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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: October 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: 8,129,880 shares of Common Stock as of December 22, 2006

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



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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 (9 months)            |  | 3   
|                            |  |                                                            
|                            |  | Consolidated Statements of Cash Flows                       |  | 4   
|                            |  |                                                            
|                            |  | Notes to Consolidated Financial Statements                  |  | 5   
|                            |  |                                                            
|2                           |  | Managements Discussion and Analysis or Plan of Operation   |  | 13  
|                            |  |                                                            
|3                           |  | Controls and Procedures                                     |  | 19  
|                           
|PART II  OTHER INFORMATION
|ITEM                        |  |                                                             |  | PAGE
|                            |  |                                                            
|1                           |  | Legal Proceedings                                           |  | 20  
|                            |  |                                                            
|2                           |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 21  
|                            |  |                                                            
|3                           |  | Defaults Upon Senior Securities                             |  | 21  
|                            |  |                                                            
|4                           |  | Submission of Matters to a Vote of Security Holders         |  | 21  
|                            |  |                                                            
|5                           |  | Other Information                                           |  | 21  
|                            |  |                                                            
|6                           |  | Exhibits                                                    |  | 21  



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##### Table of Contents

Part I  Financial Information



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

AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                  |  |                            |             |   |                 |   |             |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | - | --------------- | - | ----------- | -
|                                                                                                                  |  | October 31,2006(Unaudited) |             |   | January 31,2006 |  
|ASSETS                                                                                                            |  |                            |             |   |                 |   |             |  
|CURRENT ASSETS                                                                                                    |  |                            |             |   |                 |   |             |  
|Cash and Cash Equivalents                                                                                         |  | $                          | 4,580,203   |   |                 | $ | 2,221,445   |  
|Restricted Cash                                                                                                   |  |                            | 1,071,851   |   |                 |   | 1,296,204   |  
|Accounts Receivable, net of doubtful accounts allowance                                                           |  |                            | 688,428     |   |                 |   | 334,150     |  
|Inventories                                                                                                       |  |                            | 219,991     |   |                 |   | 702,591     |  
|Deferred Tax Assets, net                                                                                          |  |                            | 440,481     |   |                 |   | 440,481     |  
|Prepaid Expenses and Other Current Assets                                                                         |  |                            | 710,903     |   |                 |   | 407,696     |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL CURRENT ASSETS                                                                                              |  |                            | 7,711,857   |   |                 |   | 5,402,567   |  
|Property and Equipment, net                                                                                       |  |                            | 4,335,130   |   |                 |   | 2,047,840   |  
|Goodwill                                                                                                          |  |                            | 103,725     |   |                 |   | 103,725     |  
|Other Assets                                                                                                      |  |                            | 374,632     |   |                 |   | 295,367     |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL ASSETS                                                                                                      |  |                            | 12,525,344  |   |                 | $ | 7,849,499   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  |                            |             |   |                 |   |             |  
|CURRENT LIABILITIES                                                                                               |  |                            |             |   |                 |   |             |  
|Current Portion of Long-Term Debt                                                                                 |  | $                          | 2,150,490   |   |                 | $ | 208,400     |  
|Accounts Payable                                                                                                  |  |                            | 684,896     |   |                 |   | 483,852     |  
|Accrued Expenses                                                                                                  |  |                            | 1,160,455   |   |                 |   | 884,197     |  
|Unpaid Winning Tickets                                                                                            |  |                            | 1,061,052   |   |                 |   | 739,074     |  
|Customer Deposits and Other                                                                                       |  |                            | 1,231,679   |   |                 |   | 1,416,764   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL CURRENT LIABILITIES                                                                                         |  |                            | 6,288,572   |   |                 |   | 3,732,287   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|LONG-TERM DEBT, less current portion                                                                              |  |                            | 3,170,477   |   |                 |   | 129,423     |  
|OTHER LONG-TERM LIABILITIES                                                                                       |  |                            | 1,097,466   |   |                 |   | 1,315,784   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL LONG-TERM LIABILITIES                                                                                       |  |                            | 4,267,943   |   |                 |   | 1,445,207   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|Redeemable Series A Preferred Stock (3,238 shares)                                                                |  |                            | 323,800     |   |                 |   | 323,800     |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL LIABILITIES                                                                                                 |  |                            | 10,880,315  |   |                 |   | 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; 8,129,880 and 8,248,864 shares issued               |  |                            | 81,299      |   |                 |   | 82,488      |  
|Additional Paid-In Capital                                                                                        |  |                            | 12,072,672  |   |                 |   | 14,139,686  |  
|Deficit                                                                                                           |  |                            | (11,273,849 | ) |                 |   | (12,638,876 | )
|Treasury Stock, 61,100 common shares, at cost                                                                     |  |                            | (327,493    | ) |                 |   | (327,493    | )
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                        |  |                            | 1,645,029   |   |                 |   | 2,348,205   |  
|                                                                                                                  |  |                            |             |   |                 |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                        |  |                            | 12,525,344  |   |                 | $ | 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 October 31, |          
|                                    |  | 2006                                   |           |   | 2005 |  
|Revenues                            |  |                                        |           |   |      |   |           |  
|Wagering                            |  | $                                      | 2,501,438 |   |      | $ | 2,216,385 |  
|Hotel/Casino                        |  |                                        | 878,084   |   |      |   |          |  
|Systems                             |  |                                        | 1,347,147 |   |      |   | 1,159,596 |  
|                                    |  |                                        |           |   |      |   |           |  
|                                    |  |                                        | 4,726,669 |   |      |   | 3,375,981 |  
|                                    |  |                                        |           |   |      |   |           |  
|Direct Costs and Expenses           |  |                                        |           |   |      |   |           |  
|Wagering                            |  |                                        | 1,903,354 |   |      |   | 1,705,702 |  
|Hotel/Casino                        |  |                                        | 743,478   |   |      |   |          |  
|Systems                             |  |                                        | 408,228   |   |      |   | 624,778   |  
|                                    |  |                                        |           |   |      |   |           |  
|                                    |  |                                        | 3,055,060 |   |      |   | 2,330,480 |  
|                                    |  |                                        |           |   |      |   |           |  
|Administrative Costs and Expenses   |  |                                        |           |   |      |   |           |  
|Research and Development            |  |                                        | 322,132   |   |      |   | 262,553   |  
|Selling, General and Administrative |  |                                        | 905,119   |   |      |   | 822,038   |  
|Depreciation and Amortization       |  |                                        | 227,743   |   |      |   | 105,899   |  
|                                    |  |                                        |           |   |      |   |           |  
|                                    |  |                                        | 1,454,994 |   |      |   | 1,190,490 |  
|                                    |  |                                        |           |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES  |  |                                        | 4,510,054 |   |      |   | 3,520,970 |  
|                                    |  |                                        |           |   |      |   |           |  
|OPERATING INCOME (LOSS)             |  |                                        | 216,615   |   |      |   | (144,989  | )
|                                    |  |                                        |           |   |      |   |           |  
|Other Income (Expense)              |  |                                        |           |   |      |   |           |  
|Interest Income                     |  |                                        | 26,425    |   |      |   | 12,051    |  
|Interest Expense                    |  |                                        | (58,839   | ) |      |   | (9,434    | )
|Litigation                          |  |                                        | (329,396  | ) |      |   |          |  
|Other, net                          |  |                                        | (29,859   | ) |      |   | 6,430     |  
|                                    |  |                                        |           |   |      |   |           |  
|                                    |  |                                        | (391,669  | ) |      |   | 9,047     |  
|                                    |  |                                        |           |   |      |   |           |  
|LOSS BEFORE INCOME TAX BENEFIT      |  |                                        | (175,054  | ) |      |   | (135,942  | )
|INCOME TAX BENEFIT                  |  |                                        |          |   |      |   | (63,000   | )
|                                    |  |                                        |           |   |      |   |           |  
|NET LOSS                            |  |                                        | ($175,054 | ) |      |   | ($72,942  | )
|                                    |  |                                        |           |   |      |   |           |  
|BASIC LOSS PER SHARE                |  |                                        | ($0.03    | ) |      |   | ($0.01    | )

