The following discussion and analysis should be read together with our unaudited consolidated financial statements and the accompanying notes. This discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statement including those discussed herein and elsewhere in our Form 10-K for the year ended January 31, 2009, particularly under the heading "Risk Factors." We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We do not intend, and undertake no obligation to update our forward-looking statements to reflect future events or circumstances.

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

"Company" means American Wagering, Inc. and its subsidiaries collectively.

"AWI" means American Wagering, Inc.

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

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

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

"Leroy's" means Leroy's Horse & Sports Place, Inc., a wholly-owned subsidiary of
AWI.

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

"Sturgeon's" means Sturgeon's Inn & Casino (which, as of March 1, 2006, is owned by Sturgeons, LLC).

Overview. Our primary operating strategies for the foreseeable future are to focus on our core businesses relating to the race and sports industry, and the operation of Sturgeon's. Our intentions regarding the following subsidiaries are to continue:

† Leroy's - operating existing sports books, generating revenue from customer wagers less pay outs, adding new books where and when appropriate, and continuing to become more efficient in order to reduce expenses. We periodically review our existing Leroy's locations in order to close those locations that are not operating efficiently. Based on our strategy, the number of race and sports books operated by Leroy's may increase or decrease in the future, due to the closure of unprofitable locations or host properties, closures due to other factors beyond our control and/or the possible opening of new locations with greater potential for profitability. There is no assurance that Leroy's will be able to add new locations and/or that any new locations so added will be profitable.

† CBS - developing, selling and maintaining computerized race and sports wagering systems for the gaming industry and seeking strategic international alliances with third party gaming suppliers and/or gaming operators that desire to utilize our expertise in the race and sports industry. These strategies should enable us to gain a competitive advantage by offering the gaming operator and/or the betting patron a well-rounded gaming experience, both in the United States and abroad. There is no assurance that CBS will be successful in obtaining any strategic alliances.

† AWIM - developing the self-service wagering kiosk, installing kiosks in Leroy's locations to assist in controlling personnel costs, and marketing the kiosks to non-Leroy's locations.

† Sturgeon's - effectively operating the hotel/casino while periodically reviewing and modifying existing procedures and personnel alignment to increase efficiency and reduce expenses.

We have implemented, and are continuing to initiate cost-cutting measures throughout the Company. In the first quarter of fiscal 2009, the Company reduced its workforce by means of a lay-off of several employees in each of our subsidiaries and began to focus on additional ways to control costs. During the remainder of fiscal 2009 and continuing though the first six months of fiscal 2010, AWI's corporate expenses that are allocated to Leroy's and CBS have been reduced primarily due to reductions in administrative salaries and benefits, including accounting, decreased audit fees and outside services; which were partially offset by increases in interest expense, contributed services expense for certain executives, legal expense and insurance expenses. We will continue to evaluate and closely monitor costs, looking for additional efficiencies and improvements during at least the remainder of fiscal 2010. Subject to our cost constraints, where appropriate, we will continue to explore possible new locations for our products, including foreign jurisdictions. Additionally, we have products that are in various stages of development and regulatory approval, which could potentially increase future revenue and cash flow.

During the latter part of fiscal 2008, and continuing throughout fiscal 2009 and into 2010, our local, regional and national economy has been negatively impacted due to a number of factors, including the nationwide economic downturn and the subprime mortgage crisis. Confidence in the credit market has also eroded, which resulted in a tightening of credit availability. During fiscal 2009 and continuing through the first quarter of fiscal 2010, Las Vegas has experienced higher than average foreclosure and unemployment rates and reduced passenger traffic at McCarran airport. We face the risk that the effects of higher average unemployment rates, foreclosures and continued pressure on housing prices, as well as business failures and stock market volatility will place added strain on consumers' ability to make purchases, repay their loans and thus, leave less funds available for travel and leisure activities. Consumer demand for gambling, due to decreased disposable income, has declined as a result of the current economic environment. We have also experienced a change in gambling patterns of our patrons, including a trend toward more conservative bets, which tend to be less profitable to the Company. In addition, because Sturgeon's Hotel and Casino is heavily dependent on the drive-through market, these factors have and will continue to have an adverse affect on our business. Accordingly, if the economic downturn in the United States continues, it will likely continue to hurt our financial performance, due to, among other things, decreased wagering activity and a change in the types of wagers made.

