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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, 2005



| ̈ | 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 registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 registrants classes of common
equity, as of the latest practicable date: 8,218,456 shares of Common Stock as of December 8, 2005



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



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##### Table of Contents

TABLE OF CONTENTS



PART I 
FINANCIAL INFORMATION



|     |  |                                                           |  |     
|---- |  | --------------------------------------------------------- |  | ----
|ITEM |  |                                                           |  | PAGE
|     |  |                                                          
|1    |  | Financial Statements                                      |  | 1   
|     |  |                                                          
|     |  | Consolidated Balance Sheets                               |  | 1   
|     |  |                                                          
|     |  | Consolidated Statements of Operations                     |  | 2   
|     |  |                                                          
|     |  | Consolidated Statements of Cash Flows                     |  | 4   
|     |  |                                                          
|     |  | Notes to Consolidated Financial Statements                |  | 5   
|     |  |                                                          
|2    |  | Managements Discussion and Analysis or Plan of Operation |  | 11  
|     |  |                                                          
|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 |  | 20  
|     |  |                                                            
|3    |  | Defaults Upon Senior Securities                             |  | 20  
|     |  |                                                            
|4    |  | Submission of Matters to a Vote of Security Holders         |  | 20  
|     |  |                                                            
|5    |  | Other Information                                           |  | 20  
|     |  |                                                            
|6    |  | Exhibits                                                    |  | 20  



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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, 2005(Unaudited) |             |   | January 31,2005 |  
|ASSETS                                                                                                            |  |                             |             |   |                 |   |             |  
|CURRENT ASSETS                                                                                                    |  |                             |             |   |                 |   |             |  
|Cash and Cash Equivalents                                                                                         |  | $                           | 2,686,278   |   |                 | $ | 3,998,851   |  
|Restricted Cash                                                                                                   |  |                             | 1,290,746   |   |                 |   | 1,238,159   |  
|Accounts Receivable, net of doubtful accounts allowance                                                           |  |                             | 275,863     |   |                 |   | 108,720     |  
|Notes Receivable                                                                                                  |  |                             |             |   |                 |   | 620,000     |  
|Inventories                                                                                                       |  |                             | 855,624     |   |                 |   | 348,755     |  
|Deferred Tax Assets, net                                                                                          |  |                             | 440,481     |   |                 |   | 440,481     |  
|Prepaid Expenses and Other Current Assets                                                                         |  |                             | 508,985     |   |                 |   | 419,434     |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL CURRENT ASSETS                                                                                              |  |                             | 6,057,977   |   |                 |   | 7,174,400   |  
|Property and Equipment, net                                                                                       |  |                             | 1,935,596   |   |                 |   | 1,685,932   |  
|Goodwill                                                                                                          |  |                             | 103,725     |   |                 |   | 103,725     |  
|Other Assets                                                                                                      |  |                             | 301,730     |   |                 |   | 322,209     |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL ASSETS                                                                                                      |  | $                           | 8,399,028   |   |                 | $ | 9,286,266   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  |                             |             |   |                 |   |             |  
|CURRENT LIABILITIES                                                                                               |  |                             |             |   |                 |   |             |  
|Current Portion of Long-Term Debt                                                                                 |  | $                           | 209,845     |   |                 | $ | 35,473      |  
|Accounts Payable                                                                                                  |  |                             | 519,253     |   |                 |   | 516,016     |  
|Accrued Expenses                                                                                                  |  |                             | 1,057,296   |   |                 |   | 548,223     |  
|Unpaid Winning Tickets                                                                                            |  |                             | 1,173,778   |   |                 |   | 801,074     |  
|Customer Deposits and Other Current Liabilities                                                                   |  |                             | 855,167     |   |                 |   | 1,036,786   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL CURRENT LIABILITIES                                                                                         |  |                             | 3,815,339   |   |                 |   | 2,937,572   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|Accounts Payable                                                                                                  |  |                             |             |   |                 |   | 160,216     |  
|Accrued Payroll                                                                                                   |  |                             |             |   |                 |   | 4,950       |  
|Accrued Expenses                                                                                                  |  |                             |             |   |                 |   | 482,577     |  
|Litigation Payable, including accrued interest                                                                    |  |                             |             |   |                 |   | 2,760,310   |  
|Accrued Preferred Stock Dividends                                                                                 |  |                             |             |   |                 |   | 213,400     |  
|Redeemable Series A Preferred Stock (3,238 Shares)                                                                |  |                             |             |   |                 |   | 323,800     |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL SUBJECT TO COMPROMISE                                                                                       |  |                             |             |   |                 |   | 3,945,253   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|LONG-TERM DEBT, less current portion                                                                              |  |                             | 181,440     |   |                 |   | 93,766      |  
|OTHER LONG-TERM LIABILITIES                                                                                       |  |                             | 1,397,779   |   |                 |   | 1,643,385   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL LONG-TERM LIABILITIES                                                                                       |  |                             | 1,579,219   |   |                 |   | 1,737,151   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|Redeemable Series A Preferred Stock (3,238 shares)                                                                |  |                             | 323,800     |   |                 |   |             |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL LIABILITIES                                                                                                 |  |                             | 5,718,358   |   |                 |   | 8,619,976   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|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; 8,212,471 and 7,897,946 shares issued               |  |                             | 82,124      |   |                 |   | 78,979      |  
|Additional Paid-In Capital                                                                                        |  |                             | 14,117,807  |   |                 |   | 12,738,889  |  
|Deficit                                                                                                           |  |                             | (12,284,168 | ) |                 |   | (12,916,485 | )
|Treasury Stock (61,100 shares)                                                                                    |  |                             | (327,493    | ) |                 |   | (327,493    | )
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                        |  |                             | 2,680,670   |   |                 |   | 666,290     |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                        |  | $                           | 8,399,028   |   |                 | $ | 9,286,266   |  
|                                                                                                                  |  |                             |             |   |                 |   |             |  



See notes to
consolidated financial statements.



