenses                                                                                                 |  |                           | 986,638     |   |                  |   | 884,197     |  
|Unpaid Winning Tickets                                                                                           |  |                           | 412,212     |   |                  |   | 739,074     |  
|Customer Deposits and Other                                                                                      |  |                           | 622,947     |   |                  |   | 1,416,764   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL CURRENT LIABILITIES                                                                                        |  |                           | 3,072,521   |   |                  |   | 3,732,287   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|LONG-TERM DEBT, less current portion                                                                             |  |                           | 1,632,417   |   |                  |   | 129,423     |  
|OTHER LONG-TERM LIABILITIES                                                                                      |  |                           | 1,152,044   |   |                  |   | 1,315,784   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL LONG-TERM LIABILIITES                                                                                      |  |                           | 2,784,461   |   |                  |   | 1,445,207   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|Redeemable Series A Preferred Stock (3,238 shares)                                                               |  |                           | 323,800     |   |                  |   | 323,800     |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL LIABILITIES                                                                                                |  |                           | 6,180,782   |   |                  |   | 5,501,294   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|STOCKHOLDERS EQUITY                                                                                             |  |                           |             |   |                  |   |             |  
|Series A Preferred Stock  10% cumulative; $100.00 par value;18,924 shares authorized; 10,924 shares outstanding |  |                           | 1,092,400   |   |                  |   | 1,092,400   |  
|Common Stock  $0.01 par value; 25,000,000 shares authorized;8,312,166 and 8,248,864 shares issued               |  |                           | 83,121      |   |                  |   | 82,488      |  
|Additional Paid-In Capital                                                                                       |  |                           | 14,336,630  |   |                  |   | 14,139,686  |  
|Deficit                                                                                                          |  |                           | (11,063,099 | ) |                  |   | (12,638,876 | )
|Treasury Stock (61,100 shares)                                                                                   |  |                           | (327,493    | ) |                  |   | (327,493    | )
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                       |  |                           | 4,121,559   |   |                  |   | 2,348,205   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  | $                         | 10,302,341  |   |                  | $ | 7,849,499   |  
|                                                                                                                 |  |                           |             |   |                  |   |             |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                    |  |                                     |           |   |      |   |           |  
|----------------------------------- |  | ----------------------------------- | --------- | - | ---- | - | --------- | -
|                                    |  | For the Three Months Ended July 31, |          
|                                    |  | 2006                                |           |   | 2005 |  
|Revenues                            |  |                                     |           |   |      |   |           |  
|Wagering                            |  | $                                   | 1,799,884 |   |      | $ | 1,449,300 |  
|Hotel/Casino                        |  |                                     | 863,908   |   |      |   |           |  
|Systems                             |  |                                     | 2,189,868 |   |      |   | 1,549,762 |  
|                                    |  |                                     |           |   |      |   |           |  
|                                    |  |                                     | 4,853,660 |   |      |   | 2,999,062 |  
|                                    |  |                                     |           |   |      |   |           |  
|Direct Costs                        |  |                                     |           |   |      |   |           |  
|Wagering                            |  |                                     | 1,505,214 |   |      |   | 1,301,499 |  
|Hotel/Casino                        |  |                                     | 688,478   |   |      |   |           |  
|Systems                             |  |                                     | 590,931   |   |      |   | 597,801   |  
|                                    |  |                                     |           |   |      |   |           |  
|                                    |  |                                     | 2,784,623 |   |      |   | 1,899,300 |  
|                                    |  |                                     |           |   |      |   |           |  
|Administrative Costs and Expenses   |  |                                     |           |   |      |   |           |  
|Research and Development            |  |                                     | 261,372   |   |      |   | 245,273   |  
|Selling, General and Administrative |  |                                     | 802,856   |   |      |   | 547,657   |  
|Depreciation and Amortization       |  |                                     | 204,506   |   |      |   | 95,448    |  
|                                    |  |                                     |           |   |      |   |           |  
|                                    |  |                                     | 1,268,734 |   |      |   | 888,378   |  
|                                    |  |                                     |           |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES  |  |                                     | 4,053,357 |   |      |   | 2,787,678 |  
|                                    |  |                                     |           |   |      |   |           |  
|OPERATING INCOME                    |  |                                     | 800,303   |   |      |   | 211,384   |  
|                                    |  |                                     |           |   |      |   |           |  
|Other Income (Expense)              |  |                                     |           |   |      |   |           |  
|Interest Income                     |  |                                     | 21,273    |   |      |   | 14,811    |  
|Interest Expense                    |  |                                     | (47,107   | ) |      |   | (6,906    | )
|Reorganization Expense              |  |                                     |           |   |      |   | (27,505   | )
|Litigation                          |  |                                     |           |   |      |   | 328,624   |  
|Other, net                          |  |                                     | 18,249    |   |      |   | 35,494    |  
|                                    |  |                                     |           |   |      |   |           |  
|                                    |  |                                     | (7,585    | ) |      |   | 344,518   |  
|                                    |  |                                     |           |   |      |   |           |  
|INCOME BEFORE INCOME TAX BENEFIT    |  |                                     | 792,718   |   |      |   | 555,902   |  
|PROVISION FOR INCOME TAX            |  |                                     |           |   |      |   | 43,119    |  
|                                    |  |                                     |           |   |      |   |           |  
|NET INCOME                          |  | $                                   | 792,718   |   |      | $ | 512,783   |  
|                                    |  |                                     |           |   |      |   |           |  
|EARNINGS PER SHARE:                 |  |                                     |           |   |      |   |           |  
|Basic                               |  | $                                   | 0.10      |   |      | $ | 0.06      |  
|Diluted                             |  | $                                   | 0.09      |   |      | $ | 0.06      |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                     |  |                                   |           |   |      |   |           |  
|------------------------------------ |  | --------------------------------- | --------- | - | ---- | - | --------- | -
|                                     |  | For the Six Months Ended July 31, |          
|                                     |  | 2006                              |           |   | 2005 |  
|Revenues                             |  |                                   |           |   |      |   |           |  
|Wagering                             |  | $                                 | 4,062,589 |   |      | $ | 3,638,112 |  
|Hotel/Casino                         |  |                                   | 1,296,272 |   |      |   |           |  
|Systems                              |  |                                   | 4,031,959 |   |      |   | 2,667,245 |  
|                                     |  |                                   |           |   |      |   |           |  
|                                     |  |                                   | 9,390,820 |   |      |   | 6,305,357 |  
|                                     |  |                                   |           |   |      |   |           |  
|Direct Costs                         |  |                                   |           |   |      |   |           |  
|Wagering                             |  |                                   | 2,914,589 |   |      |   | 2,735,081 |  
|Hotel/Casino                         |  |                                   | 1,079,884 |   |      |   |           |  
|Systems                              |  |                                   | 1,322,272 |   |      |   | 1,238,865 |  
|                                     |  |                                   |           |   |      |   |           |  
|                                     |  |                                   | 5,316,745 |   |      |   | 3,973,946 |  
|                                     |  |                                   |           |   |      |   |           |  
|Administrative Costs and Expenses    |  |                                   |           |   |      |   |           |  
|Research and Development             |  |                                   | 500,734   |   |      |   | 487,452   |  
|Selling, General and Administrative  |  |                                   | 1,556,586 |   |      |   | 1,203,057 |  
|Depreciation and Amortization        |  |                                   | 373,524   |   |      |   | 187,239   |  
|                                     |  |                                   |           |   |      |   |           |  
|                                     |  |                                   | 2,430,844 |   |      |   | 1,877,748 |  
|                                     |  |                                   |           |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES   |  |                                   | 7,747,589 |   |      |   | 5,851,694 |  
|                                     |  |                                   |           |   |      |   |           |  
|OPERATING INCOME                     |  |                                   | 1,643,231 |   |      |   | 453,663   |  
|                                     |  |                                   |           |   |      |   |           |  
|Other Income (Expense)               |  |                                   |           |   |      |   |           |  
|Interest Income                      |  |                                   | 38,051    |   |      |   | 28,739    |  
|Interest Expense                     |  |                                   | (81,326   | ) |      |   | (10,551   | )
|Reorganization Expense               |  |                                   |           |   |      |   | (45,492   | )
|Litigation                           |  |                                   |           |   |      |   | 328,624   |  
|Other, net                           |  |                                   | 46,047    |   |      |   | 136,200   |  
|                                     |  |                                   |           |   |      |   |           |  
|                                     |  |                                   | 2,772     |   |      |   | 437,520   |  
|                                     |  |                                   |           |   |      |   |           |  
|INCOME BEFORE INCOME TAX BENEFIT     |  |                                   | 1,646,003 |   |      |   | 891,183   |  
|PROVISION FOR INCOME TAX             |  |                                   |           |   |      |   | 80,000    |  
|                                     |  |                                   |           |   |      |   |           |  
|NET INCOME                           |  | $                                 | 1,646,003 |   |      | $ | 811,183   |  
|                                     |  |                                   |           |   |      |   |           |  
|BASIC AND DILUTED EARNINGS PER SHARE |  | $                                 | 0.20      |   |      | $ | 0.09      |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                       |  |                                   |           |   |      |   |            |  
|---------------------------------------------------------------------- |  | --------------------------------- | --------- | - | ---- | - | ---------- | -
|                                                                       |  | For the Six Months Ended July 31, |          
|                                                                       |  | 2006                              |           |   | 2005 |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       |  | $                                 | 2,221,445 |   |      | $ | 3,998,851  |  
|                                                                       |  |                                   |           |   |      |   |            |  
|Net cash provided by (used in) operating activities                    |  |                                   | 1,186,748 |   |      |   | (1,425,120 | )
|                                                                       |  |                                   |           |   |      |   |            |  
|INVESTING ACTIVITIES                                                   |  |                                   |           |   |      |   |            |  
|Increase in restricted cash                                            |  |                                   | (24,378   | ) |      |   |            |  
|Withdrawals of restricted cash                                         |  |                                   |           |   |      |   | 80,684     |  
|Decrease in notes receivable                                           |  |                                   |           |   |      |   | 320,000    |  
|Purchase of property and other, including $300,000 in 2006 acquisition |  |                                   | (665,431  | ) |      |   | (270,517   | )
|                                                                       |  |                                   |           |   |      |   |            |  
|Net cash provided by (used in) investing activities                    |  |                                   | (689,809  | ) |      |   | 130,167    |  
|                                                                       |  |                                   |           |   |      |   |            |  
|FINANCING ACTIVITIES                                                   |  |                                   |           |   |      |   |            |  
|Sale of stock                                                          |  |                                   | 38,602    |   |      |   | 25,893     |  
|Repayment of borrowings                                                |  |                                   | (409,968  | ) |      |   | (75,034    | )
|Proceeds from borrowings                                               |  |                                   | 300,000   |   |      |   |            |  
|Current dividends on preferred stock                                   |  |                                   | (70,228   | ) |      |   | (70,228    | )
|Payment of preferred stock dividends in arrears                        |  |                                   |           |   |      |   | (213,400   | )
|                                                                       |  |                                   |           |   |      |   |            |  
|Net cash used in financing activities                                  |  |                                   | (141,594  | ) |      |   | (332,769   | )
|                                                                       |  |                                   |           |   |      |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   |  |                                   | 355,345   |   |      |   | (1,627,722 | )
|                                                                       |  |                                   |           |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                             |  | $                                 | 2,576,790 |   |      | $ | 2,371,129  |  
|                                                                       |  |                                   |           |   |      |   |            |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JULY 31, 2006

