** **

**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

----

**FORM10-QSB**

| (Mark One)                                      |                                                                                      |
|-------------------------------------------------|-------------------------------------------------------------------------------------------|
| **x**                                           | **QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF  THE   SECURITIES EXCHANGE ACT OF 1934**  |
| For  the quarterly period ended: April 30, 2007 |
| **o**                                           | **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**

**AMERICANWAGERING, INC.**(Exact name of smallbusiness 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, Nevada89119** (Address ofprincipal executive offices)

**702-735-0101** (Issuer’stelephone number)

****(Former name, former address and former fiscal year, if changed sincelast report)

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.  x Yes     o  No

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  o  Yes x No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 8,129,880 shares of Common Stock asof June 11, 2007

Transitional Small Business Disclosure Format (Checkone): Yes  o    No  x

 

----

**TABLE OF CONTENTS**

**PART I — FINANCIALINFORMATION**
| ** ** | ** ** | ** **                                                      | ** ** | **Page**   |
|------------|------------|-----------------------------------------------------------------|------------|------------|
| ITEM       | ** ** | ** **                                                      | ** ** | ** ** |
|       |       |                                                            |       |       |
| 1          |       | Consolidated  Financial Statements                              |       | 1          |
|       |       |                                                            |       |       |
|       |       | Balance  Sheet                                                  |       | 1          |
|       |       |                                                            |       |       |
|       |       | Statements of Operations (3 months)                             |       | 2          |
|       |       |                                                            |       |       |
|       |       | Statements of Cash Flows                                        |       | 3          |
|       |       |                                                            |       |       |
|       |       | Notes to Consolidated Financial Statements                      |       | 4          |
|       |       |                                                            |       |       |
| 2          |       | Management’s Discussion and Analysis or Plan of  Operation |       | 10         |
|       |       |                                                            |       |       |
| 3A(T)      |       | Controls and Procedures                                         |       | 17         |

 

**PART II — OTHER INFORMATION**
| ITEM   | ** ** | ** **                                                   | ** ** | ** ** |
|--------|------------|--------------------------------------------------------------|------------|------------|
|   |       |                                                         |       |       |
| 1      |       | Legal  Proceedings                                           |       | 19         |
|   |       |                                                         |       |       |
| 2      |       | Unregistered Sales of Equity Securities and Use of  Proceeds |       | 19         |
|   |       |                                                         |       |       |
| 3      |       | Defaults Upon Senior Securities                              |       | 20         |
|   |       |                                                         |       |       |
| 4      |       | Submission of Matters to a Vote of Security Holders          |       | 20         |
|   |       |                                                         |       |       |
| 5      |       | Other  Information                                           |       | 20         |
|   |       |                                                         |       |       |
| 6      |       | Exhibits                                                     |       | 20         |

 

----

**Part I — Financial Information**

**Item 1.  Financial Statements****.**

**AMERICAN WAGERING, INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEET(Unaudited)**
| ** **                                                                                                                                 | ** ** | **April 30,  2007** | ** **     |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|----------------|
| **ASSETS**                                                                                                                                 | ** ** | ** **               | ** **     |
| CURRENT ASSETS                                                                                                                             |       |                     |           |
| Cash and Cash  Equivalents                                                                                                                 |       | $                        | 3,645,767      |   |
| Restricted Cash                                                                                                                            |       | 1,103,738                |           |
| Accounts  Receivable                                                                                                                       |       | 620,928                  |           |
| Inventories                                                                                                                                |       | 782,255                  |           |
| Deferred Tax  Assets, net of allowance                                                                                                     |       | 440,481                  |           |
| Prepaid Expenses  and Other Current Assets                                                                                                 |       | 499,763                  |           |
| ** **                                                                                                                                 | ** ** | **7,092,932**            | ** **     |
| Property and  Equipment, net of depreciation and amortization                                                                              |       | 4,432,177                |           |
| Goodwill                                                                                                                                   |       | 103,725                  |           |
| Other Assets                                                                                                                               |       | 367,775                  |           |
| ** **                                                                                                                                 | ** ** | **$**                    | **11,996,609** | ** ** |
|                                                                                                                                       |       |                     |           |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                             | ** ** | ** **               | ** **     |
| CURRENT LIABILITIES                                                                                                                        |       |                     |           |
| Current Portion  of Long-Term Debt                                                                                                         |       | $                        | 3,376,243      |   |
| Accounts Payable                                                                                                                           |       | 824,846                  |           |
| Accrued Expenses                                                                                                                           |       | 1,262,826                |           |
| Unpaid Winning  Tickets                                                                                                                    |       | 815,529                  |           |
| Customer  Deposits and Other Current Liabilities                                                                                           |       | 941,100                  |           |
| ** **                                                                                                                                 | ** ** | **7,220,544**            | ** **     |
|                                                                                                                                       |       |                     |           |
| Long-Term Debt, less  current portion                                                                                                      |       | 1,710,742                |           |
| Other Long-Term  Liabilities                                                                                                               |       | 906,391                  |           |
| ** **                                                                                                                                 | ** ** | **2,617,133**            | ** **     |
|                                                                                                                                       |       |                     |           |
| Redeemable Series A  Preferred Stock (3,238 shares)                                                                                        |       | 323,800                  |           |
|                                                                                                                                       |       |                     |           |
| ** **                                                                                                                                 | ** ** | **10,161,477**           | ** **     |
|                                                                                                                                       |       |                     |           |
| STOCKHOLDERS’ EQUITY                                                                                                                  |       |                     |           |
| Series A  Preferred Stock — 10.00% cumulative; $100.00 par andliquidation value; 18,924  shares authorized; 10,924 shares outstanding |       | 1,092,400                |           |
| Common Stock -  $0.01 par value; 25,000,000 shares authorized; 8,129,880 shares issued and  outstanding                                    |       | 81,299                   |           |
| Additional  Paid-In Capital                                                                                                                |       | 12,172,661               |           |
| Deficit                                                                                                                                    |       | (11,183,735              | )              |
| Treasury Stock,  at cost (61,100 common shares)                                                                                            |       | (327,493                 | )              |
| ** **                                                                                                                                 | ** ** | **1,835,132**            | ** **     |
|                                                                                                                                       |       |                     |           |
| ** **                                                                                                                                 | ** ** | **$**                    | **11,996,609** | ** ** |

 