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                     |  |                                       |            |   |      |   |           |  
|------------------------------------ |  | ------------------------------------- | ---------- | - | ---- | - | --------- | -
|                                     |  | For the Nine Months Ended October 31, |           
|                                     |  | 2006                                  |            |   | 2005 |  
|Revenues                             |  |                                       |            |   |      |   |           |  
|Wagering                             |  | $                                     | 6,456,447  |   |      | $ | 5,855,017 |  
|Hotel/Casino                         |  |                                       | 2,174,357  |   |      |   |          |  
|Systems                              |  |                                       | 5,486,685  |   |      |   | 3,824,785 |  
|                                     |  |                                       |            |   |      |   |           |  
|                                     |  |                                       | 14,117,489 |   |      |   | 9,679,802 |  
|                                     |  |                                       |            |   |      |   |           |  
|Direct Costs and Expenses            |  |                                       |            |   |      |   |           |  
|Wagering                             |  |                                       | 4,728,427  |   |      |   | 4,433,730 |  
|Hotel/Casino                         |  |                                       | 1,823,363  |   |      |   |          |  
|Systems                              |  |                                       | 1,894,082  |   |      |   | 1,870,085 |  
|                                     |  |                                       |            |   |      |   |           |  
|                                     |  |                                       | 8,445,872  |   |      |   | 6,303,815 |  
|                                     |  |                                       |            |   |      |   |           |  
|Administrative Costs and Expenses    |  |                                       |            |   |      |   |           |  
|Research and Development             |  |                                       | 822,866    |   |      |   | 750,005   |  
|Selling, General and Administrative  |  |                                       | 2,461,704  |   |      |   | 2,024,173 |  
|Depreciation and Amortization        |  |                                       | 601,267    |   |      |   | 293,138   |  
|                                     |  |                                       |            |   |      |   |           |  
|                                     |  |                                       | 3,885,837  |   |      |   | 3,067,316 |  
|                                     |  |                                       |            |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES   |  |                                       | 12,331,709 |   |      |   | 9,371,131 |  
|                                     |  |                                       |            |   |      |   |           |  
|OPERATING INCOME                     |  |                                       | 1,785,780  |   |      |   | 308,671   |  
|                                     |  |                                       |            |   |      |   |           |  
|Other Income (Expense)               |  |                                       |            |   |      |   |           |  
|Interest Income                      |  |                                       | 64,476     |   |      |   | 40,791    |  
|Interest Expense                     |  |                                       | (140,164   | ) |      |   | (19,985   | )
|Reorganization Expense               |  |                                       |           |   |      |   | (43,493   | )
|Litigation                           |  |                                       | (329,396   | ) |      |   | 328,624   |  
|Other, net                           |  |                                       | 90,256     |   |      |   | 140,633   |  
|                                     |  |                                       |            |   |      |   |           |  
|                                     |  |                                       | (314,828   | ) |      |   | 446,570   |  
|                                     |  |                                       |            |   |      |   |           |  
|INCOME BEFORE INCOME TAX             |  |                                       | 1,470,952  |   |      |   | 755,241   |  
|INCOME TAX PROVISION                 |  |                                       |           |   |      |   | 17,000    |  
|                                     |  |                                       |            |   |      |   |           |  
|NET INCOME                           |  | $                                     | 1,470,952  |   |      | $ | 738,241   |  
|                                     |  |                                       |            |   |      |   |           |  
|BASIC AND DILUTED EARNINGS PER SHARE |  | $                                     | 0.17       |   |      | $ | 0.08      |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                     |  |                                      |            |   |      |   |            |  
|---------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                     |  | For the Nine Months EndedOctober 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  |  |                                      | 2,534,045  |   |      |   | (648,096   | )
|                                                     |  |                                      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                 |  |                                      |            |   |      |   |            |  
|Increase in restricted cash                          |  |                                      | (1,001,089 | ) |      |   | (52,587    | )
|Withdrawal of restricted cash                        |  |                                      | 1,225,442  |   |      |   |           |  
|Purchase of property and equipment                   |  |                                      | (763,214   | ) |      |   | (513,145   | )
|Proceeds from sale of property and equipment         |  |                                      | 2,500      |   |      |   |           |  
|Decrease in notes receivable                         |  |                                      |           |   |      |   | 320,000    |  
|                                                     |  |                                      |            |   |      |   |            |  
|Net cash used in investing activities                |  |                                      | (536,361   | ) |      |   | (245,732   | )
|                                                     |  |                                      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                 |  |                                      |            |   |      |   |            |  
|Sale of stock                                        |  |                                      | 82,484     |   |      |   | 38,438     |  
|Repayment of borrowings                              |  |                                      | (515,486   | ) |      |   | (137,859   | )
|Proceeds from borrowings                             |  |                                      | 900,000    |   |      |   |           |  
|Dividends on preferred stock                         |  |                                      | (105,924   | ) |      |   | (105,924   | )
|Payment of preferred stock dividends in arrears      |  |                                      |           |   |      |   | (213,400   | )
|                                                     |  |                                      |            |   |      |   |            |  
|Net cash provided by (used in) financing activities  |  |                                      | 361,074    |   |      |   | (418,745   | )
|                                                     |  |                                      |            |   |      |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |  |                                      | 2,358,758  |   |      |   | (1,312,573 | )
|                                                     |  |                                      |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIODS          |  | $                                    | 4,580,203  |   |      | $ | 2,686,278  |  
|                                                     |  |                                      |            |   |      |   |            |  

See notes to consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED OCTOBER 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 periods 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 4) 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 employee compensation
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 Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, and 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.