(UNAUDITED)



|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited interim,
consolidated financial statements of American Wagering, Inc. (AWI) and Subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been
included. Results of operations for the current interim period are not necessarily indicative of results to be expected for the full year. For further information, please refer to the consolidated financial statements of the Company, and the related
notes, included in the Annual Report on Form 10-KSB of AWI for the fiscal year ended January 31, 2006, previously filed with the Securities and Exchange Commission (SEC) (from which consolidated balance sheet information of the
Company at January 31, 2006, included in this report, was derived). All significant inter-company accounts and transactions have been eliminated in the consolidation.

Certain minor reclassifications have been made to amounts in the consolidated financial statements of prior periods to conform to the current period presentation.



|2. | Adoption of SFAS No. 123R
|-- | -------------------------

The Company has issued
various stock options (Note 5) in non-capital raising transactions in exchange for services rendered and to be rendered. Prior to February 1, 2006, the Company accounted for stock-based compensation under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (Statement 123). However, as permitted under Statement 123, employee compensation cost was recognized using the intrinsic value method described in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25). Effective February 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R), and applied the provisions of SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method. Therefore, prior periods were not restated to reflect the impact of the adoption of SFAS
No. 123R.



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As a result of the adoption of SFAS No. 123R, stock-based compensation expense recognized during the three and six
months ended July 31, 2006, of $84,798 and $158,974, respectively, included compensation expense for all share-based payments granted on or prior to January 31, 2006, but not yet vested as of February 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of Statement 123, and compensation cost for all share-based payments granted or vesting on or subsequent to February 1, 2006, based on the fair value estimates in accordance with
SFAS No. 123R. Had we not adopted and implemented SFAS No. 123R, net income and diluted earnings per share for the three and six months ended July 31, 2006 would have been as follows:



|                                             |  |                                  |         |   |                                |   |           |  
|-------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------ | - | --------- | -
|                                             |  | Three Months Ended July 31,
2006 |         |   | Six Months Ended July 31,
2006 |  
|Net income, prior to effect of SFAS No. 123R |  | $                                | 877,516 |   |                                | $ | 1,804,977 |  
|Effect of adoption of SFAS No. 123R          |  |                                  | (84,798 | ) |                                |   | (158,974  | )
|                                             |  |                                  |         |   |                                |   |           |  
|Net income                                   |  | $                                | 792,718 |   |                                | $ | 1,646,003 |  
|                                             |  |                                  |         |   |                                |   |           |  
|Earnings per share:                          |  |                                  |         |   |                                |   |           |  
|Basic, as reported                           |  | $                                | 0.10    |   |                                | $ | 0.20      |  
|Basic, pro forma                             |  | $                                | 0.11    |   |                                | $ | 0.22      |  
|Diluted, as reported                         |  | $                                | 0.09    |   |                                | $ | 0.20      |  
|Diluted, pro forma                           |  | $                                | 0.10    |   |                                | $ | 0.22      |  

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing
model using the following weighted average assumptions for grants in the three and six month periods ended July 31, 2006:



|                        |  |      |  
|----------------------- |  | ---- | -
|Expected life in years  |  | 7.1  |  
|Risk-free interest rate |  | 4.9  | %
|Dividend yield          |  | 0.0  | %
|Expected volatility     |  | 84.6 | %

Prior to the adoption of SFAS No. 123R, the Company measured compensation cost for share-based compensation
plans using the intrinsic value method under APB No. 25 and made pro forma disclosures of the fair value method as computed under Statement 123. If compensation expense for stock options issued to officers and employees had been determined
based upon the fair value at the grant date consistent with the methodology prescribed under Statement 123, the net income (loss) and basic earnings (loss) per share would have been as shown below.



|                                                                                                                                            |  |                                  |         |   |                                |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------ | - | ------- | -
|                                                                                                                                            |  | Three Months Ended July 31,
2005 |         |   | Six Months Ended July 31, 2005 |  
|Net income, as reported                                                                                                                     |  | $                                | 512,783 |   |                                | $ | 811,183 |  
|Total stock-based employee compensation expense determined under fair-market value based method for all rewards, net of related tax
effects |  |                                  | (103    | ) |                                |   | (103    | )
|                                                                                                                                            |  |                                  |         |   |                                |   |         |  
|Pro forma net income                                                                                                                        |  | $                                | 512,680 |   |                                | $ | 811,080 |  
|                                                                                                                                            |  |                                  |         |   |                                |   |         |  
|Earnings per share:                                                                                                                         |  |                                  |         |   |                                |   |         |  
|Basic and diluted, as reported                                                                                                              |  | $                                | 0.06    |   |                                | $ | 0.09    |  
|Basic and diluted, pro forma                                                                                                                |  | $                                | 0.06    |   |                                | $ | 0.09    |  

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing
model for grants in the three and six month periods ending July 31, 2005:



|                        |  |       |  
|----------------------- |  | ----- | -
|Expected life in years  |  | 8.8   |  
|Risk-free interest rate |  | 4.0   | %
|Dividend yield          |  | 0.0   | %
|Expected volatility     |  | 120.0 | %



6



---

##### Table of Contents

|3. | Long-Term Debt
|-- | --------------

Long-term debt (less current portion)
increased from $129,423 at January 31 to $1,632,417 at July 31, 2006. AWI Gaming, Inc. (AWIG), guaranteed by AWI and Sturgeons, LLC, borrowed $1,500,000 from Great Basin Bank of Nevada for the acquisition in the first
quarter of 2006 of Sturgeons Inn & Casino (Note 8). This commercial loan is collateralized by a first deed of trust on Sturgeons Inn & Casino and a security interest in the personal property and fixtures of
Sturgeons Inn & Casino. Interest at the Wall Street Journal-listed prime rate plus 2% is payable monthly. The principal is due in a single payment on March 1, 2008.



|4. | Net Income per Share
|-- | --------------------

Basic net income per share is computed
by dividing net income by the weighted average number of common shares outstanding during the reported period. Except in loss years when to do so would be anti-dilutive, diluted earnings per share considers potentially dilutive securities (options)
as outstanding and net income is adjusted for preferred stock dividends. For the operating periods presented, the tables below reconcile net income and weighted average shares outstanding used to calculate basic and diluted income per share.