1

----

**AMERICANWAGERING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                            | ** ** | **For the Three Months Ended  April 30,** | ** **   |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|
| ** **                                            | ** ** | **2007**                                                           | ** **   | **2006** | ** ** |
| **REVENUES:**                                         | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| Wagering                                              |       | $                                                                  | 2,163,589    |   | $ | 2,262,705 |   |
| Hotel/Casino                                          |       | 662,894                                                            |         | 417,574 |   |
| Systems                                               |       | 1,347,715                                                          |         | 1,842,091 |   |
| ** **                                            | ** ** | **4,174,198**                                                      | ** **   | **4,522,370** | ** ** |
| **OPERATING  COSTS AND EXPENSES:**                    | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| **Direct Costs:**                                     | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| Wagering                                              |       | 2,080,181                                                          |         | 1,409,375 |   |
| Hotel/Casino                                          |       | 549,584                                                            |         | 376,616 |   |
| Systems                                               |       | 400,491                                                            |         | 731,341 |   |
| ** **                                            | ** ** | **3,030,256**                                                      | ** **   | **2,517,332** | ** ** |
| **Operating Expenses:**                               | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| Research and Development                              |       | 274,980                                                            |         | 239,361 |   |
| Selling, General and Administrative                   |       | 789,530                                                            |         | 753,729 |   |
| Depreciation and Amortization                         |       | 216,913                                                            |         | 169,018 |   |
| ** **                                            | ** ** | **1,281,423**                                                      | ** **   | **1,162,108** | ** ** |
|                                                  |       |                                                               |         |   |   |
| ** **                                            | ** ** | **4,311,679**                                                      | ** **   | **3,679,440** | ** ** |
|                                                  |       |                                                               |         |   |   |
| **OPERATING  INCOME (LOSS)**                          | ** ** | **(137,481**                                                       | **)**        | **842,930** | ** ** |
|                                                  |       |                                                               |         |   |   |
| **OTHER  INCOME (EXPENSES):**                         | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| Interest Income                                       |       | 32,653                                                             |         | 16,778 |   |
| Interest Expense                                      |       | (66,612                                                            | )            | (34,219 | ) |
| Litigation Expense                                    |       | (55,475                                                            | )            | — |   |
| Other, net                                            |       | 27,507                                                             |         | 27,798 |   |
| ** **                                            | ** ** | **(61,927**                                                        | **)**        | **10,357** | ** ** |
|                                                  |       |                                                               |         |   |   |
| **INCOME  (LOSS) BEFORE INCOME TAXES**                | ** ** | **(199,408**                                                       | **)**        | **853,287** | ** ** |
|                                                  |       |                                                               |         |   |   |
| **PROVISION  FOR INCOME TAXES**                       |       | —                                                             |         | — |   |
|                                                  |       |                                                               |         |   |   |
| **NET  INCOME (LOSS)**                                | ** ** | **$**                                                              | **(199,408** | **)** | **$** | **853,287** | ** ** |
|                                                  |       |                                                               |         |   |   |
| **BASIC  AND DILUTED INCOME (LOSS) PER COMMON SHARE** | ** ** | **$**                                                              | **(0.03**    | **)** | **$** | **0.10** | ** ** |

 

**See notesto consolidated financial statements.**

2

----

**AMERICANWAGERING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                               | ** ** | **For the Three Months Ended  April 30,** | ** **    |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|---------------|
| ** **                                               | ** ** | **2007**                                                           | ** **    | **2006** | ** ** |
| ** **                                               | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| **CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**    | ** ** | **$**                                                              | **4,537,424** | ** ** | **$** | **2,221,445** | ** ** |
| ** **                                               | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| **Net  cash provided by (used in) operating activities** | ** ** | **(580,984**                                                       | **)**         | **75,669** | ** ** |
| ** **                                               | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| Increase in restricted cash                              |       | (36,687                                                            | )             | (10,132 | ) |
| Withdrawal of restricted cash                            |       | 46,605                                                             |          | — |   |
| Acquisition of Sturgeon’s                           |       | —                                                             |          | (300,000 | ) |
| Purchase of property and equipment                       |       | (187,399                                                           | )             | (164,955 | ) |
| **Net  cash used in investing activities**               | ** ** | **(177,481**                                                       | **)**         | **(475,087** | **)** |
|                                                     |       |                                                               |          |   |   |
| Stock options exercised                                  |       | —                                                             |          | 3,378 |   |
| Repayment of borrowings                                  |       | (98,661                                                            | )             | (353,679 | ) |
| Proceeds from borrowings                                 |       | —                                                             |          | 300,000 |   |
| Preferred stock dividends                                |       | (34,531                                                            | )             | (34,532 | ) |
| **Net  cash used in financing activities**               | ** ** | **(133,192**                                                       | **)**         | **(84,833** | **)** |
|                                                     |       |                                                               |          |   |   |
| **NET  DECREASE IN CASH AND CASH EQUIVALENTS**           | ** ** | **(891,657**                                                       | **)**         | **(484,251** | **)** |
|                                                     |       |                                                               |          |   |   |
| **CASH AND CASH EQUIVALENTS AT  END OF PERIOD**          | ** ** | **$**                                                              | **3,645,767** | ** ** | **$** | **1,737,194** | ** ** |

 

**See notes to consolidated financial statements.**

 

3

----

**AMERICAN WAGERING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED APRIL 30, 2007(Unaudited)**

**1.  Basis of Presentation**

The accompanyingunaudited interim, consolidated financial statements of American Wagering, Inc.(“AWI”) and all of its subsidiaries (collectively, the “Company”) have beenprepared in accordance with the instructions to Form 10-QSB per Item 310(b) ofRegulation S-B published by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do notinclude all of the information and disclosures required by generally acceptedaccounting principles for annual financial statements.  In the opinion of management, all adjustmentsnecessary for a fair presentation have been included.  Results of operations for the current interimperiods are not necessarily indicative of results to be expected for the fullyear.  For further information, pleaserefer to the consolidated financial statements of the Company, and the relatednotes, included in the Annual Report on Form 10-KSB of AWI for the fiscal yearended January 31, 2007, previously filed with the SEC.  All significant inter-company accounts andtransactions have been eliminated in the consolidation.

Certainreclassifications have been made to the consolidated financial statements ofprior periods to confirm to the current period presentation primarily to reportHotel/Casino information separately from Wagering.

**2.  Income(Loss) per Common Share**

Basicincome (loss) per common share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the reportedperiod.  The diluted income per shareconsiders potentially dilutive securities (options) as outstanding and ispresented except in loss periods, when to do so would be anti-dilutive.  Net income (loss) is adjusted for preferredstock dividends.  For the operatingperiods presented, the tables below reconcile net income (loss) and weightedaverage shares outstanding used to calculate basic income (loss) and dilutedincome per share.

|                                                    | ** ** | **Three Months Ended  April 30,** | ** **   |
|----------------------------------------------------|------------|--------------------------------------------------|--------------|
|                                                    | ** ** | **2007**                                         | ** **   | **2006** | ** ** |
| Net Income (Loss)                                  |       | $                                                | (199,408     | ) | $ | 853,287 |   |
| Preferred stock  dividends                         |       | (34,531                                          | )            | (34,532 | ) |
| **Net Income (Loss) available to  common shares**  | ** ** | **$**                                            | **(233,939** | **)** | **$** | **818,755** | ** ** |
|                                               |       |                                             |         |   |   |
| Basic weighted average  common shares outstanding  |       | 7,818,780                                        |         | 8,190,631 |   |
| Diluted weighted average common shares outstanding |       | 7,818,780                                        |         | 8,272,833 |   |

 

**3. Income Taxes**

At April 30, 2007, theCompany had federal tax net operating loss (“NOL”) carryforwards available topotentially reduce future tax obligations in the aggregate amount ofapproximately $3,161,000; of which $1,856,000 expires in 2020, and the balanceexpires 2026.  Management believes thatthe Company will likely be profitable for at least the short-term future andthat it is therefore more likely than not that our net deferred tax asset of$440,481, which resulted primarily from NOLs, will be fully realized.  Therefore, no additional tax benefit wasrecognized for the current period loss.