Liquidity and Capital Resources.

The United States is currently experiencing a severe economic downturn accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming and other recreational activities, and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and related risks and uncertainties on our future operations and cash flows, including, our principal officer's ability to continue to provide financial support to the Company, as in the past, and other access to capital or credit financing, cannot be estimated at this time but may likely be significant.

As of July 31, 2009, we had a working capital deficit of ($242,034) compared to a working capital deficit ($470,703) at July 31, 2008. (Also see Restricted Cash Requirements (Regulation 22.040.)) The increase in working capital is primarily due to the timing of future bets and unpaid tickets outstanding; increased accounts receivable and prepaid expenses; and decreased short-term debt due to the repayment of equipment leases nearing maturity. The working capital improvement was partially offset by decreased inventory due to kiosk sales; the decrease in hold amounts due to a decreased wagers and mix of wagers influenced by the poor economic environment; and the result of the ongoing pay-down of the Racusin obligation.

In addition, as discussed below, on August 18, 2009, the court in the Racusin matter entered an order that would have the net effect of increasing the Company's obligation to Racusin by approximately $1.0 million, increasing the Company's working capital deficit by approximately $1.2 million, and causing the then entire obligation to Racusin of approximately $1.5 million to be immediately due and payable. The Company is attempting to negotiate a settlement with Racusin and, based on legal arguments that management believes to have merit, is considering its procedural alternatives. Management intends to file a motion for a rehearing, or in the alternative, a motion for reconsideration and if unsuccessful, may file an appeal to the U.S. District Court of Nevada, which may require the posting of an appeal bond. In the event the Company is unable to negotiate a settlement under acceptable terms, post an appeal bond or is also unsuccessful as to its other procedural alternatives, it would likely be unable to satisfy its obligations as they become due and may, therefore, be unable to continue as a going concern depending, in part, on the course of action pursued by Racusin in this matter and the Company's ability to finance the judgment.

In light of the Racusin matter and the current economic environment, the Company has taken the following additional measures to increase cash flow. Effective January 1, 2009, the Company no longer matches the employees' 401(k) contributions. The salaries of the President of AWIG and the controller of Sturgeon's Hotel and Casino were reduced by 20%, effective October 3, 2008. On December 2, 2008, the CEO and the in-house general counsel each agreed to reduce their annual base salaries to the amount sufficient to cover payroll deductions for benefits, effective November 24, 2008. Pursuant to the original terms of Mr. Salerno's employment agreement, Mr. Salerno was entitled to an annual base salary of $240,000. Melody J. Sullivan, the Company's Chief Financial Officer and Treasurer, agreed to reduce her annual base salary by 20% effective January 3, 2009. Pursuant to the original

terms of her employment agreement, Ms. Sullivan was entitled to an annual base salary of $180,000. Additionally, several other high salaried employees agreed to reduce their salaries by 20% effective January 3, 2009. Certain high paid hourly employees agreed to a 32-hour work week, effective January 4, 2009, also resulting in a 20% pay reduction. Additionally, the Company's outside directors elected not to receive their directors' fees, effective for the last three calendar months of 2008, continuing through the first six calendar months of 2009, and renounced their stock option grants for fiscal 2009 effective January 31, 2009. The salary reductions and discontinued 401(k) match are intended to be temporary pending an improvement in the Company's cash flow but were in place as of July 31, 2009.

Victor Salerno, the Company's President, Chief Executive Officer and Chief Operating Officer, loaned the Company an additional $500,000 on December 1, 2008 due to the cash flow needs of the Company. Due to the urgency, the funds were advanced on an expedited basis without formal board approval, as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. Mr. Salerno had previously loaned the Company $500,000 pursuant to a loan agreement dated April 21, 2008. The independent directors of the Company evaluated, ratified and approved the fairness of the loan agreement to cover the total $1,000,000, at the same terms of the April 21, 2008 loan agreement.