|                                                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                      |  | Three Months Ended July 31, |           |   | Six Months Ended July 31, |  
|                                                                                                      |  | 2006                        |           |   | 2005                      |   |           | 2006 |  |   | 2005      |  
|Net Income                                                                                            |  | $                           | 792,718   |   |                           | $ | 512,783   |      |  | $ | 1,646,003 |   |  | $ | 811,183   |  
|Preferred stock dividends                                                                             |  |                             | (35,696   | ) |                           |   | (35,696   | )    |  |   | (70,228   | ) |  |   | (70,228   | )
|                                                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Net income as adjusted                                                                                |  | $                           | 757,022   |   |                           | $ | 477,087   |      |  | $ | 1,575,775 |   |  | $ | 740,955   |  
|                                                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Basic weighted average shares outstanding                                                             |  |                             | 8,274,376 |   |                           |   | 7,882,970 |      |  |   | 8,263,241 |   |  |   | 7,861,139 |  
|                                                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Diluted weighted average shares outstanding                                                           |  |                             | 8,388,452 |   |                           |   | 8,000,231 |      |  |   | 8,389,004 |   |  |   | 8,002,219 |  
|                                                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                     
|The following factors were considered in determining the diluted weighted average shares outstanding: | 
|                                                                                                      |  |                            
|                                                                                                      |  | Three Months Ended July 31, |           |   | Six Months Ended July 31, |  
|                                                                                                      |  | 2006                        |           |   | 2005                      |   |           | 2006 |  |   | 2005      |  
|Stock Options Outstanding                                                                             |  |                             | 847,552   |   |                           |   | 451,515   |      |  |   | 847,552   |   |  |   | 451,515   |  
|Stock Options Exercisable                                                                             |  |                             | 325,952   |   |                           |   | 200,715   |      |  |   | 325,952   |   |  |   | 200,715   |  
|Exercise Price  Low                                                                                  |  | $                           | 0.12      |   |                           | $ | 0.12      |      |  | $ | 0.12      |   |  | $ | 0.12      |  
|Exercise Price  High                                                                                 |  | $                           | 2.00      |   |                           | $ | 1.80      |      |  | $ | 2.00      |   |  | $ | 1.80      |  
|Average Market Price                                                                                  |  | $                           | 1.26      |   |                           | $ | 1.27      |      |  | $ | 1.44      |   |  | $ | 1.27      |  
|Net income as adjusted                                                                                |  | $                           | 757,022   |   |                           | $ | 477,087   |      |  | $ | 1,575,775 |   |  | $ | 740,955   |  
|Diluted weighted average of the options outstanding(1)                                                |  |                             | 114,076   |   |                           |   | 24,293    |      |  |   | 125,763   |   |  |   | 17,387    |  
|Anti-dilutive weighted average excluded(1)                                                            |  |                             | 770,057   |   |                           |   |           |      |  |   | 763,931   |   |  |   |           |  

---

|(1) | Options are not included in the weighted average number of shares outstanding if their effect is anti-dilutive or if the exercise price is greater than the market
price.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

|5. | Stock Options
|-- | -------------

2001 Stock Option Plan.



|                                                |  |         |  
|----------------------------------------------- |  | ------- | -
|                                                |  | OPTIONS |  
|Balance at January 31, 2006                     |  | 888,310 |  
|Granted (equal to or greater than market price) |  | 30,000  |  
|Exercised                                       |  | (63,302 | )
|Cancelled                                       |  | (17,456 | )
|                                                |  |         |  
|Balance at July 31, 2006                        |  | 837,552 |  
|                                                |  |         |  



| |  |  | 323,552 options are exercisable.
| | - |  | --------------------------------



| |  |  | Prices range from $0.50 to $2.00, with an average price of $1.71.
| | - |  | -----------------------------------------------------------------



| |  |  | Expiration dates range from August 9, 2006 to December 14, 2015.
| | - |  | ----------------------------------------------------------------



| |  |  | 148,228 options are available for grant under the plan.
| | - |  | -------------------------------------------------------

Vesting Schedule  2001 Stock Option Plan



|                                               |  |        
|---------------------------------------------- |  | -------
|Vested at July 31, 2006                        |  | 323,552
|Vesting, fiscal year ending January 31, 2007   |  | 112,000
|Vesting, fiscal year ending January 31, 2008   |  | 172,000
|Vesting, fiscal year ending January 31, 2009   |  | 80,000 
|Vesting, fiscal year ending January 31, 2010   |  | 80,000 
|Vesting, fiscal year ending January 31, 2011   |  | 70,000 
|                                               |  |        
|Number of Options Outstanding at July 31, 2006 |  | 837,552
|                                               |  |        

Directors Stock Option Plan.



|                                                 |  |        
|------------------------------------------------ |  | -------
|                                                 |  | OPTIONS
|Balance at January 31, 2006 and at July 31, 2006 |  | 10,000 
|                                                 |  |        



| |  |  | 2,400 options are exercisable.
| | - |  | ------------------------------



| |  |  | Prices range from $0.12 to $2.00, with an average price of $1.59.
| | - |  | -----------------------------------------------------------------



| |  |  | Expiration dates range from January 31, 2012 to August 31, 2015.
| | - |  | ----------------------------------------------------------------



| |  |  | 10,000 options are available for grant under the plan.
| | - |  | ------------------------------------------------------

Vesting Schedule  Directors Stock Option Plan



|                                               |  |       
|---------------------------------------------- |  | ------
|Vested at July 31, 2006                        |  | 2,400 
|Vesting, fiscal year ending January 31, 2007   |  | 3,800 
|Vesting, fiscal year ending January 31, 2008   |  | 3,800 
|                                               |  |       
|Number of Options Outstanding at July 31, 2006 |  | 10,000
|                                               |  |       



|6. | Business Segments
|-- | -----------------

The Company conducts operations through
three primary business segments: Wagering, Hotel/Casino and Systems.



8



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##### Table of Contents

Wagering. The Wagering segment is comprised of Leroys Horse & Sports Place, Inc.
(Leroys) and AWI Manufacturing, Inc. (AWIM). Leroys owns and operates race and sports books in the state of Nevada. AWIM leases self-service race and sports wagering kiosks; at the present time, Leroys
accounts for the bulk of AWIMs revenues.

Hotel/Casino. The Hotel/Casino segment is comprised of AWIG and Sturgeons, LLC. AWIG is the
sole member of Sturgeons, LLC, the operator of Sturgeons Inn & Casino in Lovelock, Nevada.

Systems. The Systems segment is
comprised of Computerized Bookmaking Systems, Inc. (CBS) and Contest Sports Systems, Inc. (CSS). CBS designs, sells, installs and maintains computerized race and sports book systems for the Nevada gaming industry. CSS leases
contest-related self-service kiosks; at the present time, CSS does not have revenues or significant expenses.



|                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|-------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                     |  | Three Months Ended July 31, |           | Six Months Ended July 31,
|                     |  | 2006                        |           | 2005                      |   | 2006      |  | 2005
|Wagering Revenue     |  | $                           | 1,799,884 |                           | $ | 1,449,300 |  | $    | 4,062,589 |  | $ | 3,638,112
|Hotel/Casino Revenue |  |                             | 863,908   |                           |   |           |  |      | 1,296,272 |  |   |          
|Systems Revenue      |  |                             | 2,189,868 |                           |   | 1,549,762 |  |      | 4,031,959 |  |   | 2,667,245
|                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Total Revenue        |  | $                           | 4,853,660 |                           | $ | 2,999,062 |  | $    | 9,390,820 |  | $ | 6,305,357
|                     |  |                             |           |                           |   |           |  |      |           |  |   |          



|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|---------------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                           |  | Three Months Ended July 31, |           | Six Months Ended July 31,
|                                                           |  | 2006                        |           | 2005                      |   | 2006      |  | 2005
|Wagering Direct and Administrative Costs and Expenses:     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Direct Costs                                               |  | $                           | 1,505,214 |                           | $ | 1,301,499 |  | $    | 2,914,589 |  | $ | 2,735,081
|Unallocated                                                |  |                             | 267,469   |                           |   | 235,407   |  |      | 632,574   |  |   | 548,455  
|Depreciation/Amortization                                  |  |                             | 76,611    |                           |   | 58,891    |  |      | 154,014   |  |   | 115,704  
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                           |  |                             | 1,849,294 |                           |   | 1,595,797 |  |      | 3,701,177 |  |   | 3,399,240
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|Hotel/Casino Direct and Administrative Costs and Expenses: |  |                             |           |                           |   |           |  |      |           |  |   |          
|Direct Costs                                               |  |                             | 688,478   |                           |   |           |  |      | 1,079,884 |  |   |          
|Unallocated                                                |  |                             | 213,869   |                           |   |           |  |      | 315,828   |  |   |          
|Depreciation/Amortization                                  |  |                             | 75,117    |                           |   |           |  |      | 118,863   |  |   |          
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                           |  |                             | 977,464   |                           |   |           |  |      | 1,514,575 |  |   |          
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|Systems Direct and Administrative Costs and Expenses:      |  |                             |           |                           |   |           |  |      |           |  |   |          
|Direct Costs                                               |  |                             | 590,931   |                           |   | 597,801   |  |      | 1,322,272 |  |   | 1,238,865
|Research & Development                                     |  |                             | 261,372   |                           |   | 245,273   |  |      | 500,734   |  |   | 487,452  
|Unallocated                                                |  |                             | 321,518   |                           |   | 312,250   |  |      | 608,184   |  |   | 654,602  
|Depreciation/Amortization                                  |  |                             | 52,778    |                           |   | 36,557    |  |      | 100,647   |  |   | 71,535   
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                           |  |                             | 1,226,599 |                           |   | 1,191,881 |  |      | 2,531,837 |  |   | 2,452,454
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|Total Direct and Administrative Costs and Expenses         |  | $                           | 4,053,357 |                           | $ | 2,787,678 |  | $    | 7,747,589 |  | $ | 5,851,694
|                                                           |  |                             |           |                           |   |           |  |      |           |  |   |          



