10-K/A 1 a08-2596_110ka.htm 10-K/A

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

FORM 10-K/A

(Amendment No. 1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2007

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-14316

HERBST GAMING, INC.
(Exact name of Registrant as specified in its charter)

Nevada		88-0446145
(State of incorporation)		(I.R.S. Employer Identification Number)

3440 West Russell Road, Las Vegas, NV		89118
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (702) 889-7695

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable		Not Applicable
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the Registrant (1) has 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. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Applicable o Not Applicable x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

Large accelerated filer o

Accelerated filer o Non-accelerated filer x Smaller reporting company o

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

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant as of December 31, 2007, based on the price at which the common equity was sold, was approximately $0.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of December 31, 2007.

Common Stock, no par value, 300 outstanding shares.

Documents Incorporated by Reference

None.

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K/A of Herbst Gaming, Inc. (the “Company”) for the fiscal year ended December 31, 2007 is being filed to correct certain information on Form 10-K that was filed inadvertently by the Company’s financial printer prior to the Form 10-K being finalized. This Amendment No. 1 contains a correction of certain typographical errors and page number cross-references, and corrected final information in the following Items:

· Reclassifications of certain 2005 historical revenue: As indicated in the Form 10-K, certain prior period information was reclassified . Corrected 2005 revenue information is included in Part I, Item 1, Business, Part II, Item 6, Selected Financial Data and Part II, Item 8, Financial Statements and Supplementary Data (Note 1).

· Part I, Item 1B, Unresolved Staff Comments

· Part I, Item 1A, Risk Factors (see “If interest rates rise, the amount of interest paid by us under our credit facility will increase.”)

· Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (see “Year 2007 Compared to Year 2006 — Casino Operations,” “Year 2006 Compared to Year 2005 — Casino Operations,” and “Liquidity and Capital Resources”)

· Part II, Item 8, Financial Statements and Supplementary Data (see Note 1 — Reclassifications, Note 5—Goodwill and Other Intangibles, Note 14 — Going Concern, and to include the signed Report of Deloitte & Touche LLP our independent registered public accounting firm)

· Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

TABLE OF CONTENTS

PART I

Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information

PART III

Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services

PART IV

Item 15.	Exhibits and Financial Statement Schedules

PART I

Item 1. Business.

General

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations. Our slot route operations involve the exclusive installation and operation of slot machines in certain strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. We currently have approximately 7,200 slot machines in our slot route business and are one of the largest slot machine operators in Nevada. As of December 31, 2007, our casino operations in Nevada consisted of 16 casinos. Five of these casinos focus on local gaming patrons, and include the ownership and operation of Terrible’s Hotel & Casino in Las Vegas, Nevada and four other small casinos in southern Nevada operated under the Terrible’s name. As of December 31, 2007, these casinos contained an aggregate of approximately 6,800 slot machines and 138 table games. Our casino operations outside of Nevada consist of Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri (“St. Jo”), Terrible’s Mark Twain Casino in LaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside Casino Resort in Osceola, Iowa (“Lakeside Iowa”). As of December 31, 2007, these three properties contained an aggregate of approximately 2,300 slot machines and 47 table games.

In January 2007, we acquired Rail City Casino in Sparks, Nevada (“Rail City”); the Sands Regency Casino Hotel in downtown Reno, Nevada (“Sands”); Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada (“Gold Ranch”) and Terrible’s Dayton Depot Casino (“Dayton Casino”) and Red Hawk Sports Bar (“Red Hawk”, together with Rail City, Sands, Gold Ranch and Dayton Casino, the “Sands Regent Casinos”) in Dayton, Nevada, which added approximately 2,050 slot machines and 25 table games to our operations (such acquisition, the “Sands Regent Acquisition”). In April 2007, we acquired Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley”) and Whiskey Pete’s Hotel and Casino (“Whiskey Pete’s”, and together with Buffalo Bill’s and Primm Valley, the “Primm Casinos”), all located in Primm, Nevada (such acquisition, the “Primm Acquisition”), which added approximately 2,800 slot machines and 90 table games to our operations.

Herbst Gaming, Inc. was incorporated in Nevada on January 21, 1997. It commenced business operations as a holding company of subsidiaries conducting slot route and casino operations on August 23, 2001.

Our principal executive offices are located at 3440 West Russell Road, Las Vegas, Nevada 89118 and our telephone number is (702) 889-7695.

Herbst Gaming, Inc. has elected to be taxed as an S corporation.

As used in this Form 10-K, the terms the “Company,” “we,” “us,” “our” and “Herbst Gaming” refer to Herbst Gaming, Inc. and its subsidiaries, unless the context indicates otherwise.

Available Information

Our Internet address is www.herbstgaming.com. We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

Narrative Description of Business

Our business focuses on attracting and fostering repeat business from local gaming patrons in both our route and casino operations. Local patrons are typically sophisticated gaming customers who seek convenient locations, high payouts and a pleasant atmosphere.

Route Operations

Our route operations involve the exclusive installation and operation of slot machines in chain store and street account locations. At December 31, 2007, we operated approximately 7,200 slot machines throughout the state of Nevada. We define chain stores as grocery stores, drug stores, merchandise stores and convenience stores, each with more than five locations. Our chain store contracts are primarily with large, national retailers such as Albertsons, Vons, Safeway, SavOn, Smith’s, Kmart and Rite Aid, as well as Terrible Herbst gas stations and convenience stores. Street accounts include local bars, restaurants and non-chain convenience stores. Nevada law limits slot route operations to certain types of non-casino locations including bars, taverns, convenience stores, grocery stores and drug stores. Most locations are limited to offering no more than 15 slot machines.

We generally enter into two types of route contracts: space lease arrangements and revenue-sharing arrangements. Under space lease arrangements, which we principally enter into with chain stores, we pay a fixed monthly fee for each location in which we place slot machines. Under revenue-sharing arrangements, which we typically enter into with street accounts, we pay the location owner a percentage of the revenues generated by our slot machines located at that particular street account. In order to enter into a revenue-sharing arrangement, the location owner must hold a gaming license. Both space lease and revenue-sharing arrangements typically involve long-term contracts that provide us with the exclusive right to install our slot machines at particular locations. In the case of chain stores, our contracts give us the exclusive right to install slot machines at stores opened in the future.

Casino Operations

Our casino operations consist of 16 casinos in northern and southern Nevada, six of which we acquired as of January 3, 2007 pursuant to the Sands Regent Acquisition and three of which were acquired as of April 10, 2007 pursuant to the Primm Acquisition (see Note 2 for a discussion of these acquisitions). We also own three casinos in Missouri and Iowa. All of our casino properties focus on local customers, with an emphasis on slot play. The following table summarizes our casino assets as of December 31, 2007:

		Number of
Property	Location	Slot Machines	Table Games	Hotel Rooms	Additional

Herbst Gaming Casino Properties (as of December 31, 2007)

Terrible’s Hotel & Casino	Las Vegas, NV	1,000	12	330	Race and sports book 196 seat bingo facility

Terrible’s Town Casino	Pahrump, NV	396	6	—	Race and sports book; 120 seat bingo facility

Terrible’s Lakeside Casino & RV Park	Pahrump, NV	291	0	159 RV spaces	Race and sports book; 192-seat bingo facility; 7 acre lake

Terrible’s Casino & Bowl	Henderson, NV	163	—	—	16-lane bowling alley

Terrible’s Searchlight Casino	Searchlight, NV	75	—	—	—

Terrible’s Lakeside Casino Resort	Osceola, IA	1,099	22	60 65 RV spaces	10,000 sq. ft. conference space;convenience store and gas station; 121 acres (88 acres un- developed; 15 acre lake)

Terrible’s Mark Twain Casino	LaGrange, MO	665	14	—	—

Terrible’s St. Jo Frontier Casino	St. Joseph, MO	579	11	—	2,400 sq. ft. conference space; 40 acres (32 acres undeveloped)

Sands Regent Casino Properties (acquired as of January 3, 2007)

Terrible’s Rail City	Sparks, NV	941	5	—	Sports book

Sands Regency	Reno, NV	609	20	833	Sports book; 12,000 sq. ft. conference space

Terrible’s Gold Ranch	Verdi, NV	235	—	105 RV spaces	Sports book; California lottery station

Terrible’s Dayton Depot Casino and Red Hawk Sports Bar	Dayton, NV	273	2	—	Sports book

Primm Casino Properties (acquired as of April 10, 2007)

Buffalo Bill’s	Primm, NV	1,050	34	1,242	31,280 sq. ft. conference space, 6,000 seat “Star of the Desert” arena, rollercoaster

Whiskey Pete’s	Primm, NV	832	25	779	8,000 sq. ft. convention space

Primm Valley Resort and Casino	Primm, NV	925	34	625	21,000 sq.ft conference space

Total		9,133	185	3,869 rooms	329 RV spaces

Terrible’s Hotel & Casino

Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s”), opened on December 6, 2000. Terrible’s offers a buffet and a 24-hour café. There are currently 350 rooms with standard amenities as well as a pool and spa. Terrible’s is conveniently located approximately one mile east of the Las Vegas Strip, which we believe appeals to locals who wish to avoid the congestion of the Strip. Terrible’s favorable location has made it popular with Strip casino employees. Although we are not a tourist destination, we receive a certain amount of tourist traffic through our casino due to our location near the airport, the Strip and the Las Vegas Convention Center.

Terrible’s Lakeside Casino Resort

Lakeside Iowa, a riverboat casino located on West Lake in Osceola, Iowa, is a facility that opened in January 2000. Lakeside Iowa offers a 60 room, all-suite hotel, modular conference and meeting facilities that can seat up to 900 people and that are used for meetings, banquets and concerts, a fitness center, an outdoor pool and a gift shop. In addition, Lakeside Iowa offers a newly renovated 280-seat restaurant/buffet and lounge located in the main lobby, two bars located in the casino, a convenience store and gas station that are located adjacent to the casino and 65 RV spaces with utility hookups. Lakeside Iowa owns 121 acres of land, 88 acres of which are undeveloped.

Terrible’s Mark Twain Casino

Mark Twain, located in a man-made basin adjacent to the Mississippi River in LaGrange, Missouri, is facility that opened in July 2001. Mark Twain offers a 165-seat restaurant, an 80-seat bar and an additional bar in the casino. The casino has a locally popular theme based on Mark Twain, who grew up in and wrote about nearby Hannibal, Missouri.

Terrible’s St. Jo Frontier Casino

St. Jo, located in a man-made basin adjacent to the Missouri River in St. Joseph, Missouri, is a facility that opened in May 1998 as a successor to a casino that opened in June 1994. St. Jo offers a recently remodeled bar and buffet. Additionally, St. Jo offers over 2,400 total square feet of modular conference and meeting space. The casino and its amenities have a locally popular Pony Express western theme that plays off St. Joseph’s heritage as the founding location and headquarters of the Pony Express. St. Jo owns 40 acres of land, 32 acres of which are undeveloped.

Terrible’s Rail City Casino

Rail City completed an expansion in early 2007 and has approximately 30,000 square feet of gaming space housing 941 slots, 5 table games, including keno, a sports book operated by an independent party, a 24-hour family-style restaurant and a new ale house and brew pub. Rail City’s customer base comes primarily from northern Nevada and a majority of its customers reside in close proximity to the casino.

Sands Regency Casino Hotel

The Sands has approximately 29,000 square feet of gaming space and a full selection of gaming alternatives, including 609 slot machines and 20 table games, including keno, bingo, live poker and a sports book operated by an independent party. Additionally, the Sands resort complex has 833 hotel rooms, including 29 suites, a health spa, and a large outdoor swimming pool. Dining options at the Sands include Cabana Café, a coffee house/deli-style restaurant, The Buffet at the Sands, and Fuzio’s, a new Italian restaurant, that opened in the first quarter of 2007. The property also has a Mel’s, the Original, diner style restaurant, and an Arby’s restaurant, both of which are operated by third parties. The facility also includes an entertainment cabaret, three cocktail lounges, a comedy club operated by a third party and approximately 12,000 square feet of convention and meeting space. Third parties lease space from the Sands and operate a wedding chapel, a bicycle and ski rental shop, and a beauty shop. The Sands facility contains multiple parking areas, including a parking garage, with total combined capacity for approximately 1,100 vehicles. A substantial portion of the Sands’ business, particularly our hotel customer base, is arranged through travel groups, both air and motor coach wholesalers, which offer economy rates, and are primarily from Western Canada, the Pacific Northwest and Northern California.

Terrible’s Gold Ranch Casino and RV Resort

Gold Ranch offers approximately 235 slot machines in an 8,370 square foot casino, a sports book operated by a third party, a family-style restaurant, a Jack-in-the-Box restaurant leased to and operated by a third-party, a bar, a 105-space RV park, a California lottery station, a gas station and a convenience store. Gold Ranch’s guests include both tourists and local residents with local residents generating over half of the property’s casino patronage, and attempts to attract local residents through mid-week promotions geared toward enhancing local play mainly through lottery, casino, and restaurant programs. Tourist programs emphasize the RV Park, casino and restaurant cross-promotions. Gold Ranch attempts to attract as much traffic as possible off Interstate 80, the major Nevada/California thoroughfare. We lease the real property on which the Gold Ranch is located. The real property lease has a twenty-year term with four five-year extension options ending in 2042. We possess the option to purchase the real property on which the Gold Ranch business assets are located.

Terrible’s Dayton Depot Casino and Red Hawk Sports Bar

Dayton Casino and Red Hawk, are each located in Dayton, Nevada. We own the two buildings that house the Dayton Casino and the 4.5 acres of real property on which the Dayton Casino is located, and the building which houses the Red Hawk and the 0.5 acres of real property on which the Red Hawk is located. Dayton Casino has approximately 16,000 square feet of casino space, a family-style restaurant, two bars, 237 slot machines, four poker games, two table games and a sports book operated by a third party. Red Hawk, located across Highway 50 from Dayton Casino, houses 30 slot machines.