4

----

 

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, *Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes*(“FIN 48”), to be effective for us beginning on February 1, 2007. Based on itsevaluation, management believes that adopting FIN 48 did not have a materialeffect on the Company’s opening deficit, its tax provision or benefit for thequarter ended April 30, 2007, or its net NOL carryforwards or the relateddeferred tax assets or the valuation allowance.

Managementhas assessed the valuation allowance against the remainder of the deferred taxassets and continues to reevaluate this asset periodically. The change in thedeferred tax asset valuation allowance for the three months ended April 30,2007 and 2006, based on these estimates, created an income tax expense(benefit) of approximately $(68,000) and $290,000, respectively, which offsetthe income tax expense (benefit) for the three-month periods ended April 30,2007 and 2006.

**4. Litigation**

##### The Companycontinues to be involved in previously disclosed legal proceedings with MichaelRacusin, d/b/a M. Racusin & Company (“Racusin”), who introduced certainunderwriters to the Company and provided certain advisory services in relationto the Company’s initial public offering. There have been no material developments in the Racusin litigationduring the current period.

##### Upon advice oflegal counsel, the Company has accrued an aggregate amount of $2,682,374 plusaccrued interest at 8% of $139,799 in accordance with a previously negotiatedsettlement agreement to be repaid in a series of cash payments by the Companyto or for the benefit of Racusin, which represents management’s best estimateof the minimum cost of the ultimate outcome of this matter.  However, the ultimate timing of payments andmethods are pending resolution of the legal proceedings.

**5.  StockOptions**

**2001stock option plan.**  In general, AWI may, uponapproval from the Board of Directors, award options to any employee at any timeexcept that no employee may receive in excess of 250,000 options per year andthe 2001 Plan may not grant more than 1,150,000 options in total.  The 2001 Plan does not require any specificvesting schedule and/or term; as such, the vesting and term is at thediscretion of AWI, as approved by the Board of Directors.  Pursuant to the terms of the 2001 Plan, theexercise price of options must be equal to or greater than the market value ofthe Common Stock on the date of the grant. The 2001 Plan is scheduled toterminate on August 8, 2011.

**Directors stock option plan**.  In 1996, the Company adopted the “DirectorsStock Option Plan” (the “Directors Plan”). The Directors Plan was extended inAugust 2006 to terminate on April 30, 2011. Each non-employee director of theCompany is awarded options for 400 shares of stock on the last day of eachfiscal year unless another amount/date is approved by the Board of Directors;these grants do not require any additional approval from the Board ofDirectors.  No more than 20,000 optionsmay be granted pursuant to the Directors Plan. The Directors Plan provides that options will vest 100.00% after oneyear of service and will expire 10 years from the grant date.  Pursuant to the terms of the Directors Plan,the exercise price of options must be equal to the market value of the Company’scommon stock on the date of the grant.

5

----

 

Activity related to boththe 2001 Employee Stock Option Plan and the Directors Plan for the three monthsended April 30, 2007 and 2006 is as follows:

|                                   | ** ** | **Option Shares** | ** ** | **Weighted-average  exercise price** | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| Balance at  January 31, 2007 |       | 757,749                |       | $                                         | 1.80       |   |
|                              |       |                   |       |                                      |       |
| Granted                           |       | —                 |       | —                                    |       |
| Exercised                         |       | —                 |       | —                                    |       |
| Forfeited or Canceled             |       | (26,250                | )          | 2.00                                      |       |
|                              |       |                   |       |                                      |       |
| Balance at April 30, 2007         |       | 731,499                |       | 1.79                                      |       |
|                                   |            |                        |            |                                           |            |  |

 

|                                   | ** ** | **Option Shares** | ** ** | **Weighted- average  exercise price** | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| Balance at  January 31, 2006 |       | 897,998                |       | $                                               | 1.64       |   |
|                              |       |                   |       |                                            |       |
| Granted                           |       | —                 |       | —                                          |       |
| Exercised                         |       | (5,306                 | )          | 0.64                                            |       |
| Forfeited or Canceled             |       | —                 |       | —                                          |       |
|                              |       |                   |       |                                            |       |
| Balance at April 30, 2006         |       | 892,692                |       | 1.65                                            |       |
|                                   |            |                        |            |                                                 |            |  |

 

Stockoptions exercisable and available for future grants for both stock option plansas of April 30, 2007 are as follows: 

|                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Life** | ** **      |
|-----------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|-----------------|
| Exercisable                 |       | 341,950    |       | $                                       | 1.92       |                                    | 6.02 years |   |
| Available for future grants |       | 206,567    |       | —                                  |       | —                                  |            |
|                             |            |            |            |                                         |            |                                         |                 |  |

 

Non-cashstock-based compensation expense recorded in the line item “Selling, Generaland Administrative Expenses” on the consolidated income statements for April30, 2007 and 2006 was $50,839 and $74,176, respectively.

6

----

 

**6. Acquisition of Sturgeon’s**

On March 1, 2006, AWIG acquired Sturgeon’s for$1,800,000 and separately purchased on-hand inventories for cash 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 bya 1st deed of trust on the Sturgeon’s real estate and a security interest inthe personal property and fixtures of Sturgeon’s. Interest is payable monthlyat the Wall Street Journal-listed prime rate plus 2.00% and the principal isdue in a single payment on March 1, 2008.

An additional $300,000 was advanced by Victor J.Salerno, AWI’s Chief Executive Officer (“CEO”), and his wife, AWI’s GeneralCounsel, under an agreement with AWI that expires in 2011 and which providesfor guarantees of Company indebtedness and advances not to exceed $500,000 inthe aggregate. Under the agreement monthly interest payments at 10.00% perannum were made by AWI to Mr. and Mrs. Salerno on the balanceoutstanding, which amount ($300,000) has been fully repaid. In addition, theCompany agreed to reimburse Mr. and Mrs. Salerno for finance charges,fees and other expenses they incur under a $500,000 personal revolving line ofcredit with their bank, to the extent the line of credit was or will be used toprovide funding for the Company.

In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 141, *Business Combinations*,the Company performed a valuation corroborated by an independent appraisalreport to determine, among other things, the cost of the acquired entity and toassign that cost to the assets acquired on the basis of their fair values.Based upon this valuation process, the Company determined an overall assetvalue for Sturgeon’s of $2,091,570, which amount exceeded the purchase price of$1,800,000 and resulting in tentative negative goodwill in the amount of$291,570. The Company attributed the negative goodwill primarily to the valueof the land which increased dramatically between the time the purchaseagreement was executed and the time the Nevada Gaming Commission approved theacquisition and it was consummated. However, pursuant to paragraphs 44 and 45 ofSFAS No. 141, the negative goodwill was apportioned to each asset class ona pro rata basis. As all eligible assets were reduced on a pro rata basis andaccordingly, no unallocated negative goodwill remained to be recognized as anextraordinary gain from the acquisition of Sturgeon’s nor was any portion ofthe purchase price available for allocation to future operations.