9



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##### Table of Contents

|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|-------------------------------- |  | --------------------------- | -------- | - | ------------------------- | - | -------- | ---- |  | - | --------- | - |  | - | -------
|                                 |  | Three Months Ended July 31, |          |   | Six Months Ended July 31,
|                                 |  | 2006                        |          |   | 2005                      |   |          | 2006 |  |   | 2005     
|Operating Income (Loss):         |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Wagering                         |  | $                           | (49,410  | ) |                           | $ | (146,497 | )    |  | $ | 361,412   |   |  | $ | 238,872
|Hotel/Casino                     |  |                             | (113,556 | ) |                           |   |          |      |  |   | (218,303  | ) |  |   |        
|Systems                          |  |                             | 963,269  |   |                           |   | 357,881  |      |  |   | 1,500,122 |   |  |   | 214,791
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Total Operating Income           |  | $                           | 800,303  |   |                           | $ | 211,384  |      |  | $ | 1,643,231 |   |  | $ | 453,663
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|                                 |  |                            
|                                 |  | Three Months Ended July 31, |          |   | Six Months Ended July 31,
|                                 |  | 2006                        |          |   | 2005                      |   |          | 2006 |  |   | 2005     
|Income (Loss) Before Income Tax: |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Wagering                         |  | $                           | (49,410  | ) |                           | $ | (146,497 | )    |  | $ | 361,412   |   |  | $ | 238,872
|Hotel/Casino                     |  |                             | (113,556 | ) |                           |   |          |      |  |   | (218,303  | ) |  |   |        
|Systems                          |  |                             | 963,269  |   |                           |   | 357,881  |      |  |   | 1,500,122 |   |  |   | 214,791
|Other                            |  |                             | (7,585   | ) |                           |   | 344,518  |      |  |   | 2,772     |   |  |   | 437,520
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Total Income Before Income Tax   |  | $                           | 792,718  |   |                           | $ | 555,902  |      |  | $ | 1,646,003 |   |  | $ | 891,183
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|                                 |  |                            
|                                 |  | Three Months Ended July 31, |          |   | Six Months Ended July 31,
|                                 |  | 2006                        |          |   | 2005                      |   |          | 2006 |  |   | 2005     
|Income Tax (Benefit):            |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Wagering                         |  | $                           | (16,799  | ) |                           | $ | (11,363  | )    |  | $ | 122,880   |   |  | $ | 21,440 
|Hotel/Casino                     |  |                             | (38,609  | ) |                           |   |          |      |  |   | (74,223   | ) |  |   |        
|Systems                          |  |                             | 327,511  |   |                           |   | 27,759   |      |  |   | 510,041   |   |  |   | 19,280 
|Unallocated                      |  |                             | (272,103 | ) |                           |   | 26,723   |      |  |   | (558,698  | ) |  |   | 39,280 
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Total Income Tax                 |  | $                           | 0        |   |                           | $ | 43,119   |      |  | $ | 0         |   |  | $ | 80,000 
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|                                 |  |                            
|                                 |  | Three Months Ended July 31, |          |   | Six Months Ended July 31,
|                                 |  | 2006                        |          |   | 2005                      |   |          | 2006 |  |   | 2005     
|Net Income (Loss):               |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Wagering                         |  | $                           | (32,611  | ) |                           | $ | (135,134 | )    |  | $ | 238,532   |   |  | $ | 217,432
|Hotel/Casino                     |  |                             | (74,947  | ) |                           |   |          |      |  |   | (144,080  | ) |  |   |        
|Systems                          |  |                             | 635,758  |   |                           |   | 282,729  |      |  |   | 990,081   |   |  |   | 195,511
|Unallocated                      |  |                             | 264,518  |   |                           |   | 365,188  |      |  |   | 561,470   |   |  |   | 398,240
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        
|Net Income                       |  | $                           | 792,718  |   |                           | $ | 512,783  |      |  | $ | 1,646,003 |   |  | $ | 811,183
|                                 |  |                             |          |   |                           |   |          |      |  |   |           |   |  |   |        



10



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##### Table of Contents

|7. | Revenues and Direct Costs of Hotel/Casino Segment
|-- | -------------------------------------------------

The
revenue of the Hotel/Casino segment is comprised of the following departments:



|                                    |  |                                  |         |   |                                |   |           |  
|----------------------------------- |  | -------------------------------- | ------- | - | ------------------------------ | - | --------- | -
|                                    |  | Three Months Ended July 31, 2005 |         |   | Six Months Ended July 31,
2005 |  
|Casino                              |  | $                                | 404,021 |   |                                | $ | 616,567   |  
|Hotel                               |  |                                  | 186,340 |   |                                |   | 257,800   |  
|Food/Beverage                       |  |                                  | 320,244 |   |                                |   | 468,602   |  
|Less: Casino Promotional Allowances |  |                                  | (46,697 | ) |                                |   | (46,697   | )
|                                    |  |                                  |         |   |                                |   |           |  
|Hotel/Casino Revenue                |  | $                                | 863,908 |   |                                | $ | 1,296,272 |  
|                                    |  |                                  |         |   |                                |   |           |  

The direct costs of the Hotel/Casino segment are comprised of the following departments:



|                          |  |                                  |         |                                |   |          
|------------------------- |  | -------------------------------- | ------- | ------------------------------ | - | ---------
|                          |  | Three Months Ended July 31,
2005 |         | Six Months Ended July 31,
2005
|Casino                    |  | $                                | 177,914 |                                | $ | 281,623  
|Hotel                     |  |                                  | 68,124  |                                |   | 102,159  
|Food/Beverage             |  |                                  | 291,907 |                                |   | 458,800  
|Unallocated               |  |                                  | 150,533 |                                |   | 237,302  
|                          |  |                                  |         |                                |   |          
|Hotel/Casino Direct Costs |  | $                                | 688,478 |                                | $ | 1,079,884
|                          |  |                                  |         |                                |   |          



|8. | Acquisition of Sturgeons Inn & Casino
|-- | --------------------------------------

On
March 1, 2006, AWIG acquired the assets of Sturgeons Inn & Casino for $1,800,000 and separately purchased on-hand inventories totaling $148,075. In connection with the acquisition, AWIG incurred indebtedness of $1,800,000 as
follows. As of July 31, 2006, the indebtedness has been reduced to $1,500,000 as noted below.

Great Basin Bank of Nevada

AWIG, guaranteed by AWI and Sturgeons, LLC, borrowed $1,500,000 from Great Basin Bank of Nevada for the acquisition of
Sturgeons Inn & Casino. This commercial loan is collateralized by a 1stdeed of trust on
Sturgeons Inn & Casino and a security interest in the personal property and fixtures of Sturgeons Inn & Casino. Interest at the Wall Street Journal-listed prime rate plus 2% is payable monthly. The principal is due in a
single payment on March 1, 2008.

Victor and Terina Salerno

On February 16, 2006, AWI entered into a Guaranty Agreement with Victor and Terina Salerno, which was amended and restated on June 8, 2006.
Under the Guaranty Agreement, which has a five-year term, Mr. and Mrs. Salerno have agreed to guarantee certain indebtedness of AWI or its wholly-owned subsidiaries, in amounts not to exceed $500,000 in the aggregate. Mr. and
Mrs. Salerno provided funding under the Guaranty Agreement in order for AWIG to complete the acquisition of Sturgeons Inn & Casino. As consideration under the Guaranty Agreement, AWI made monthly interest payments to Mr. and
Mrs. Salerno, at the rate of ten percent per annum, on any balance outstanding under the Guaranty Agreement and reimburses them for finance charges, fees and other expenses that they incur under a $500,000 revolving line of credit with their
bank, to the extent that they use the line of credit to provide funding for AWI or its subsidiaries. To complete the acquisition of Sturgeons Inn & Casino, AWI borrowed $300,000 from Mr. and Mrs. Salerno against this
Guaranty Agreement; the $300,000 loan was subsequently repaid.



11



---

##### Table of Contents

The operating results of Sturgeons Inn & Casino are included with the Companys operating results for
the period subsequent to our acquisition of it on March 1, 2006. Depreciation and amortization related to the acquisition is calculated based on our preliminary purchase price allocation, subject to change, as noted below.

Sturgeons Inn & Casino

Purchase Price Allocation



|                     |  |   |           |  |                                                       
|-------------------- |  | - | --------- |  | ------------------------------------------------------
|Land                 |  | $ | 300,000   |  | Not depreciable                                       
|Buildings            |  |   | 900,000   |  | Straight-line depreciation, 30 years                  
|Other                |  |   | 600,000   |  | Straight-line depreciation and amortization, 5-7 years
|                     |  |   |           |  |                                                       
|Total Purchase Price |  | $ | 1,800,000 |  |                                                       
|                     |  |   |           |  |                                                       

In addition to previously disclosed accounting policies and estimates, management has determined that the
following accounting policies relative to revenue recognition and promotional allowances are significant to the preparation of our consolidated financial statements with respect to the Sturgeons Inn & Casino operation.

Casino revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for tokens in the customers possession. Food and
beverage and other operating revenues are recognized as services are performed. Advance deposits are recorded as deferred revenue until services are provided to the customer. Sturgeons Inn & Casino gaming (casino), food and beverage
and other operating revenues are included in wagering revenue.

Revenues are recognized net of certain sales incentives in accordance with Emerging Issues
Task Force Issue No. 01-9 Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products.) Accordingly, cash incentives to customers for gambling, which are not material, have been
recognized as a direct reduction of casino revenue.

Revenue does not include the retail value of food and beverage, and other services gratuitously
furnished to customers, which are not material. The estimated cost of providing such gratuities is included in wagering direct expenses.