1



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##### Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



|                                            |  |                                       |           |   |      |   |           |  
|------------------------------------------- |  | ------------------------------------- | --------- | - | ---- | - | --------- | -
|                                            |  | For the Three Months EndedOctober 31, |          
|                                            |  | 2005                                  |           |   | 2004 |  
|Revenues                                    |  |                                       |           |   |      |   |           |  
|Wagering                                    |  | $                                     | 2,216,385 |   |      | $ | 1,374,570 |  
|Systems                                     |  |                                       | 1,159,596 |   |      |   | 1,005,572 |  
|                                            |  |                                       |           |   |      |   |           |  
|                                            |  |                                       | 3,375,981 |   |      |   | 2,380,142 |  
|                                            |  |                                       |           |   |      |   |           |  
|Direct Costs                                |  |                                       |           |   |      |   |           |  
|Wagering                                    |  |                                       | 1,710,177 |   |      |   | 1,522,969 |  
|Systems                                     |  |                                       | 620,303   |   |      |   | 537,769   |  
|                                            |  |                                       |           |   |      |   |           |  
|                                            |  |                                       | 2,330,480 |   |      |   | 2,060,738 |  
|                                            |  |                                       |           |   |      |   |           |  
|Administrative Costs and Expenses           |  |                                       |           |   |      |   |           |  
|Research and Development                    |  |                                       | 262,553   |   |      |   | 241,495   |  
|Selling, General and Administrative         |  |                                       | 822,038   |   |      |   | 565,039   |  
|Depreciation and Amortization               |  |                                       | 105,899   |   |      |   | 95,846    |  
|                                            |  |                                       |           |   |      |   |           |  
|                                            |  |                                       | 1,190,490 |   |      |   | 902,380   |  
|                                            |  |                                       |           |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES          |  |                                       | 3,520,970 |   |      |   | 2,963,118 |  
|                                            |  |                                       |           |   |      |   |           |  
|OPERATING LOSS                              |  |                                       | (144,989  | ) |      |   | (582,976  | )
|                                            |  |                                       |           |   |      |   |           |  
|Other Income (Expense)                      |  |                                       |           |   |      |   |           |  
|Interest Income                             |  |                                       | 12,051    |   |      |   | 1,107     |  
|Interest Expense                            |  |                                       | (6,078    | ) |      |   | (33,458   | )
|Reorganization Expense                      |  |                                       | (1,357    | ) |      |   | (147,724  | )
|Other, net                                  |  |                                       | 4,431     |   |      |   | 22,659    |  
|                                            |  |                                       |           |   |      |   |           |  
|                                            |  |                                       | 9,047     |   |      |   | (157,416  | )
|                                            |  |                                       |           |   |      |   |           |  
|LOSS BEFORE INCOME TAX BENEFIT              |  |                                       | (135,942  | ) |      |   | (740,392  | )
|INCOME TAX BENEFIT                          |  |                                       | (63,000   | ) |      |   |           |  
|                                            |  |                                       |           |   |      |   |           |  
|NET LOSS                                    |  |                                       | ($72,942  | ) |      |   | ($740,392 | )
|                                            |  |                                       |           |   |      |   |           |  
|BASIC AND DILUTED EARNINGS (LOSS) PER SHARE |  |                                       | ($0.01    | ) |      |   | ($0.09    | )
|                                            |  |                                       |           |   |      |   |           |  



See notes to
consolidated financial statements.



2



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AMERICAN WAGERING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



|                                            |  |                                      |           |   |      |   |           |  
|------------------------------------------- |  | ------------------------------------ | --------- | - | ---- | - | --------- | -
|                                            |  | For the Nine Months EndedOctober 31, |          
|                                            |  | 2005                                 |           |   | 2004 |  
|Revenues                                    |  |                                      |           |   |      |   |           |  
|Wagering                                    |  | $                                    | 5,855,417 |   |      | $ | 4,333,538 |  
|Systems                                     |  |                                      | 3,826,841 |   |      |   | 3,592,429 |  
|                                            |  |                                      |           |   |      |   |           |  
|                                            |  |                                      | 9,682,258 |   |      |   | 7,925,967 |  
|                                            |  |                                      |           |   |      |   |           |  
|Direct Costs                                |  |                                      |           |   |      |   |           |  
|Wagering                                    |  |                                      | 4,447,102 |   |      |   | 3,863,158 |  
|Systems                                     |  |                                      | 1,859,169 |   |      |   | 1,740,033 |  
|                                            |  |                                      |           |   |      |   |           |  
|                                            |  |                                      | 6,306,271 |   |      |   | 5,603,191 |  
|                                            |  |                                      |           |   |      |   |           |  
|Administrative Costs and Expenses           |  |                                      |           |   |      |   |           |  
|Research and Development                    |  |                                      | 750,005   |   |      |   | 704,100   |  
|Selling, General and Administrative         |  |                                      | 2,024,173 |   |      |   | 1,628,964 |  
|Depreciation and Amortization               |  |                                      | 293,138   |   |      |   | 276,317   |  
|                                            |  |                                      |           |   |      |   |           |  
|                                            |  |                                      | 3,067,316 |   |      |   | 2,609,381 |  
|                                            |  |                                      |           |   |      |   |           |  
|TOTAL OPERATING COSTS AND EXPENSES          |  |                                      | 9,373,587 |   |      |   | 8,212,572 |  
|                                            |  |                                      |           |   |      |   |           |  
|OPERATING INCOME (LOSS)                     |  |                                      | 308,671   |   |      |   | (286,605  | )
|                                            |  |                                      |           |   |      |   |           |  
|Other Income (Expense)                      |  |                                      |           |   |      |   |           |  
|Interest Income                             |  |                                      | 40,791    |   |      |   | 9,690     |  
|Interest Expense                            |  |                                      | (19,985   | ) |      |   | (103,049  | )
|Reorganization Expense                      |  |                                      | (43,493   | ) |      |   | (455,019  | )
|Litigation                                  |  |                                      | 328,624   |   |      |   |           |  
|Other, net                                  |  |                                      | 140,633   |   |      |   | 73,391    |  
|                                            |  |                                      |           |   |      |   |           |  
|                                            |  |                                      | 446,570   |   |      |   | (474,987  | )
|                                            |  |                                      |           |   |      |   |           |  
|INCOME (LOSS) BEFORE INCOME TAX             |  |                                      | 755,241   |   |      |   | (761,592  | )
|INCOME TAX                                  |  |                                      | 17,000    |   |      |   | 3,000     |  
|                                            |  |                                      |           |   |      |   |           |  
|NET INCOME (LOSS)                           |  | $                                    | 738,241   |   |      |   | ($764,592 | )
|                                            |  |                                      |           |   |      |   |           |  
|BASIC AND DILUTED EARNINGS (LOSS) PER SHARE |  | $                                    | 0.08      |   |      |   | ($0.11    | )
|                                            |  |                                      |           |   |      |   |           |  