As a result of the adoption of SFAS No. 123R, stock-based compensation expense
recognized during the three and nine months ended October 31, 2006, of $70,339 and $229,313, 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 established in accordance with the original provisions of SFAS No 123 (prior to the adoption of SFAS No. 123R), and compensation cost for all share-based payments granted or vesting on or
subsequent to February 1, 2006, using fair value estimates based on the grant date established in accordance with SFAS No. 123R. The effect of adopting SFAS No. 123R on net income (loss) and earnings (loss) per share for the three and
nine months ended October 31, 2006 was to increase net loss (decrease net income) by $70,339 and $229,313, respectively for the three and nine months ended October 31, 2006, and to decrease diluted earnings per share by $0.03 for the nine
months.

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 month period ended October 31, 2006:



|                        |  |       |  
|----------------------- |  | ----- | -
|Expected life in years  |  | 6.46  |  
|Risk-free interest rate |  | 4.57  | %
|Dividend yield          |  | 0.0   | %
|Expected volatility     |  | 82.89 | %



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If compensation expense for stock options issued to officers and employees had been determined in prior comparable
periods based upon the fair value at the grant date under SFAS No. 123, pro forma net income (loss) and basic earnings (loss) per share would have been as shown below.



|                                                                                                                                            |  |                                     |   |  |                                  |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | - |  | -------------------------------- | ------- | -
|                                                                                                                                            |  | Three Months Ended October 31, 2005 |   |  | Nine MonthsEndedOctober 31, 2005 |        
|Net income (loss), as reported                                                                                                              |  | ($72,942                            | ) |  | $                                | 738,241 |  
|Total stock-based employee compensation expense determined under fair-market value based method for all rewards, net of related tax
effects |  | (85                                 | ) |  |                                  | (188    | )
|                                                                                                                                            |  |                                     |   |  |                                  |         |  
|Pro forma net income (loss)                                                                                                                 |  | ($73,027                            | ) |  | $                                | 738,053 |  
|                                                                                                                                            |  |                                     |   |  |                                  |         |  
|Earnings (loss) per share:                                                                                                                  |  |                                     |   |  |                                  |         |  
|Basic, as reported                                                                                                                          |  | ($0.01                              | ) |  | $                                | 0.08    |  
|Diluted, as reported                                                                                                                        |  |                                     |   |  | $                                | 0.08    |  
|Basic, proforma                                                                                                                             |  | ($0.01                              | ) |  | $                                | 0.08    |  
|Diluted, proforma                                                                                                                           |  |                                     |   |  | $                                | 0.08    |  

For pro forma purposes, 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 nine month periods ending October 31, 2005:



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

3. Long-Term Debt

On August 8, 2006, the Company entered into a sale/lease-back transaction with a finance company involving 75 race/sports kiosks for a sale price of $600,000 (less a $2,500 documentation fee and a 5% closing
fee). Lease payments are $238,032 per year for 3 years. At the conclusion of the lease term, the Company may exercise a bargain re-purchase option for $1. Accordingly, the Company has accounted for this transaction as a capital lease.

4. Earnings (Loss) per Share

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



6



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##### Table of Contents

|                                                   |  |                                |   |  |                               |   |  |      |           |   |      |   |           |  
|-------------------------------------------------- |  | ------------------------------ | - |  | ----------------------------- | - |  | ---- | --------- | - | ---- | - | --------- | -
|                                                   |  | Three Months Ended October 31, |   |  | Nine Months Ended October 31, |  
|                                                   |  | 2006                           |   |  | 2005                          |   |  | 2006 |           |   | 2005 |  
|Net Income (Loss)                                  |  | ($175,054                      | ) |  | ($72,942                      | ) |  | $    | 1,470,952 |   |      | $ | 738,241   |  
|Preferred stock dividends                          |  | (35,696                        | ) |  | (35,696                       | ) |  |      | (105,924  | ) |      |   | (105,924  | )
|                                                   |  |                                |   |  |                               |   |  |      |           |   |      |   |           |  
|Net Income (Loss) attributable to common stock     |  | ($210,750                      | ) |  | ($108,638                     | ) |  | $    | 1,365,028 |   |      | $ | 632,317   |  
|                                                   |  |                                |   |  |                               |   |  |      |           |   |      |   |           |  
|Basic weighted average common shares outstanding   |  | 8,246,386                      |   |  | 7,956,104                     |   |  |      | 8,214,744 |   |      |   | 7,956,104 |  
|                                                   |  |                                |   |  |                               |   |  |      |           |   |      |   |           |  
|Diluted weighted average common shares outstanding |  | 8,246,386                      |   |  | 7,956,104                     |   |  |      | 8,262,911 |   |      |   | 7,997,881 |  
|                                                   |  |                                |   |  |                               |   |  |      |           |   |      |   |           |  

The following factors were considered in determining the diluted weighted average shares outstanding:



|                                                       |  |                                |           |   |                               |   |           |      |  |      |           |  |   |        
|------------------------------------------------------ |  | ------------------------------ | --------- | - | ----------------------------- | - | --------- | ---- |  | ---- | --------- |  | - | -------
|                                                       |  | Three Months Ended October 31, |           |   | Nine Months Ended October 31,
|                                                       |  | 2006                           |           |   | 2005                          |   |           | 2006 |  | 2005
|Stock Options Outstanding                              |  |                                | 784,000   |   |                               |   | 834,760   |      |  |      | 784,000   |  |   | 834,760
|Stock Options Exercisable                              |  |                                | 348,200   |   |                               |   | 176,360   |      |  |      | 348,200   |  |   | 176,360
|Exercise Price  Low                                   |  | $                              | 0.12      |   |                               | $ | 0.12      |      |  | $    | 0.12      |  | $ | 0.12   
|Exercise Price  High                                  |  | $                              | 2.00      |   |                               | $ | 2.00      |      |  | $    | 2.00      |  | $ | 2.00   
|Average Market Price                                   |  | $                              | 1.33      |   |                               | $ | 1.59      |      |  | $    | 1.40      |  | $ | 1.65   
|Net income (loss) attributable to common stock         |  |                                | ($210,750 | ) |                               |   | ($108,638 | )    |  | $    | 1,365,028 |  | $ | 632,417
|Diluted weighted average of the options outstanding(1) |  |                                | 4,408     |   |                               |   | 114,597   |      |  |      | 48,167    |  |   | 135,276
|Anti-dilutive weighted average excluded(1)             |  |                                | 780,948   |   |                               |   | 511,644   |      |  |      | 769,666   |  |   | 220,041



|(1) | Options are not included in the weighted average number of shares outstanding for the computation of diluted earnings per share if their effect is anti-dilutive or
if the exercise price is greater than the market price. All options are excluded in loss periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. Business Segments

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

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 AWI Gaming, Inc. (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 primarily
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.