The operations of Sturgeon’s is included in theaccompanying consolidated financial statements since the acquisition date,March 1, 2006. The following unaudited pro forma consolidated financialinformation has been prepared assuming that the acquisition of Sturgeon’s hadoccurred on February 1, 2006.

|                                    | ** ** | **Three Months  Ended  April 30,** | ** **  |
|------------------------------------|------------|----------------------------------------------|-------------|
| ** **                         | ** ** | **2006**                                     | ** **  |
| Revenues                           |       | $                                            | 4,731,549   |   |
| Operating Expenses                 |       | 3,953,016                                    |        |
| Operating Income                   |       | 778,533                                      |        |
| Other Income                       |       | 11,039                                       |        |
| Income Before  Income Taxes        |       | 789,572                                      |        |
| Provision for Income  Taxes        |       | —                                       |        |
| **Net  Income**                    | ** ** | **$**                                        | **789,572** |   |
| Basic and Diluted Income Per Share |       | $                                            | 0.09        |   |

 

Theunaudited pro forma results above do not include information for the threemonths ended April 30, 2007, as Sturgeon’s was in operation during the entirequarter and, as such, actual results presented in these consolidated financialstatements should be used.

Theseunaudited pro forma results are presented for comparative purposes only. Thepro forma results are not necessarily indicative of what our actual resultswould have been had the acquisition been completed as of the beginning of eachfiscal year, or of future results.

7

----

 

**7.  BusinessSegments**

We report our results of operations through threeoperating segments:  Wagering,Hotel/Casino, and Systems.

**Wagering Segment**. Thefollowing table indicates the primary components of revenue and operating costsresulting in this segment’s operating income (loss).  

|                                      | ** ** | **Three Months Ended  April 30,** | ** **    |
|--------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                           | ** ** | **2007**                                         | ** **    | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                            | **2,163,589** | ** ** | **$** | **2,262,705** | ** ** |
| Direct Costs                         |       | 2,080,181                                        |          | 1,409,375 |   |
| Selling, General and  Administrative |       | 222,450                                          |          | 269,782 |   |
| Depreciation and  Amortization       |       | 67,984                                           |          | 79,686 |   |
| ** **                           | ** ** | **2,370,615**                                    | ** **    | **1,758,843** | ** ** |
| **Operating Income (Loss)**          | ** ** | **$**                                            | **(207,026**  | **)** | **$** | **503,862** | ** ** |

 

**Hotel/Casino Segment**. Thefollowing table indicates the primary components of revenue and operating costsresulting in this segment’s operating loss.

|                                                                | ** ** | **Three Months Ended  April 30,** | ** **   |
|----------------------------------------------------------------|------------|--------------------------------------------------|--------------|
| ** **                                                     | ** ** | **2007**                                         | ** **   | **2006** | ** ** |
| **Revenue**                                                    |       |                                             |         |   |   |
| Casino                                                         |       | $                                                | 345,415      |   | $ | 212,545 |   |
| Hotel                                                          |       | 134,283                                          |         | 71,461 |   |
| Food/Beverage                                                  |       | 212,208                                          |         | 148,358 |   |
| Less: Casino  Cash Incentives and Other Promotional Allowances |       | (29,012                                          | )            | (14,790 | ) |
| ** **                                                     | ** ** | **662,894**                                      | ** **   | **417,574** | ** ** |
| **Direct Costs and Expenses**                                  |       |                                             |         |   |   |
| Casino                                                         |       | 129,206                                          |         | 50,171 |   |
| Hotel                                                          |       | 52,863                                           |         | 32,122 |   |
| Food/Beverage                                                  |       | 227,871                                          |         | 151,890 |   |
| Unallocated                                                    |       | 139,644                                          |         | 142,433 |   |
|                                                           |       | 549,584                                          |         | 376,616 |   |
|                                                           |       |                                             |         |   |   |
| Selling, General and  Administrative                           |       | 176,783                                          |         | 101,958 |   |
| Depreciation and  Amortization                                 |       | 56,376                                           |         | 43,746 |   |
| ** **                                                     | ** ** | **782,743**                                      | ** **   | **522,320** | ** ** |
| **Operating Loss**                                             | ** ** | **$**                                            | **(119,849** | **)** | **$** | **(104,746** | **)** |

 

8

----

 

**Systems Segment****.**  The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating income.

|                                      | ** ** | **Three Months Ending  April 30,** | ** **    |
|--------------------------------------|------------|---------------------------------------------------|---------------|
| ** **                           | ** ** | **2007**                                          | ** **    | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                             | **1,347,715** | ** ** | **$** | **1,842,091** | ** ** |
| Direct Costs                         |       | 400,491                                           |          | 731,341 |   |
| Research and  Development            |       | 274,980                                           |          | 239,361 |   |
| Selling, General and  Administrative |       | 390,297                                           |          | 381,989 |   |
| Depreciation and  Amortization       |       | 92,553                                            |          | 45,586 |   |
| ** **                           | ** ** | **1,158,321**                                     | ** **    | **1,398,277** | ** ** |
| **Operating Income**                 | ** ** | **$**                                             | **189,394**   | ** ** | **$** | **443,814** | ** ** |

 

**Operating Income (Loss) to Income (Loss) BeforeTaxes****.**Thefollowing table reconciles the operating income (loss) from each segment toincome (loss) before taxes.

|                                        | ** ** | **Three Months Ending  April 30,** | ** **   |
|----------------------------------------|------------|---------------------------------------------------|--------------|
| ** **                             | ** ** | **2007**                                          | ** **   | **2006** | ** ** |
| **Operating Income (Loss)**            |       |                                              |         |   |   |
| Wagering                               |       | $                                                 | (207,026     | ) | $ | 503,862 |   |
| Hotel/Casino                           |       | (119,849                                          | )            | (104,746 | ) |
| Systems                                |       | 189,394                                           |         | 443,814 |   |
| ** **                             | ** ** | **(137,481**                                      | **)**        | **842,930** | ** ** |
| **Other Income (Expenses)**            |       |                                              |         |   |   |
| Interest Income                        |       | 32,653                                            |         | 16,778 |   |
| Interest Expense                       |       | (66,612                                           | )            | (34,219 | ) |
| Litigation  Expense                    |       | (55,475                                           | )            | — |   |
| Other, net                             |       | 27,507                                            |         | 27,798 |   |
| ** **                             | ** ** | **(61,927**                                       | **)**        | **10,357** | ** ** |
| ** **                             | ** ** | ** **                                        | ** **   | ** ** | ** ** |
| **Income (Loss) Before Income  Taxes** | ** ** | **$**                                             | **(199,408** | **)** | **$** | **853,287** | ** ** |

 

9

----

**Item 2.  Management’s Discussion and Analysis or Planof Operation****.**

**Forward-LookingStatements** Throughout this report we makestatements regarding our business, expectations and prospects, such asprojections of future performance, statements of our plans and objectives,forecasts of market trends, and other matters that are “forward-lookingstatements” as defined in Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”).  Statementscontaining words or phrases such as “will likely result,” “are expected to,” “willcontinue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”“intends,” “target,” “goal,” “plans,” “objective,” “might,” “may,” “could,” “will,”“should,” or similar expressions, or the negative thereof, constituteforward-looking statements.  Although webelieve that our plans, objectives and expectations reflected in, or suggestedby, such forward-looking statements are reasonable at the present time, wemight not achieve them or we may modify them from time to time.  You should read this report thoroughly andwith the understanding that actual future results may be materially differentfrom what we expect.  We do not plan toupdate forward-looking statements even though our situation or plans may changein the future, unless applicable law requires us to do so.