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, |           
|                                                 |  | 2005                                 |            |   | 2004 |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |  | $                                    | 3,998,851  |   |      | $ | 4,113,196  |  
|                                                 |  |                                      |            |   |      |   |            |  
|Net cash provided (used) in operating activities |  |                                      | (648,096   | ) |      |   | 501,554    |  
|                                                 |  |                                      |            |   |      |   |            |  
|INVESTING ACTIVITIES                             |  |                                      |            |   |      |   |            |  
|Increase in restricted cash                      |  |                                      | (52,587    | ) |      |   | (106,333   | )
|Withdrawals of restricted cash                   |  |                                      |            |   |      |   |            |  
|Decrease (increase) in notes receivable          |  |                                      | 320,000    |   |      |   | (620,000   | )
|Purchase of property and equipment               |  |                                      | (513,145   | ) |      |   | (660,112   | )
|                                                 |  |                                      |            |   |      |   |            |  
|Net cash used in investing activities            |  |                                      | (245,732   | ) |      |   | (1,386,445 | )
|                                                 |  |                                      |            |   |      |   |            |  
|FINANCING ACTIVITIES                             |  |                                      |            |   |      |   |            |  
|Sale of stock                                    |  |                                      | 38,438     |   |      |   |            |  
|Repayment of borrowings                          |  |                                      | (137,859   | ) |      |   | (106,889   | )
|Proceeds from borrowings                         |  |                                      |            |   |      |   |            |  
|Current dividends on preferred stock             |  |                                      | (105,924   | ) |      |   |            |  
|Payment of preferred stock dividends in arrears  |  |                                      | (213,400   | ) |      |   |            |  
|                                                 |  |                                      |            |   |      |   |            |  
|Net cash used in financing activities            |  |                                      | (418,745   | ) |      |   | (106,889   | )
|                                                 |  |                                      |            |   |      |   |            |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS        |  |                                      | (1,312,573 | ) |      |   | (991,780   | )
|                                                 |  |                                      |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD       |  | $                                    | 2,686,278  |   |      | $ | 3,121,416  |  
|                                                 |  |                                      |            |   |      |   |            |  



See notes to
consolidated financial statements.



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AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. Basis of Presentation



The accompanying unaudited interim, consolidated financial statements 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 considered 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
American Wagering, Inc. (AWI) and Subsidiaries, and the related notes, included in the Annual Report on Form 10-KSB of AWI for the fiscal year ended January 31, 2005, previously filed with the Securities and Exchange Commission
(from which consolidated balance sheet information of AWI and its Subsidiaries (collectively, the Company) at January 31, 2005, included in this report, was derived). All significant inter-company accounts and transactions have been
eliminated in the consolidation.



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



2. Chapter 11 Filing



On
September 26, 2005, the United States Bankruptcy Court for the District of Nevada issued an order closing the Chapter 11 cases of AWI and its wholly-owned subsidiary, Leroys Horse Sports Place, Inc. (Leroys). All
required distributions have been made. However, the appeal by Michael Racusin to the United States Court of Appeals for the Ninth Circuit (the 9thCircuit), of the April 14, 2005 ruling by the United States Bankruptcy Appellate Panel of the Ninth Circuit (the BAP), remains pending.



3. Reorganization Expenses



Reorganization expenses were charged to expense as incurred. The following table provides a
breakdown of reorganization expenses (recoveries).



|                              |  |                               |         |                              |      |   |         |  |   |        |   |  |   |        
|----------------------------- |  | ----------------------------- | ------- | ---------------------------- | ---- | - | ------- |  | - | ------ | - |  | - | -------
|                              |  | Three Months EndedOctober 31, |         | Nine Months EndedOctober 31,
|                              |  | 2005                          |         |                              | 2004 |   | 2005    |  |   | 2004  
|United States Trustee (Taxes) |  | $                             | 11,750  |                              |      |   |         |  | $ | 45,500 |   |  | $ | 17,000 
|Legal Counsel (Bankruptcy)    |  |                               | (10,393 | )                            |      | $ | 147,724 |  |   | (2,007 | ) |  |   | 438,019
|                              |  |                               |         |                              |      |   |         |  |   |        |   |  |   |        
|Total                         |  | $                             | 1,357   |                              |      | $ | 147,724 |  | $ | 43,493 |   |  | $ | 455,019
|                              |  |                               |         |                              |      |   |         |  |   |        |   |  |   |        



5



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During the period, the Company reported $5,021 in interest expense in the first quarter, $27 in interest expense in the
second quarter and $0 in interest expense in the third quarter, all relating to the reorganization proceedings.



4. Net Income (Loss) per Share



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



|                                            |  |                               |   |  |                              |   |  |      |           |   |      |           |  
|------------------------------------------- |  | ----------------------------- | - |  | ---------------------------- | - |  | ---- | --------- | - | ---- | --------- | -
|                                            |  | Three Months EndedOctober 31, |   |  | Nine Months EndedOctober 31, |  
|                                            |  | 2005                          |   |  | 2004                         |   |  | 2005 |           |   | 2004 |          
|Net Income (Loss)                           |  | ($72,942                      | ) |  | ($740,392                    | ) |  | $    | 738,341   |   |      | ($761,592 | )
|Preferred stock dividends                   |  | (35,696                       | ) |  | (36,192                      | ) |  |      | (105,924  | ) |      | (107,789  | )
|                                            |  |                               |   |  |                              |   |  |      |           |   |      |           |  
|Net income (loss) as adjusted               |  | ($108,638                     | ) |  | ($776,584                    | ) |  | $    | 632,417   |   |      | ($869,381 | )
|                                            |  |                               |   |  |                              |   |  |      |           |   |      |           |  
|Basic weighted average shares Outstanding   |  | 7,956,104                     |   |  | 7,836,846                    |   |  |      | 7,956,104 |   |      | 7,836,846 |  
|                                            |  |                               |   |  |                              |   |  |      |           |   |      |           |  
|Diluted weighted average shares Outstanding |  | 7,956,104                     |   |  | 7,836,846                    |   |  |      | 7,997,881 |   |      | 7,836,846 |  
|                                            |  |                               |   |  |                              |   |  |      |           |   |      |           |  