Primm Casinos

We own the business and lease the real property on which Buffalo Bill’s Hotel and Casino, Whiskey Pete’s Hotel and Casino and Primm Valley Resort and Casino are located in Primm, Nevada. The three Primm properties are subject to a real property lease that has an initial fifty-year term, which expires in 2043, with one twenty-five-year extension option ending in 2068. Also, the three Primm properties collectively own and manage three gas station/convenience stores, a Starbucks Coffee outlet and one California Lottery lotto store.

Buffalo Bill’s Hotel and Casino

Buffalo Bills offers approximately 1,050 slot machines and 30 table games. In addition to a 1,242-room hotel and 12,000 square feet of convention space. Buffalo Bill’s has a full service restaurant and buffet as well as a “Tony Roma’s” restaurant. The western themed property also has extensive entertainment amenities including the 6,000 seat “Star of the Desert” arena that hosts big name entertainers throughout the year. Buffalo Bill’s has a world class roller coaster as well as water park log rides, two movie theaters and a midway style arcade.

Whiskey Pete’s Hotel and Casino

Whiskey Pete’s offers approximately 830 slot machines and 25 table games, a sports book and two full service bars. Additionally Whiskey Pete’s has a 779 room hotel , a gourmet steakhouse, a recently renovated full service coffee shop and buffet, a McDonald’s restaurant, an 8,000 square feet special events and concert venue, a swimming pool and a midway style arcade.

Primm Valley Resort and Casino

Primm Valley offers approximately 900 slot machines, 30 table games, a sports book and keno. Additionally Primm Valley has a 625 room hotel and 21,000 square feet of convention space. Primm Valley has a full service coffee shop and buffet as well as the GP Steakhouse. The resort has a swimming pool and is connected to the “Fashion Outlets of Las Vegas”, a retail complex owned by a third party that houses over 150 designer outlet stores, including a Neiman Marcus “Last Call”, a William Sonoma Outlet store and DKNY, Tommy Bahama, Banana Republic and Gap factory outlet stores.

Financial Information

The primary source of our revenue and income is from our route and casino operations, although we view the restaurants, bars and services on our premises to be important adjuncts to our casino operations. The following table sets forth the contribution to total net revenues on a dollar and percentage basis of our major activities for the years ended December 31, 2005, 2006 and 2007.

	Years Ended December 31,
	2005(1)					2006					2007(2)
	Amount			Percent		Amount			Percent		Amount			Percent
	(in thousands, except percentages)
Revenues:
Route operations(3)	$	339,401		63.2	%	$	347,041		61.7	%	$	276,946		35.3	%
Casino operations(3)
Nevada	95,400			17.8		95,614			17.0		331,593			42.2
Other states	117,774			21.9		141,435			25.1		141,655			18.0
Other	4,923			1.1		10,676			2.0		98,987			12.6
Total revenues	557,498			104.0		$	594,766		105.8		$	849,181		108.1
Less promotional allowances(3)	(21,657		)	(4.0	)	(32,703		)	(5.8	)	(64,241		)	(8.1	)
Total net revenues	$	535,841		100.0	%	$	562,063		100.0	%	$	784,940		100.0	%

(1) Calendar year 2005 reflects a partial year of operations of the casinos purchased pursuant to the acquisition of our casinos located outside of Nevada from Grace Entertainment, Inc. (the “Grace Acquisition”) in February 2005. As a result, the results of operations for calendar year 2005 may not be comparable to the results of operations in 2006 or 2007.

(2) Calendar year 2007 reflects a year of operations of the casinos purchased pursuant to the Sands Regent Acquisition and a partial year of operations of the casinos purchased pursuant to the Primm Acquisition. As a result, the results of operations for calendar year 2007 may not be comparable to the results of operations in 2006 or 2005.

(3) Route and casino revenues are the net difference between gaming wins and losses. Promotional allowances consist primarily of food and beverages furnished gratuitously to customers. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances. See “Note 1. Description of Business and Summary of Significant Accounting Policies” to the accompanying consolidated financial statements in “Item 8. Financial Statements and Supplementary Data”.

See “Item 8. Financial Statements and Supplementary Data” for additional financial information about us.

Marketing

Nevada Market

Since we believe that a vast majority of our patrons at our casinos in southern Nevada are locals, our marketing efforts are primarily focused on the local population of Clark County, Nevada. These marketing efforts seek to capitalize on the strong recognition and high level of quality and value associated with the Terrible Herbst trade name and its cowboy logo, which are used in over 80 gasoline stations and convenience stores in southern Nevada and nine gasoline stations and convenience stores in California and Arizona. The Terrible Herbst brand is prominently displayed in our route and casino operations. We license the Terrible Herbst trade name from Terrible Herbst, Inc., a related party, through 2011. Subject to mutual consent, we may extend the term of the agreement for two successive 5-year periods.

In addition, we have implemented a unique players club that rewards customers with points for playing at our route and casino locations. Points may be redeemed for cash as well as free or discounted rooms, food or other goods or services provided at any such location.

The customer base of the casinos we acquired pursuant to the Sands Regent Acquisition ranges from locals living in northern Nevada, in the case of Rail City, to customers from Western Canada, the Pacific Northwest and Northern California, in the case of the Sands. The marketing efforts for the Sands Regent Casinos prior to our acquisition were primarily focused on attracting locals and value-minded out-of-market visitors through aggressive promotions and customer loyalty programs. We expect to continue this focus through the adoption of a player’s club points program that is similar to those that have proven successful at our other casinos.

The customer base of the Primm Casinos consists primarily of value oriented tourists living in the inland empire of southern California such as San Bernardino, Victorville and Barstow. The marketing efforts of the Primm Casinos prior to our acquisition were primarily focused on attracting value-minded out-of-market visitors through aggressive promotions and special events. While continuing this focus, we have begun expanding the marketing of these casinos into the southern Nevada locals market. We are also installing a state of the art player’s club loyalty program, “the one card”, that will be combined with the loyalty programs at all of our other Nevada casinos. We anticipate that this will be completed by the third quarter of 2008.

Midwest Market

Each of Lakeside Iowa, Mark Twain and St. Jo have a highly recognizable brand name within its respective community. In addition, each of Lakeside Iowa, Mark Twain and St. Jo operates a slot club that rewards customers with points for every coin-in. Points are redeemable for vouchers that may be used for food, valet or retail items. Each of the three casinos also hosts blackjack and slot tournaments as well as other special events on the casino premises that seek to recognize and cultivate regular casino patrons.

Business Strategy

Our business strategy for the route business primarily focuses on attracting and fostering repeat business from local gaming patrons. Local patrons are typically sophisticated gaming customers who seek convenient locations, high payouts and a pleasant atmosphere. Because local gaming consumers represent high potential repeat

business, generating customer satisfaction and loyalty is a critical component of our strategy. With respect to the casino businesses, our business strategy focuses on the value oriented, high repeat, business patron from both local and drive in tourist gaming markets.

Route Operations

We believe that route patrons choose to play slot machines near their homes. We attract and retain these players by installing state-of-the-art slot machines with popular games, offering a high level of customer service and providing an attractive, comfortable atmosphere at our route locations. We actively manage our route locations as if they were casinos. For example, we extend patrons’ slot play by offering free snacks and beverages at some of our route locations. We place our gaming machines in locations where they will receive maximum customer traffic, generally near a store’s entrance. In addition, we utilize a game tracking system and other technology to monitor the play of our patrons. Upon reviewing and analyzing our customer play, we adjust the types of games available.

We also maximize profitability through cost-saving technologies. For example, our multi-denominational, multi-game machines, which allow patrons to tailor their gaming experience to their preferences, may be upgraded by exchanging a computer chip instead of replacing the entire machine. Recent technologies also allow patron jackpot payments on site and help to reduce the need for slot route technicians to drive to locations to fill slot machines with coins or to pay jackpots.

Casino Operations

Our casino operations strategy is to offer high quality gaming, hotel and dining experiences at affordable prices. Our primary target market consists of value oriented local middle market gaming patrons who gamble frequently. We believe that we attract our targeted customers and that they return to our casinos because of our high value orientation, as well as convenient locations, great food, ample parking and high slot machine payout rates. Because locals demand variety and quality in their slot and video poker machine play, our locals casino properties offer the latest in slot and video poker technology. Although perceived value initially attracts a customer to our casino properties, actual value generates customer satisfaction and loyalty. For our drive-in tourist market casinos many of the same strategies apply as this market is heavily focused on repeat business and high value. There is very little, if any, non-drive-in tourist market. As part of our commitment to providing a quality entertainment experience for our patrons, we are dedicated to ensuring a high level of customer satisfaction and loyalty by providing attentive customer service in a friendly, casual atmosphere. We recognize that consistent quality and a comfortable atmosphere stem from the collective care and friendliness of each employee.

Competition

Nevada Market

Our slot route operations are subject to substantial direct competition for our revenue-sharing and fixed space lease locations from one large route operator and numerous small operators, located principally in Las Vegas, Nevada. The principal method of competition for slot route operators includes the economic terms of the revenue-sharing or space lease arrangement, the services provided and the reputation of the route operator. Price competition for revenue-sharing or space lease arrangements is intense and we believe that price competition among slot route operators will continue. We are one of the largest route operators with approximately 7,200 slot machines situated in locations outside of our casinos as of December 31, 2007.

With respect to our casino operations in Las Vegas, Terrible’s Hotel & Casino competes for local gaming customers with other locals-oriented casino-hotels in Las Vegas. We do not believe that we are in direct competition with many of the resort-casino properties on the Las Vegas Strip, which focus primarily on attracting tourist players. Instead, we believe that our principal competitors in our casino operations are the two other local casinos located within a one mile radius. We compete with these properties on the basis of the desirability of location, payout rates, personalized approach, casino promotions, comfort and value of restaurants and hotel rooms and the variety and value of entertainment. The construction of new casinos or the expansion of existing casinos near our casinos could have a negative impact on our casino operations.

Our casino operations in Pahrump, Henderson, and Searchlight, Nevada face competition from other casinos located in the vicinity of these properties.

Competition among casinos in the markets in which the Sands Regent Casinos are located, particularly the Reno/Sparks market, is intense. The expansion and maturation of Native American gaming in Northern California, the Pacific Northwest, and British Columbia has had an adverse impact on total gaming revenues of the greater Reno area. Over the last few years, existing Native American casinos in Northern California have undergone significant expansions and now offer most of the amenities that casinos in Reno offer, including big name entertainment and hotel rooms. In addition, Thunder Valley, on the Interstate-80 corridor in California, has grown to be one of the country’s busiest and most profitable casinos. More Native American casinos and expansions to existing casinos are planned in northern California and many are partnering with existing gaming companies that have financial resources to promote their facilities. Many of our direct competitors in the Reno market have greater financial and other resources than we do.

Primm Casinos face competition from Native American gaming in southern California, other casinos outside of Las Vegas, such as casinos located in Laughlin and Mesquite, Nevada, as well as value oriented casinos located in the Las Vegas market. The California legislature recently approved expansions to existing slot capacity of the Native American casinos in southern California and our competitors have greater financial and other resources than we do.

Midwest Market

Each of Lakeside Iowa, Mark Twain and St. Jo competes for local gaming customers with other casinos in their respective markets.

Lakeside Iowa is located along Interstate 35, approximately 40 miles southwest of Des Moines, Iowa. The primary competitors of Lakeside Iowa are Prairie Meadows racino and the Meskwaki Bingo Casino Hotel. The Prairie Meadows racino is located approximately 60 miles from Lakeside Iowa east of Des Moines. The Meskwaki Bingo Casino Hotel is located in Tama, Iowa and is approximately 110 miles from Lakeside Iowa. Riverside Casino and Golf Resort, a new casino that opened in 2006 in Riverside, Iowa, is approximately 175 miles from Osceola.

Mark Twain is the only casino in northeast Missouri and is approximately 15 miles from Quincy, Illinois and approximately 25 miles from Hannibal, Missouri. The closest casino to Mark Twain is the Catfish Bend Casino, which spends the summer docked in Fort Madison, Iowa and spends the winter docked in Burlington, Iowa, which are approximately 55 miles and 75 miles, respectively, from LaGrange.

St. Jo is approximately 50 miles north of Kansas City, Missouri. St. Jo primarily targets residents of St. Joseph, Missouri and is the only casino in St. Joseph. However, St. Jo competes indirectly with four riverboats in Kansas City, Missouri and to a lesser extent with several Native American casinos, none of which is closer than 45 miles from St. Joseph.

Certain states have recently legalized, and other states are considering legalizing, casino gaming in certain areas. In addition, states such as Illinois, Missouri, Iowa and Kansas have recently considered awarding additional gaming licenses or expanding permitted gaming.

Seasonality

We do not believe that our business as a whole is seasonal to any significant degree. However, our casinos in the Midwest and in northern Nevada do experience some business interruption during the winter months.

Environmental Laws

Compliance with federal, state and local laws enacted for the protection of the environment to date had no material effect upon our capital expenditures, earnings or competitive position and we do not anticipate any material adverse effects in the future based on the nature of our operations.

Employees

As of December 31, 2007, we employed approximately 8,700 employees. None of our current employees is covered by a collective bargaining agreement. We believe that our relationship with our employees is good.

Regulation and Licensing

Nevada

The ownership and operation of casino gaming facilities and slot routes in Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder, or the Nevada Act, and various local regulations.

Our gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board, and the Cities of Las Vegas, Reno, Henderson and other local regulatory authorities (the “Nevada Gaming Authorities”).

The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things:

· the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;

· the establishment and maintenance of responsible accounting practices and procedures;

· the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;

· the prevention of cheating and fraudulent practices; and

· providing a source of state and local revenues through taxation and licensing fees.

Changes in these laws, regulations and procedures could have an adverse effect on our gaming operations.