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|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|---------------------------------------------------------- |  | ------------------------------ | --------- | - | ----------------------------- | -- | --------- | ---- |  | - | ---------- | - |  | - | ---------
|                                                           |  | Three Months Ended October 31, |           |   | Nine Months Ended October 31,
|                                                           |  | 2006                           |           |   | 2005                          |    |           | 2006 |  |   | 2005      
|Revenues:                                                  |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Wagering                                                   |  | $                              | 2,501,438 |   |                               | $  | 2,216,385 |      |  | $ | 6,456,447  |   |  | $ | 5,855,017
|Hotel/Casino *                                             |  |                                | 878,084   |   |                               |    |          |      |  |   | 2,174,357  |   |  |   |         
|Systems                                                    |  |                                | 1,347,147 |   |                               |    | 1,159,596 |      |  |   | 5,486,685  |   |  |   | 3,824,785
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Total Revenues                                             |  | $                              | 4,726,669 |   |                               | $  | 3,375,981 |      |  | $ | 14,117,489 |   |  | $ | 9,679,802
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Wagering Direct and Administrative Costs and Expenses:     |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Direct Costs and Expenses                                  |  | $                              | 1,903,354 |   |                               | $  | 1,705,702 |      |  | $ | 4,728,427  |   |  | $ | 4,433,730
|Unallocated                                                |  |                                | 247,728   |   |                               |    | 429,644   |      |  |   | 702,130    |   |  |   | 977,176  
|Depreciation/Amortization                                  |  |                                | 93,642    |   |                               |    | 66,114    |      |  |   | 251,539    |   |  |   | 181,817  
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|                                                           |  |                                | 2,244,724 |   |                               |    | 2,201,460 |      |  |   | 5,682,096  |   |  |   | 5,592,723
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Hotel/Casino Direct and Administrative Costs and Expenses: |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Direct Costs and Expenses *                                |  |                                | 743,478   |   |                               |    |          |      |  |   | 1,823,363  |   |  |   |         
|Unallocated                                                |  |                                | 319,639   |   |                               |    |          |      |  |   | 827,628    |   |  |   |         
|Depreciation/Amortization                                  |  |                                | 85,148    |   |                               |    |          |      |  |   | 207,893    |   |  |   |         
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|                                                           |  |                                | 1,148,265 |   |                               |    |          |      |  |   | 2,858,884  |   |  |   |         
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Systems Direct and Administrative Costs and Expenses:      |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Direct Costs and Expenses                                  |  |                                | 408,228   |   |                               |    | 624,778   |      |  |   | 1,894,082  |   |  |   | 1,870,085
|Research and Development                                   |  |                                | 322,132   |   |                               |    | 262,553   |      |  |   | 822,866    |   |  |   | 750,005  
|Unallocated                                                |  |                                | 337,752   |   |                               |    | 392,395   |      |  |   | 931,946    |   |  |   | 1,046,997
|Depreciation/Amortization                                  |  |                                | 48,953    |   |                               |    | 39,784    |      |  |   | 141,835    |   |  |   | 111,321  
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|                                                           |  |                                | 1,117,065 |   |                               |    | 1,319,510 |      |  |   | 3,790,729  |   |  |   | 3,778,408
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Total Direct and Administrative Costs and Expenses         |  | $                              | 4,510,054 |   |                               | $  | 3,520,970 |      |  | $ | 12,331,709 |   |  | $ | 9,371,131
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Operating Income (Loss):                                   |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Wagering                                                   |  | $                              | 256,714   |   |                               | $  | 14,925    |      |  | $ | 774,351    |   |  | $ | 262,294  
|Hotel/Casino                                               |  |                                | (270,181  | ) |                               |    |          |      |  |   | (684,527   | ) |  |   |         
|Systems                                                    |  |                                | 230,082   |   |                               |    | (159,914  | )    |  |   | 1,695,956  |   |  |   | 46,377   
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Total Operating Income (Loss)                              |  | $                              | 216,615   |   |                               | ($ | 144,989   | )    |  | $ | 1,785,780  |   |  | $ | 308,671  
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Income (Loss) Before Income Tax Provision (Benefit):       |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Wagering                                                   |  | $                              | 256,714   |   |                               | $  | 14,925    |      |  | $ | 774,351    |   |  | $ | 262,294  
|Hotel/Casino                                               |  |                                | (270,181  | ) |                               |    |          |      |  |   | (684,527   | ) |  |   |         
|Systems                                                    |  |                                | 230,082   |   |                               |    | (159,914  | )    |  |   | 1,695,956  |   |  |   | 46,377   
|Other                                                      |  |                                | (391,669  | ) |                               |    | 9,047     |      |  |   | (314,828   | ) |  |   | 446,570  
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          
|Total Income (Loss) Before Income Tax Provision (Benefit)  |  | ($                             | 175,054   | ) |                               | ($ | 135,942   | )    |  | $ | 1,470,952  |   |  | $ | 755,241  
|                                                           |  |                                |           |   |                               |    |           |      |  |   |            |   |  |   |          



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|                                     |  |                                |  |                               |  |      |           |   |      |   |        
|------------------------------------ |  | ------------------------------ |  | ----------------------------- |  | ---- | --------- | - | ---- | - | -------
|                                     |  | Three Months Ended October 31, |  | Nine Months Ended October 31,
|                                     |  | 2006                           |  | 2005                          |  | 2006 |           |   | 2005
|Income Tax Provision (Benefit):      |  |                                |  |                               |  |      |           |   |      |   |        
|Wagering                             |  |                               |  | $5,469                        |  |      |          |   |      | $ | 5,642  
|Hotel/Casino                         |  |                               |  |                              |  |      |          |   |      |   |       
|Systems                              |  |                               |  | (72,663)                      |  |      |          |   |      |   | 1,306  
|Unallocated                          |  |                               |  | 4,194                         |  |      |          |   |      |   | 10,052 
|                                     |  |                                |  |                               |  |      |           |   |      |   |        
|Total Income Tax Provision (Benefit) |  |                               |  | ($63,000)                     |  |      |          |   |      | $ | 17,000 
|                                     |  |                                |  |                               |  |      |           |   |      |   |        
|Net Income (Loss):                   |  |                                |  |                               |  |      |           |   |      |   |        
|Wagering                             |  | $256,714                       |  | $9,456                        |  | $    | 774,351   |   |      | $ | 256,652
|Hotel/Casino                         |  | (270,181)                      |  |                              |  |      | (684,527  | ) |      |   |       
|Systems                              |  | 230,082                        |  | (87,251)                      |  |      | 1,695,956 |   |      |   | 45,071 
|Unallocated                          |  | (391,669)                      |  | 4,853                         |  |      | (314,828  | ) |      |   | 436,518
|                                     |  |                                |  |                               |  |      |           |   |      |   |        
|Total Net Income (Loss)              |  | ($175,054)                     |  | ($72,942)                     |  | $    | 1,470,952 |   |      | $ | 738,241
|                                     |  |                                |  |                               |  |      |           |   |      |   |        