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



|                                                       |  |                               |          |   |                              |   |          |      |  |      |         |  |   |          |  
|------------------------------------------------------ |  | ----------------------------- | -------- | - | ---------------------------- | - | -------- | ---- |  | ---- | ------- |  | - | -------- | -
|                                                       |  | Three Months EndedOctober 31, |          |   | Nine Months EndedOctober 31, |  
|                                                       |  | 2005                          |          |   | 2004                         |   |          | 2005 |  | 2004 |        
|Stock Options Outstanding                              |  |                               | 834,760  |   |                              |   | 260,669  |      |  |      | 834,760 |  |   | 260,669  |  
|Stock Options Exercisable                              |  |                               | 176,360  |   |                              |   | 257,869  |      |  |      | 176,360 |  |   | 257,869  |  
|Exercise Price  Low                                   |  | $                             | 0.12     |   |                              | $ | 0.12     |      |  | $    | 0.12    |  | $ | 0.12     |  
|Exercise Price  High                                  |  | $                             | 2.00     |   |                              | $ | 0.70     |      |  | $    | 2.00    |  | $ | 0.70     |  
|Average Market Price                                   |  | $                             | 1.59     |   |                              | $ | 0.44     |      |  | $    | 1.65    |  | $ | 0.37     |  
|Net income (loss) as adjusted                          |  | $                             | (108,638 | ) |                              | $ | (776,584 | )    |  | $    | 632,417 |  | $ | (869,381 | )
|Diluted weighted average of the options outstanding(1) |  |                               | 114,597  |   |                              |   | 1,350    |      |  |      | 135,276 |  |   | 651      |  
|Anti-dilutive weighted average excluded(1)             |  |                               | 511,644  |   |                              |   | 256,354  |      |  |      | 220,041 |  |   | 265,480  |  

---

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



6



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##### Table of Contents

5. Stock Options



2001 Stock Option Plan.



|                            |  |         |  
|--------------------------- |  | ------- | -
|                            |  | OPTIONS |  
|Balance at January 31, 2005 |  | 253,242 |  
|Issued                      |  | 650,000 |  
|Exercised                   |  | (64,525 | )
|Cancelled                   |  | (13,957 | )
|                            |  |         |  
|Balance at October 31, 2005 |  | 824,760 |  
|                            |  |         |  



| |  |  | 174,760 options are exercisable.
| | - |  | --------------------------------



| |  |  | Prices range from $0.40 to $2.00, with an average price of $1.65.
| | - |  | -----------------------------------------------------------------



| |  |  | Expiration dates range from August 9, 2006 to June 10, 2015.
| | - |  | ------------------------------------------------------------



| |  |  | 260,715 options are available for grant under the plan.
| | - |  | -------------------------------------------------------



Directors Stock Option Plan.



|                            |  |        
|--------------------------- |  | -------
|                            |  | OPTIONS
|Balance at January 31, 2005 |  | 2,400  
|Issued                      |  | 7,600  
|Exercised                   |  |        
|Cancelled                   |  |        
|                            |  |        
|Balance at October 31, 2005 |  | 10,000 
|                            |  |        



| |  |  | 1,600 options are exercisable.
| | - |  | ------------------------------



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



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



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



Fair value method. The following table represents pro forma net income (loss) in total and on a per-share basis, using the alternative fair value
approach described in Statement of Financial Accounting Standards (SFAS) No. 123.



|                                                                                               |  |                              |         |   |      |           |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | --------- | -
|                                                                                               |  | Nine Months EndedOctober 31, |        
|                                                                                               |  | 2005                         |         |   | 2004 |          
|Net Income (Loss) as Reported                                                                  |  | $                            | 738,241 |   |      | ($764,592 | )
|Less: Total Stock-Based Employee Compensation Expense Determined Under Fair Value-Based Method |  |                              | (188    | ) |      | (145      | )
|                                                                                               |  |                              |         |   |      |           |  
|Pro forma Net Income (Loss)                                                                    |  | $                            | 738,053 |   |      | ($764,737 | )
|                                                                                               |  |                              |         |   |      |           |  
|Net Income (Loss) Per Share:                                                                   |  |                              |         |   |      |           |  
|As reported                                                                                    |  | $                            | 0.08    |   |      | ($0.11    | )
|Pro forma                                                                                      |  | $                            | 0.08    |   |      | ($0.11    | )



7



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##### Table of Contents

6. Business Segments



The Company conducts operations through two primary business segments: Wagering and Systems.



Wagering. The Wagering segment is comprised of Leroys, AWI Manufacturing, Inc.
(AWIM) and AWI Gaming, Inc. (AWIG). 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. AWIGs plans are to acquire hotel/casino operations; at the present time, AWIG has signed a definitive agreement to purchase Sturgeons Inn & Casino in Lovelock, Nevada upon licensure by the Nevada
Gaming Commission.