Corporations and other entities that operate casinos or slot routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license for such activities requires the periodic payment of fees and taxes and is not transferable. Herbst Gaming is registered by the Nevada Gaming Commission as a publicly traded corporation (a “registered corporation”). As a registered corporation, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information that the Nevada Gaming Commission may require. Herbst Gaming has been found suitable by the Nevada Gaming Commission to own the stock or the membership interests of various licensed corporations and limited liability companies that own and operate casinos or slot machine operating routes licensed by the Nevada Gaming Commission (all of which are collectively referred to as the “Gaming Subsidiaries”). No person may become a stockholder or member of, or receive any percentage of the profits from, any of the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. Herbst Gaming and all of its Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in the various gaming businesses that each respectively operates in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Herbst Gaming or any of the Gaming Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of Herbst Gaming or any of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. The Nevada Gaming

Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove any change in corporate position.

If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

Herbst Gaming and the Gaming Subsidiaries are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by Herbst Gaming and its Gaming Subsidiaries must be reported to the Nevada Gaming Commission.

If it were determined that Herbst Gaming or any of its Gaming Subsidiaries violated the Nevada gaming laws, our gaming licenses and registrations with the Nevada Gaming Commission could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, Herbst Gaming, the Gaming Subsidiaries and the persons involved could be subject to substantial fines for each separate violation of the Nevada laws at the discretion of the Nevada Gaming Commission. Further, the Nevada Gaming Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our operations.

As a privately owned company, any beneficial holder of Herbst Gaming’s voting securities, regardless of the number of shares owned, is required to file an application, be investigated and have his or her suitability as a beneficial holder of Herbst Gaming’s voting securities determined before acquiring an equitable interest in the company. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in connection with conducting such investigation.

If Herbst Gaming decided to register any of its voting equity securities under the federal securities laws, it would first have to obtain the approval of the Nevada Gaming Commission to do so and, once such approval is obtained, Nevada law would require any person who acquires more than 5% of a registered corporation’s voting securities to report the acquisition to the Nevada Gaming Commission. Nevada law requires that beneficial owners of more than 10% of a registered corporation’s voting securities apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring the filing for a finding of suitability. Under certain circumstances, an “institutional investor,” as defined in the regulations of the Nevada Gaming Commission, that acquires more than 10%, but not more than 15%, of our voting securities may apply to the Nevada Gaming Commission for a waiver of such finding of suitability if that institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates or any other action which the Nevada Gaming Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:

· voting on all matters voted on by stockholders;

· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and

· other activities as the Nevada Gaming Commission may determine to be consistent with such investment intent.

If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chairman of the Nevada State Gaming Control Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. Herbst Gaming and the Gaming Subsidiaries may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be a stockholder or to have any other relationship with Herbst Gaming or the Gaming Subsidiaries, Herbst Gaming:

· pays that person any dividend or interest upon voting securities;

· allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;

· pays remuneration in any form to that person for services rendered or otherwise; or

· fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.

Additionally, the Clark County Liquor and Gaming Licensing Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.

Herbst Gaming may be required to disclose to the Nevada State Gaming Control Board and the Nevada Gaming Commission the identities of all holders of its debt securities. The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a registered corporation to file applications, be investigated and be found suitable to own the debt security of a registered corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own a debt security, then pursuant to Nevada law, the registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming Commission, it:

· pays to the unsuitable person any dividend, interest, or any distribution whatsoever;

· recognizes any voting right by the unsuitable person in connection with debt securities;

· pays the unsuitable person remuneration in any form; or

· makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.

Herbst Gaming is required to maintain a current ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial holder to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render

maximum assistance in determining the identity of the beneficial owner. The Nevada Gaming Commission has the power to require our securities to bear a legend indicating that the securities are subject to the Nevada Act.

Herbst Gaming may not make a public offering of securities without the prior approval of the Nevada Gaming Commission if the securities or proceeds from the securities are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for the purposes of constructing, acquiring or financing gaming facilities. Furthermore, any approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Gaming Commission or the Nevada State Gaming Control Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

Changes in the control of Herbst Gaming through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control or ownership of a registered corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Nevada Gaming Commission may also require the stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee’s respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:

· a percentage of the gross revenues received;

· the number of gaming devices operated; or

· the number of table games operated.

Any person who is licensed, required to be licensed, registered, required to be registered or is under common control with such persons, or Licensees, and who is or who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada State Gaming Control Board of the Licensees’ participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability.

Missouri

On November 3, 1992, a statewide referendum authorized gaming in the State of Missouri on the Missouri and the Mississippi Rivers. On April 29, 1993, Missouri enacted revised legislation (as amended, the “Missouri Gaming Law”) which amended the existing legislation. In a decision handed down on January 25, 1994, the Missouri Supreme Court held that games of chance were prohibited under the Missouri constitution. In a statewide election held on November 8, 1994, Missouri voters approved the adoption of an amendment to the Missouri Constitution which permits the legislature to allow games of chance to be conducted on excursion boats and floating facilities on the Mississippi River and the Missouri River. As a result of the amendment, games of chance are also permitted, subject to Missouri Gaming Law. Pursuant to the Missouri Gaming Law, there are eleven operating

riverboat gaming facility sites in Missouri: one in Caruthersville; one in Boonville; three in the St. Louis area; four in the Kansas City area; one in LaGrange; and one in St. Joseph.

Opponents of gaming in Missouri have brought several legal challenges to gaming in the past and may possibly bring similar challenges in the future. On November 25, 1997, the Missouri Supreme Court overturned a state lower court and held that a portion of the Missouri Gaming Law that authorized excursion gaming facilities in “artificial basins” up to 1,000 feet from the Mississippi or Missouri rivers was unconstitutional. This ruling created uncertainty as to the legal status of several excursion gaming riverboat facilities in the state. On November 3, 1998, a statewide referendum was held, whereby the voters amended the constitution to allow “artificial basins” for existing facilities, effectively overturning the above Missouri Supreme Court decision. There can be no assurances that any future challenges, if brought, would not further interfere with gaming operations in Missouri, including the operations of St. Jo and Mark Twain.

Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. Herbst Gaming, HGI—St. Jo, Inc., the subsidiary of Herbst Gaming that owns St. Jo and the current licensee and HGI—Mark Twain, Inc., the subsidiary of Herbst Gaming that owns Mark Twain and the current licensee, any subsidiaries, and some of their officers and employees are and will be subject to specific regulations, including ongoing licensing requirements. As part of the application and licensing process for a gaming license, the applicant must submit detailed financial, operating and other reports to the Missouri Gaming Commission. Each applicant has an ongoing duty to update the information provided to the Missouri Gaming Commission in the application, usually within seven days of a material change in the information on file with the Missouri Gaming Commission. Each of St. Jo and Mark Twain have frequently updated its application materials since it was initially licensed. In addition to the information required of the applicant, directors, officers, affiliated business entities and other defined “key persons” (which include individuals and companies designated by the Missouri Gaming Commission) must submit Personal Disclosure Forms, which include detailed financial information, and are subject to thorough investigations. In addition, some officers and directors of Herbst Gaming, as well as Herbst Gaming itself, have submitted Personal Disclosure Forms and applications to the Missouri Gaming Commission. All gaming employees must obtain an occupational license issued by the Missouri Gaming Commission. Suppliers are also subject to licensing requirements of the Missouri Gaming Commission.

The operators’ licenses (or “Class A” gaming licenses) are issued through application to the Missouri Gaming Commission, which requires, among other things:

· suitability investigations into an applicant’s character, financial responsibility, experience and qualifications;

· suitability investigations into each designated key person or affiliated business entity’s character, financial responsibility, experience and qualifications;

· disclosure of required financial (see above) and other personal information on each key person or designated affiliated business entity;

· disclosure of detailed information about the applicant’s history, business, affiliations, officers, directors and owners;

· an affirmative action plan for the hiring and training of minorities and women; and

· an economic development or impact report.

License fees cover all related costs of the Missouri Gaming Commission investigation and are a minimum of $50,000 for the initial application and $25,000 annually thereafter. Each of Herbst Gaming, HGI—St. Jo and HGI—Mark Twain has undergone a full licensing investigation and hearing in connection with its licensing.

The Missouri Gaming Law and implementing regulations impose restrictions on the use of and do not permit the transfer of the gaming licenses as well as limitations on transactions engaged in by licensees. The

licenses issued by the Missouri Gaming Commission may not be transferred nor pledged as collateral. The Missouri Gaming Law regulations bar a licensee from taking any of the following actions without prior notice to, and approval by, the Missouri Gaming Commission:

· any transfer or issuance of an ownership interest in a gaming licensee that is not a publicly held company;

· any transfer or issuance of an ownership interest of five percent or more of the issued and outstanding ownership interest of Herbst Gaming which is publicly traded and is a holding company;

· any private incurrence of debt by the licensee or any holding company of $1,000,000 or more;

· any public issuance of debt by a licensee or its holding company; and

· defined “significant related party transactions.”

In addition, the licensee must notify the Missouri Gaming Commission of other transactions that include the transfer of five percent or more of an ownership interest in the licensee or holding company if publicly held and any transaction of at least $1,000,000.

The restrictions on transfer of ownership apply to Herbst Gaming as well as the direct licensees, HGI—St. Jo and HGI—Mark Twain. Gaming equipment may not be pledged. Corporate stock of some licensees may not be pledged except in narrow circumstances and subject to regulatory conditions.

Missouri statutes and administrative rules contain detailed requirements and conditions concerning the operation of a licensed excursion gaming boat facility, including but not limited to the following:

· a charge of two dollars per gaming customer per excursion that licensees must either collect from each customer or pay itself to the Missouri Gaming Commission;

· minimum payouts;

· the payment of a 20% tax on adjusted gross receipts;

· prohibitions against providing credit to gaming customers;

· the use of credit cards and cashing of checks by customers;

· providing security on the excursion gambling boat, including a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff, including Missouri Highway Patrol Officers, necessary to protect the public on the licensee’s riverboat;

· the receipt of liquor licenses from the Missouri Gaming Commission and local jurisdictions; and

· the adoption of minimum control standards for the conduct of gaming and the operation of the facility approved by the Missouri Gaming Commission.

The Missouri Gaming Commission has the power, as well as broad discretion in exercising this power, to revoke or suspend gaming or occupational licenses and impose other penalties for violations of the Missouri Gaming Law and the rules and regulations promulgated thereunder, including without limitation, forfeiture of all gaming equipment used for improper gaming and fines of up to three times a licensee’s highest daily gross receipts during the preceding twelve months.

Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may be used for gaming, the Missouri Gaming Commission is empowered to impose space limitations through the adoption of rules and regulations. In addition, the Missouri Gaming Law imposes as to each customer a $500 loss limit per two-hour period established by each licensee with the approval of the Missouri Gaming Commission. In order to establish an excursion schedule, which allows patrons to enter and exit the gaming floor during the excursion, the licensee must prove to the satisfaction of the Missouri Gaming Commission that it can enforce the $500 loss limit.

In addition, the Missouri Gaming Commission is empowered to determine on a city and county-specific basis where “dockside” or permanently-docked gaming is appropriate and may be permitted. The Missouri Gaming Commission has authorized all eleven licensed sites to operate all or a portion of their facilities on a continuously docked basis. On February 23, 2000, the Missouri Gaming Commission granted Mark Twain Casino, L.L.C., from which Herbst Gaming purchased the Mark Twain, the authority to permanently dock the excursion gambling riverboat facility known as the “Mark Twain Casino.” On February 15, 1996, the Missouri Gaming Commission granted St. Joseph Riverboat Partners, from which Herbst Gaming purchased St. Jo, the authority to permanently dock the excursion gambling riverboat facility known as the “Biloxi Bell, II.”

Iowa

In 1989, the State of Iowa legalized riverboat gaming on the Mississippi River and other waterways located in Iowa. Under Iowa law, a license to conduct gaming may be issued in a county only if the county electorate has approved gaming. The electorate of Clarke County, Iowa, approved gaming on February 28, 1995 by referendum. Gaming conducted by the Lakeside Casino Resort was approved by referendum on November 18, 1997. In addition, a referendum must be held every eight years in each of the counties where gambling games are conducted and the proposition to continue to allow gambling games in such counties must be approved by a majority of the county electorate voting on the proposition. Such a referendum took place on November 5, 2002 with approximately 80% of the electorate voting on the proposition favoring continued gaming on riverboats in Clarke County. The next referendum is scheduled for 2010. If any reauthorization referendum is defeated, Iowa law provides that any previously issued gaming license will remain valid and subject to renewal for a total of nine years from the date of original issuance of the license, subject to earlier non-renewal or revocation under Iowa law and regulations applicable to all licenses.

In addition, Iowa law authorizes the granting of licenses to non-profit corporations that, in turn, are permitted to enter into operating agreements with qualified persons who also actually conduct riverboat gaming operations. Such operators must likewise be approved and licensed by the Iowa Racing and Gaming Commission (the “Iowa Gaming Commission”).

In July 1997, Clarke County Development Corporation, a non-profit corporation organized for the purpose of facilitating riverboat gaming in Osceola, Iowa, entered into an operator’s contract, since amended, for Lakeside Iowa for a term of up to 50 years. Under the operator’s contract, as amended, Clarke County Development Corporation is to be paid a monthly fee equal to 1.5% of the adjusted gross gaming revenue of Lakeside Iowa. Further, pursuant to a dock site agreement executed in August 1997 (which also has a term of up to 50 years), Lakeside Iowa is required to pay a monthly fee to the City of Osceola and the Water Works Board of Trustees equal to 1.25% of the adjusted gross gaming revenue of Lakeside Iowa and an annual fee, to be paid in equal monthly installments, equal to approximately $160,000, with such amount to increase each year by 1% until termination of the lease. In September 2004, we entered into an agreement whereby upon the later of our obtaining approval from the Iowa Gaming Commission or our closing the transactions contemplated with Southern Iowa Gaming Company, Southern Iowa will immediately pay $3.2 million to the City of Osceola. Beginning eight years from the date of such payment and continuing for so long as the operator’s contract, as amended, remains in effect, we will pay the City of Osceola an additional 1% of annual adjusted gross receipts from Lakeside Iowa. We may, however, offset up to 50% of this 1% annual payment with any expenditures we have made for capital improvements (excluding gaming devices and improvements to the gaming facility, casino floor, development of a truck stop and general repairs and maintenance).