|* | Revenues and direct costs and expenses of the Hotel/Casino segment are comprised of the following:
|- | --------------------------------------------------------------------------------------------------



|                                             |  |                                     |         |   |                                    |   |           |  
|-------------------------------------------- |  | ----------------------------------- | ------- | - | ---------------------------------- | - | --------- | -
|                                             |  | Three Months Ended October 31, 2006 |         |   | Nine Months Ended October 31, 2006 |  
|Hotel/Casino Revenues:                       |  |                                     |         |   |                                    |   |           |  
|Casino                                       |  | $                                   | 433,611 |   |                                    | $ | 1,050,178 |  
|Hotel                                        |  |                                     | 172,377 |   |                                    |   | 430,177   |  
|Food/Beverage                                |  |                                     | 307,194 |   |                                    |   | 775,796   |  
|Less: Casino Promotional Allowances          |  |                                     | (35,098 | ) |                                    |   | (81,794   | )
|                                             |  |                                     |         |   |                                    |   |           |  
|Total Hotel/Casino Revenues                  |  | $                                   | 878,084 |   |                                    | $ | 2,174,357 |  
|                                             |  |                                     |         |   |                                    |   |           |  
|Hotel/Casino Direct Costs and Expenses:      |  |                                     |         |   |                                    |   |           |  
|Casino                                       |  | $                                   | 200,132 |   |                                    | $ | 480,190   |  
|Hotel                                        |  |                                     | 67,890  |   |                                    |   | 170,049   |  
|Food/Beverage                                |  |                                     | 301,652 |   |                                    |   | 759,718   |  
|Unallocated                                  |  |                                     | 173,804 |   |                                    |   | 413,406   |  
|                                             |  |                                     |         |   |                                    |   |           |  
|Total Hotel/Casino Direct Costs and Expenses |  | $                                   | 743,478 |   |                                    | $ | 1,823,363 |  
|                                             |  |                                     |         |   |                                    |   |           |  

6. 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, which included a loan of $1,500,000 from a bank, collateralized by a 1stdeed of trust on the Sturgeons Inn & Casino real estate and a security interest in the personal property and fixtures of Sturgeons Inn & Casino. Interest is payable
monthly at the Wall Street Journal-listed prime rate plus 2% and the principal is due in a single payment on March 1, 2008. An additional $300,000 was advanced by Victor Salerno, the Companys CEO, and his wife, under an agreement with AWI
that expires in 2011 and which provides for guarantees of Company indebtedness and advances not to exceed $500,000 in the aggregate. Under the agreement monthly interest payments at the 10% per annum were made by AWI to Mr. and
Mrs. Salerno on the balance outstanding, which amount ($300,000) has been fully repaid. In addition, the Company agreed to reimburse Mr. and Mrs. Salerno for finance charges, fees and other expenses they incur under a $500,000
personal revolving line of credit with their bank, to the extent the line of credit was or will be used to provide funding for the Company.



9



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



|                     |  |   |          
|-------------------- |  | - | ---------
|Land                 |  | $ | 505,558  
|Buildings            |  |   | 795,618  
|Other                |  |   | 498,824  
|                     |  |   |          
|Total Purchase Price |  | $ | 1,800,000
|                     |  |   |          

In accordance with SFAS No. 141, Business Combinations, the Company performed a valuation using the
cost approach, and corroborated by an independent appraisal report valuing Sturgeons Inn & Casino at $2,200,000 using the income approach, to determine, among other things, the cost of the acquired entity and to assign that cost to
the assets acquired on the basis of their fair values. Based upon this valuation process, the Company determined an overall asset value for Sturgeons Inn & Casino of $2,091,570, which amount exceeded the purchase price of $1,800,000
and created negative goodwill in the amount of $291,570. The Company attributes the negative goodwill primarily to the value of the land which increased dramatically between the time the purchase agreement was executed and the time the Nevada Gaming
Commission approved the acquisition and it was consummated. However, pursuant to paragraphs 44 and 45 of SFAS No. 141, the negative goodwill was apportioned to each asset class on a pro rata basis. As all eligible assets were reduced on a pro
rata basis and no unallocated negative goodwill remained, the Company did not recognize an extraordinary gain from the acquisition of Sturgeons Inn & Casino nor was any portion of the purchase price available for allocation to future
operations.

In addition to previously disclosed accounting policies and estimates, we have determined that the following accounting policies relative to
revenue recognition and promotional allowances are significant to the preparation of our current period 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 hotel/casino revenue (see detail in Note 5).

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.



10



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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 the fiscal year for each interim period presented prior to the acquisition:



|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|--------------------------------- |  | --------------------------------- | --------- | - | ------------------------------- | - | --------------------------------- |  | - | ---------- | -
|                                  |  | Three MonthsEnded October 31,2005 |           |   | Nine MonthsEndedOctober 31,2005 |   | Nine Months Ended October 31,2006 | 
|Revenues                          |  | $                                 | 4,037,590 |   |                                 | $ | 11,563,258                        |  | $ | 14,301,512 |  
|Operating Expenses                |  |                                   | 4,229,449 |   |                                 |   | 11,410,133                        |  |   | 12,591,079 |  
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|Operating Income (Loss)           |  |                                   | (191,859  | ) |                                 |   | 153,125                           |  |   | 1,710,433  |  
|Other Income (Expense)            |  |                                   | (33,948   | ) |                                 |   | 317,586                           |  |   | (329,160   | )
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|Income (Loss) Before Income Taxes |  |                                   | (225.807  | ) |                                 |   | 470,711                           |  |   | 1,381,273  |  
|Income Tax Provision (Benefit)    |  |                                   | (63,000   | ) |                                 |   | 17,000                            |  |   |           |  
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|Net Income                        |  | $                                 | (162,807  | ) |                                 | $ | 453,711                           |  | $ | 1,381,273  |  
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|Basic Earnings (Loss) Per Share   |  |                                   | ($0.02    | ) |                                 | $ | 0.04                              |  | $ | 0.16       |  
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  
|Diluted Earnings (Loss) Per Share |  |                                   | ($0.02    | ) |                                 | $ | 0.04                              |  | $ | 0.15       |  
|                                  |  |                                   |           |   |                                 |   |                                   |  |   |            |  

These unaudited pro forma results do not include information for the three months ended October 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.