Systems. The Systems segment is comprised of
Computerized Bookmaking Systems, Inc. (CBS) and Contest Sports Systems, Inc. (CSS). CBS designs, sells, installs and maintains computerized race and sports book systems for the Nevada gaming industry. CSS leases
contest-related self-service kiosks.



|                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|-------------------------- |  | ----------------------------- | --------- | ---------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                           |  | Three Months EndedOctober 31, |           | Nine Months EndedOctober 31,
|                           |  | 2005                          |           | 2004                         |   | 2005      |  | 2004
|Leroys (Wagering Revenue) |  | $                             | 2,216,385 |                              | $ | 1,374,570 |  | $    | 5,855,417 |  | $ | 4,333,538
|CBS (Systems Revenue)      |  | $                             | 1,159,596 |                              | $ | 1,005,572 |  | $    | 3,826,841 |  | $ | 3,592,429
|                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|Total Revenue              |  | $                             | 3,375,981 |                              | $ | 2,380,142 |  | $    | 9,682,258 |  | $ | 7,925,967
|                           |  |                               |           |                              |   |           |  |      |           |  |   |          



|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|------------------------------------------ |  | ----------------------------- | --------- | ---------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                           |  | Three Months EndedOctober 31, |           | Nine Months EndedOctober 31,
|                                           |  | 2005                          |           | 2004                         |   | 2005      |  | 2004
|Wagering Administrative Costs and Expenses |  |                               |           |                              |   |           |  |      |           |  |   |          
|Direct Costs                               |  | $                             | 1,710,177 |                              | $ | 1,522,969 |  | $    | 4,447,102 |  | $ | 3,863,158
|Unallocated                                |  |                               | 429,644   |                              |   | 253,740   |  |      | 977,176   |  |   | 742,688  
|Depreciation/Amortization                  |  |                               | 66,114    |                              |   | 50,410    |  |      | 181,817   |  |   | 145,781  
|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|                                           |  |                               | 2,205,935 |                              |   | 1,827,119 |  |      | 5,606,095 |  |   | 4,751,627
|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|Systems Administrative Costs and Expenses  |  |                               |           |                              |   |           |  |      |           |  |   |          
|Direct Costs                               |  |                               | 620,303   |                              |   | 537,769   |  |      | 1,859,168 |  |   | 1,740,033
|Research and Development                   |  |                               | 262,553   |                              |   | 241,495   |  |      | 750,005   |  |   | 704,100  
|Unallocated                                |  |                               | 392,395   |                              |   | 311,299   |  |      | 1,046,997 |  |   | 886,276  
|Depreciation/Amortization                  |  |                               | 39,786    |                              |   | 45,436    |  |      | 111,321   |  |   | 130,536  
|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|                                           |  |                               | 1,315,037 |                              |   | 1,135,999 |  |      | 3,767,491 |  |   | 3,460,945
|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          
|Total Administrative Costs and Expenses    |  | $                             | 3,520,972 |                              | $ | 2,963,118 |  | $    | 9,373,586 |  | $ | 8,212,572
|                                           |  |                               |           |                              |   |           |  |      |           |  |   |          



8



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##### Table of Contents

|                              |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|----------------------------- |  | ----------------------------- | --------- | - | ---------------------------- | --------- | - | ---- | - | ------- |  | --------- | -
|                              |  | Three Months EndedOctober 31, |           |   | Nine Months EndedOctober 31, |          
|                              |  | 2005                          |           |   | 2004                         |           |   | 2005 |   | 2004    | 
|Operating Income (Loss)       |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|Wagering                      |  | $                             | 10,450    |   |                              | ($452,549 | ) |      | $ | 249,322 |  | ($445,203 | )
|Systems                       |  |                               | (155,441  | ) |                              | (130,427  | ) |      |   | 59,350  |  | 158,598   |  
|                              |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|Total Operating Income (Loss) |  |                               | ($144,991 | ) |                              | ($582,976 | ) |      | $ | 308,672 |  | ($286,605 | )
|                              |  |                               |           |   |                              |           |   |      |   |         |  |           |  



|                               |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|------------------------------ |  | ----------------------------- | --------- | - | ---------------------------- | --------- | - | ---- | - | ------- |  | --------- | -
|                               |  | Three Months EndedOctober 31, |           |   | Nine Months EndedOctober 31, |          
|                               |  | 2005                          |           |   | 2004                         |           |   | 2005 |   | 2004    | 
|Income Before Income Tax       |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|Wagering Operating (Loss)      |  | $                             | 10,450    |   |                              | ($452,549 | ) |      | $ | 249,322 |  | ($445,203 | )
|Systems Operating (Loss)       |  |                               | (155,441  | ) |                              | (130,427  | ) |      |   | 59,350  |  | 158,598   |  
|Other Income (Expense)         |  |                               | 9,049     |   |                              | (157,416  | ) |      |   | 446,569 |  | (474,987  | )
|                               |  |                               |           |   |                              |           |   |      |   |         |  |           |  
|Total Income Before Income Tax |  |                               | ($135,942 | ) |                              | ($740,392 | ) |      | $ | 755,241 |  | ($761,592 | )
|                               |  |                               |           |   |                              |           |   |      |   |         |  |           |  



|                 |  |                               |          |                              |      |   |      |  |      |        |  |   |         |  
|---------------- |  | ----------------------------- | -------- | ---------------------------- | ---- | - | ---- |  | ---- | ------ |  | - | ------- | -
|                 |  | Three Months EndedOctober 31, |          | Nine Months EndedOctober 31, |     
|                 |  | 2005                          |          |                              | 2004 |   | 2005 |  | 2004 |       
|Income Tax       |  |                               |          |                              |      |   |      |  |      |        |  |   |         |  
|Wagering         |  | $                             | 5,469    |                              |      | $ | 0    |  | $    | 5,642  |  |   | ($1,754 | )
|Systems          |  |                               | (72,663  | )                            |      |   | 0    |  |      | 1,306  |  |   | 6,625   |  
|Unallocated      |  |                               | 4,194    |                              |      |   | 0    |  |      | 10,052 |  |   | (1,871  | )
|                 |  |                               |          |                              |      |   |      |  |      |        |  |   |         |  
|Total Income Tax |  |                               | ($63,000 | )                            |      | $ | 0    |  | $    | 17,000 |  | $ | 3,000   |  
|                 |  |                               |          |                              |      |   |      |  |      |        |  |   |         |  



9



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##### Table of Contents

|                  |  |                               |          |   |                              |           |   |      |   |         |  |           |  
|----------------- |  | ----------------------------- | -------- | - | ---------------------------- | --------- | - | ---- | - | ------- |  | --------- | -
|                  |  | Three Months EndedOctober 31, |          |   | Nine Months EndedOctober 31, |          
|                  |  | 2005                          |          |   | 2004                         |           |   | 2005 |   | 2004    | 
|Net Income (Loss) |  |                               |          |   |                              |           |   |      |   |         |  |           |  
|Wagering          |  | $                             | 4,981    |   |                              | ($452,549 | ) |      | $ | 243,680 |  | ($443,449 | )
|Systems           |  |                               | (82,778  | ) |                              | (130,427  | ) |      |   | 58,044  |  | 151,973   |  
|Unallocated       |  |                               | 4,855    |   |                              | (157,416  | ) |      |   | 436,517 |  | (473,116  | )
|                  |  |                               |          |   |                              |           |   |      |   |         |  |           |  
|Net Income (Loss) |  |                               | ($72,942 | ) |                              | ($740,392 | ) |      | $ | 738,241 |  | ($764,592 | )
|                  |  |                               |          |   |                              |           |   |      |   |         |  |           |  



7. Litigation



In accordance with SFAS No. 5, Accounting for
Contingencies, the Company records an allowance for claims equal to the lower end of the estimated probable loss range and periodically revises these estimates as known facts and circumstances change.