Iowa law permits gaming licensees to offer unlimited stakes gaming on games approved by the Iowa Gaming Commission on a 24-hour basis. Dockside casino gaming is authorized by the Iowa Gaming Commission

and the Iowa Legislature, subject to certain limitations not applicable to Lakeside Iowa, eliminated the requirement that gaming licensees cruise, effective May 6, 2004. The legal age for gaming is 21.

All Iowa excursion gambling boat licenses were approved for renewal at a March 1, 2007 meeting of the Iowa Gaming Commission. These licenses are not transferable and will need to be renewed annually and prior to the commencement of each subsequent annual renewal period.

The ownership and operation of gaming facilities in Iowa are subject to extensive state laws, regulations of the Iowa Gaming Commission and various county and municipal ordinances (collectively, the “Iowa Gaming Laws”), concerning the responsibility, financial stability and character of gaming operators and persons financially interested or involved in gaming operations. Iowa Gaming Laws seek to: (1) prevent unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees (including the establishment of minimum procedures for internal fiscal affairs, the safeguarding of assets and revenues, the provision of reliable record keeping and the filing of periodic reports with the Iowa Gaming Commission); (4) prevent cheating and fraudulent practices; and (5) provide a source of state and local revenues through taxation and licensing fees. Changes in Iowa Gaming Laws could have a material adverse effect on the Iowa gaming operations.

Gaming licenses granted to individuals must be renewed every year, and licensing authorities have broad discretion with regard to such renewals. Licenses are not transferable. The Iowa gaming operations must submit detailed financial and operating reports to the Iowa Gaming Commission. Certain contracts of licensees in excess of $100,000, that exceed three years in term or that involve related parties must be submitted to and approved by the Iowa Gaming Commission.

Officers, directors, managers and employees of the Iowa gaming operations are required to be licensed by the Iowa Gaming Commission. Employees associated with gaming must obtain a license and these licenses are subject to immediate suspension under specific circumstances. In addition, anyone having a material relationship or involvement with the Iowa gaming operations may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Gaming Commission in connection with the investigation. The Iowa Gaming Commission may deny an application for a license for any cause deemed reasonable. In addition to its authority to deny an application for license, the Iowa Gaming Commission has jurisdiction to disapprove a change in position by officers or key employees and the power to require the Iowa gaming operations to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Gaming Commission finds unsuitable to act in such capacities.

The Iowa Gaming Commission may revoke a gaming license if the licensee:

· has been suspended from operating a gaming operation in another jurisdiction by a board or commission of that jurisdiction;

· has failed to demonstrate financial responsibility sufficient to meet adequately the requirements of the gaming enterprise;

· is not the true owner of the enterprise;

· has failed to disclose ownership of other persons in the enterprise;

· is a corporation 10% of the stock of which is subject to a contract or option to purchase at any time during the period for which the license was issued, unless the contract or option was disclosed to the Iowa Gaming Commission and the Iowa Gaming Commission approved the sale or transfer during the period of the license;

· knowingly makes a false statement of a material fact to the Iowa Gaming Commission;

· fails to meet a monetary obligation in connection with an excursion gaming boat;

· pleads guilty to, or is convicted of, a felony;

· loans to any person, money or other thing of value for the purpose of permitting that person to wager on any game of chance;

· is delinquent in the payment of property taxes or other taxes or fees or a payment of any other contractual obligation or debt due or owed to a city or county; or

· assigns, grants or turns over to another person the operation of a licensed excursion boat (this provision does not prohibit assignment of a management contract approved by the Iowa Gaming Commission) or permits another person to have a share of the money received for admission to the excursion boat.

If it were determined that the Iowa Gaming Laws were violated by a licensee, the gaming licenses held by a licensee could be limited, made conditional, suspended or revoked. In addition, the licensee and the persons involved could be subject to substantial fines for each separate violation of the Iowa Gaming Laws in the discretion of the Iowa Gaming Commission. Limitations, conditioning or suspension of any gaming license could (and revocation of any gaming license would) have a material adverse effect on operations.

The Iowa Gaming Commission may also require any individual who has a material relationship with the Iowa gaming operations to be investigated and licensed or found suitable. The Iowa Gaming Commission, prior to the acquisition, must approve any person who acquires 5% or more of a licensee’s equity securities in the event that approval by the Iowa Gaming Commission is not otherwise contemplated by the operative acquisition document. The applicant stockholder is required to pay all costs of this investigation.

Gaming taxes approximating 22% of the adjusted gross receipts above $3,000,000 will be payable by each licensee on its operations to the State of Iowa. In addition, there was a prepaid assessment due on June 1, 2005 and another prepaid assessment paid on June 1, 2006, in an aggregate amount equal to 2.152% of each licensee’s estimated adjusted gross receipts for fiscal year 2004. These assessments will be offset by future state gaming taxes paid by each licensee with a credit for 20% of the assessments paid allowed each year beginning July 1, 2010 for five consecutive years. The state of Iowa is also reimbursed by the licensees for all costs associated with monitoring and enforcement by the Iowa Gaming Commission and the Iowa Department of Criminal Investigation.

Item 1A. Risk Factors.

The following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in this report. If any of the following risks and uncertainties or other risks and uncertainties not currently known to us or not currently considered to be material actually occur, our business, financial condition or operating results could be harmed substantially.

Our operations have been adversely affected by the general economic downturn in southern California and Nevada. The opinion of our independent auditor with respect to our financial statements for the fiscal year ended December 31, 2007 contains a “going concern” qualification, which is a default under our credit agreement. If we are unable to negotiate a forbearance with our lenders and they declare an event of default and require repayment of our credit agreement indebtedness, we may not be able to restructure or refinance our indebtedness.

The results of operations of our route business were negatively impacted during the last quarter of the 2007 fiscal year by the economic downturn in Southern Nevada. Our route operations derive a significant amount of business from the Southern Nevada market, the economy of which has been negatively impacted by the subprime mortgage crisis. In addition, as previously reported, our slot route operations were adversely affected earlier in the 2007 fiscal year by the enactment of anti-smoking legislation. Consequently, our route revenues were down 20% in the 2007 fiscal year when compared to the 2006 fiscal year and decreased 24.6% during the last quarter of the 2007 fiscal year when compared to the prior year’s period.

In addition, the results of the operations of the Primm Casinos were negatively impacted during the 2007 fiscal year by the general economic downturn in southern California, particularly in the second half of fiscal 2007. Results in the first months of fiscal year 2008 continue to be negatively impacted. The Primm Casinos derive a significant amount of their business from the Inland Empire region of southern California, which is comprised primarily of the San Bernardino and Riverside counties, the economies of which have been negatively impacted due to a number of factors, including the subprime mortgage crisis and higher gasoline costs.

The results of operations at our northern Nevada and Midwest casinos did not appear to be affected by these economic forces during 2007. To the extent the economies of southern California and Nevada do not improve in the near term and the results from our other businesses do not offset the decrease in results of the Primm Casinos and our route operations in the next several quarters, we will likely not be in compliance with the financial covenants in our credit agreement in future quarters.

As a result of the adverse change in our results of operations and our significant outstanding indebtedness, the opinion of our independent auditor contains a “going concern” qualification, which is a default under our credit agreement. We expect to enter into discussions with our credit agreement lenders to negotiate a forbearance agreement pursuant to which they would agree not to declare, for a specified period of time, an event of default under the credit agreement as a result of the going concern opinion or the probable failure to comply with financial covenants in the future. As previously disclosed, we have engaged Goldman, Sachs & Co. as our financial advisor to assist us with our evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of the our obligations or a sale of some or all of our businesses. We and our advisors are actively working toward such a transaction that would address the decline in our operating results and our capital structure, including our outstanding indebtedness. We cannot assure you that we will be successful in negotiating a forbearance with our credit agreement lenders or in undertaking any such alternative in the near term.

If we were not successful in obtaining a forbearance or entering into a transaction to address our liquidity and capital structure, the lenders under our credit agreement would have the ability to accelerate repayment of all amounts outstanding under the credit agreement ($853 million at March 15, 2008). If the lenders under the credit agreement were to require repayment of the outstanding borrowings upon a default, the holders of our subordinated indebtedness would have the ability to declare a default, and accelerate repayment of, the subordinated indebtedness ($330 million principal amount at March 15, 2008). If either the credit agreement indebtedness or the subordinated indebtedness were to be accelerated upon a default, we would be required to refinance or restructure the payments on that debt. We cannot assure you that we would be successful in completing a refinancing or restructuring, if necessary. If we were unable to do so, we may be required to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

Our operations have been adversely affected by the adoption of certain anti-smoking regulations.

On November 7, 2006, voters in Nevada passed Question 5, which prohibits smoking in indoor places of employment including, but not limited to, bars and taverns that serve food, grocery stores, malls and other retail establishments, and that gives future control over smoking regulation to individual counties or municipalities. Since its adoption, Question 5 has led to significant decreased patron play at our route locations. A number of our larger space leases for our route operations for which we pay a fixed rent provided for an adjustment to the rent after six months of operations under the anti-smoking legislation have occurred. These adjustments resulted in a decrease in our annual rental payments of approximately $20 million when compared to the amounts paid with respect to these contracts during the previous twelve months. However, if we are not able to offset decreased patron play, or patron play continues to decrease, there may be a material adverse effect on our business, financial condition and results of operations.

The success of our route operations is dependent on our ability to renew our contracts.

We conduct our route operations under contracts with third parties. Both contracts with chain and street customers are renewable at the option of the owner of the respective chain store or street account. As our route contracts expire, we are required to compete for renewals. Although we have historically been able to renew our contracts, if we are unable to renew a material portion of our route contracts because our competitors offer more

favorable terms or for any other reason, our business, financial condition and results of operations would be adversely affected. We cannot assure you that our current chain or street contracts will be renewed.

We may experience a loss of market share.

The gaming industry is highly competitive. Our slot-route operations are subject to substantial direct competition for our revenue-sharing and fixed space lease locations from one large route operator and numerous small operators, located principally in Las Vegas, Nevada. With respect to our casino operations in Nevada, we compete for local gaming customers with other locals-oriented casino-hotels and other casinos located in the vicinity of these properties. Our casino operations in the Midwest face competitors that include land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American reservations and racing and pari-mutuel operations. If our competitors operate more successfully, if existing route operations or properties are enhanced or expanded, or if additional competitors are established in and around the locations in which we conduct business, we may lose market share. In particular, the expansion of route operations or casino gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a material adverse effect on our business, financial condition and results of operations.

Changes to applicable tax laws could have a material adverse effect on our financial condition.

We pay substantial taxes and fees in connection with our operations as a gaming company. From time to time, federal, state and local legislators and other government officials have proposed and adopted changes in tax laws, or in the administration of those laws affecting the gaming industry. It is not possible to determine the likelihood of changes in tax laws or in the administration of those laws. If adopted, changes to applicable tax laws could have a material adverse effect on our business, financial condition and results of operations. For instance, in 2007 voters in Nevada approved a referendum be placed on the November 2008 general election ballot to add 3% to the current gaming tax rate in Nevada of 6.76%. If the voters approve the tax rate, such increase would take effect in July 2011. Any increase in taxation would impact the Company’s future profitability.

We face extensive regulation from gaming and other government authorities.

As owners and operators of gaming facilities, we are subject to extensive state and local regulations in Nevada, Iowa and Missouri. State and local government authorities in such jurisdictions, including the Nevada Gaming Commission, the Iowa Racing and Gaming Commission and the Missouri Gaming Commission, require us and our subsidiaries to obtain gaming licenses and require our officers, key employees and business entity affiliates to demonstrate suitability to hold gaming licenses, and such state and local government authorities may limit, condition, suspend or revoke a license for any cause deemed reasonable by the respective licensing agency. They may also levy substantial fines against us or our subsidiaries or the individuals involved in violating any gaming laws or regulations. The violation of any such state and local regulations could have a material adverse effect on our business, financial condition and results of operations.

In Nevada, the Nevada Gaming Commission could request that a state court appoint a supervisor to operate any non-restricted gaming establishment operated by us if the licenses held by us are revoked, suspended or otherwise lapse. In such extraordinary circumstances, earnings generated by gaming operations during a supervisor’s appointment (except for reasonable rental value) could be forfeited to the State of Nevada. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

Any future public offering of debt or equity securities by Herbst Gaming will require review of and prior approval by the Nevada Gaming Commission, the Iowa Racing and Gaming Commission and the Missouri Gaming Commission. The Missouri Gaming Commission also requires notice of the intended incurrence of any private debt exceeding $1,000,000 and reserves the right to elect to have prior review and approval.

We are subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws, regulations and permits that govern the serving of alcoholic beverages. Any changes to these laws could have a material adverse effect on our business, financial condition and results of operations.

From time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations in the jurisdictions in which we operate. Any such change to the regulatory environment or the adoption of new federal, state or local government legislation could have a material adverse effect on our business.

For a more complete summary of regulations that affect our business, see “Item 1. Business—Regulation and Licensing.”

We depend upon our key employees and certain members of our management.

Our success is substantially dependent upon the efforts and skills of Edward J. Herbst, our chairman of the board and chief executive officer, Ferenc Szony, our newly appointed president and chief operating officer, and Mary E. Higgins, our chief financial officer. We have entered into employment agreements with Mr. Herbst, Mr. Szony, and Ms. Higgins through 2009. These agreements automatically renew for successive one-year periods unless sooner terminated or unless either party to the respective agreements notifies the other in writing at least 60 days prior to the date the respective agreement is scheduled to expire. If we were to lose the services rendered by these employees, our operations could be adversely affected. In addition, we compete with other potential employers for employees, and we may not succeed in hiring and retaining the executives and other employees that we need. An inability to hire quality employees could have a material adverse effect on our business, financial condition and results of operations.

Our executive officers and members of our board of directors own 100% of the company and conflicts of interests could arise.