7. Income Taxes

We have has federal net operating loss carryforwards available to reduce future tax obligations in the aggregate amount of approximately $900,000 at October 31, 2006, which are expected to expire in various years
ending in 2025. We believe that we will continue to be profitable for at least the short-term future and that it is therefore more likely than not that our net deferred tax asset of $440,481, which resulted primarily from the net operating loss
carryforwards, will be fully realized. We have assessed the valuation allowance against the remainder of the deferred tax assets and we continue to reevaluate this asset periodically. We used these expectations to estimate the annual effective
income tax rate for fiscal 2007 in determining the tax rate applied to the current quarter.

The change in deferred tax asset valuation allowance for the
three and nine months ended October 31, 2006, based on these estimates, created an income tax expense (benefit) of approximately $500,000 and $(60,000), respectively, which offset all current income tax expense (benefit) for the three and nine
months ended October 31, 2006. Although the expectations reflected in these estimates are based upon information currently available to us and what we believe are reasonable assumptions, our actual results could differ materially from these
expectations.

8. Litigation

Pursuant to an
adverse ruling on October 6, 2006, by the United States Court of Appeals for the Ninth Circuit (the 9thCircuit), which reversed the ruling of the United States Bankruptcy Appellate Panel of the Ninth Circuit (the BAP), we have recorded a long-term debt payable to Michael Racusin d/b/a M. Racusin & Company
(Racusin) in the amount of $2,682,374 (with $1,500,000 current) as of October 31, 2006. This amount represents the agreed-upon sum of $2,800,000 less $420,000 already paid plus awarded interest of $302,374 from March 11, 2005
(the effective date of the Companys Chapter 11 Plan of Reorganization) to September 11, 2006. On October 20, 2006, we petitioned the 9thCircuit for a panel rehearing or, in the alternative, a rehearing en banc.

We expect that the
9thCircuit will rule on our petition for rehearing within the next 60 days. If our petition is granted, the
rehearing is expected to occur 12 to 18 months later. If the 9thCircuit rehears the case and affirms the BAPs
ruling, then Racusins claim will be resolved by our issuance of 250,000 shares of AWI common stock to Racusin, in accordance with a previously executed settlement agreement (the Settlement Agreement). Those



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shares were issued in Racusins name on July 27, 2005, pursuant to the BAPs ruling, and are currently held in trust by the United States
Bankruptcy Court for the District of Nevada pending a resolution of this matter.

If the 9thCircuit declines to rehear the case or if it rehears the case and reverses the BAPs ruling, then the 250,000 shares that we issued in Racusins
name will be cancelled and Racusins claim will be resolved by a series of cash payments by us to (or for the benefit of) Racusin, in accordance with the Settlement Agreement, expected to begin within 30 days, in the aggregate amount of
$2,682,374 plus interest at 8% per annum from September 11, 2006.

Pursuant to the 9thCircuits ruling, and pending the outcome of the petition for a rehearing, we have reduced common stock by $2,500 (250,000 shares) and additional paid-in
capital by $2,377,500. Long-term debt has been recorded in the amount of $2,682,374 and additional litigation judgment expense in the amount of $329,396 has been recorded, which includes accrued interest of $27,022 from September 12 to
October 31, 2006.



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|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 9thCircuit) will not rehear the matter reversing the favorable ruling by the United States Bankruptcy Appellate Panel of the Ninth Circuit (the BAP) in the Racusin case, or that the
9thCircuit does rehear the matter and again reverses the favorable BAP ruling;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 (NGC);
|- |  | -------------------------------------------------------------------------------------------------



| |  | 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 or elsewhere 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.



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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 nine months ended
October 31, 2006, we funded our operations primarily with net cash provided by operating activities. As of October 31, 2006, we had working capital of $1,423,285, compared to working capital of $1,670,280 at January 31, 2006. 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 nine months ended October 31, 2006 provided net cash of $2,534,045 as compared to net cash used of $648,096 in the comparable period of last year. This increase of $3,182,141 was primarily due to improved revenues from wagering and
systems and improved margins related to each.

Net cash used in investing activities for the nine months ended October 31, 2006 was $536,361 as
compared to net cash used of $245,732 in the same period last year. This increase includes an increase in cash used to purchase property and equipment of $250,069, which was offset by a net reduction (withdrawal) in restricted cash of



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$224,353, as compared to an increase in restricted cash of $52,587 in the prior years comparable period. Further, investing activities for the nine
months ended October 31, 2006 did not include our one-time receipt of cash collected on a note receivable of $320,000 during the prior years nine-month interim period.

Net cash provided by financing activities for the nine months ended October 31, 2006 was $361,074 as compared to net cash used in financing activities for the same period last year of $418,745, an increase of
$779,819. Such increase is primarily due to the non-recurrence of the prior year payment of preferred stock dividends in arrears of $213,400 and proceeds from borrowings of $900,000, minus an increase in the repayment of long-term debt of $377,627.

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

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  Through August 31, 2006. 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 $1.2 million cash deposit maintained at SmithBarney.

NGC Regulation 22.040  As of 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). The ILOC is secured by a $1,000,000 Certificate of Deposit (CD) held by Great Basin. We anticipate the Fidelity surety bond will be sufficient to fully satisfy 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, $1,500,000 from a bank and $300,000 from an officer/shareholder, which latter amount has been repaid (see Note
6 to the accompanying consolidated financial statements).

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 a $2,500 documentation fee and a 5% closing fee) and are leasing the kiosks back from
the finance company at a payment of $19,836 per month for 36 months ($238,032 per year). 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, which is included in long-term debt. 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/sports kiosks.
However, before it was finalized, we determined that such financing was not necessary and terminated it.

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.



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Results of operations  Comparisons of the Nine Months ended October 31, 2006 and 2005.