We issued a certificate representing 250,000 shares of AWIs common stock in the name of
Michael Racusin pursuant to the April 14, 2005 ruling by the BAP. On May 13, 2005, Racusin filed with the 9thCircuit a notice of appeal of the ruling by the BAP. We do not know when the 9thCircuit will make
a decision on Racusins appeal, but we believe that a decision before May 2006 is unlikely. Our position is that even if the 9thCircuit overturns the BAPs ruling, it should not materially affect the manner in which we have dealt with the Racusin matter. However, if the 9thCircuit overturns the BAPs ruling, Racusin might claim entitlement to a cash payment in lieu of shares of AWI common stock. We can not predict the
outcome of Racusins appeal to the 9thCircuit.



8. Regulatory Matters



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



9. Commitments



On June 17, 2005, AWIG, a wholly owned subsidiary of AWI, entered into a definitive agreement to acquire Sturgeons Inn &
Casino (Sturgeons), a privately-held, licensed and regulated gaming company located in Lovelock, Nevada, from Marlys A. Koehler as Trustee of the Koehler Family Trust and Log Cabin, Inc. The proposed acquisition of Sturgeons
is contingent upon certain events, including approval and licensing by the Nevada Gaming Commission. The purchase price for Sturgeons is $1,800,000 of which $100,000 has been paid as a non-refundable deposit. The remaining $1,700,000 is due
upon the closing date, no later than the last day of the month following approval and licensing by the Nevada Gaming Commission, if any.



10



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##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | our failure to obtain, delays in obtaining, or loss of, any licenses, permits or approvals, or the limitation, conditioning, suspension or revocation of any such
licenses, permits or approvals,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

| | 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 in the Middle East and any future security alerts or terrorist attacks such as the attacks that occurred on
September 11, 2001; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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
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.



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 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



12



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##### Table of Contents

liquidity to fund the purchase of kiosks and to deal with the seasonality of sports betting, the uncertain timing of system sales, etc.



Key developments.



| |  |  | Leroys sports handle (the total amount wagered) increased 12.1% from the third quarter of last year while sports win increased 64.4%. We attribute the increase in sports
handle and win to normal fluctuations in betting patterns. The following table indicates the increase/decrease, by sporting category, from the third quarter of last year to the third quarter of this year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |        |   |  |      |  
|---------------- |  | ------ | - |  | ---- | -
|                 |  | HANDLE |   |  | WIN  |  
|Football         |  | +12    | % |  | +121 | %
|Baseball         |  | +8.5   | % |  | +304 | %
|Basketball       |  | +242   | % |  | -55  | %
|Hockey(1)        |  | +3,326 | % |  | +597 | %
|Boxing(2)        |  | -61    | % |  | -71  | %
|Miscellaneous(3) |  | +104   | % |  | -19  | %
|Parlay Cards     |  | +7     | % |  | -33  | %

---

|(1) | Due to the player strike in 2004, hockey figures are not comparable.
|--- | --------------------------------------------------------------------



|(2) | Boxing is seasonal in nature; handle is dependent upon the number and quality of fights offered during the quarter.
|--- | -------------------------------------------------------------------------------------------------------------------



|(3) | Miscellaneous includes auto racing, golf and other events.
|--- | ----------------------------------------------------------



| |  |  | Leroys race handle increased 44.5% from the third quarter of last year while race win increased 46.2%. We attribute the increase in race handle and win to the additional
locations opened early in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leroys combined handle (both race and sports) increased 13.0% from the third quarter of last year while combined win increased 62.3%. As a result, the third quarter of the
current fiscal year is the best third quarter in Leroys history (in terms of handle and win).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leroys player club (started in May of 2005) had in excess of 2,800 members at October 31, 2005, and we expect additional enrollments over the next several quarters. The
player club is designed to reward players for their continued play at Leroys locations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leroys continued the process of upgrading all of its point-of-sale terminals in order to take advantage of the latest technologies available. This project is over 90% complete
and we expect it to be finalized early in the fourth quarter.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Once the terminal upgrade project is completed, Leroys expects to upgrade the server to the newer 64-bit hardware platform offered by CBS (an affiliated company). Leroys
expects this upgrade to be completed by the end of the calendar year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CBS continued converting its customers from the VAX hardware platform to the newer 64-bit hardware platform. During the quarter, the HP Integrity system was
installed at the
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



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##### Table of Contents

| | Rainbow Hotel & Casino in Wendover, Nevada and the El Cortez Hotel & Casino in Las Vegas, Nevada. (The Rainbow installation was a
conversion from the older hardware platform while the El Cortez installation is a new customer.) Over the next several quarters, we expect the research and development expended on building the 64-bit system to bear fruit as we expect each conversion
to result in immediate sales for CBS as well as increased monthly maintenance fees over the long-term.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CBS completed the process of consolidating the Mandalay Resort Group properties into the MGM/Mirage system as well as finalizing installations of the newer T-3 wagering terminals at
the Luxor and Excalibur.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CBS oversaw the operation of the Fall Classic handicapping contest at the Orleans Hotel & Casino.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | AWIG continued to move forward with the gaming licensure process required prior to closing on the purchase of Sturgeons Inn & Casino in Lovelock, Nevada. We cannot
predict when the Nevada gaming regulators will complete their investigation and allow the transaction to close, but we are hopeful the closing will occur in the first quarter of the next fiscal year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity and capital resources. In 2003, AWI and Leroys filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. On September 26, 2005, the United States Bankruptcy Court for the District of Nevada issued an order closing the Chapter 11 cases of AWI and Leroys. All required distributions
have been made. The appeal by Michael Racusin to the 9thCircuit, of the April 14, 2005 ruling by the BAP,
remains pending.