Edward, Timothy and Troy Herbst own all of the outstanding stock of Herbst Gaming. This concentration of ownership gives them the power to control the outcome of all matters requiring stockholder approval, including the election of all directors, and will give them the power to hinder or delay a change of control of the Company. In addition, Edward, Timothy and Troy Herbst are all officers and directors of Terrible Herbst, Inc., a company owned by parties related to us. We currently engage in transactions with Terrible Herbst, Inc. and plan to continue to do so in the future. These related-party transactions could lead to potential conflicts of interest. See “Item 13. Certain Relationships and Related Transactions.”

The gaming operations and casinos owned by the Company may be adversely impacted if the economy of certain markets declines, which could lead to an adverse impact on the operations of the Company.

As discussed previously, the results of operations of our route business and the Primm Casinos have been adversely affected by the decline in the economies of southern Nevada and southern California, respectively.

In addition, Lakeside Iowa, Mark Twain and St. Jo depend on customers living principally in south central Iowa and northeast and northwest Missouri, respectively, and on the economy of those areas. An economic downturn in such areas could have a material adverse effect on our operating results.

The Sands Regent Casinos heavily market to and rely upon business from Reno area residents, as well as the national bowling tournament that visits Reno on a three year cycle. Revenues are favorably impacted in years in which there is a national bowling tournament. In addition, the Sands and Gold Ranch also rely on the tourist market of northern California. Should there be negative changes in the economic climate in Reno or in northern California, the business of the Sands Regent Casinos could be adversely impacted, which could lead to an adverse impact on the overall results of the Company.

In addition, our properties use significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, the substantial increases in the cost of electricity, natural gas and gasoline in the United States in general, and in southern and northern California, southern and northern Nevada, south central Iowa and northeast and northwest Missouri in particular, may negatively affect our operating results. In addition, further energy price increases in such areas could result in a decline in disposable income of potential customers and a corresponding decrease in visitation and spending at our route and casino operations, which could

negatively impact revenues. Gaming industry revenues are sensitive to general economic conditions and are influenced by consumer confidence in the economy and other factors. An extended period of reduced discretionary spending could significantly harm our operations and we may not be able to lower our costs rapidly enough, or at all, to offset a decrease in revenues.

The business of the Sands Regent Casinos and the Primm Casinos may be adversely impacted by expanded Native American gaming operations in California and the Pacific Northwest, which could lead to an adverse impact on the operations of the Company.

The largest sources of customers for the Sands Regent Casinos are California and the Pacific Northwest, including a large number who drive to Reno from the San Francisco and Sacramento metropolitan areas, and the largest source of customers for the Primm Casinos are from southern California, including a large number who drive to Las Vegas from the San Bernardino and Barstow metropolitan areas. The expansion of Native American casinos in California, Oregon and Washington continues to have an impact on casino revenues in Nevada in general, and such impact may be significant on the markets in which the Sands Regent Casinos and the Primm Casinos operate.

California’s voters recently approved propositions that further expand the number of slot machines in California. While the effect of increased slot machines or any other increase in gaming in California and other states is difficult to predict, the business of the Sands Regent Casinos and Primm Casinos would be adversely impacted if such competing casinos attract patrons who would otherwise travel to Reno, Nevada or Primm, Nevada, respectively.

Adverse winter weather conditions in the Midwest, the Sierra Nevada Mountains and Reno-Lake Tahoe area could have a material adverse effect on the results of operations and financial condition of our casinos, which could lead to an adverse impact on the results of operation and financial condition of the Company.

Adverse winter weather conditions, particularly snowfall, can deter customers of our northern Nevada and Midwest Casinos from traveling or make it difficult for them to frequent its facilities. If these locations were to experience prolonged adverse winter weather conditions, the results of operations and financial condition of these casinos could also be materially adversely affected, thereby adversely affecting the results of operations and financial condition of the Company.

The business of the Primm Casinos may be adversely impacted if their use of water exceed allowances permitted by federal and local governmental agencies or if such governmental agencies impose additional requirements in connection with such use of water, which in each case could lead to an adverse impact on the operations of the Company.

The Primm Casinos are not served by a municipal water system. As a result, the water supply of such casinos is dependent on rights they have been granted to water in various wells located on federal land in the vicinity of the Primm Casinos and permits that allow the delivery of water to the Primm Casinos. These permits and rights are subject to the jurisdiction and ongoing regulatory authority of the U.S. Bureau of Land Management, the States of Nevada and California and local governmental units. While we believe that adequate water for the Primm Casinos is available, the future water needs of the Primm Casinos may exceed the permitted allowance. In such an event, future requests for additional water may not be approved or may be approved with terms or conditions that are more onerous. Any such denial or any such additional terms and conditions may have a material adverse effect on the results of operations of the Primm Casinos, thereby adversely affecting the results of operations and financial condition of the Company.

We may be unable to obtain slot machines or related technology from our third party supplier on a timely, cost-effective basis.

We currently primarily rely on International Game Technology, Inc. for our supply of slot machines and related technology, which are only available from a limited number of suppliers. We cannot assure you that we can obtain slot machines or related technology on a cost-effective basis. As a result, we may be forced to incur significant unanticipated costs to secure alternative third party suppliers or adjust our operations.

Riverboats and dockside facilities are subject to risks relating to weather or mechanical failure and must comply with applicable regulations.

We own and operate riverboat and dockside casino facilities, which are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, mechanical failure, extended or extraordinary maintenance, flood or other severe weather. Reduced patronage and the loss of a dockside or riverboat casino from service for any period of time could adversely affect our results of operations.

Although not required to cruise, to the extent that the casino boat of Lakeside Iowa, the USS Osceola, cruises, it and the gaming and support facilities located on board must comply with U.S. Coast Guard requirements as to boat design, on-board facilities, equipment, personnel and safety or requirements of state and local law, including the requirements of state gaming authorities, or both. If the USS Osceola fails to meet these requirements, we might be forced to stop operating Lakeside Iowa. The USS Osceola must hold a Certificate of Inspection or must be approved by the American Bureau of Shipping for stabilization and flotation, and may also be subject to local zoning and building codes, as well as additional requirements mandated by state law or by the gaming regulatory authority with jurisdiction over the facilities. The U.S. Coast Guard requirements establish design standards, set limits on the operation of the cruising vessels and require individual licensing of all personnel involved with the operation of the cruising vessels. Loss of a Certificate of Inspection or American Bureau of Shipping approval or other approval mandated by state law or by the gaming regulatory authority with respect to the USS Osceola would preclude its use as a floating casino.

The failure to achieve the anticipated benefits of the past or future acquisition could adversely impact our business.

The Sands Regent and Primm Acquisitions constitute material acquisitions on the part of the Company. We have incurred significant capitalized costs and committed significant management time in integrating operations, information, communications and other systems, among other items, which involved retaining professionals and consultants to complete the acquisition process and integrate technology. However, despite such efforts, difficulties have arisen due to factors such as integrating personnel with disparate corporate cultures, reconciling different information, communications and other systems and managing customer relationships. The failure to timely resolve these difficulties and achieve the anticipated benefits of the Sands Regent and Primm Acquisitions could harm our business and results of operations.

We have spent and may continue to spend significant resources identifying businesses to acquire. The efficient and effective integration of any businesses we acquire into our organization is critical to our growth. The Sands Regent and Primm Acquisitions, and any future acquisitions or mergers, involve numerous risks including difficulties in integrating the operations, technologies and personnel of the acquired companies, the diversion of management’s attention from other business concerns and the potential loss of key employees of the acquired companies and businesses. Additional risks include:

· negative impacts on employee morale and performance as a result of job changes and reassignments;

· difficulties attracting key personnel;

· loss of customers; and

· unanticipated incompatibility of logistics, marketing and administration methods.

Failure to achieve the anticipated benefits of any of our past, pending and future acquisitions or mergers or to successfully integrate the operations of the companies we acquire could also harm our business, results of operations and cash flows. Additionally, we cannot assure you that we will not incur material charges in future quarters to reflect additional costs associated with any future acquisitions we may make.

Risks Related to Our Outstanding Indebtedness

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness.

We have incurred a significant amount of indebtedness, including indebtedness incurred under our senior credit facility to consummate the Sands Regent and Primm Acquisitions. The following chart shows certain important statistics with respect to such indebtedness.

	As of and for the Year ended December 31, 2007
	(in thousands, except ratio)
Long-term debt, including current portion	$	1,146,070
Stockholders’ equity	$	(118,729	)
Ratio of earnings to fixed charges(1)	0.50:1.0

(1) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before fixed charges and loss on early retirement of debt (other than capitalized interest). Fixed charges consist of interest expensed and capitalized and the interest component of rent expense.

Our substantial indebtedness could have important consequences. For example, it could:

· make it more difficult to satisfy our obligations with respect to the instruments governing our outstanding indebtedness;

· increase our vulnerability to general adverse economic and industry conditions;

· require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

· limit our flexibility in planning for, or reacting to, competitive pressures and changes in our business and the industry in which we operate;

· place us at a competitive disadvantage compared to our competitors that have less debt; and

· limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.

If interest rates rise, the amount of interest paid by us under our credit facility will increase.

The interest on revolving borrowings and on the term loan under our credit facility in effect as of December 31, 2007 is based on a floating rate (a base rate or LIBOR, at our option), plus a leverage grid-based variable amount. At December 31, 2007, the principal amount of the borrowings under such credit facility was approximately $816.7 million. We cannot predict the interest rate environment or guarantee that interest rates will not rise in the near future. Consequently, a hypothetical 1.0% increase in LIBOR would result in an approximately $8.2 million annual increase in interest expense. Should interest rates rise significantly, our ability to satisfy our obligations under the instruments governing our outstanding indebtedness will be adversely affected.

Our indebtedness imposes restrictive covenants on us.

Our credit facility and the indentures governing our 8 1/8% senior subordinated notes due 2012 and our 7% senior subordinated notes due 2014 impose operational and financial restrictions on us and our subsidiaries. The restrictions imposed under these debt instruments include, among other obligations, limitation on our and our subsidiaries’ ability to:

· incur additional debt;

· make payments on subordinated obligations;

· make dividends or distribution and repurchase stock;

· make investments;

· grant liens on our property to secure debt;

· enter into certain transactions with affiliates;

· sell assets or enter into mergers or consolidations;

· sell equity interests in our subsidiaries;

· create dividend and other payment restrictions affecting subsidiaries;

· change the nature of our lines of business;

· make capital expenditures; and

· designate restricted and unrestricted subsidiaries.

Our credit facility imposes various customary affirmative covenants on us and our subsidiaries, including among others, reporting covenants, covenants to maintain insurance, comply with laws, maintain properties and other covenants customary in senior credit financings of this type. In addition, our credit facility will require us to comply with various restrictive financial covenants, including interest coverage and debt to operating cash flow ratios, and capital spending limits.

Item 1B. Unresolved Staff Comments.

In December 2007, the SEC issued a letter to the Company requesting a description of management’s consideration to the purchase price allocation and valuation of the assets acquired pursuant to the Sands Regent and Primm Acquisitions, along with the primary reasons for these acquisitions and a description of the factors that contributed to a recognition of goodwill in accordance with paragraph 51(c) of SFAS No. 141. This letter also requested the timing of when the final allocation and valuation was expected to be completed. The Company’s response gave the primary reasons for the Sands Regent and Primm Acquisitions and those factors that contributed to the recognition of goodwill. It also indicated that the requested final valuations and allocations are to be included in this filing.

The valuation and allocations for the Primm Acquisition and Sands Regent Acquisition included in this filing are final as to all amounts except for property, plant and equipment. The Company is finalizing its review of various valuation data and will record final adjustments to the purchase allocation, if any, in the first quarter of 2008. Any adjustment to property, plant and equipment would result in an offsetting adjustment to goodwill and an adjustment to depreciation expense.

Item 2. Properties.

Our principal properties consist of the following:

Nevada

Company Headquarters and Warehouse.

We lease a four-acre site in Las Vegas and own the 50,000 square foot building where our executive offices and operational headquarters are located. This facility houses our executive and administrative offices and is used for sub-assembly and warehouse space for our slot route operations. The lease between the Herbst Family Limited Partnership II, a Nevada limited partnership, and us ends on June 30, 2017, with options to renew the lease for five additional successive terms of ten years each.

Office Space and Convenience Store.

We lease a three-acre site and a 50,000 square foot building where our employment center and purchasing department are located. The lease between the Herbst Grandchildren’s Trust, a trust governed under the laws of the State of Nevada and a related party, and us ends on November 27, 2012, with options to renew the lease for five additional successive terms of ten years each.

Terrible’s Searchlight Casino.

We lease the space in which Terrible’s Searchlight Casino is located in Searchlight, Nevada. The space is leased from Terrible Herbst, Inc. and the lease ends on June 30, 2022, with options to renew the lease for five additional successive terms of ten years each.

Terrible’s Hotel & Casino.

We own the ten-acre site in Las Vegas on which Terrible’s Hotel & Casino is located, consisting of a 45,000 square foot casino with 255 guest rooms.

Terrible’s Town Casino.

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60 miles from Las Vegas, comprises an approximately 30,000 square foot building on approximately three acres. We lease the land from the Herbst Family Limited Partnership I, a Nevada limited partnership and a related party. The lease expires on June 30, 2011. We also have an option to further extend the lease for three additional successive terms of five years through 2026.

Terrible’s Lakeside Casino & RV Park.

We own the land in Pahrump, Nevada on which Terrible’s Lakeside Casino & RV Park, an approximately 8,000 square foot casino on 30 acres, is located.

Terrible’s Town Casino & Bowl.

We lease the land and building on which our Terrible’s Town Casino & Bowl is located in Henderson, Nevada from an unrelated third party. The lease ends on February 9, 2014, with options to renew the lease for five additional successive terms of ten years each. We own a 0.8-acre lot adjacent to Terrible’s Town Casino & Bowl that we are holding for possible future development.

Terrible’s Gold Ranch Casino and RV Park.

We lease the land on which Terrible’s Gold Ranch Casino and RV Resort is located in Sparks, Nevada from an unrelated third party. The lease ends on January 1, 2022, with an option to renew the lease for an additional twenty year term.