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. Condensed operating results for the
nine months ended October 31, 2006 and 2005 are as follows:



|                             |  |                               |             |   |          |   |            |          |  |   |            |   |  |        |  
|---------------------------- |  | ----------------------------- | ----------- | - | -------- | - | ---------- | -------- |  | - | ---------- | - |  | ------ | -
|                             |  | Nine Months Ended October 31, |             |   | $ CHANGE |   |            | % CHANGE | 
|                             |  | 2006                          |             |   | 2005     |   |            |         
|Revenues                     |  | $                             | 14,117,489  |   |          | $ | 9,679,802  |          |  | $ | 4,437,687  |   |  | +45.8  | %
|Costs and Expenses           |  |                               | (12,331,709 | ) |          |   | (9,371,131 | )        |  |   | (2,960,578 | ) |  | +31.6  | %
|                             |  |                               |             |   |          |   |            |          |  |   |            |   |  |        |  
|Operating Income             |  |                               | 1,785,780   |   |          |   | 308,671    |          |  |   | 1,477,109  |   |  | +478.5 | %
|Other Income (Expense), net  |  |                               | (314,828    | ) |          |   | 446,570    |          |  |   | (761,398   | ) |  | -170.5 | %
|                             |  |                               |             |   |          |   |            |          |  |   |            |   |  |        |  
|Income Before Income Taxes   |  |                               | 1,470,952   |   |          |   | 755,241    |          |  |   | 715,711    |   |  | +94.8  | %
|Income Tax (Expense) Benefit |  |                               |            |   |          |   | (17,000    | )        |  |   | 17,000     |   |  | n/a    |  
|                             |  |                               |             |   |          |   |            |          |  |   |            |   |  |        |  
|Net Income                   |  |                               | 1,470,952   |   |          | $ | 738,241    |          |  |   | 732,711    |   |  | +99.3  | %
|                             |  |                               |             |   |          |   |            |          |  |   |            |   |  |        |  

The increase in revenues of $4.4 million (+45.8%) consisted of increases in wagering, hotel/casino and
systems revenues of approximately $601,000 (+10.3%), $2.2 million (+100.0%) and $1.7 million (+43.5%), respectively. The increase in wagering revenue is primarily due to an improvement in the net win (gross wagers less customer winnings) on
gross wagering of $72.2 million, which gross wagering was approximately the same as in the comparable prior year nine months. The net win percentage increase from wagering increased from 7.25% in the nine months ended October 31, 2005 to 8.15%
in the nine months ended October 31, 2006 and is attributable to normal fluctuations.

The increase in hotel/casino revenue is attributable to the
acquisition and commencement of operations of Sturgeons on March 1, 2006. The increase in systems revenue includes increases in the sale, installation and upgrade of wagering terminals and the associated HP Integrity operating system of
$1.2 million, an increase in maintenance fees and sales of $299,000 and a non-recurring sale of wagering kiosks previously leased of $112,000. System sales are low volume, high dollar sales based on the needs of the market, which is limited to the
number of Nevada casinos that operate race and sports book servers, and vary substantially from quarter to quarter. System sales, installations and upgrades are non-recurring as the impetus for a sale or upgrade is outdated or expired equipment at
existing casinos or the opening of new sports books. System sales, installations and upgrades generally decrease during the third and fourth quarters as most race/sports book operations are reluctant to install new or upgraded equipment and software
during the professional football season.

Costs and expenses for the nine months ended October 31, 2006 increased by approximately $3.0 million
(+31.6%), which consists of increases in direct costs and expenses of $2.1 million (+34.0%), and in administrative costs and expenses of $819,000 (+26.7%). The increase in direct costs and expenses, from $6.3 million in the nine months ended
October 31, 2005 to $8.4 million in the nine months ended October 31, 2006, includes increases in wagering, hotel/casino and systems costs and expenses of $295,000 (+6.6%), $1.8 million (+100.0%) and $24,000 (+1.3%), respectively.

The increase in wagering direct costs and expenses primarily includes increases in wages and benefits of approximately $189,000, and in advertising of
$90,000. The increase in wages and benefits is due to the addition of management personnel for Northern Nevada operations, general compensation increases to retain and attract qualified staff, and increased health care costs as a result of increased
health insurance costs borne by the Company. The increase in advertising is attributable to increased marketing efforts to attract new customers.

The
increase in hotel/casino direct costs and expenses is attributable to the acquisition and commencement of operations of Sturgeons on March 1, 2006. The slight increase in system costs and expenses primarily consists of an increase in
costs of sales of $158,000, associated with the increase in revenues from the sale, installation and upgrade of wagering terminals and the associated HP Integrity operating system, and the cost of the wagering kiosks previously leased of $88,000.
Such increases were significantly offset by a decrease in wages and benefits of $158,000, which resulted from a reduction and realignment of personnel, attributing to improved operational efficiencies.



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The increase in administrative costs and expenses, from $3.1 million in the nine months ended October 31, 2005 to
$3.9 million in the nine months ended October 31, 2006, includes increases in research and development, selling, general and administrative and depreciation and amortization costs and expenses of $73,000 (+9.7%), $438,000 (+21.6%) and
$308,000 (+105.1%), respectively. The increase in research and development costs and expenses is primarily due to compensation and benefit increases associated with the retention and attraction of qualified management and staff.

The increase in selling, general and administrative costs and expenses includes the recognition of stock-based employee compensation expense of approximately $236,000 in
the nine months ended October 31, 2006 in connection with the Companys February 1, 2006 adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment. Selling, general and
administrative costs and expenses also increased by approximately $310,000 in various other cost and expense categories including gaming investigative fees, legal, general outside services, general and administrative costs and expenses associated
with the March 1, 2006 acquisition and operation of Sturgeons and in other miscellaneous categories. Such increases were partially offset by a decrease of approximately $108,000 as a result of the discontinuance of unsuccessful contract
services relative to improving the Companys public market perception, which costs and expenses were primarily incurred in the fiscal year ended January 31, 2006.

The increase in depreciation and amortization primarily includes an increase from wagering of approximately $70,000 and depreciation and amortization of approximately $208,000 attributable to the acquisition and
operation of Sturgeons on March 1, 2006.

Other income (expense) decreased from other income, net of approximately $447,000 in the nine months
ended October 31, 2005 to other expense, net of approximately $315,000 in the nine months ended October 31, 2006, a $761,000 decrease. This decrease primarily consists of an increase in interest expense of approximately $120,000, and the
current nine-month recognition of a litigation judgment expense of approximately $329,000, which was a reversal of the prior years comparable nine-month recognition of such amount as other income. The increase in interest expense is primarily
due to additional long-term debt incurred in purchasing Sturgeons on March 1, 2006. The recognition of litigation judgment expense in the nine months ended October 31, 2006, reversing the recognition of such amount as other income in
the nine months ended October 31, 2005, is a result of the October 6, 2006 reversal by the 9thCircuit of
the prior ruling by the BAP. In accordance with the BAP ruling during the nine months ended October, 31, 2005, we recorded the resolution of such claim as the issuance of common stock and additional paid-in capital and recognized income. Pursuant to
the 9thCircuits ruling on October 6, 2006, we have reversed the prior years accounting entries and
have reduced common stock and additional paid-in capital, recognized expense and increase long-term debt. On October 20, 2006, we petitioned the 9thCircuit for a panel rehearing or, in the alternative, a rehearing en banc. (See Part II, Item 1. Legal Proceedings below.)