Nevada Gaming Commission 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. As of October 31, 2005, we
maintain 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 (Travelers). The surety bond is secured by a $1,200,000 cash deposit that we
maintain at Smith Barney. We anticipate the Travelers surety bond will be sufficient to fully fund the Regulation 22.040 reserve requirement for the reasonably foreseeable future.



Prior to obtaining the Travelers surety bond on September 1, 2005, we maintained the reserve in the form of an irrevocable standby
letter of credit (ILOC) from a bank in the amount of $1,100,000. The ILOC was secured by a $1,500,000 second mortgage on the personal residence of Victor Salerno, our President, Chief Executive Officer, Chief Operating Officer and
Chairman of the Board. In exchange for providing the collateral for the ILOC, we compensated Mr. Salerno as follows:



|                                                    |  |   |       
|--------------------------------------------------- |  | - | ------
|For the period July 1, 2003 through June 30, 2004:  |  | $ | 38,500
|For the period July 1, 2004 through June 30, 2005:  |  | $ | 52,500
|For the period July 1, 2005 through August 31, 2005 |  | $ | 8,750 



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The amounts that we paid to Mr. Salerno represent 3.5% of $1,100,000 for the first 12 months and 3.5% of $1,500,000
on an annual basis for the other 14 months. The difference in the rates is due to an inadvertent error on our part; for the first 12 months, we compensated Mr. Salerno based upon the amount of the ILOC ($1,100,000) rather than on the amount of
his risk relative to the transaction ($1,500,000). We consider the payments to Mr. Salerno (3.5%) to be appropriate based on our borrowing rate, the level of risk associated with the transaction, and our prior history in paying for surety
bonds.



On September 1, 2005, the ILOC was cancelled in its entirety (in
favor of the Travelers surety bond) and the collateral for the ILOC returned to Mr. Salerno; we do not anticipate any future payments to Mr. Salerno as a result of the Regulation 22.040 reserve requirement.



In the event we are unable to maintain the Regulation 22.040 reserve and/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.



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



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



Three Months Ended October 31:



|                             |  |                               |   |  |            |   |  |          |   |  |        |   
|---------------------------- |  | ----------------------------- | - |  | ---------- | - |  | -------- | - |  | ------ | --
|                             |  | Three Months EndedOctober 31, |   |  | $ CHANGE   |   |  | % CHANGE |  
|                             |  | 2005                          |   |  | 2004       |   |  |         
|Revenue                      |  | $3,375,981                    |   |  | $2,380,142 |   |  | $995,839 |   |  | 41.84  | % 
|Costs and Expenses           |  | (3,520,970                    | ) |  | (2,963,118 | ) |  | (557,852 | ) |  | 18.83  | % 
|                             |  |                               |   |  |            |   |  |          |   |  |        |   
|Operating Loss               |  | (144,989                      | ) |  | (582,976   | ) |  | 437,987  |   |  | (75.13 | %)
|Other Income (Expense)       |  | 9,047                         |   |  | (157,416   | ) |  | 166,463  |   |  | 105.75 | % 
|                             |  |                               |   |  |            |   |  |          |   |  |        |   
|Loss Before Income Taxes     |  | (135,942                      | ) |  | (740,392   | ) |  | 604,450  |   |  | (81.64 | %)
|Income Tax (Expense) Benefit |  | 63,000                        |   |  | 0          |   |  | 63,000   |   |  | 100.00 | % 
|                             |  |                               |   |  |            |   |  |          |   |  |        |   
|Net Loss                     |  | ($72,942                      | ) |  | ($740,392  | ) |  | $667,450 |   |  | (90.15 | %)
|                             |  |                               |   |  |            |   |  |          |   |  |        |   



Revenues for the quarter ending
October 31, 2005 increased $995,839 (+41.84%) compared to the quarter ending October 31, 2004. We attribute this to an increase in Wagering segment revenues of $841,815 (+61.25%) and a increase in Systems segment revenues of
$154,024 (+15.32%).



Costs and expenses for the quarter ending October 31,
2005 increased $557,854 (+18.83%) from costs and expenses for the quarter ending October 31, 2004. We attribute this to an increase in Wagering segment costs and expenses of $187,208 (+12.30%), an increase in Systems segment costs and
expenses of $82,534 (+15.35%), an increase in research and development costs of $21,058 (+8.72%), an increase in selling, general & administrative expenses of $256,999 (+45.49%), and an increase in depreciation expense of $10,053 (+10.49%).
$138,592 of the increase in selling general & administrative expense was due to the creation of the new subsidiary, AWIG.



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As a result of revenues increasing at a faster rate than cost and expenses (+41.84% for revenues versus +18.83% for costs
and expenses), our operating loss for the quarter ending October 31, 2005 decreased $437,987 (-75.13%) from the operating loss for the quarter ending October 31, 2004.



Other income (expense) for the quarter ending October 31, 2005 increased $166,463 (+105.75%) compared to the quarter ending
October 31, 2004 due primarily to increases in interest income $10,944 (+988.62%), a decrease in interest expense $27,380 (-81.83%), a decrease in reorganization expense $146,367 (-99.09%), a theft at one of the Leroys point of sale
locations of $12,800 and a loss of $3,985 on the disposal of assets due to Leroys upgrading of their point -of-sale terminals.