Buffalo Bill’s, Whiskey Pete’s and Primm Valley Resort Hotels and Casinos.

We lease (from an unrelated party) approximately 143 acres of land on which Buffalo Bill’s, Whiskey Pete’s and Primm Valley are located in Primm, Nevada. The lease ends on June 30, 2043, with an option to renew the lease for one additional twenty-five year term.

Midwest

Lakeside Casino Resort.

We own the land in Osceola, Iowa on which certain facilities of Lakeside Iowa are located, including the all-suite hotel, convention facilities, RV park and convenience store and own an additional 121 acres of land

adjacent to or nearby the casino. We lease the use of West Lake and certain real estate surrounding West Lake from the City of Osceola, Iowa. The lease ends on March 11, 2009. We have an option to extend the lease for seven additional successive terms of five years each.

Mark Twain Casino.

We own the land in LaGrange, Missouri on which certain facilities of Mark Twain are located, and own an additional 14 acres of land adjacent to or nearby the casino.

St. Jo Frontier Casino.

We own the land in St. Joseph, Missouri on which certain facilities of St. Jo are located, and own an additional 72 acres of land adjacent to or nearby the casino.

Item 3. Legal Proceedings.

On February 17, 2006, the Clark County District Court entered judgment of a jury verdict delivered against our subsidiary, ETT, for $4.2 million in compensatory damages and $10.1 million in punitive damages. The jury verdict was lowered in a post trial ruling from $10.1 million to $4.2 to match compensatory damages. The verdict was delivered in connection with an action brought by the family of an individual that alleged that ETT had negligently retained and negligently supervised a temporary employee who in 2001 stole a truck from ETT and, while drunk, hit and killed the individual. The Company believes the award of compensatory and punitive damages against ETT, the liability of ETT, and the amount thereof, are not supportable in either law or in fact and plans to vigorously pursue all appropriate post-trial and other remedies. The Company currently has this decision under appeal.

From time to time, we are a party to various claims arising in the normal course of business. Management believes, however, that there are no proceedings pending or threatened against us which, if determined adversely, would have a material adverse effect on our financial condition, results of operations or liquidity.

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

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market Information

There is no established public trading market for any class of our common equity. No class of our capital stock has been registered under the Securities Act of 1933, as amended, or under Section 12 of the Exchange Act. All 300 shares of our outstanding common stock are beneficially owned by Edward, Timothy and Troy Herbst.

(b) Holders

Edward, Timothy and Troy Herbst beneficially own all of the outstanding shares of our common stock.

Dividends of $31.3 million and $10.3 million were paid in respect of our outstanding common stock in fiscal 2006 and 2007, respectively.

Our credit agreement and the indentures governing our 81/8% senior subordinated notes due 2012 and our 7% senior subordinated notes due 2014 restrict our ability to declare or make distributions on our capital shares. To date, the only distributions that we have made on our common stock are distributions permitted by the instruments governing our outstanding indebtedness. Subject to contractual restrictions contained in our credit facility, cash dividends may be declared and paid only in an aggregate amount not to exceed the Company’s percentage of excess cash flow (as defined in our credit agreement) for the preceding fiscal year so long as the Company is in compliance the financial covenants. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.”

Item 6. Selected Financial Data.

We derived the selected consolidated financial data as of and for each of the prior five years ended December 31, 2007 from our audited consolidated financial statements, as of and for each of the prior three years ended December 31, 2007, which are included elsewhere in this report. In February 2005, we consummated the Grace Acquisition, and as a result the period beginning on January 1, 2005 may not be comparable to prior years. Similarly, in January 2007 we consummated the Sands Regent Acquisition and in April 2007 we consummated the Primm Acquisition, and as a result the period beginning January 1, 2007 may not be comparable to prior years. The following table summarizes certain selected consolidated financial data, which you should read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this report and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986. Under those provisions, the owners of our company pay income taxes on our taxable income. Accordingly, a provision for income taxes is not included in our financial data.

	Year Ended December 31,
	2003			2004			2005			2006			2007
	(in thousands)
Income statement data:
Revenues
Route operations	$	241,833		$	293,244		$	339,401		$	347,041		$	276,946
Casino operations
Nevada	78,342			91,254			95,400			95,614			331,517
Other states							117,774			141,435			141,731
Other operations	3,049			3,628			4,923			10,676			98,987
Total revenues	323,224			388,126			557,498			594,766			849,181
Promotional allowances—route	(371		)	(376		)	(223		)	(86		)	(64		)
Promotional allowances—casino	(10,878		)	(12,138		)	(21,434		)	(32,617		)	(64,177		)
Net revenues	311,975			375,612			535,841			562,063			784,940
Costs of revenues:
Route operations	192,757			227,929			258,114			271,463			244,086
Casino operations
Nevada	51,142			56,331			59,125			64,349			245,507
Other states	—			—			79,239			87,852			89,745
Other operations
Depreciation and amortization	22,789			25,407			33,941			38,124			56,405
General and administrative	12,514			14,366			15,217			13,324			22,983
Other										6,491			80,184
Loss on impairment of assets	—			—			3,360			—			72,965
Loss on lease termination	—			600			—			—			—
Total costs and expenses	279,202			324,633			448,996			481,603			811,875
Income from operations	32,773			50,979			86,845			80,460			(26,935		)
Interest income	228			353			740			734			1,481
Interest expense	(24,525		)	(22,109		)	(36,532		)	(39,134		)	(85,631		)
Change in value of derivative instruments	—			—			—			—			(16,115		)
Loss on early retirement of debt(1)	(267		)	(37,991		)	(221		)	—			—

Net income (loss)	$	8,209		$	(8,768	)	$	50,832		$	42,060		$	(127,200	)

	Year Ended December 31,
	2003			2004			2005			2006			2007
	(in thousands, except ratios)
Other data:
Route EBITDA(2)(3)	$	48,705		$	64,939		$	79,922		$	75,492		$	32,796
Casino EBITDA(2)(4)
Nevada(4)	$	16,322		$	22,785		$	20,281		$	17,719		$	43,551
Other states(4)	—			—			$	29,865		$	34,512		$	30,268
Net cash provided by operating activities	$	34,997		$	50,010		$	92,204		$	81,493		$	4,273
Net cash used in investing activities	$	(74,724	)	$	(17,009	)	$	(309,172	)	$	(79,758	)	$	(574,128	)
Net cash provided by (used in) financing activities	$	38,722		$	51,141		$	152,645		$	(9,944	)	$	598,495
Capital expenditures	15,117			15,229			43,893			66,622			32,418
Ratio of earnings to fixed charges(5)	1.3		x	2.3		x	2.4		x	2.0		x	0.5		x

	December 31,
	2003		2004			2005		2006		2007
	(in thousands)
Balance sheet data:
Cash and cash equivalents	$	54,030	$	138,172		$	73,849	$	65,540	$	94,282
Total assets	$	237,068	$	318,431		$	534,930	$	568,450	$	1,080,385
Total debt(6)	$	215,269	$	333,412		$	500,593	$	522,618	$	1,146,070
Stockholders’ equity (deficiency)	$	1,554	$	(30,764	)	$	7,981	$	18,771	$	(118,729	)

(1)	Consists of (a) a premium of $267,000 paid in conjunction with the repurchase of $2.0 million of our senior secured notes in 2003, (b) a loss on early retirement of debt in June 2004 which consisted of $31.3 million in a debt prepayment penalty and $6.7 million in unamortized loan fees and (c) a premium of $221,000 paid to call the balance of our 10 ¾% notes in September 2005.

(2)	Route and Casino segment EBITDA are non-GAAP measures but are used by management to measure segment profits and losses in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, and are calculated before allocation of overhead. See “Note 12. Business Segments” to the accompanying consolidated financial statements.

(3)	Route segment EBITDA consists of net income plus depreciation and amortization and interest expense, net of capitalized interest, and is calculated before allocation of overhead.

(4)	Casino segment EBITDA consists of net income plus depreciation and amortization, interest expense, net of capitalized interest, impairment charges and costs associated with the retirement of assets. Casino EBITDA for casinos in Nevada and other states are calculated before allocation of overhead.

(5)	For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before fixed charges and loss on early retirement of debt, impairment charges and loss on derivatives (other than capitalized interest). Fixed charges consist of interest expensed and capitalized and the interest component of rent expense.

(6)	Total debt consists of the current and long-term portions for all periods presented.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and with “Item 8. Financial Statements and Supplementary Data”.

Overview

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations. Our route operations involve the exclusive installation and operation of approximately 7,200 slot machines as of December 31, 2007 in strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. Taking into account the Primm Acquisition and the Sands Regent Acquisition, our casino operations consist of sixteen casinos located in Nevada, Iowa and Missouri, other than the Sands Regent Casinos and the Primm Casinos, our casinos are operated under the “Terrible’s” brand. We are in the process of re-branding the Sands and Primm Casinos under the “Terrible’s” brand.

We generally enter into two types of route contracts. With chain store customers, such as Albertsons, Vons, Safeway, SavOn, Smith’s, Kmart, Terrible Herbst and Rite Aid, we pay a fixed monthly fee for each location in which we place slot machines. With our street accounts, such as bars, restaurants and non-chain convenience stores, we share in the revenues on a percentage basis with the location owner. Revenues from street accounts are recorded gross of amounts shared.

Our revenues are primarily derived from gaming revenues, which include revenues from slot machines and table games. Gaming revenues are generally defined as gaming wins less gaming losses. Our largest component of revenues is from our slot machines. Promotional allowances consist primarily of food and beverages furnished gratuitously to customers. The retail value of such services is included in the respective revenue classifications and

is then deducted as promotional allowances. We calculate income from operations as net revenues less total operating costs and expenses. Income from operations represents only those amounts that relate to our operations and excludes interest income, interest expense and other non-operating income and expenses. Segment EBITDA consists of income from segment operations plus depreciation and amortization, and is calculated before an allocation of overhead.

We have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986. Under those provisions, the owners of our Company pay income taxes on our taxable income. Accordingly, a provision for income taxes is not included in our financial statements. During the first quarter, The Sands Regent elected to be treated as a Subchapter S corporation for federal income tax purposes.

On April 10, 2007, the Company completed the Primm Acquisition for a net cash purchase price of $394 million. The acquired properties include Buffalo Bill’s Hotel and Casino, Whiskey Pete’s Hotel and Casino, and Primm Valley Resort and Casino. For a detailed description of the acquired properties see “Item 1. Business—Narrative Description of Business—Primm Casinos.” Also acquired pursuant the Primm Acquisition were a California lottery station located on the Nevada/California border, three gasoline stations and the Primm Travel Center.

On January 3, 2007, we consummated the Sands Regent Acquisition, paying approximately $149 million in cash for the outstanding securities of The Sands Regent, the prepayment of outstanding debt and the payment of related fees. Pursuant to the Sands Regent Acquisition, we acquired Terrible’s Rail City Casino in Sparks, Nevada, Terrible’s Sands Regency Casino Hotel in downtown Reno, Nevada, Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada, and Terrible’s Dayton Casino and Red Hawk Sports Bar, each located in Dayton, Nevada, which together contain an aggregate of approximately 285 slot machines. For a detailed description of the acquired properties see “Item 1. Business—Narrative Description of Business.”

We used proceeds from our credit facility to fund both acquisitions.

Year 2007 Compared to Year 2006

	Year ended December 31, 2006					Year ended December 31, 2007
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Slot route revenue	$	347,041		100.0	%	$	276,946		100.0	%
Promotional allowances	(86		)	0.0		(64		)	0.0
Direct expenses	(271,463		)	78.2		(244,086		)	88.1
EBITDA	75,492			21.8		32,796			11.9
Impairment of Intangibles	—					(3,165		)	1.1
Depreciation and amortization	(21,431		)	6.2		(21,979		)	7.9
Income from slot route operations	$	54,061		15.6	%	$	7,652		2.9	%

Route Operations

Route operations accounted for 33% of total revenues during the year ended December 31, 2007. This was a decrease from 58% of total revenues for the year ended December 31, 2006. Total revenues from route operations were $276.9 million for the year ended December 31, 2007, a decrease of $70.1 million, or 20%, from $347.0 million for the year ended December 31, 2006. The decrease in route revenue primarily reflects the impact of the passage in November 2006 in Nevada of Question 5 and, in the fourth quarter of 2007, general economic weakness. At December 31, 2007 and 2006, we operated approximately 7200 slot machines.

Route operating costs were $244.1 million, or 88%, of route revenues for the year ended December 31, 2007. This compares to $270.1 million, or 78%, of route revenues for the same period in 2006. The decrease in route operating expenses was primarily associated with the lower revenues at our participation locations, which provide for a decrease in revenue share costs in conjunction with revenue decline. We typically enter into fixed space leases with our chain store customers, which do not provide for a decrease in our lease payments if revenue declines. However, many of our larger space lease contracts provided for an adjustment of lease payments if a smoking ban were to occur. We renegotiated substantially all of these larger space lease contracts in the third quarter, resulting in an annual reduction of lease payments of approximately $20.0 million in 2007. The reductions applicable to 2007 were approximately $8.2 million. In connection with these renewals, the average duration of larger space lease contracts was increased from approximately two years to four years.

As a result of the amendment to many of our space lease contracts we determined that there was an impairment to the intangible value associated with two of those lease contracts. The Company recorded an impairment charge of $3.3 million in 2007.

Primarily as a result of the smoking ban and the general economic weakness discussed above, Route EBITDA for the year ended December 31, 2007 was $32.8 million, a decrease of $42.7 million, or 57%, from $75.5 million for the year ended December 31, 2006.