The following
unaudited pro forma consolidated financial information has been prepared assuming that the acquisition of Sturgeons Inn & Casino had occurred at the beginning of each fiscal year:



|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          
|------------------------------------ |  | -------------------------------- | --------- | - | ------------------------------ | - | --------- | ------------------------------ |  | - | ---------
|                                     |  | Three Months Ended July 31,
2005 |           |   | Six Months Ended July 31,
2005 |   |           | Six Months Ended July 31,
2006
|Revenues                             |  | $                                | 3,738,062 |   |                                | $ | 7,549,210 |                                |  | $ | 9,599,999
|Operating Expenses                   |  |                                  | 3,537,323 |   |                                |   | 7,366,354 |                                |  |   | 8,021,165
|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          
|Operating Income                     |  |                                  | 200,739   |   |                                |   | 182,856   |                                |  |   | 1,578,834
|Other Income                         |  |                                  | 296,856   |   |                                |   | 443,563   |                                |  |   | 3,274    
|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          
|Income Before Income Taxes           |  |                                  | 497,595   |   |                                |   | 626,419   |                                |  |   | 1,582,108
|Provision for Income Taxes           |  |                                  | (43,119   | ) |                                |   | (80,000   | )                              |  |   |          
|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          
|Net Income                           |  | $                                | 454,476   |   |                                | $ | 546,419   |                                |  | $ | 1,582,108
|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          
|Basic and Diluted Earnings Per Share |  | $                                | 0.06      |   |                                | $ | 0.07      |                                |  | $ | 0.19     
|                                     |  |                                  |           |   |                                |   |           |                                |  |   |          

---

These unaudited pro forma results do
not include information for the three months ended July 31, 2006 as Sturgeons Inn & Casino was in operation during the entire quarter and, as such, actual results presented in these Consolidated Financial Statements should be
used.

These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our
actual results would have been had the acquisition been completed as of the beginning of each fiscal year, or of future results.



12



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##### Table of Contents

|9. | Litigation
|-- | ----------

We issued a certificate for 250,000 shares of
AWIs common stock in the name of Michael Racusin (Racusin) pursuant to the April 14, 2005 ruling by the United States Bankruptcy Appellate Panel of the Ninth Circuit (the BAP). On May 13, 2005, Racusin filed
with the United States Court of Appeals for the Ninth Circuit (the 9thCircuit) a notice of appeal of
the ruling by the BAP. Oral arguments in the appeal occurred on July 24, 2006. We do not know when the 9thCircuit will make a decision on Racusins appeal, but we believe that a decision within the next sixty (60) days is likely. If the 9thCircuit overturns the BAPs ruling, Racusin might claim entitlement to a cash payment in lieu of shares of AWI common stock; such an event could adversely affect our liquidity and future results.
We can not predict the outcome of Racusins appeal to the 9thCircuit and no estimated minimum loss is
currently accrued.



|10. | Regulatory Matters
|--- | ------------------

The scope of our licensed race/sports
books and casino operations in Nevada is limited by regulation and statute (as well as certain federal, county and local laws and ordinances). The passage of legislation designed to limit or prohibit race and/or sports wagering, at any level of
government, would likely have a material adverse affect upon our wagering operations.



|11. | Subsequent Events/Commitments
|--- | -----------------------------

On August 8, 2006, AWI
and AWIM entered into a sale/lease-back transaction with a finance company involving 75 race/sports kiosks that had previously been purchased by AWIM. AWIM sold the kiosks to the finance company for $600,000 (less closing fees) and is leasing the
kiosks back from the finance company at a payment of $238,032 per year for 3 years. AWIM was also charged a $2,500 documentation fee and a 5% closing fee on the capitalized equipment cost. At the conclusion of the lease term, AWIM will have the
option of re-purchasing the kiosks for $1. The Company is reporting this transaction for accounting purposes as a capital lease.

On August 28, 2006,
AWIM submitted to the finance company a request for a second equipment lease financing arrangement under which the finance company would purchase and lease to AWIM 50 new race/sports kiosks. Our payment obligations to the finance company under this
lease would be $238,032 per year for 3 years and, at the conclusion of the lease term, AWIM would have the option of purchasing the kiosks for $1. AWIM will also be charged a documentation fee and closing fee as described above. The Company expects
to report this transaction for accounting purposes as a capital lease in the amount of $600,000 (less closing fees). This lease is not expected to become effective until the kiosks are delivered to AWIM, which we estimate will be in early October
2006.



13



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis or Plan of Operation.
|------- | ----------------------------------------------------------

Forward-Looking Statements. Throughout this report we make forward-looking statements, as that term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (Exchange Act). Forward-looking statements include the words may, would, could, likely, estimate, intend, plan,
continue, believe, expect or anticipate and similar words and include all discussions about our ongoing or future plans, objectives or expectations. We do not guarantee that any of the transactions or
events described in this report will happen as described or that any positive trends suggested or referred to in this report will continue. These forward-looking statements generally relate to our plans, objectives and expectations for future
operations and results and are based upon what we consider to be reasonable future estimates. Although we believe that our plans, objectives and expectations reflected in, or suggested by, such forward-looking statements are reasonable at the
present time, we might not achieve them or we may modify them from time to time. You should read this report thoroughly and with the understanding that actual future results may be materially different from what we expect. We do not plan to update
forward-looking statements even though our situation or plans may change in the future, unless applicable law requires us to do so.

Specific factors that
might cause our actual results to differ from our plans, objectives or expectations, might cause us to modify them, or might affect our ability to achieve them include, but are not limited to:



| |  |  | increased competition in the race and sports wagering business;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to develop and refine products and technologies in a timely manner, and the markets acceptance of them;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to carry out our plans to grow the Company through the acquisition and operation of hotel/casino properties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the possibility that the United States Court of Appeals for the Ninth Circuit (the 9th Circuit) will overturn the favorable ruling by the United States Bankruptcy
Appellate Panel of the Ninth Circuit (the BAP) in the Racusin case;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the availability and adequacy of our cash flow to meet our requirements;
| | - |  | ------------------------------------------------------------------------



| |  |  | our ability to control our operating expenses;
| | - |  | ----------------------------------------------



| |  |  | our ability to secure external sources of financing on acceptable terms, including financing to implement our acquisition plans mentioned above;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes or developments in laws, regulations or taxes affecting the race and sports wagering business;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | economic, demographic, business and other conditions in our local and regional markets;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | actions taken or not taken by third parties, such as our customers, competitors and vendors, as well as legislative, regulatory, judicial and other governmental authorities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decline in the public acceptance of wagering;
| | - |  | -----------------------------------------------



| |  |  | changes in our personnel or their compensation, including those resulting from changes in minimum wage requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to continue to meet the reserve requirements of the Nevada Gaming Commission;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our failure to obtain, delays in obtaining, or loss of, any licenses, permits or approvals, or the limitation, conditioning, suspension or revocation of any such licenses, permits
or approvals, or our failure to obtain an unconditional renewal of any of our licenses, permits or approvals on a timely basis;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other adverse conditions, such as economic downturns, changes in general customer confidence or spending, increased transportation costs or travel concerns that may adversely affect
the economy in general or the Nevada gaming industry in particular;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the consequences of the war in Iraq and other military conflicts or political instability in the Middle East and any future security alerts or terrorist attacks such as the attacks
that occurred on September 11, 2001; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other risk factors discussed elsewhere in this report.
| | - |  | ------------------------------------------------------

All future
written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. In light of these and other risks,
uncertainties and assumptions, the forward-looking events discussed in this report might not occur.



14



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##### Table of Contents

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

The Company means American Wagering, Inc. and its subsidiaries collectively.

AWI means American Wagering, Inc.

AWIG means AWI
Gaming, Inc., a wholly-owned subsidiary of AWI.

AWIM means AWI Manufacturing, Inc., a wholly-owned subsidiary of AWI.

CBS means Computerized Bookmaking Systems, Inc., a wholly-owned subsidiary of AWI.

CSS means Contest Sports Systems, Inc., a wholly-owned subsidiary of CBS.

Leroys means
Leroys Horse & Sports Place, Inc., a wholly-owned subsidiary of AWI.

Sturgeons, LLC means Sturgeons, LLC, a
wholly-owned subsidiary of AWIG.

Sturgeons means Sturgeons Inn & Casino (which, as of March 1, 2006, is owned by
Sturgeons, LLC).

Overview. Our primary operating strategies for the foreseeable future will be to focus on our core businesses relating to
the race and sports industry and to grow the Company through the acquisition/operation of hotel/casino properties. In regard to Leroys, we intend to continue operating its existing race and sports books, add new books where and when we are
able to secure agreements for them, and operate more efficiently in order to reduce expenses. In regard to CBS, we intend to continue developing, selling and maintaining computerized race and sports wagering systems for the gaming industry. In
regard to AWIM, we intend to continue developing self-service wagering kiosks, installing the kiosks in Leroys locations to assist in controlling escalating personnel costs, and marketing the kiosks to non-Leroys locations. In regard to
CSS, we intend to continue developing contest-related kiosks and marketing the kiosks to non-Leroys locations. In regard to AWIG, we intend to acquire and operate hotel/casino properties if we are able to obtain the necessary financing on
acceptable terms. In regard to Sturgeons, we intend to continue operating the facility, refreshing the slot floor, upgrading the property as cash flow permits, and operating more efficiently in order to reduce expenses. In addition, we have
implemented and are continuing to initiate other cost-cutting measures.

We believe that we will be able to satisfy our operating cash requirements for at
least the next 12 months from existing cash balances and anticipated cash flows. We plan to accumulate cash liquidity to fund the purchase of kiosks and to deal with the seasonality of sports betting, the uncertain timing of system sales, etc.