In addition to othermatters identified or described by us from time to time in this report or inour other filings with the Securities and Exchange Commission (the “SEC”),there are several important factors that could cause our future results todiffer materially from historical results or trends, results anticipated orplanned, or results that are reflected from time to time in any forward-lookingstatement that may be made by us or on our behalf.  Some of these important factors, but notnecessarily all important factors, include the following:

·                  increased intense competition in the race and sports wagering business;

·                  the possibility that our stock could be removed from quotation on the OTC Bulletin Board (“OTCBB”) if we are late with the filing of another Exchange Act report between now and the due date for our October 31, 2008 Form 10-QSB;

·                  our ability to develop and refine products and technologies in a timely manner, and the market’s acceptance of them;

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

·                  the possibility that the United States Court of Appeals for the Ninth Circuit (the “9th Circuit”) will 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 9th Circuit does rehear the matter and again reverses the favorable BAP ruling;

·                  volatility in quarterly results due to the timing of sales installations and fluctuations in levels of wagering during particular times of the year;

·                  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;

·                  our ability to complete our assessment of, or the receipt of a qualified opinion from our auditors, and the excessive costs, all  related to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002;

·                  the availability and adequacy of our cash flow to meet our requirements;

·                  our ability to control our operating expenses;

·                  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;

·                  changes in our key management, other personnel or their compensation, including those resulting from changes in minimum wage requirements;

·                  the potential political, economic and other issues related to our international subsidiary, AWI International, Inc. (“AWI Intl”);

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

10

----

·                  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;

·                  a decline in the public acceptance of wagering;

·                  our ability to continue to meet the reserve requirements of the Nevada Gaming Commission (“NGC”);

·                  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.

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

“TheCompany” 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.

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

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

“Sturgeon’s”means Sturgeon’s Inn & Casino (which, as of March 1, 2006, is owned bySturgeons, LLC).

**Overview.**  Our primary operating strategies for theforeseeable future are to focus on our core businesses relating to the race andsports industry, the operation of Sturgeon’s and the acquisition of additionalhotel/casino operations through AWIG. Concerning Leroy’s, we intend to continue operating existing sportsbooks, adding new books where and when appropriate, and continue to become moreefficient in order to reduce expenses. Regarding CBS, we intend to continue developing, selling and maintainingcomputerized race and sports wagering systems for the gaming industry.  As to AWIM, we intend to continue developingthe self-service wagering kiosk, installing the kiosk in Leroy’s locations toassist in controlling escalating personnel costs, and marketing the kiosk tonon-Leroy’s locations. With regard to AWI Int’l, we intend to seek strategicalliances with third party gaming suppliers and/or gaming operators that desireto utilize our expertise in the race and sports industry to gain a competitiveadvantage by offering the gaming operator and/or the betting patron awell-rounded gaming experience. Regarding AWIG, we intend to seek additionalhotel/casino acquisitions that meet our established criteria.  Additionally, we intend to continue tooperate the Sturgeon’s facility, change the slot mix where and whenappropriate, and modify existing procedures to increase efficiency and reduceexpenses.  We have implemented, and arecontinuing to initiate, other cost cutting measures.

Where appropriate, wewill continue to explore possible new locations for our products, includingforeign jurisdictions. We will also continue our review of existing Leroy’slocations in order to close those locations that are not operating efficiently.Based on our strategy, the number of race and sports books operated by Leroy’smay increase or decrease in the future, due to the closure of unprofitablelocations or host properties, closures due to other factors beyond our controland/or the possible opening of new locations with greater potential forprofitability.   There is no assurancethat Leroy’s will be able to add new locations and/or that any new locations soadded will be profitable.

11

----

**Liquidity and CapitalResources.**

**Cash Flow**.

As of April 30, 2007, we had a working capitaldeficit of $128,152, compared to working capital of $1,205,572 at January 31,2007.  Our principal cash requirementsconsist of payroll and benefits, business insurance, real estate and equipmentleases, legal expenses, telecommunications, debt service, interest expense, andcosts related to inventory and to assemble race/sports systems for our CBScustomers.

A $656,653 decrease in cash from operating activitiesfor the three months ended April 30, 2007 as compared to the comparable periodof last year was primarily due to decreased revenues from systems and wageringoperations.

Netcash used in investing activities for the three months ended April 30, 2007 decreasedby $297,606 as compared to the same period last year primarily as a result ofthe prior year period acquisition of Sturgeon’s. During thethree months ended April 30, 2007, we spent $187,399, primarily for thepurchase of upgraded computers and networks, leasehold improvements, new kiosklocations and other furniture and equipment.

Net cash used in financing activities for the threemonths ended April 30, 2007 increased by $48,359 as compared to the same periodlast year primarily due to the repayment of long-term debt of $98,661.

Regulation:  Nevada Gaming CommissionRegulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash,surety bonds, irrevocable standby letter of credit, etc.) sufficient to coverany outstanding wagering liability including unpaid winning tickets, futuretickets and telephone account deposits; since September 1, 2005  to August 2006, we maintained a Regulation22.040 reserve in the amount of $2.4 million; which was increased to $3.0million in August 2006 in the form of a surety bond issued by Fidelity andDeposit Company of Maryland (a subsidiary of Zurich American Insurance) (“Fidelity”). This $3.0 million surety bond is secured by a$1.0 million cash deposit, in the form of certificates of deposit at GreatBasin Bank of Nevada (“Great Basin Bank”).

If we are required toincrease the Regulation 22.040 reserve and are unable to do so, it would havean adverse impact on us including, but not limited to, requiring a significantreduction in the number of race/sports locations operated by Leroy’s, anelimination or reduction of telephone wagering accounts, and a reduction inhandle (total amount wagered).