On December 11, 2008, U.S. Bank gave the Company oral approval to extend the maturity date of its $500,000 revolving line of credit for 90 days after the original maturity date of December 31, 2008, and further negotiated the terms of the line of credit, converting it to a term loan, maturing in January 2010.

As previously reported, on March 17, 2008, the Company filed with the Bankruptcy Court what it believed was an appropriately corrected amortization schedule ("Corrected Amortization Schedule") relating to the calculation of pre-judgment interest occurring under the settlement agreement regarding the Racusin matter. A hearing was held on May 8, 2009, regarding a Motion for Summary Judgment filed by Racusin related to the Company's filing of the Corrected Amortization Schedule. The Court entered its order on August 18, 2009, granting the Motion for Summary Judgment in favor of Racusin, awarding damages as of May 1, 2009. The total damages awarded pursuant to the order were $3,935,932.70 of which $2,306,649.25 has already been paid (including $1,806,041.80 paid into the bankruptcy court registry). Therefore, as of May 1, 2009, $1,629,283.45 at 12% interest per annum is deemed due and payable immediately, less any principal amounts deposited into the bankruptcy court's registry on or after May 1, 2009 which amounts to $125,000, through September 1, 2009. The remaining amount of $1,504,283.45 exceeds the existing recorded current liability of $300,000.00, which is in accordance with management's interpretation of the settlement agreement and related proceedings. The Company is attempting to negotiate a settlement with Racusin and, based on legal arguments that management believes to have merit, is considering its procedural alternatives. Management intends to file a motion for a rehearing, or in the alternative, a motion for reconsideration and if unsuccessful, may file an appeal to the U.S. District Court of Nevada, which may require the posting of an appeal bond. In the event the Company is unable to negotiate a settlement under acceptable terms, post an appeal bond, or is also unsuccessful as to its other procedural alternatives, it would likely be unable to satisfy its obligations as they become due and may, therefore, be unable to continue as a going concern depending, in part, on the course of action pursued by Racusin in this matter and the Company's ability to finance the judgment.

Our principal cash requirements consist of cash used in operations for the first half of fiscal 2010 of approximately $1.7 million as compared to cash used in operations of $2.1 million for the same period of fiscal 2009, primarily due to unpaid winning tickets, as a result of the timing of bets placed on the last big football game of the year, which occurred on February 1, 2009. In the event the Company is unable to successfully resolve the Racusin matter and is required to immediately pay $1.5 million, the future principal cash requirements in operations would be impacted.

Net cash used in investing activities for the first six months of fiscal 2010 was approximately $6,000 as compared to approximately $228,000 for the same period of fiscal 2009, primarily as a result of the decrease in purchases of upgraded computers and networks, leasehold improvements, new kiosk locations and other furniture and equipment from the prior fiscal year, due to cost controls.

Net cash used in financing activities for the first half of fiscal 2010 was approximately $408,000 compared to approximately $355,000 in cash provided by financing activities for the same period of fiscal 2009 primarily due to decreased borrowings and repayments on debt, primarily with U.S. Bank.

Restricted Cash Requirements (Regulation 22.040)

Nevada Gaming Commission ("Commission") Regulation 22.040 ("Regulation 22.040") requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. From November 16, 2007 to May 8, 2009, we maintained a Regulation 22.040 reserve in the form of a surety bond issued by Fidelity and Deposit Company of Maryland (a subsidiary of Zurich American Insurance) ("Fidelity") secured by $1.2 million in cash deposits. The cash deposits, in the form of one certificate of deposit and one checking account, are held

at Great Basin Bank of Nevada (now Nevada State Bank) along with an irrevocable letter of credit, also with Great Basin Bank of Nevada (now Nevada State Bank).