Liquidity and capital resources. For the six months ended July 31, 2006, we funded our operations primarily with net cash provided by
operating activities. (See Acquisition of Sturgeons and Kiosk Financing below for significant debt financings during the period.) As of July 31, 2006, we had net working capital of $2,690,148, compared to working
capital of $1,670,280 at January 31, 2006. As of July 31, 2006, we had $2,576,790 in cash and cash equivalents, $1,320,582 in restricted cash, and $2,143,872 in debt. Our principal cash requirements consist of payroll and benefits,
business insurance, real estate and equipment leases, legal expenses, telecommunications, debt service, interest expense, and costs to inventory and assemble race/sports systems for our CBS customers. We believe that our ongoing efforts to contain
costs and operate efficiently, combined with the growth in win and system sales, have improved cash flow to a level that will support our operations. We believe that our cash flow from operations and our cash and cash equivalents are sufficient to
fund our working capital requirements for at least the next 12 months.

Operating activities for the six months ended July 31, 2006 provided net cash
of $1,186,748 as compared to the same period of last year which used net cash of $1,425,120. This represents an increase in net cash provided by operating activities of $2,611,868 (+183%) primarily due to the settlement of the Racusin
judgment ($1,672,249) with 250,000 shares of AWI common stock, the acquisition of Sturgeons and increases in existing operations.

Investing
activities for the six months ended July 31, 2006 used net cash of $689,809 as compared to the same period last year which provided net cash of $130,167. This represents an increase in net cash used in investing activities of $819,976
(+230%) primarily due to the purchase of property and equipment (an increase of $394,914, or +146%, over the same period last year) and a one-time receipt on a note receivable of $320,000 for the same period last year.



15



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##### Table of Contents

Net cash used in financing activities for the six months ended July 31, 2006, compared to net cash used in financing
activities for the same period last year, decreased by $191,175 (-57%) primarily due to the one-time payment of preferred stock dividends in arrears of $213,400 for the same period last year.

We do not have any off-balance sheet financing arrangements or liabilities.

Nevada Gaming Commission (NGC) Regulation 22.040  General. NGC Regulation 22.040 requires us to have reserves (cash, surety bonds, irrevocable standby letters of credit, etc.) sufficient to cover any outstanding
wagering liability including unpaid winning tickets, future tickets and telephone account deposits. In the event we are unable to maintain the Regulation 22.040 reserve or satisfy any increased reserve requirement, it would have an adverse impact on
us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroys, an elimination or reduction of telephone wagering accounts and a reduction in our sports handle.

NGC Regulation 22.040  Prior to September 1, 2006. As of July 31, 2006 (and through August 31, 2006), we maintained a Regulation 22.040
reserve in the amount of $2,400,000 in the form of a surety bond issued by Travelers Casualty and Surety Company of America. The surety bond was secured by a cash deposit maintained at SmithBarney in the amount of $1,247,569 as of July 31,
2006.

NGC Regulation 22.040  Subsequent to September 1, 2006. Effective September 1, 2006, we maintain a Regulation 22.040 reserve
in the amount of $3,000,000 in the form of a surety bond issued by Fidelity and Deposit Company of Maryland (a subsidiary of Zurich American Insurance) (Fidelity). The surety bond is secured by a $1,000,000 Irrevocable Letter of Credit
(ILOC) issued to the benefit of Fidelity by Great Basin Bank of Nevada (Great Basin). Currently, the ILOC is secured by a $400,000 Certificate of Deposit (CD) held by Great Basin and a second deed of trust on the
property and equipment of Sturgeons (the Second Deed of Trust). Upon release of the cash deposit from the SmithBarney account, we will increase the CD to $1,000,000 and the Second Deed of Trust will be extinguished. We anticipate the
cash deposit from the SmithBarney account will be released by September 30, 2006. We anticipate the Fidelity surety bond will be sufficient to fully fund our Regulation 22.040 reserve requirement for the next 12 months.

Acquisition of Sturgeons. On March 1, 2006, we acquired the assets of Sturgeons for $1,800,000 and separately purchased on-hand inventories
totaling $148,075. In connection with the acquisition, AWIG incurred indebtedness of $1,800,000 as follows. As of July 31, 2006, the indebtedness has been reduced to $1,500,000 as noted below.

Great Basin

AWIG, guaranteed by AWI
and Sturgeons, LLC, borrowed $1,500,000 from Great Basin for the acquisition of Sturgeons. This commercial loan is collateralized by a 1stdeed of trust on Sturgeons and a security interest in the personal property and fixtures of Sturgeons. We pay Great Basin interest at the Wall Street Journal-listed prime rate plus 2%
monthly. The principal is due in a single payment on March 1, 2008.

Victor and Terina Salerno

On February 16, 2006, AWI entered into a Guaranty Agreement with Victor and Terina Salerno, which was amended and restated on June 8, 2006.
Under the Guaranty Agreement, which has a five-year term, Mr. and Mrs. Salerno have agreed to guarantee certain indebtedness of AWI or its wholly-owned subsidiaries, in amounts not to exceed $500,000 in the aggregate. Mr. and
Mrs. Salerno provided funding under the Guaranty Agreement in order for us to complete the acquisition of Sturgeons. As consideration under the Guaranty Agreement, AWI makes monthly interest payments to Mr. and Mrs. Salerno, at
the rate of ten percent per annum, on any balance outstanding under the Guaranty Agreement and reimburses them for finance charges, fees and other expenses that they incur under a $500,000 revolving line of credit with their bank, to the extent that
they use the line of credit to provide funding for AWI or its subsidiaries. To complete the acquisition of Sturgeons, AWI borrowed $300,000 from Mr. and Mrs. Salerno against this Guaranty Agreement; the $300,000 loan was subsequently
repaid.



16



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##### Table of Contents

Kiosk Financing

On August 8, 2006, we entered into a sale/lease-back transaction with a finance company involving 75 race/sports kiosks that had previously been purchased by AWIM. We sold the kiosks to the financial company for $600,000 (less closing
fees) and are leasing the kiosks back from the financial company at a payment of $19,836 per month for 36 months ($238,032 per year). We were also charged a $2,500 documentation fee and a 5% closing fee on the capitalized equipment cost. At the
conclusion of the lease term, we will have the option of re-purchasing the kiosks for $1. We are reporting this transaction for accounting purposes as a capital lease.

On August 28, 2006, we submitted to the finance company a second equipment lease financing arrangement under which the finance company would purchase and lease to AWIM 50 new race/sports kiosks. Our payment
obligations to the finance company under the lease would be $19,836 per month for 36 months ($238,032 per year). We will also be charged a documentation fee and closing fee as described above. At the conclusion of the lease term, we would have the
option of purchasing the kiosks for $1. We expect to report this transaction for accounting purposes as a capital lease in the amount of $600,000 (less closing fees). This lease is not expected to become effective until the kiosks are delivered to
AWIM, which we estimate will be in early October 2006.

Other. We may, from time to time, seek additional capital to fund our operations, reduce our
liabilities, or fund our expansion plans (including acquisitions). To raise capital, we may seek to sell additional equity securities (common or preferred), issue debt or convertible securities, or obtain credit facilities through financial
institutions. The sale of additional equity or convertible securities would result in dilution to our shareholders.

Results of operations. We
report our results of operations through three operating segments: Wagering (Leroys and AWIM), Hotel/Casino (AWIG and Sturgeons, LLC) and Systems (CBS and CSS). Although we take numerous factors into consideration, the operating income
of each segment is a significant profitability measure that we use to allocate resources and assess performance of each segment.

Three Months Ended
July 31:



|                           |  |                             |           |          |      |          |           |  |            |  |         |  
|-------------------------- |  | --------------------------- | --------- | -------- | ---- | -------- | --------- |  | ---------- |  | ------- | -
|                           |  | Three Months Ended July 31, |           | $ CHANGE |      | % CHANGE |          
|                           |  | 2006                        |           |          | 2005 |          |          
|Revenue                    |  | $                           | 4,853,660 |          |      | $        | 2,999,062 |  | +1,854,598 |  | +61.84  | %
|Costs and Expenses         |  |                             | 4,053,357 |          |      |          | 2,787,678 |  | +1,265,679 |  | +45.40  | %
|                           |  |                             |           |          |      |          |           |  |            |  |         |  
|Operating Income           |  |                             | 800,303   |          |      |          | 211,384   |  | +588,919   |  | +278.60 | %
|Other Income (Expense)     |  |                             | (7,585    | )        |      |          | 344,518   |  | -352,103   |  | -102.20 | %
|                           |  |                             |           |          |      |          |           |  |            |  |         |  
|Income Before Income Taxes |  |                             | 792,718   |          |      |          | 555,902   |  | +236,816   |  | +42.60  | %
|Income Tax Expense         |  |                             |           |          |      |          | 43,119    |  | -43,119    |  | -100.00 | %
|                           |  |                             |           |          |      |          |           |  |            |  |         |  
|Net Income                 |  | $                           | 792,718   |          |      | $        | 512,783   |  | +279,935   |  | +54.59  | %
|                           |  |                             |           |          |      |          |           |  |            |  |         |  

Revenues for the three months ended July 31, 2006 increased $1,854,598 (+61.84%) compared to the
three months ended July 31, 2005.