**Long-termDebt****.**

Sturgeon’s:  On March 1, 2006, we acquired the assets ofSturgeon’s for $1,800,000 and separately purchased on-hand inventories totaling$148,075.  In connection with theacquisition, AWIG incurred indebtedness of $1,800,000, $1,500,000 from a bankand $300,000 from an officer/shareholder, which latter amount has been repaid(see Note 6 to the accompanying consolidated financial statements).  The Company is currently exploring variousoptions for the future repayments, including refinancing and other optionsregarding the debt to the bank for $1,500,000, due on March 1, 2008

KioskFinancing**: **On August 8,2006, we entered into a sale/lease-back transaction with a finance companyinvolving 75 race/sports kiosks that had previously been purchased byAWIM.  We sold the kiosks to thefinancial company for $600,000 (less a $2,500 documentation fee and a 5.00%closing fee) and are leasing the kiosks back from the finance company at apayment of $19,836 per month for 36 months ($238,032 per year).  At the conclusion of the lease term, we willhave the option of re-purchasing the kiosks for $1.  We are reporting this transaction foraccounting purposes as a capital lease, which is included in long-term debt.

Long-termdebt also includes loans for the service automobiles utilized in the Leroy’sand CBS operations and operating leases. The Company plans to utilize their annual cash flow from operations tofund the repayments of long-term debt, other than the $1,500,000 bank debt asdescribed above. The operating leases are comprised of rents payable at theLeroy’s operating locations, an automobile, and copy machines.  Rent at the Leroy’s locations includes thebase rent due per the contract terms. The rental leases also include three locations in which the rent iscalculated based on a formula relating to the activity of the location.

12

----

**Other**. 

Wedo not have any off-balance sheet financing arrangements or liabilities. Wemay, from time to time, seek additional capital to fund our operations, reduceour liabilities, or fund our expansion plans (including acquisitions).  To raise capital, we may seek to sell additionalequity securities (common or preferred), issue debt or convertible securities,or obtain credit facilities through financial institutions.  The sale of additional equity or convertiblesecurities would result in dilution to our shareholders.

We believe that we willbe able to satisfy our operating cash requirements for at least the next 12months from existing cash balances and anticipated cash flows.  We plan to accumulate cash liquidity duringthe current fiscal year (ending January 31, 2008) to help us fund thefollowing:   possible acquisition ofadditional hotel/casino operations; potential litigation expenses andjudgments; potential purchase of kiosks; volatility and seasonality effects ofsports betting; volatility and timing of system sales; compliance costsassociated with Section 404 of the Sarbanes-Oxley Act of 2002; and the possibleeffects of legislation to ban wagering on amateur athletic events.

**Results of operations — Comparisons of the ThreeMonths ended April 30, 2007 and 2006.**

We report our results ofoperations through three operating segments: Wagering, Hotel/Casino and Systems. Although numerous factors are taken into consideration, the operatingincome (loss) of the segment represents a significant profitability measureused by us in allocating resources and assessing performance of the segments.

**Summary.**

The decrease in revenuesfor the three months ended April 30, 2007 compared to the three months endedApril 30, 2006, is attributed to a decrease in systems segment revenues of$494,376 (-26.84%) and a decrease in wagering segment revenues of $99,116(-4.38%); partially offset by an increase in Hotel/Casino revenue of $245,320(+58.75%).

The increase in costsand expenses for the three months ended April 30, 2007 compared to the threemonths ended April 30, 2006, is attributed to an increase in direct wageringsegment costs and expenses of $670,806 (+47.60%), an increase in directHotel/Casino costs and expenses of $172,968 (+45.93%), partially offset by adecrease in direct systems segment costs and expenses of $330,850 (-45.24%).

Management feesallocated to the segments also increased due to increased public company costs,bonuses paid pursuant to employment contracts and increased insurance expenses.

The decrease in other income(expense) for the three months ended April 30, 2007 compared to the threemonths ended April 30, 2006, is due, in part, to the following factors:  Interest income increased $15,875 (+94.62%);interest expense increased $32,393 (+94.66%); and litigation expense increased$55,475 (+100.00%).

Please refer to thediscussions below (“Wagering Segment,” “Hotel/Casino Segment,” “SystemsSegment,” and “Other Income and Expense”) for additional information,discussion and analysis.

**Wagering Segment.**

**Wagering Segment revenues for thethree months ended April 30, 2007 decreased $99,116 (-4.38%) over the threemonths ended April 30, 2006. **We attributethis decrease to the following factors:

Our hold percentage oncollege and professional basketball sporting events’ wagers was lower than thecomparable period. This decrease was partially offset by an increase in actualRace and Pari-Mutuel win revenue, due to additional locations with greaterhandle volume and increased win percentages.

13

----

**Wagering Segment total costs andexpenses for the three months ended April 30, 2007 increased $611,772 (+34.78%)over the three months ended April 30, 2006. **This increase may be attributed to the following factors:

Direct costs increasedby primarily attributable to increased expenses related to establishing newlocations, advertising expenses, wages due to additional locations, increasedcommunication costs and increases in rent paid to our Leroy’s sports booklocations.

Selling, general andadministrative costs decreased primarily due to decreases in variousadministrative costs in the quarter ending April 30, 2007 compared to thequarter ending April 30, 2006.

Depreciation andamortization expense decreased over the prior fiscal year primarily due tofewer capitalized acquisitions versus the same quarter ending April 30, 2006.

Note that an increase ordecrease in handle is not necessarily indicative of an increase or decrease inrevenues or profits. Elimination of unprofitable locations, closure of hostproperties, changes in state and/or federal regulations, and other factorsbeyond our control may result in declines in handle.

We intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently.  There is noassurance that the number of race and sports books operated by us will notdecrease in the future due to elimination of unprofitable locations, closure ofhost properties, and other factors beyond our control, that we will be able toadd new locations, and/or that any new locations so added will be profitable.

**Hotel/Casino Segment**. TheHotel/Casino Segment includes the operating results of Sturgeon’s. Sturgeon’scommenced operations on March 1, 2006, therefore, the quarter ending April 30,2006 contained only two months of revenues and expenses, while the quarterending April 30, 2007 reflects all three months in the quarter.

**Hotel/Casino Segment revenues forthe three months ended April 30, 2007 increased $245,320 (+58.75%) over thethree months ended April 30, 2006. **Thisincrease may be attributed to the following factors.

Casino revenuesincreased primarily due to the inclusion of all three months in the in thefirst quarter ending April 30, 2007 compared to the same quarter ending April30, 2006 and increased handle.

Hotel revenues increaseddue to the inclusion of all three months in the in the first quarter endingApril 30, 2007 compared to the same quarter ending April 30, 2006 and increasedroom occupancies.

Food and Beveragerevenues increased primarily due to the inclusion of all three months in the inthe first quarter ending April 30, 2007 compared to the same quarter endingApril 30, 2006.

Casino cash incentivesand other promotional allowances increased primarily due to the inclusion ofall three months in the first quarter ending April 30, 2007 compared to thesame quarter ending April 30, 2006 and additional promotions offered during thequarter.

**Hotel/Casino Segment costs and expenses for thethree months ended April 30, 2007 increased $260,423 (+49.86%) over the threemonths ended April 30, 2006.** We attribute this increase to the following factors:

Directcosts for the casino operations increased over the prior three months endedApril 30, 2006 primarily due to the inclusion of all three months in the firstquarter ending April 30, 2007 compared to the same quarter ending April 30,2006 and increased personnel expense.