Critical accounting estimates and policies. Although our financial statements necessarily make use of certain accounting estimates by our management, we believe
that, except as discussed below, the Company does not employ any critical accounting policies or estimates that are either selected from among available alternatives or require the exercise of significant management judgment to apply or, that if
changed, are likely to materially affect future periods. The following summarizes our critical estimates and policies.

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



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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.



| |  |  | 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.

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 currently 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. We believe that we will continue to be profitable at least for the short-term future and, therefore, 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 need for 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. (See Recent Accounting Pronouncements below.)

Stock-based
compensation: On February 1, 2006, as required, we adopted SFAS No. 123R, Share-Based Payment, using the modified prospective method. Fair values of stock options are estimated using the Black-Scholes method based on assumptions
that we consider reasonable and that we disclose in our financial statements. Previously, we used Accounting Principles Board Opinion No. 25, Stock-Based Compensation, to account for employee stock options.

Recent Accounting Pronouncements.In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities  a replacement of FASB Statement No. 125. SFAS No. 155 will be effective for all financial instruments issued or acquired beginning in the first interim period of a fiscal year that begins after September 15,
2006. We do not expect to issue or acquire any financial instruments likely to be affected by SFAS No. 155 in the foreseeable future.



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In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, an Interpretation of Statement of Financial Accounting Standard No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax
return. FIN 48 will be effective for interim periods within fiscal years beginning after December 15, 2006. Management is currently evaluating the likely impact of adopting FIN 48 on its financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 will be effective for interim periods within fiscal years beginning after November 15, 2007. WE do not believe that the application of SFAS No. 157 will have a material
impact on our financial statements.

Impact of Inflation.We do not anticipate that inflation or changes in interest rates will have a material
impact on our current or future operations.

Recent developments. On December 18, 2006, we appointed Victor J. Salerno as our principal
financial officer on an interim basis. Mr. Salerno also serves as our Chairman of the Board, President, Chief Executive Officer (CEO), Chief Operating Officer and Assistant Secretary. We made this appointment following the
termination of employment of Timothy F. Lockinger, who was our Chief Financial Officer, Secretary and Treasurer and who continues to serve as a member of our board of directors. On November 17, 2006, Mr. Lockinger notified us that he was
terminating his employment agreement for Good Reason. Thereafter, we notified Mr. Lockinger that we believe his claim of termination for Good Reason is without merit and that we were terminating his employment agreement for
Cause.



|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 October 31, 2006. This evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) 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



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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.

PART II  OTHER INFORMATION



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

Racusin

On October 6, 2006, the 9thCircuit reversed the decision of the BAP which previously ruled in our favor that the bankruptcy claim of Michael Racusin, d/b/a M. Racusin & Company (Racusin), was subject to subordination under Section 510(b) of the U.S.
Bankruptcy Code. In reversing the BAPs ruling, the 9thCircuit ruled that Racusins claim was not subject
to subordination and remanded the case for further proceedings.

On October 20, 2006, we petitioned the 9thCircuit for a panel rehearing or, in the alternative, a rehearing en banc.

The manner in which Racusins claim is ultimately resolved will be based on the 9thCircuits decision and a September 3, 2004 Settlement Agreement among AWI, Leroys and Racusin (the Settlement Agreement), which is described further and appears in Exhibit 99.1 in the Form 8-K that we
filed on September 7, 2004.

If the 9thCircuit rehears the case and affirms the BAPs ruling, then Racusins claim will be resolved by the issuance of 250,000 shares of AWI common stock to Racusin, in accordance with the Settlement Agreement. Those
shares were issued in Racusins name on July 27, 2005 pursuant to the BAPs ruling and are currently held in trust by the Bankruptcy Court pending a resolution of this matter.

If the 9thCircuit declines to
rehear the case or if it rehears the case and reverses the BAPs ruling, then the 250,000 shares that we issued in Racusins name will be cancelled and Racusins claim will be resolved by a series of cash payments by us to (or for the
benefit of) Racusin, in accordance with the Settlement Agreement, expected to begin within 30 days, in the aggregate amount of $2,682,374 plus interest at 8% per annum from September 11, 2006.

Pending the outcome of our petition for a rehearing, we have taken the following actions:



| | (1) | We have not cancelled the certificate for 250,000 shares of AWI common stock issued in Racusins name on July 27, 2005. Instead, this certificate will remain in trust with
the Bankruptcy Court until such time as a resolution to this matter is reached. However, notwithstanding this, we have treated such shares as not issued and have reduced common stock by $2,500 and additional paid-in capital by $2,377,500 (reversal
of our previous recording of the elimination of the Racusin claim through our issuance of common stock);
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | We have recorded litigation judgment expense in the amount of $329,396 in the current period to account for accrued interest from the effective date of our Plan (March 11, 2005)
through September 11, 2006 ($302,374) and interest from September 12 to October 31, 2006; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | We have recorded long-term debt in the amount of $2,682,374 as of October 31, 2006 to account for the balance due Racusin should he prevail in this matter.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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In the event we are unsuccessful in our efforts for a favorable ruling by a rehearing, we will be obligated to make
payments to pursuant to the Settlement Agreement, approximately as follows, plus interest at 8% per annum on the unpaid balance as follows:



|                 |  |   |          
|---------------- |  | - | ---------
|First 12 months  |  | $ | 1,502,374
|Second 12 months |  |   | 300,000  
|Third 12 months  |  |   | 300,000  
|Fourth 12 months |  |   | 300,000  
|Fifth 12 months  |  |   | 280,000  
|                 |  |   |          
|Total            |  | $ | 2,682,374
|                 |  |   |          

We anticipate that the 9thCircuit will rule on our petition for rehearing within the next 60 days. If our petition is granted, we anticipate that the rehearing would occur 12 to 18 months later. If our petition is denied, we
anticipate that our payments to (or for the benefit of) Racusin will begin within 30 days after the denial.

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 |  | DESCRIPTION                                                                                                                                                                           
|10.1           |  | Amendment/Extension of Directors Stock Option Plan, dated August 1, 2006                                                                                                              
|               | 
|10.2           |  | Lease Schedule No. 1 (with Options), dated July 14, 2006 by and between AWI Manufacturing, Inc., American Wagering, Inc. and PDS Gaming Corporation-Nevada, and Master Lease
Agreement
|               | 
|31.1           |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                  
|               | 
|32.1           |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350                                       



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SIGNATURES

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



|                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------
|AMERICAN WAGERING, INC.                                                                                                                 
|                                                                                                                                        
|Dated: December 22, 2006                                                                                                                
|                                                                                                                                        
|/s/ Victor J. Salerno                                                                                                                   
|Victor J. Salerno                                                                                                                       
|President, Chief Executive Officer, Chief Operating Officer, Chairman of the Board of Directors, and Interim Principal Financial Officer



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