Nine Months Ended October 31:



|                                  |  |                              |            |   |          |   |            |          |  |   |            |   |  |        |  
|--------------------------------- |  | ---------------------------- | ---------- | - | -------- | - | ---------- | -------- |  | - | ---------- | - |  | ------ | -
|                                  |  | Nine Months EndedOctober 31, |            |   | $ CHANGE |   |            | % CHANGE | 
|                                  |  | 2005                         |            |   | 2004     |   |            |         
|Revenue                           |  | $                            | 9,682,258  |   |          | $ | 7,925,967  |          |  | $ | 1,756,291  |   |  | 22.16  | %
|Costs and Expenses                |  |                              | (9,373,587 | ) |          |   | (8,212,572 | )        |  |   | (1,161,015 | ) |  | 14.14  | %
|                                  |  |                              |            |   |          |   |            |          |  |   |            |   |  |        |  
|Operating Income (Loss)           |  |                              | 308,671    |   |          |   | (286,605   | )        |  |   | 595,276    |   |  | 207.70 | %
|Other Income (Expense)            |  |                              | 446,570    |   |          |   | (474,987   | )        |  |   | 921,557    |   |  | 194.02 | %
|                                  |  |                              |            |   |          |   |            |          |  |   |            |   |  |        |  
|Income (Loss) Before Income Taxes |  |                              | 755,241    |   |          |   | (761,592   | )        |  |   | 1,516,833  |   |  | 199.17 | %
|Income Tax Expense                |  |                              | (17,000    | ) |          |   | (3,000     | )        |  |   | (14,000    | ) |  | 466.67 | %
|                                  |  |                              |            |   |          |   |            |          |  |   |            |   |  |        |  
|Net Income (Loss)                 |  | $                            | 738,241    |   |          |   | ($764,592  | )        |  | $ | 1,502,833  |   |  | 196.56 | %
|                                  |  |                              |            |   |          |   |            |          |  |   |            |   |  |        |  



Revenues for the nine months ending
October 31, 2005 increased $1,756,291 (+22.16%) compared to the nine months ending October 31, 2004. We attribute this to an increase in Wagering segment revenues of $1,521,879 (+35.12%) and an increase in Systems segment
revenues of $234,412 (+6.53%).



Costs and expenses for the nine months ending
October 31, 2005 increased $1,161,015 (+14.14%) from costs and expenses for the nine months ending October 31, 2004. We attribute this to an increase in Wagering segment costs and expenses of $583,944 (+15.12%), an increase in Systems
segment costs and expenses of $119,136 (+6.85%), an increase in research & development expense of $45,905 (+6.52%), an increase in selling, general & administrative expense of $395,209 (+24.27%) and an increase in depreciation
expense of $16,821 (+6.09%). $138,592 of the increase in selling general & administrative expense was due to the creation of the new subsidiary, AWIG.



As a result of revenues increasing at a faster rate than costs and expenses (+22.16% for revenues versus +14.14% for costs and expenses), our operating income for the
nine months ending October 31, 2005 increased $595,276 (+207.70%) from the operating loss for the nine months ending October 31, 2004.



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Other income (expense) for the nine months ending October 31, 2005 increased $921,557 (+194.02%) compared to
the nine months ending October 31, 2004 due primarily to increases in interest income $31,101 (+320.96%), a decrease in interest expense $83,064 (-80.61%), a decrease in reorganization expense $411,526 (-90.45%), an increase in income from
litigation $328,624 (+100.00%) and an increase in miscellaneous other income and expense of $67,242 (+91.63%) due primarily to an adjustment to a settlement that had previously been recorded.



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



Wagering: We record wagering revenues in compliance with the Nevada Revised Statutes and the Regulations of the Nevada Gaming Commission and State Gaming Control Board.
For sports and non-pari-mutuel race, 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. Our other sources of revenue are relatively insignificant.



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



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



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



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



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



Accounting for long-lived assets: Our owned property and
equipment are recorded at cost and depreciated to residual values over their estimated useful lives under the straight-line method.



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Leasehold improvements on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. The estimated useful life
of our equipment generally ranges from 3 to 10 years. We test for impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired under Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We recognize an impairment loss if the carrying amount of the asset is not recoverable from its undiscounted cash flows; the impairment is
measured as the difference between the carrying amount and fair value of the asset.



Accounting for income taxes: In assessing when to realize deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized in accordance with SFAS No. 109,
Accounting for Income Taxes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the amount and
timing of scheduled reversals of deferred tax liabilities and forecasted future taxable income over the periods for which the deferred tax assets are deductible. We will recognize an impairment loss if we determine that all or a portion of the
deferred tax asset will not be realized.



Use of estimates: The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of our financial statements and reported amounts of revenues and expenses during the reported period. Our actual results could differ from those estimates.



Recently issued accounting pronouncements.In November 2004, the Financial Accounting
Standards Board (FASB) issued Revised Statement No. 123, Accounting for Share-Based Payment(SFAS No. 123R). SFAS No. 123R requires us to recognize the grant-date fair value of stock options in our
statement of operations. In addition, we will be required to calculate this compensation using the fair value-based method, versus the intrinsic value method previously allowed under Opinion No. 25 of the Accounting Principles Board
(APB). This revision is effective for us for periods beginning after December 15, 2005. Accordingly, we will adopt SFAS No. 123R as of the first quarter of fiscal year 2007 (beginning February 1, 2006). We do not expect
the adoption of SFAS No. 123R to have a material effect on our results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153
are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and
replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not
presently expect to enter into any material transactions that would be affected by SFAS No. 153.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 changes the requirement for the
accounting for and reporting of a change in accounting principles. SFAS No. 154 applies to all



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voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. The provisions of SFAS No. 154 will be effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not presently expect to implement any accounting changes
that would be subject to SFAS No. 154.



|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, 2005. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer 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.



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. 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 Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.



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



19



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##### Table of Contents

PART II  OTHER INFORMATION



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



Racusin



There were no material developments during the quarter ended October 31, 2005; please refer to our Form 10-QSB for the quarter ending July 31, 2005 for the most recent information.



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.
|------- | ----------------------------------------------------



Please refer to our Form 10-QSB for the quarter ending July 31, 2005 for information concerning the results of our Annual Meeting of Shareholders held on
August 30, 2005.



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



Not applicable.



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



|              |  |                                                                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITNUMBER |  | DESCRIPTION                                                                                                                            
|31.1          |  | Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                   
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                   
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350



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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 15, 2005                                                                 
|                                                                                         
|/s/ Timothy F. Lockinger                                                                 
|Timothy F. Lockinger                                                                     
|Chief Financial Officer, Secretary, Treasurer and Director (Principal Accounting Officer)



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