Casino Operations

	Year ended December 31, 2006					Year ended December 31, 2007
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	237,049		100.0	%	473,248			100.0
Promotional allowances	(32,617		)	13.8		(64,177		)	13.6
Direct expenses	(152,201		)	64.2		(335,252		)	70.8
EBITDA	52,231			22.0		73,819			15.6
Impairment of intangibles						(69,800		)
Depreciation and amortization	(16,375		)	6.9		(34,081		)
Income (loss) from casino operations	$	35,856		15.1	%	$	(30,062	)

Casino operations accounted for 56% of total revenues for the year ended December 31, 2007 and 40% of total revenues for the year ended December 31, 2006. Total revenues derived from casino operations were $473.3 million for the year ended December 31, 2007, an increase of $236.3 million, or 100%, from $237.0 million for the year ended December 31, 2006. Revenues from the Sands Regent Casinos that were acquired on January 3, 2007 and the Primm Casinos that were acquired on April 10, 2007 accounted for substantially all of this increase. However, results from the Primm Casinos, Lakeside Iowa and the Company’s casinos located in Pahrump, Nevada were below expectations.

As a result of the factors mentioned above, Casino EBITDA was $73.8 million for the year ended December 31, 2007, an increase of $21.6 million, or 41%, from $52.2 million from the year ended December 31, 2006.

The following paragraphs divide the results from our casino operations geographically between casinos in Nevada and those in other states.

Casino Operations — Nevada

	Year ended December 31, 2006					Year ended December 31, 2007
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	95,614		100.0	%	$	331,517		100.0	%
Promotional allowances	(13,546		)	14.2		(42,459		)	12.8
Direct expenses	(64,349		)	67.3		(245,507		)	74.1
EBITDA	17,719			18.5		43,551			13.1
Depreciation and amortization	(6,408		)	6.7		(22,765		)	6.7
Impairment of intangibles						(36,500		)
Income from casino operations	$	11,311		11.8	%	(15,714		)

Nevada casino operations accounted for 39% of total Company revenues for the year ended December 31, 2007 and 16% of total revenues for the year ended December 31, 2006. Revenues derived from Nevada casino operations were $331.5 million for the year ended December 31, 2007 compared with $95.6 million for the year ended December 31, 2006. These results reflect increases in revenue due to the four casinos acquired in the Sands Regent Acquisition, all located in northern Nevada, and the three casinos acquired in the Primm Acquisition, all located in Primm, Nevada. The new casinos accounted for substantially all of the increase in net revenues. Revenues were flat or increased at our other casinos in Nevada, except at the two casinos in Pahrump. The decreases in the revenues at the casinos in Pahrump were due in part to refurbishments of our primary competitors by new owners, which made them more competitive. In the aggregate, gross revenues at our casinos, other than the Sands Regent Casinos and Primm Casinos, were up approximately 2.2% from of 2006.

Nevada casino operating costs for the year ended December 31, 2007 were $245.5 million, up $181.8 million, from the year ended December 31, 2006. The majority of this increase represents operating costs of the Sands Regent and Primm Casinos. Nevada casino promotional spending was up $28.7 million. This increase was substantially attributable to spending at the Sands Regent and Primm Casinos. As a percentage of revenue, promotional allowances were 12.8% for the year ended December 31, 2007 compared to 14.2% for the year ended December 31, 2006.

Nevada casino EBITDA was $43.6 million for the year ended December 31, 2007 compared to $17.7 million for the year ended December 31, 2006.

The Primm Casinos had lower than expected results when compared to 2006. The Primm Casinos derive a significant amount of their business from the Inland Empire region of southern California, which is comprised primarily of the San Bernardino and Riverside counties, the economies of which have been negatively impacted due to a number of factors, including the subprime mortgage crisis and higher gasoline costs. For the year ended December 31, 2007, the Company recognized a non- cash impairment charge of $36.5 million to write down the carrying value of goodwill related to the estimated fair value of the Primm assets (see Note 5 to the audited financial statements).

Casino Operations — Other states

	Year ended December 31, 2006					Year ended December 31, 2007
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Other state casino revenue	$	141,435		100.0	%	$	141,731		100.0	%
Promotional allowances	(19,071		)	13.5		(21,718		)	15.3
Direct expenses	(87,852		)	62.1		(89,745		)	63.3
EBITDA	34,512			24.4		30,268			21.4
Impairment of Intangibles						(33,300		)
Depreciation and amortization	(9,967		)	7.0		(11,316		)	8.0
Income from casino operations	$	24,545		17.4	%	$	(14,348	)

Casino operations in other states accounted for 17% of total company revenues for the year ended December 31, 2007, which is down from 24% in 2006. Total revenues derived from casino operations located in states other than Nevada were $141.7 million, an increase of $0.3 million, , compared to $141.4 million for the year ended December 31, 2006. Other state casino operating costs were $89.7 million, or 63.3% of revenues, for the year ended December 31, 2007 compared to $87.9 million, or 62.1% of revenues, for the year ended December 31, 2006. The increases in operating costs were associated with increases in food and beverage costs.

Promotional allowances for the year ended December 31, 2007 were $21.7 million compared to $19.1 million for the three months ended September 30, 2006, an increase of $2.6 million or 13.6%. The majority of those increases were at the Lakeside Iowa property as it incurred $1.6 million more in promotional costs in 2007 than in 2006 in response to increased competition from four new casinos.

Other state casino EBITDA was $30.3 million for the year ended December 31, 2007, a decrease of $4.2 million, or 12.2%, from $34.5 million for the year ended December 31, 2006. This decrease in EBITDA was due to the operations of Lakeside Iowa, which was subject to significant competitive pressure from the opening of four new casinos in Iowa in over the last eighteen months.

As discussed above, our operating results at Lakeside Iowa were lower than our expectations. For the year ended December 31, 2007, the Company recorded a non-cash impairment charge of $33.3 million to write down the carrying value of intangible assets related to the estimated fair value of the Lakeside Iowa assets (see Note 5 to the audited consolidated financial statements).

Other and G and A

	Year ended December 31, 2006					Year ended December 31, 2007
	$			% of Total revenue		$			% of Total revenue
				(dollars in thousands)
Other revenue	$	10,676		2.0	%	$	98,987		11.7	%
Direct expense	(6,491		)	1.1		(80,184		)	9.4
General and administrative expenses	(13,324		)	2.2		(22,983		)	2.8
Depreciation and amortization	(318		)			(345		)
Income from Operations Other and SGA	$	(9,457	)			$	(4,474	)
Depreciation and amortization	318					345
Interest Income	734					1,481
Other and Corporate EBITDA	$	(8,405	)			$	(2,699	)

Revenue from other operations consists of revenue from sources such as ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations, including sales (i) at our gas station and convenience store located in Osceola, Iowa, (ii) beginning in the first quarter, at Terrible’s Gold Ranch, our gas station in Verdi, Nevada, which was part of the Sands Regent Acquisition and (iii) beginning in the second quarter, at the three gas stations we acquired in the Primm Acquisition. Revenues from other operations were $99.0 million for the year ended December 31, 2007 compared to $10.7 million for the year ended December 31, 2006, an increase of $88.3 million, $85.8 million of which was associated with the revenue from the gas stations and other operations at the new facilities.

Costs associated with other revenues were $80.2 million for the year ended December 31, 2007 and $6.5 million for the year ended December 31, 2006, an increase of $73.7 million. Of the increase, $71.1 million was costs associated with the gas station convenience store operations at the new facilities and the remainder was associated with increased gas costs at Lakeside Iowa as the facility had a significant summertime gas promotion.

Promotional Allowances

Promotional allowances were $64.2 million, or 7.5% of total revenues, for the year ended December 31, 2007, an increase of $31.4 million, or 96%, from $32.7 million, or 5.5% of total revenues, for the year ended December 31, 2006. Approximately $29.3 million of the increase was due to the Sands Regent and Primm Casinos. Of the remaining $2.1 million increase over 2006, $1.6 million was due to increased spending at the Lakeside Iowa property. The remaining $0.5 million was growth in costs from all other existing properties.

Income(Loss) from Operations

As a result of the factors discussed above, as well as impairment charges of $73.0 million, loss from operations was $26.9 million for the year ended December 31, 2007, a decrease of $107.4 million, from income of $80.5 million for the year ended December 31, 2006.

Other Expenses

	Year ended December 31, 2006			Year ended December 31, 2007
	(dollars in thousands)
Interest Expense	$	(39,134	)	$	(85,631	)
Change in value of derivative	—			(16,115		)
Interest Income	734			1,481
Total Other income (expense)	$	(38,400	)	$	(100,265	)

Other expense was $100.3 million for the year ended December 31, 2007, an increase of $61.9 million from expenses of $38.4 million for the year ended December 31, 2006. This increase was primarily a result of the increase in the Company’s debt. Debt grew from $522.6 million at December 31, 2006 to $1,146.1 million at December 31, 2007, as a result of borrowings incurred to complete the Sands Regent and Primm Acquisitions. Additionally, during 2007, the Company incurred a loss on an interest rate swap, which was terminated, resulting in a $16.1 million charge to earnings.

Net (Loss) Income

As a result of the factors discussed above, net loss for the year ended December 31, 2007 was $127.2 million compared to net income of $42.1 million recorded for year ended December 31, 2006.

Year 2006 Compared to Year 2005

	Year ended December 31, 2005					Year ended December 31, 2006
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Slot route revenue	$	339,401		100.0	%	$	347,041		100.0	%
Promotional allowances	(223		)	0.1		(86		)	0.0
Direct expenses	(259,255		)	76.4		(271,463		)	77.8
EBITDA	79,923			23.5		75,492			22.2
Depreciation and amortization	(20,114		)	5.9		(21,431		)	6.2
Income from slot route operations	$	59,809		17.6	%	$	54,061		16.0

Route Operations

Route operations accounted for 58% of total revenues during the year ended December 31, 2006. This was a decrease from 61% of total revenues for the year ended December 31, 2005. Total revenues from route operations were $347.0 million for the year ended December 31, 2006, an increase of $7.6 million, or 2.2%, from $339.4 million for the year ended December 31, 2005. The increase in route revenue was a result of increased number of games during 2006. At December 31, 2006, we were operating approximately 7,200 slot machines, which is 100 greater than the approximately 7,100 we operated at December 31, 2005.

Route operating costs were $271.5 million, or 78%, of route revenues for the year ended December 31, 2006. This compares to $259.3 million and 76% of route revenues for the same period in 2005. The increase in route operating expenses was primarily associated with expenses that correlate with increases in revenue such as participation costs and payroll. In addition, partly due to staff additions to our systems and operations departments, payroll and insurance costs grew during the year, which increase is unrelated to growth in revenue.

As a result of the increased expenses, Route EBITDA for the year ended December 31, 2006 was $75.5 million, a decrease of $4.4 million, or 5.5%, from $79.9 million for the year ended December 31, 2005.

Casino Operations

	Year ended December 31, 2005					Year ended December 31, 2006
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Casino revenue	$	213,174		100.0	%	$	237,049		100.0	%
Promotional allowances	(21,434		)	10.1		(32,617		)	13.8
Direct expenses	$	(141,594	)	66.4		(152,201		)	64.2
EBITDA	50,146			23.5		52,231			22.0
Depreciation and amortization	(13,509		)	6.3		(16,375		)	6.9
Income from casino operations	$	36,637		17.2	%	$	35,856		15.1	%

Casino operations accounted for 40% of total revenues for the year ended December 31, 2006 and 38% of revenues for the year ended December 31, 2005. Total revenues derived from casino operations were $236.5 million for the year ended December 31, 2006, an increase of $23.8 million, or 11 %, from $213.2 million for the year ended December 31, 2005. This increase was due to growth from the Midwest properties, particularly at St. Jo and Lakeside Iowa, where we made extensive casino renovations.

Casino operating costs were $148.4 million, or 63%, of casino revenues for the year ended December 31, 2006, compared to $138.4 million, or 65%, of casino revenues for the year ended December 31, 2005. The increase in expenses was due primarily to expenses that correlate with increases in revenue such as payroll and gaming taxes.

As a result of the factors mentioned above, Casino EBITDA was $52.2 million for the year ended December 31, 2006, an increase of $2.1 million, or 4%, from $50.1 million from the year ended December 31, 2005.

The following paragraphs divide the results from our casino operations geographically between casinos in Nevada and those in other states.

Casino Operations — Nevada

	Year ended December 31, 2005					Year ended December 31, 2006
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Casino revenue	$	95,400		100.0	%	$	95,614		100.0	%
Promotional allowances	(12,528		)	13.1		(13,546		)	14.2
Direct expenses	(62,591		)	65.6		(64,349		)	67.3
EBITDA	20,281			21.3		17,719			18.5
Depreciation and amortization	(6,359		)	6.7		(6,408		)	6.7
Income from casino operations	$	13,922		14.6	%	$	11,311		11.8	%

Nevada casino operations accounted for 16% of total Company revenues for the year ended December 31, 2006 and 17% of total revenues for the year ended December 31, 2005. Revenues derived from Nevada casino operations were $95.6 million for the year ended December 31, 2006 compared with $95.4 million for the year ended December 31, 2005. These results reflect the slight decrease in revenue at Terrible’s Hotel & Casino in Las Vegas as a result of the disruption to operations caused by the demolition of one-third of its hotel rooms in

connection with the construction of its new parking structure and casino floor expansion, which was completed in the fourth quarter of 2006.

Nevada casino operating costs were $64.3 million, or 67%, of revenues for the year ended December 31, 2006, compared to $62.6 million, or 66%, of revenues for the year ended December 31, 2005. This increase in costs was due to an increase in spending at Terrible’s to maintain business during the disruption from the construction described in the previous paragraph as well as increase in payroll and insurance costs.