Directcosts for the hotel operations increased primarily due to the inclusion of allthree months in the first quarter ending April 30, 2007 compared to the samequarter ending April 30, 2006 and increased room occupancies.

Directcosts for the food and beverage operations increased primarily due to theinclusion of all three months in the first quarter ending April 30, 2007compared to the same quarter ending April 30, 2006.

14

----

Selling,general and administrative costs for Sturgeon’s increased primarily due to theinclusion of all three months in the first quarter ending April 30, 2007compared to the same quarter ending April 30, 2006.

**Systems Segment.**

**Systems Segment revenues for thethree months ended April 30, 2007 decreased $494,376 (-26.84%) over the threemonths ended April 30, 2006. **Thisdecrease may be attributed to the following factors:

System sales decreasedover the prior fiscal year due to decreased one-time sales and installations inthis quarter compared to the prior quarter ending April 30, 2006.

Revenues frommaintenance contracts increased over the prior fiscal year.  This increase is attributable to the additionof the number of new customers and the higher fees charged to customers.

**Systems Segment costs andexpenses for the three months ended April 30, 2007 decreased $239,956 (-17.16%)over the three months ended April 30, 2006.**  We attribute this decrease to the followingfactors:

Direct costs for systemsdecreased by over the prior three months ended April 30, 2006 primarily due todecreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies and a decline in the numberof sales installations.

Research and developmentcosts increased from the prior three months ended April 30, 2006 primarily dueto higher costs for technical support and personnel.

Depreciation andamortization increased from the prior three months ended April 30, 2006 due toincreased property acquisitions, primarily to the upgrades to our networks.

**Other income and (expenses).**  The other income and (expenses) categoriesare primarily administrative in nature and, as such, are not directlyattributable to any operating segment. Accordingly, these items are generally not taken into consideration byus when we allocate resources to the segments or assess the performance of thesegments.

Interest Income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  (Refer to thediscussion regarding this matter located at “Liquidity and Capital Resources”above.)  The remainder of the interestincome is attributable to interest earned on interest-bearing checkingaccounts.  The increase in interestincome of $15,875 (+94.62%) is primarily due to our increased cash balancesfrom prior three months ended April 30, 2006.

Interest Expense:  The increase in interest expense is primarilydue to our financing of Sturgeon’s. (Refer to the discussion regarding theSturgeon’s acquisition financing located in “Liquidity and Capital Resources”above.)

Litigation expense of$55,475 was recorded in the first quarter of fiscal 2008 related to the Racusinlitigation, while no similar expense was recorded for the same quarter of theprior fiscal year.

**Criticalaccounting estimates and policies.**  Although our financial statements necessarilymake use of certain accounting estimates by our management, we believe that,except as discussed below, we do not employ any critical accounting policies orestimates that are either selected from among available alternatives, orrequire the exercise of significant management judgment to apply, or that ifchanged are likely to affect future periods. The following summarizes ourcritical estimates and policies.

Wagering:  We record wagering revenues in compliancewith Nevada law and the regulations of the Nevada gaming regulators.  For sports and non pari-mutuel race, we usean accrual method wherein the handle (total amount wagered) is recognized onthe day the event occurs (rather than the day the wager is accepted) decreasedby the total amount owed to patrons with winning wagers.  This gross calculation (handle less payouts)is then adjusted upward 

15

----

toaccount for any winning wagers that were not redeemed (cashed) within thespecified time period.  For pari-mutuelrace, commission and breakage revenues are recorded when the wagers aresettled, typically the same day as the wager. Other sources of revenue are relatively insignificant.

Hotel/CasinoRevenue: We report the wagering revenues of Sturgeon’s, which is primarilycomprised of slot revenue, hotel room revenue and food and beverage revenue, incompliance with Nevada law and the regulations of the Nevada gaming regulators.These revenues are generally in the form of cash, personal checks, creditcards, or gaming chips and tokens, which do not require estimates. We doestimate certain liabilities with payment periods that extend for longer thanseveral months. We believe these estimates are reasonable based on ourassumptions related to possible outcomes in the future. Future actual resultsmight differ materially from these estimates. Slot revenue is the drop (thetotal amount removed from the machine) less the fills and the payouts.  Bingo revenue is calculated as the totalhandle (the amount wagered) less the payouts. For non-gaming revenues, such asfood and beverage, hotel, etc., we record revenues in compliance with generallyaccepted accounting principles, recognizing revenue when it is earned. TheSturgeon’s acquisition was completed on March 1, 2006 and wagering revenues forthe Sturgeon’s operation were reported for the first time in the fiscal yearended January 31, 2007.

System— Software:  We recognize softwarerevenue in accordance with the provisions of Statement of Position (“SOP”)97-2, *Software Revenue Recognition, as amended by SOP98-9, Software Revenue Recognition, With Respect to Certain Transactions*.  Software license fees represent revenuesrelated to licenses for race/sports software delivered to customers forin-house use.  Revenues from softwarelicense agreements (including any related training revenue) are recognized uponinstallation of the software.

System— Hardware:  We recognize hardwarerevenue (including any related installation revenue) upon installation of thehardware.

System— Maintenance:  We negotiate maintenanceagreements with each of our customers to provide for the long-term care of thesoftware and hardware.  Pursuant to theterms of the various maintenance agreements, a fixed sum is due at thebeginning of each month regardless of whether the customer requires serviceduring that month.  We recognizemaintenance revenue on the first day of each month for which the maintenanceagreement is in place; we maintain an allowance for doubtful accounts in theevent that any such revenue recorded is not realized.

Accountingfor long-lived assets:  Owned propertyand equipment are recorded at cost and depreciated to residual values over theestimated useful lives using the straight-line method.  Leasehold improvements on operating leasesare amortized over the life of the lease or the life of the asset, whichever isshorter.  The useful life, currentlyestimated, of our equipment generally ranges from 3 to 10 years.  We test for impairment losses on long-livedassets used in operations when events and circumstances indicate that theassets might be impaired, under the standards of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.An impairment loss is recognized if the carrying amount of the asset is notrecoverable from its undiscounted cash flows and is measured as the differencebetween the carrying amount and fair value of the asset.

Accountingfor income taxes: The Company adopted FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109, Accounting for Income Taxes* (“FIN 48”) onFebruary 1, 2007. FIN 48 clarifies the recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosures, and transition of taxpositions. Accordingly, tax positions are analyzed to determine whether it ismore likely than not they will be sustained when examined by the appropriatetax authority. Positions that meet the more-likely-than-not criteria aremeasured to determine the amount of benefit to be recognized, whereas thosepositions that do not meet the more-likely-than-not criteria are derecognizedin the financial statements. We review the net loss operating carryforwardsavailable to reduce current and future tax obligations; which was approximately$3,160,000 as of April 30, 2007.  Weassess the valuation allowance against the remainder of the deferred tax assetsin our calculations to estimate the effective tax rate for the fiscal year, andat this time, we believe that more likely than not there is sufficient losscarryforward to offset the current year’s net income.  We consider and evaluate the components ofthe tax calculations and are satisfied as to realization and probability of thepermanent and temporary differences.