The Company maintained Regulation 22.040 cash reserves of $1.8 million through August 15, 2009, as approved by the Commission in April 2009. The reserve is collateralized by $1.2 million of restricted cash deposits and an assumed "floating" $600,000 availability of other funds. The amount of the required reserve and the methodology for determining the amount is currently a topic of discussion between management and the Nevada Gaming Control Board. With increased wagering associated with the football season that is now underway, the Commission may require an increase to the reserve amount. If the required reserve amount is increased substantially and/or is not commensurate with the seasonality of the Company's wagering business, the Company may be unable to either fund the reserve or, alternatively, obtain a surety bond to satisfy the requirement. The possible effects of not meeting the requirement may include, but are not necessarily limited to, a reduction in the number of the Company's race/sports locations and/or the elimination or reduction of telephone wagering accounts which would adversely affect the Company's operating results and cash flows.

Other

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

Subject to uncertainties resulting from the current economic conditions and the Racusin judgment, we plan to accumulate cash liquidity during the current fiscal year (ending January 31, 2010) to help us fund the following: payroll and benefits; sports book supplies and improvements; required cash reserves; business insurance; real estate and equipment leases; the Racusin obligations; legal expenses; telecommunications; costs related to inventory and to assemble race/sports systems for our CBS customers; compliance costs associated with gaming regulations and Section 404 of the Sarbanes-Oxley Act of 2002; and debt service.

Results of Operations

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

                               Three Months Ended July 31,                            Six Months Ended July 31,
Summary                2009          2008        $ Change     % Change      2009          2008         $ Change     % Change
Revenues            $ 3,362,968   $ 3,521,246   $  (158,278 )    (4.49 ) $ 6,695,757   $ 7,780,706   $ (1,084,949 )   (13.94 )

Costs and
Expenses              3,168,696     4,193,155    (1,024,459 )   (24.43 )   6,438,752     8,412,475     (1,973,723 )   (23.46 )
Other Income and
(Expense)               (67,235 )     (41,404 )      25,831      62.39       (93,459 )     (97,372 )       (3,913 )    (4.02 )

Income (Loss)
Before Income
Taxes               $   127,037   $  (713,313 ) $   840,350     117.81   $   163,546   $  (729,141 ) $    892,687     122.43

Please refer to the discussions below ("Wagering Segment," "Hotel Casino Segment," "Systems Segment," and "Other Income and Expense") for additional information, discussion and analysis.

For the Three Months Ended July 31, 2009 Compared to the Three Months Ended July 31, 2008.

Wagering Segment

The Wagering Segment includes the operating results of the sports gaming wagers, net of payouts and expenses.

Wagering Segment revenues for the three months ended July 31, 2009, increased $172,106 (+10.02%) over the three months ended July 31, 2008. This increase is attributed to the following factors:

During the three months ended July 31, 2009, pursuant to Nevada Gaming Control Board guidelines, the Company changed the maximum time limit before expiration for payment of outstanding winning tickets from 180 days to 90 days, resulting in increased winnings of approximately $132,000. Conversely, we have experienced a change in gambling patterns of our patrons, including a trend toward more conservative bets, which tend to be less profitable to the Company.

Wagering Segment total costs and expenses for the three months ended July 31, 2009, decreased $719,445 (-28.91%) over the three months ended July 31, 2008. This decrease is attributed to the following factors:

Direct costs decreased primarily due to decreased expenses related to the results of negotiations with select sports book locations, reduced personnel, advertising and telephone expenses related to our overall cost reduction strategies.

Selling, general and administrative costs decreased primarily due to decreases in various administrative costs allocated from the AWI parent in the three months ending July 31, 2009, compared to the three months ending July 31, 2008. The decreases in management fees allocated to the segments were partially offset by contributed services from certain executives for this quarter compared to no contributed services for the same period the prior year.

It is noted that an increase or decrease in handle is not necessarily indicative of an increase or decrease in revenues or profits, due to the volatility of the win percentages. Elimination of unprofitable locations, closure of host properties, changes in state and/or federal regulations, and other factors beyond our control may result in declines in handle.