| |  |  | Leroys sports handle (the total amount wagered) decreased $1,915,558 (-9.96%) over the same period last year largely due to the closure of several locations. Although handle
decreased, net win increased $271,595 (+22.28%) over the same period last year; the increased win figure is attributed to an increase in the overall hold percentage from 6.34% to 8.61%. We anticipate that handle and win in the third
quarter will continue the current trend (a decrease in handle and an increase in win) with an increase in both handle and win beginning in the fourth quarter. Note that an increase or decrease in handle is not necessarily indicative of an increase
or decrease in revenues or profits.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sturgeons: We completed the acquisition of Sturgeons on March 1, 2006, and began operating the property as of that date; operations at
Sturgeons account for $863,908 of the revenue increase experienced in the three months ended July 31, 2006. We anticipate that revenues from the Sturgeons operation will increase as we continue our program of refreshing the slot
floor, upgrading food and beverage offerings, and enacting
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

| | additional marketing/promotional campaigns. With the exception of new slot machine purchases, the upgrades are being financed through the cash flow generated
by the property.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CBS system sales increased $640,106 (+41.30%) over the same period last year primarily due to the completion of several system upgrades (installations of T-3 wagering
terminals and upgrades to the HP Integrity operating system). System sales are low volume, high dollar sales based on the needs of the market, which is limited based on the number of Nevada casinos that operate race and sports book servers, and vary
substantially from quarter to quarter; system sales are not recurring, as the impetus for a sale is outdated or expired equipment at existing casinos or the opening of a new sports book. We expect that system sales will decrease during the third and
fourth quarters as most race/sports books are reluctant to install new equipment during the professional football season and increase during the first quarter of the next fiscal year as we begin marketing our next generation of point-of-sale
terminals (scheduled for release during the fourth quarter of this fiscal year).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The remaining increase in revenues for the three months ended July 31, 2006 ($78,989) is attributed to normal fluctuations in other areas (i.e., Leroys pari-mutuel
commission, AWIM commissions, CBS maintenance contracts, etc.).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and expenses for the three months ended July 31, 2006,
increased $1,265,679 (+45.40%) from costs and expenses for the three months ended July 31, 2005.



| |  |  | The acquisition and operation of Sturgeons added $688,478 (+100.00%) in direct costs to the overall costs and expenses of the Company; the chart below indicates the
major expense categories associated with this increase. We anticipate that future operating expenses for Sturgeons will remain relatively stable with slight fluctuations caused by the seasons.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                    |  |                                  |        
|----------------------------------- |  | -------------------------------- | -------
|                                    |  | Three Months Ended July 31, 2006
|Wages, including taxes and benefits |  | $                                | 317,885
|Cost of goods sold                  |  |                                  | 139,111
|Depreciation/amortization           |  |                                  | 75,117 
|Utilities                           |  |                                  | 50,492 
|Tax & license                       |  |                                  | 44,565 
|Other                               |  |                                  | 61,308 
|                                    |  |                                  |        
|                                    |  | $                                | 688,478
|                                    |  |                                  |        



| |  |  | Direct costs for CBS increased $123,832 (+64.77%) over the same period last year primarily due to additional purchases in connection with system sales. These direct costs
are expected to fluctuate in future fiscal periods in proportion to increases/decreases in systems sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and amortization (net of Sturgeons; see above) increased $33,941 (+35.56%) over the same period last year due primarily to Leroys upgrades to the
point-of-sale wagering terminals and the HP Integrity server completed during the fiscal year ended January 31, 2006. We anticipate that depreciation and amortization will stabilize at current levels as significant capital expenditures are not
currently projected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the adoption and application of Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS
No. 123R), we recognized stock-based compensation expense during the three months ended July 31, 2006 of $84,798 (+100.00%) for all share-based payments granted on or prior to January 31, 2006, but not yet vested as of
February 1, 2006. We anticipate that stock-based compensation expense will stabilize at current levels as stock options continue to vest over the next several years.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct costs for AWIM increased $84,697 over the same period last year due to a one-time sale of kiosks. This expense is not expected to recur in future periods.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

| |  |  | Direct costs for Leroys increased $18,158 over the same period last year due to travel and moving expenses related to hiring/moving the new Director of Operations for Northern
Nevada from Las Vegas to Reno. This expense is not expected to recur in future periods.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs for the operation of AWIG, the sole member of Sturgeons, LLC, increased $92,677 over the same period last year due to the hiring of additional personnel at the AWIG
level to manage the Sturgeons property. This expense is expected to stabilize at current levels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The remaining increase in costs and expenses for the three months ended July 31, 2006 (+$139,098) is attributed to normal fluctuations in other areas (research and
development expenses, selling, general and administrative expenses, etc.).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of revenues increasing at a faster rate than cost and
expenses (+61.84% for revenues versus +45.40% for costs and expenses), our operating income for the three months ended July 31, 2006 increased $588,919 (+278.60%) from the operating income for the three months ended
July 31, 2005.

Other income (expense) for the three months ended July 31, 2006 decreased $352,103 (-102.20%) compared to the three months ended
July 31, 2005.



| |  |  | Interest income increased $6,462 (+43.63%) over the same period last year due primarily to moving the cash collateral for the NGC Regulation 22.040 reserve requirement to
a higher paying account at SmithBarney.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense increased $40,201 (+582.12%) over the same period last year due primarily to a loan obtained from Great Basin ($1,500,000 principal balance) used to
complete the acquisition of Sturgeons.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reorganization expenses decreased $27,505 (-100.00%) over the same period last year due to our successful emergence from Chapter 11 proceedings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Litigation income decreased $328,624 (-100.00%) as a result of the one-time adjustment resulting from the issuance of 250,000 shares of AWI common stock to Racusin.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Six Months Ended July 31:



|                           |  |                           |           |          |   |           |  |            |  |         |  
|-------------------------- |  | ------------------------- | --------- | -------- | - | --------- |  | ---------- |  | ------- | -
|                           |  | Six Months Ended July 31, |           | $ CHANGE |   | % CHANGE  | 
|                           |  | 2006                      |           | 2005     |   |          
|Revenue                    |  | $                         | 9,390,820 |          | $ | 6,305,357 |  | +3,085,463 |  | +48.93  | %
|Costs and Expenses         |  |                           | 7,747,589 |          |   | 5,851,694 |  | +1,895,895 |  | +32.40  | %
|                           |  |                           |           |          |   |           |  |            |  |         |  
|Operating Income           |  |                           | 1,643,231 |          |   | 453,663   |  | +1,189,568 |  | +262.21 | %
|Other Income (Expense)     |  |                           | 2,772     |          |   | 437,520   |  | -434,748   |  | -99.37  | %
|                           |  |                           |           |          |   |           |  |            |  |         |  
|Income Before Income Taxes |  |                           | 1,646,003 |          |   | 891,183   |  | +754,820   |  | +84.70  | %
|Income Tax Expense         |  |                           |           |          |   | 80,000    |  | -80,000    |  | -100.00 | %
|                           |  |                           |           |          |   |           |  |            |  |         |  
|Net Income                 |  | $                         | 1,646,003 |          | $ | 811,183   |  | +834,820   |  | +102.91 | %
|                           |  |                           |           |          |   |           |  |            |  |         |  

Revenues for the six months ended July 31, 2006 increased $3,085,463 (+48.93%) compared to the six
months ended July 31, 2005.



| |  |  | Leroys sports handle (the total amount wagered) decreased $734,594 (-1.79%) over the same period last year largely due to the closure of several locations. Although handle
decreased, net win increased $340,539 (+10.55%) over the same period last year; the increased win figure is attributed to an increase in the overall hold percentage from 7.85% to 8.84%. We anticipate that handle and win in the third
quarter will continue the current trend (a decrease in handle and an increase in win) with an increase in both handle and win beginning in the fourth quarter. Note that an increase or decrease in handle is not necessarily indicative of an increase
or decrease in revenues or profits.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Sturgeons: We completed the acquisition of Sturgeons on March 1, 2006, and began operating the property as of that date; operations at Sturgeons account for
$1,296,272 of the revenue increase experienced in the first six months of the current fiscal year. We anticipate that revenues from the Sturgeons operation will increase as we continue our program of refreshing the slot floor, upgrading food
and beverage offerings, and enacting additional marketing/promotional campaigns. With the exception of new slot machine purchases, the upgrades are being financed through the cash flow generated by the property.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CBS system sales increased $1,364,714 (+51.17%) over the same period last year primarily due to the completion of several system upgrades (installations of T-3 wagering
terminals and upgrades to the HP Integrity operating system). System sales are low volume, high dollar sales based on the needs of the market, which is limited based on the number of Nevada casinos that operate race and sports book servers, and vary
substantially from quarter to quarter; system sales are not recurring, as the impetus for a sale is outdated or expired equipment at existing casinos or the opening of a new sports book. We expect that system sales will decrease during the third and
fourth quarters as most race/sports books are reluctant to install new equipment during the professional football season and increase during the first quarter of the next fiscal year as we begin marketing our next generation of point-of-sale
terminals (scheduled for release during the fourth quarter of this fiscal year).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The remaining increase in revenues for the six months ended July 31, 2006 ($83,938) is attributed to normal fluctuations in other areas (i.e., Leroys pari-mutuel
commission, AWIM commissions, CBS maintenance contracts, etc.).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and expenses for the six months ended July 31, 2006,
increased $1,895,895 (+32.40%) from costs and expenses for the six months ended July 31, 2005.