16

----

Weadditionally believe that we will continue to be profitable, for at least theshort-term future, and it is therefore more likely than not that our netdeferred tax asset of $440,481, which resulted primarily from net losscarryforwards, will be fully realized.

Stock-based compensation: On February 1, 2006, asrequired, we adopted SFAS No. 123(R), *Share-Based Payment*,using the modified prospective method. Fair values of stock options areestimated using the Black-Scholes method based on assumptions that we considerreasonable and that we disclose in our financial statements. Previously, weused Accounting Principles Board Opinion No. 25, *Stock-BasedCompensation*, to account for employee stock options.

Accounting for contingencies:  Contingent liabilities are provided for inaccordance with SFAS No. 5, *Accounting forContingencies*.  According toSFAS No. 5, an estimated loss from a loss contingency is charged to incomeif:  (a) it is probable that an asset hasbeen impaired or a liability has been incurred at the date of the financialstatements; and (b) the amount of the loss can reasonably be estimated.  Disclosure in the notes to the financialstatements is required for loss contingencies not meeting both conditions ifthere is a reasonable possibility that a loss may have been incurred.  We record legal defense costs as period costswhen the related services are provided. Gain contingencies are not recorded until realized.

**RecentAccounting Pronouncements**.

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS No. 157”), which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anAmendment of SFAS No. 115,* which will permit the option of choosingto measure certain eligible items at fair value at specified election dates andreport unrealized gains and losses in earnings. SFAS Nos. 157 and 159 willbecome effective for us for financial statements issued for the fiscal yearending January 31, 2009.  We arecurrently evaluating the likely impact of these standards on our futureconsolidated financial statements.

**Recentdevelopments.**  Weopened two new sports and race books in Laughlin, Nevada in late May 2007.

**Item 3A(T).  Controls and Procedures.**

We carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of April 30, 2007, (the end of the first quarter of our 2008fiscal year).  This evaluation wascarried out under the supervision and with the participation of our management,including our Chief Executive Officer (“CEO”) and Interim Principal FinancialOfficer, Victor J. Salerno. Based upon that evaluation, our CEO and InterimPrincipal Financial Officer concluded that our disclosure controls andprocedures are not sufficiently effective, as discussed below.  “Disclosure controls and procedures” arecontrols and other procedures that are designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is accumulated and communicated to management, including ourCEO and Interim Principal Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

During the first quarterof our 2008 fiscal year, there were no changes in our internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. However, as discussed below, we have significant weaknesses and materialdeficiencies in our internal control over financing reporting that continuedduring our first fiscal quarter of 2008. “Internal control over financial reporting” means a process designed by,or under the supervision of, our principal executive and principal financialofficers, or persons performing similar functions, and effected by our board ofdirectors, management and other personnel, to provide reasonable assuranceregarding the reliability of our financial reporting and the preparation of ourfinancial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:

17

----

(1)                                  Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect our transactions and dispositions of assets;

(2)                                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorization of our management and directors; and

(3)                                  Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton our financial statements.

Our former ChiefFinancial Officer (“CFO”) gave us 30 days’ notice of termination of hisemployment on November 17, 2006.  Sincethen, we have appointed persons to assist in the preparation of our quarterlyand annual reports on Forms 10-QSB and 10-KSB, respectively, and we havecontinued to seek personnel on both a full-time and part-time basis for ouraccounting department.  Thus far, however,we have not found a suitable permanent replacement to fill the CFO position norhave we hired enough appropriate accounting personnel.  That situation, together with ouralready-small finance and accounting staff, the turnover we have experienced inthat staff, and a triennial routine gaming audit that began in March 2007,created the need for additional time to complete our October 31, 2006 Form10-QSB and January 31, 2007 Form 10-KSB, which we did not file timely.  As such, we believe we have a materialweakness in our disclosure controls and procedures. We are continuing ourefforts to find a suitable replacement CFO and we are training new finance andaccounting personnel.

The factors described in the preceding paragraph have also resulted in significant deficiencies and material weaknesses in our internal control over financial reporting, and have significantly increased the risk of continued significant deficiencies and material weaknesses.  Such deficiencies or weaknesses could cause us again to be late in satisfying our Exchange Act reporting obligations, cause the OTCBB to remove our stock from quotation and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the price of our stock.

We may be required to spend a substantial amount of management time and resources and incur significant costs in order to comply with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 will require our management’s annual review and evaluation of our internal control over financial reporting, commencing with our Annual Report on Form 10-KSB for fiscal year ended January 31, 2008 and attestations by our independent public accounting firm as to the effectiveness of our internal control over financial reporting.

Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on members of our management, diverting them from their daily business focus; and strain on our information systems and other resources.  We likely will have to hire additional personnel and use outside legal, accounting and advisory services and software. In addition, the fees to our independent public accounting firm will increase, as that firm performs the review work necessary for its attestation. Even with those expenditures, we may be unable to complete our assessment or obtain an unqualified attestation as to the sufficiency of our internal controls.

Further, we or our independent registered public accounting firm may again identify significant deficiencies or material weaknesses in our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting.  If we fail to maintain the adequacy of our internal controls or fail to implement any required new or improved controls, this could have a material adverse effect on our business, financial position and results of operations.

You should also note that internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal 

18

----

control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the applicable policies or procedures may deteriorate.

We do not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  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 we have detected all control issues and instances of fraud, if any. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of certain persons, by collusion of two or more persons, 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, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the applicable policies.

Partly in response to our obligations under Section 404a of the Sarbanes-Oxley Act of 2002, we will begin a significant redesign and upgrade of our financial reporting software, systems and procedures. We will undertake this redesign and upgrade in hopes of strengthening our internal control over financial reporting, improving our ability to plan and analyze our business, and reducing the work burden on our finance and accounting staff. We estimate that we will fully implement our new financial reporting software by the end of fiscal 2008.

**PART II —OTHER INFORMATION**

**Item 1.  Legal Proceedings**

**Racusin**

##### There have beenno material developments in the Racusin case since we reported on it in Part IItem 3. “Legal Proceedings”, of our Form 10-KSB for the fiscal year endedJanuary 31, 2007.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds****.**

Notapplicable.

19

----

**Item 3.  Defaults Upon Senior Securities****.**

Notapplicable.

**Item 4.  Submission of Matters to a Vote of SecurityHolders****.**

Notapplicable.

**Item 5.  Other Information****.**

Notapplicable.

**Item 6.  Exhibits****.**

** **
| EXHIBIT NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                       |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                  |
| 31.1           |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)-Section  302 of the Sarbanes-Oxley Act of 2002                                  |
|           |       |                                                                                                                                                                                                  |
| 32.1           |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Title  18 U.S.C. Section 1350-Section 906 of the Sarbanes-Oxley Act of 2002 |

 

20

----

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

**AMERICAN WAGERING, INC.**

Dated:    June 14, 2007
| /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 |   |

 

21

----