As the opportunity may arise, we intend to continue to open new locations and to continue our periodic review of existing locations in order to close those locations that are not operating efficiently. There is no assurance that the number of race and sports books operated by us will not decrease in the future due to elimination of unprofitable locations, closure of host properties, changes in state and/or federal regulations and other factors that may be beyond our control, that we will be able to add new locations, or that any new locations so added will be profitable.

Hotel Casino Segment

The Hotel Casino Segment includes the operating results of Sturgeon's.

Hotel Casino Segment revenues for the three months ended July 31, 2009, decreased $98,877 (-12.93%) over the three months ended July 31, 2008. This decrease is attributed to the following factors:

Casino revenues decreased primarily due to decreased handle and wagering activities for the quarter ending July 31, 2009 compared to the same period ending July 31, 2008 primarily due to the current economic downturn.

Hotel revenues decreased in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 due to a lower occupancy rate, primarily due to decreased travel.

Food and beverage revenues decreased primarily due to the decline in occupancy for the three months ended July 31, 2009 compared to the three months ended July 31, 2008, due to decreased travel and consumer spending due to the current economic downturn.

Casino cash incentives and other promotional allowancesdecreased for the second quarter of fiscal 2010 compared to the same quarter of fiscal 2009, primarily due to closer scrutiny of these costs by management, combined with a decline in hotel occupancy.

Hotel Casino Segment total costs and expenses for the three months ended July 31, 2009, decreased $95,716 (-13.41%) over the three months ended July 31, 2008. This decrease is attributed to the following factors:

Direct costs for the casino operations decreased for the three months ended July 31, 2009, compared to the three months ended July 31, 2008 due to decreased handle at the casino.

Direct costs for the hotel operations decreased primarily due to lower occupancies for the three months ended July 31, 2009, compared to the three months ended July 31, 2008, due to decreased travel and consumer spending due to the current economic downturn.

Direct costs for food and beverage operations decreased primarily due to lower occupancies in the hotel for the three months ended July 31, 2009 compared to the three months ended July 31, 2008, due to decreased travel and consumer spending due to the current economic downturn.

Selling, general and administrative costs for Sturgeon's decreased compared to the second quarter of fiscal 2009, due to decreased personnel costs and other expenses.

Systems Segment.

The Systems Segment includes the operating results of our systems sales, installations and maintenance, less the related expenses.

Systems Segment revenues for the three months ended July 31, 2009, decreased $231,507 (-22.30%) over the three months ended July 31, 2008. This decrease is attributed to the following factors:

During the second quarter of fiscal 2010, equipment sales declined, which was partially offset by increased maintenance revenue, due to additional locations compared to the second quarter of fiscal 2009.

Systems Segment total costs and expenses for the three months ended July 31, 2009, decreased $205,417 (-24.02%) over the three months ended July 31, 2008. This decrease is attributed to the following factors:

Direct costs for systems decreased over the prior three months ended July 31, 2008, primarily due to decreased equipment sales and decreased wages and benefits resulting from a reduction and realignment of personnel, improving our operational efficiencies.

Research and development costs decreased from the prior three months ended July 31, 2008, primarily due to decreased wages and benefits due to decreased personnel expense and greater efficiencies.

Depreciation and amortization decreased from the prior three months ended July 31, 2008, due to decreased property acquisitions.

Other income and (expense). The other income and (expense) categories are primarily administrative in nature and, as such, are not directly attributable to any operating segment. Accordingly, these items are generally not taken into consideration by us when we allocate resources to the segments or assess the performance of the segments.

Interest Income: The majority of interest income is attributable to interest earned on restricted cash deposits required for the Regulation 22.040 reserve. The decrease in interest income of $12,457 is due primarily to decreased interest rates paid on our cash deposits and lower amounts held in cash deposits. Interest expense remained primarily the same.

Litigation expense includes $16,815 of settlement interest for the second quarter of fiscal 2010 and $19,152 for the same three month period of the prior fiscal year related to the Racusin matter. This is considered a non-operating . . .