| |  |  | The acquisition and operation of Sturgeons added $1,079,884 (+100.00%) in direct costs to the overall costs and expenses of the Company; the chart below indicates
the major expense categories associated with this increase. We anticipate that future operating expenses for Sturgeons will remain relatively stable with slight fluctuations caused by the seasons.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                    |  |                                |          
|----------------------------------- |  | ------------------------------ | ---------
|                                    |  | Six Months Ended July 31, 2006
|Wages, including taxes and benefits |  | $                              | 488,165  
|Cost of goods sold                  |  |                                | 217,222  
|Depreciation/Amortization           |  |                                | 118,863  
|Utilities                           |  |                                | 84,335   
|Tax & License                       |  |                                | 68,659   
|Other                               |  |                                | 102,640  
|                                    |  |                                |          
|                                    |  | $                              | 1,079,884
|                                    |  |                                |          



| |  |  | The formation of AWIG, as the sole member and parent company of Sturgeons, LLC, added $30,801 (+100.0%) to the overall costs and expenses of the Company. We
anticipate that these expenses will be substantially reduced in future periods.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct costs for CBS increased $325,549 (+68.28%) over the same period last year primarily due to additional purchases in connection with system sales. These direct costs
are expected to fluctuate in future fiscal periods in proportion to increases/decreases in systems sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and amortization (net of Sturgeons; see above) increased $67,422 (+36.01%) over the same period last year due primarily to Leroys upgrades to the
point-of-sale wagering terminals and the HP Integrity server completed during the fiscal year ended January 31, 2006. We anticipate that depreciation and amortization will stabilize at current levels as significant capital expenditures are not
currently projected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the adoption and application of SFAS No. 123R, we recognized stock-based compensation expense during the six months ended July 31, 2006 of $158,974
(+100.00%) for all share-based payments granted on or prior to January 31, 2006, but not yet vested as of February 1, 2006. We anticipate that stock- based compensation expense will stabilize at current levels as stock options
continue to vest over the next several years.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Costs for the operation of AWIG, the sole member of Sturgeons, LLC, increased $123,479 over the same period last year due to the hiring of additional personnel at the AWIG
level to manage the Sturgeons property. This expense is expected to stabilize at current levels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The remaining decrease in costs and expenses for the six months ended July 31, 2006 (+$109,786) is attributed to normal fluctuations in other areas (research and
development expenses, selling, general and administrative expenses, etc.).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of revenues increasing at a faster rate than cost and
expenses (+48.93% for revenues versus +32.40% for costs and expenses), our operating income for the six months ended July 31, 2006 increased $1,189,568 (+262.21%) from the operating income for the six months ended
July 31, 2005.

Other income (expense) for the six months ended July 31, 2006 decreased $434,748 (-99.37%) compared to the six months ended
July 31, 2005.



| |  |  | Interest income increased $9,312 (+32.40%) over the same period last year due primarily to moving the cash collateral for the NGC Regulation 22.040 reserve requirement to
a higher paying account at SmithBarney.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense increased $70,775 (+670.79%) over the same period last year due primarily to a loan obtained from Great Basin ($1,500,000 principal balance) used to
complete the acquisition of Sturgeons.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reorganization expenses decreased $45,492 (-100.00%) over the same period last year due to our successful emergence from Chapter 11 proceedings.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Litigation income decreased $328,624 (-100.00%) as a result of the one-time adjustment resulting from the issuance of 250,000 shares of AWI common stock to Racusin.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A one-time adjustment to judgments payable for a judgment that had been previously recorded resulted in a decrease of $70,876 (-72.40%).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

Critical accounting estimates and policies. Although our financial statements necessarily make use of certain accounting estimates by our management, we believe
that no matters that are the subject of such estimates are so highly uncertain, subjective, complex, or susceptible to change as to present a significant risk of a material impact on our financial condition or operating performance. The following
summarizes our policies and use of estimates.

Wagering Segment Revenue: We record wagering segment revenue in compliance with the Nevada Revised Statutes
and the Regulations of the NGC and State Gaming Control Board.



| |  |  | For sports and non-pari-mutuel races, we use an accrual method under which we recognize the handle (total amount wagered) as revenue on the day the event occurs (rather than the day
we accept the wager) and we reduce such revenue by the total amount owed to patrons with winning wagers. We then adjust upwardly this gross calculation (handle less payouts) to account for any winning wagers that were not redeemed (cashed) within
the specified time period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For pari-mutuel races, we record commission and breakage revenues when the wagers are settled, typically the same day as when the wagers are placed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

Hotel/Casino Segment Revenue: The revenues of Sturgeons are primarily in the form of cash, personal checks, credit cards, or gaming chips and tokens, which by
their nature do not require complex estimates. We estimate certain liabilities with payment periods that extend for longer than several months. We believe that these estimates are reasonable based upon our assumptions related to possible outcomes in
the future. Future actual results might differ materially from these estimates.



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| |  |  | For slot machines, we calculate revenue as drop (the total amount removed from the machine) less fills and payouts.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | For bingo, we calculate revenue as handle (the total amount wagered) less payouts.
| | - |  | ----------------------------------------------------------------------------------

For non-gaming-related revenues such as food, beverage, hotel, etc., we record revenues in compliance with generally accepted accounting principles, recognizing the revenue as it is earned.

System  Software: We recognize software revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-9, Software Revenue Recognition, With Respect to Certain Transactions. Software license fees represent revenues related to licenses for race/sports software delivered to customers for in-house use. Revenues from software license
agreements (including any related training revenue) are recognized upon installation of the software.

System  Hardware: We recognize hardware
revenue (including any related installation revenue) upon installation of the hardware.

System  Maintenance: We negotiate maintenance agreements
with our customers to provide for the long-term care of the software and hardware. Under the various maintenance agreements, a fixed sum is due to us at the beginning of each month regardless of whether the customer requires service during that
month. We recognize maintenance revenue on the first day of each month for which the maintenance agreement is in place; we maintain an allowance for doubtful accounts for the non-realization of any such revenue.

System  Other: Our other sources of revenue are relatively insignificant and are typically recognized as performed.

Selling, General and Administrative Costs are charged to expense as incurred.

Accounting for long-lived assets: Our owned property and equipment are recorded at cost and depreciated to residual values over their estimated useful lives under the
straight-line method. Leasehold improvements on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. The estimated useful life of our equipment generally ranges from 3 to 10 years. We test for
impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We will recognize an
impairment loss if the carrying amount of the asset is not recoverable from its undiscounted cash flows; the impairment would be measured as the difference between the carrying amount and fair value of the asset.

Accounting for income taxes: In assessing when to realize deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets
will not be realized in accordance with SFAS No. 109, Accounting for Income Taxes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. We consider the amount and timing of scheduled reversals of deferred tax liabilities and forecasted future taxable income over the periods for which the deferred tax assets are deductible. We will recognize an
impairment loss if we determine that all or a portion of the deferred tax asset will not be realized. We believe that we will continue to be profitable for the foreseeable future and that it is more likely than not that the recorded net deferred tax
asset of $440,481, which resulted primarily from net operating loss carry-forwards and unrealized losses, will be realized. We have assessed a valuation allowance against the remainder of the deferred tax asset primarily due to our previous history
of losses and we continue to reevaluate this asset periodically.

Stock-based compensation. On February 1, 2006, we adopted SFAS No. 123R using
the modified prospective method in which compensation cost is recognized only prospectively following adoption.



|Item 3. | Controls and Procedures
|------- | -----------------------

We carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of July 31, 2006. This evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer (CEO)



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and our Chief Financial Officer (CFO). Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are
effective. During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect materially, our internal control over financial reporting, except as
noted below.

On March 1, 2006, we acquired Sturgeons. We are currently assessing the effectiveness of the internal controls of Sturgeons
and have begun to incorporate certain Company controls and procedures into this recently acquired business. Upon completion of our assessment of the effectiveness of the internal controls of Sturgeons and our implementation of certain controls
and procedures there, we will provide a conclusion in our annual report on Form 10-KSB for the year ended January 31, 2007.

Disclosure controls and
procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (SEC). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Our management does
not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Racusin

On July 24, 2006, the 9thCircuit heard oral arguments regarding Racusins appeal of the BAP decision. In the event the 9thCircuit rules
in our favor, the Racusin matter will be concluded via the delivery to Racusin of 250,000 shares of AWI common stock (which shares we issued on July 27, 2005 and are currently held in trust by the United States Bankruptcy Court for the District
of Nevada (the Bankruptcy Court) pending the outcome of Racusins 9thCircuit appeal). In the event
the 9thCircuit rules in Racusins favor, Racusin (through the Bankruptcy Court) will return the 250,000 shares
of AWI common stock and we will owe Racusin the sum of $2.8 million to be paid over the next 60 months. A ruling from the 9thCircuit is expected within the next 60 days. Please refer to our Form 10-KSB for the year ended January 31, 2006 for further information about this proceeding.

Other

We are not a party to any other material pending legal proceedings nor, to our knowledge, are any other
material legal proceedings threatened against us or our subsidiaries. We maintain insurance coverage, including property, workers compensation and general liability insurance, which we consider adequate for our size and the nature of our business.



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

Not applicable.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

Not applicable.



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

Not applicable.



|Item 5. | Other Information.
|------- | ------------------

Not
applicable.



|Item 6. | Exhibits.
|------- | ---------



EXHIBIT NUMBER

DESCRIPTION10.1*

Amended and Restated Guaranty Agreement, dated June 8, 2006, between American Wagering, Inc. and Victor and Terina Salerno (see Exhibit 10.1 to Form 10-QSB filed June 14, 2006, SEC File No.
0-20685)31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350


---

|* | This document is incorporated herein by reference as an exhibit hereto. Following the description of such exhibit is a reference to the document as it appeared in a specified report
previously filed with the SEC, to which there have been no amendments or changes.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                                                          
|----------------------------------------------------------
|AMERICAN WAGERING, INC.                                   
|                                                          
|Dated: September 14, 2006                                 
|                                                          
|/s/ Timothy F. Lockinger                                  
|Timothy F. Lockinger                                      
|Chief Financial Officer, Secretary, Treasurer and Director
|(Principal Accounting Officer)                            



25