Casino Operations — Other states

	Year ended December 31, 2005					Year ended December 31, 2006
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Other state casino revenue	$	117,774		100.0	%	$	141,435		100.0	%
Promotional allowances	(8,906		)	7.6		(19,071		)	13.5
Direct expenses	(79,003		)	67.1		(87,852		)	62.1
EBITDA	29,865			25.3		34,512			24.4
Depreciation and amortization	(7,150		)	6.1		(9,967		)	7.0
Income from casino operations	$	22,715		19.2	%	$	24,545		17.4	%

Casino operations in other states accounted for 24% of total company revenues for the year ended December 31, 2006, which is up from 21% in 2005. Total revenues derived from casino operations located in states other than Nevada were $141.4 million, an increase of $ 23.6 million, or 20%, compared to $117.8 million for the year ended December 31, 2005. Other state casino operating costs were $ 87.9 million, or 62% of revenues, for the year ended December 31, 2006 compared to $79.0 million, or 67% of revenues, for the year ended December 31, 2005. We began floor improvements at our casinos in other states in the second quarter of 2005. The floor renovations consisted of over 1,200 new machines, new “ticket-in, ticket-out” software at each casino, new carpet and entirely new slot bases. The revenues during these periods were helped by significant increases in our cash promotions, player point promotions and food specials, which were incurred to offset the disruption from, and to keep player loyalty during, these extensive floor renovations. As these renovations were completed during the last quarter of 2006, these costs should begin to normalize.

Other Operations

Revenue from other operations consists of revenue items such as ATM fees, pay phone charges, rental income, gas and convenience store revenue and other miscellaneous items unrelated to route and casino operations. Revenue from other operations were $10.7 million for the year ended December 31, 2006 compared to $4.9 million for the year ended December 31, 2005. The growth in this revenue was primarily due to a full year of gasoline sales at Lakeside Iowa.

Promotional Allowances

Promotional allowances were $32.7 million, or 5.5% of total revenues, for the year ended December 31, 2006, an increase of $11.0 million, or 51%, from $21.7 million, or 3.9% of total revenues, for the year ended December 31, 2005. The increase was due to the increase in promotions during the year to offset business disruption resulting from the significant renovations at the majority of our larger casino properties.

Cost of Revenues

	Year ended December 31, 2005					Year ended December 31, 2006
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Other operations	$	(236	)	0.0	%	$	(6,491	)	1.1	%

General and administrative	$	10,608		1.9	%	$	13,324		2.2	%
Depreciation and amortization	$	33,941		6.1	%	$	38,124		6.4	%
Loss on retirement of debt and assets	$	3,360		0.6	%	$	0		0.0	%

General and administrative expenses, or G&A, were $13.3 million for the year ended December 31, 2006, an increase of $2.7 million, or 26%, from $10.6 million for the year ended December 31, 2005. The increase was primarily due to increase in payroll, utilities and insurance costs. G&A expenses as a percentage of revenue were 2.2% of the revenue for the year ended December 31, 2006, compared to 1.9% of revenue during fiscal year ended December 31, 2005.

Depreciation and amortization expense was $38.1 million for the year ended December 31, 2006, an increase of $4.2 million, or 12%, from $33.9 million for the year ended December 31, 2005. The increase was due primarily to the depreciation and amortization expenses associated with the parking structure construction and casino expansion at Terrible’s, as well as the renovations at our Midwest casino properties.

The costs represented in “other operations” consists of expenses related to the operations of our gasoline and convenience stories. In 2006, this expense was $6.5 million. This amount is primarily related to the cost of gasoline and convenience store operations.

Income from Operations

As a result of the factors discussed above, income from operations was $80.5 million for the year ended December 31, 2006, a decrease of $6.3 million, or 7%, from $86.8 million for the year ended December 31, 2005. As a percentage of total revenues, income from operations decreased from 15.6% during 2005 to 13.5% during the same period in 2006.

Other Expenses

Other expense was $38.4 million for the year ended December 31, 2006, an increase of $2.4 million from expenses of $36.0 million for the year ended December 31, 2005. This increase was primarily a result of the increase in the interest rates on our debt that coincided with the increases in the prime lending rate during 2006.

Our interest costs increased from $36.5 million during the year ended December 31, 2005 to $39.1 million during the year ended December 31, 2006. The Company’s debt grew from $500.6 million at December 31, 2005 to $522.6 million at December 31, 2006.

Net Income

Net income for the year ended December 31, 2006 was $42.1 million compared to the net income of $50.8 million recorded for year ended December 31, 2005. The year over year decrease was primarily the result of the increased expenses discussed above.

Liquidity and Capital Resources

Cash Flows

At December 31, 2007, we had cash and cash equivalents of approximately $94.3 million on hand and approximately $36 million available under our revolving credit facility. As of March 15, 2008, we had fully drawn our revolving line of credit. As of February 29, 2008, the Company had cash balances of $124.7 million.

Based on our anticipated future operations, we believe that cash on hand and expected cash flows will be adequate to meet our anticipated working capital requirements, capital expenses for both maintenance and growth, and scheduled payments of interest on our outstanding indebtedness at least through December 31, 2008, although we cannot assure you such sources will be sufficient. However, as a result of the default under our credit agreement due to the “going concern” qualification in the opinion of our independent auditors with respect to our financial statements for the fiscal year ended December 31, 2007, our lenders could declare an event of default under the credit agreement and require repayment of all outstanding borrowings ($860 million ). We expect to enter into discussions with our credit agreement lenders to negotiate a forbearance agreement pursuant to which they would agree not to declare, for a specified period of time, an event of default under the credit agreement as a result of the going concern opinion or the probable failure to comply with financial covenants in the future. As previously disclosed, we have engaged Goldman, Sachs & Co. as our financial advisor to assist us with our evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of the our obligations or a sale of some or all of our businesses. We and our advisors are actively working toward such a transaction that would address the decline in our operating results and our capital structure, including our outstanding indebtedness. We cannot assure you that we will be successful in negotiating a forbearance with our credit agreement lenders or in undertaking any such alternative in the near term.

If we were not successful in obtaining a forbearance or entering into a transaction to address our liquidity and capital structure, the lenders under our credit agreement would have the ability to accelerate repayment of all amounts outstanding under the credit agreement ($853 million at March 15, 2008) If the lenders under the credit agreement were to require repayment of the outstanding borrowings upon a default, the holders of our subordinated indebtedness would have the ability to declare a default, and accelerate repayment of, the subordinated indebtedness ($330 million principal amount at March 15, 2008). If either the credit agreement indebtedness or the subordinated indebtedness were to be accelerated upon a default, we would be required to refinance or restructure the payments on that debt. We cannot assure you that we would be successful in completing a refinancing or restructuring, if necessary. If we were unable to do so, we may be required to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

Operating Activities

During the year ended December 31, 2007, operating activities provided $ 4.3 million in cash flows on a net loss of $(127.2) million.

Significant operating uses of cash in 2007 include interest and distributions made to stockholders for payment of S corporation taxes and discretionary distributions. Our cash payments for interest were $81.6 million for the year ended December 31, 2007 and cash distributions to stockholders were 10.3 million for the year ended December 31, 2007. The distributions to stockholders included $3.3 million in distributions to pay personal taxes and distributions of approximately $7.0 million.

Pursuant to an amendment to our credit agreement, after December 31, 2007, cash dividends may be declared and paid only in an aggregate amount not to exceed the Company’s percentage of excess cash flow (as defined in the amendment) for the preceding fiscal year so long as the Company is in compliance the financial covenants set forth in the credit agreement. For the year ended December 31, 2007, the Company had no excess cash flow, and no cash dividends (other than for tax purposes) will be allowed in 2008.

Investing Activities and Capital Expenditures

For the year ended December 31, 2007, we had net cash used for investing activities of $574.1 million, of which $541.6 million was related to the net cash used to complete the Sands Regent and Primm Acquisitions. The remainder was used for the purchase of new property and equipment including gaming devices. Capital expenditures during 2007 were approximately $32.4 million.

On January 3, 2007, we consummated the Sands Regent Acquisition, paying approximately $119 million in cash for the outstanding securities of The Sands Regent.

On April 10, 2007, we consummated the Primm Acquisition paying $394 million in cash for certain gaming assets of MGM Mirage including the Buffalo Bill’s, Primm Valley and Whiskey Pete’s hotel-casinos.

Capital projects for 2008 are anticipated to be approximately $35 million. However, to the extent that our results of operations do not improve, we may elect to delay some of the capital expenditures in order to preserve short-term liquidity.

Financing Activities

Cash flows used by financing activities were $598.5 million during the year ended December 31, 2007. We used net loan proceeds of $554 million to fund the Sands Regent and Primm Acquisitions. Also in 2007, we made distributions to our stockholders of $10.3 million. The distributions included $3.3 million for personal taxes and $7.0 million for additional distributions.

On January 3, 2007, we entered into the Credit Agreement, which was an amendment and restatement of our previous amended and restated Credit Agreement dated as of October 8, 2004. We borrowed $375.0 million in term loans under the credit agreement on the date of the agreement to finance the Sands Regent Acquisition and $325.0 million in delay draw term loans and a draw on the revolving credit facility in an amount of $75.0 million on April 9, 2007 to finance the Primm Acquisition.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2007.

	Payments Due by Period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Contractual Obligations:
Long-term debt	$	1,146,070	$	7,634	$	15,209	$	174,565	$	948,662
Estimated interest payments (1)	585,236		101,615		201,086		190,675		91,860
Operating leases	442,170		59,900		114,351		70,425		197,494
Total contractual cash obligations	$	2,173,476	$	169,149	$	330,646	$	435,665	$	1,238,016

(1) Estimated interest for variable rate debt is based on rates at December 31, 2007

Critical Accounting Policies

The preparation of our financial statements requires our management to adopt accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Our business and industry is highly regulated. The majority of our revenue is counted in the form of cash, chips and tokens and therefore, is not subject to any significant or complex estimation procedures.

We have determined that the following accounting policies and related estimates are critical to the preparation of our consolidated financial statements:

Long-Lived Assets

We have a significant investment in long-lived property and equipment and lease acquisition costs. Significant accounting policies that affect the reported amounts for these assets include the determination of the assets’ estimated useful life, evaluation of the assets’ recoverability and the likelihood of technological obsolescence. We estimate useful lives for property and equipment based on historical experience and estimates of products’ commercial lives. Significant incremental costs associated with the acquisition of location leases are capitalized and amortized using the straight-line method over the term of the related leases, which range from 1 to 20 years. Should the actual useful life of an asset differ from the estimated useful life, future operating results could be positively or negatively affected. We review useful lives, obsolescence, and assess commercial viability of these assets periodically.

We assess the recoverability of long-lived assets when circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is determined based on undiscounted expected future cash flows. An adverse change to the estimate of these undiscounted future cash flows could necessitate an impairment charge that could adversely affect operating results.

Goodwill and Intangible Assets

We have a significant investment in goodwill and other intangible assets on our consolidated balance sheet as of December 31, 2007. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The estimated fair values of the assets acquired pursuant to the Grace Acquisition, Sands Regent Acquisition and Primm Acquisition, a substantial portion of which consisted of intangible assets comprised of license rights, were determined by management after considering various information including an independent appraisal. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill.

We review the investment in goodwill and license rights for impairment annually. The annual evaluation of goodwill and license rights requires the use of estimates about future operating results of each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates. Once impairment of goodwill or other intangible assets has been recorded, it cannot be reversed. An adverse change to the estimate of these future cash flows could necessitate an impairment charge that could adversely affect operating results.

Recently Issued Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS No. 159 permits all companies to choose to measure eligible items at fair value at specified election dates. At each subsequent reporting date, a company shall report in earnings any unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the company also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements”. The Company is not going to adopt SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB deferred the adoption of SFAS No. 157 for one year as it applies to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests in accordance with SFAS No. 142 and long-lived assets measured at fair value for impairment assessments under SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets”. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141 that the acquisition method be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. By applying the acquisition method to all transaction and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 141(R) to have a material effect on our consolidated financial statements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51.” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss on net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect the adoption of SFAS No. 160 will have a material effect on our consolidated financial statements.

Statement on Forward-Looking Information

We make statements in this report that relate to matters that are not historical facts that we refer to as “forward-looking statements” regarding, among other things, our business strategy, our prospects and our financial position. These statements may be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties. Forward-looking statements in this report include, among other things, statements concerning:

· projections of future results of operations or financial condition;

· expectations for our route operations and our casino properties; and

· expectations of the continued availability of capital resources.

Any forward-looking statement made by us necessarily is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and are subject to change. Actual results of our operations may vary materially from any forward-looking statement made by or on our behalf. Forward-looking statements should not be regarded as a representation by us or any other person that the forward-looking statements will be achieved. Undue reliance should not be placed on any forward-looking statements. Some of the contingencies and uncertainties to which any forward-looking statement contained herein is subject include, but are not limited to, the following:

· The current general economic downturn, and in particular the economic downturn in southern Nevada and southern California (two of our primary markets), may adversely affect our business.

· The current economic downturn may worsen, which may have an adverse impact on the Company’s operations and therefore the Company’s liquidity.

· Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the instruments governing our outstanding indebtedness.

· We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.

· The success of our route operations is dependent on our ability to renew our contracts.

· Our indebtedness imposes restrictive covenants on us that, should current operating trends continue, may require further amendments to our credit facilities, which we may not be able to negotiate.

· We may not be able to successfully integrate the operations of casinos we acquire into our business.

· We may experience a loss of market share due to intense competition.

· We face extensive regulation from gaming and other government authorities.

· Changes to applicable tax laws could have a material adverse effect on our financial condition.

· We depend upon our key employees and certain members of our management.

· Our executive officers and members of our board of directors own 100% of the Company, which could lead to conflicts of interest.

For additional contingencies and uncertainties, see “Item 1. Business-Risk Factors.”

Industry and Market Data

This report includes market and industry data that we obtained from our own research, studies conducted by third party sources that we believe to be reliable and industry and general publications published by third parties and, in some cases, management estimates based on industry and other knowledge. We have not independently verified any of the data from third party sources, and we make no representation as to the accuracy of such information. While we believe internal company estimates are reliable and market definitions are appropriate, they have not been verified by any independent sources, and we make no representations as to the accuracy of such estimates.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and commodity prices. We do not have any cash or cash equivalents as of December 31, 2007 that are subject to market risk based on changes in interest rates. As a result of borrowings under our credit agreement, we are exposed to market risk due to floating or variable interest rates. The interest on revolving borrowings and on the additional term loan under our credit facility is based on a floating rate (a base rate or LIBOR, at our option), plus a leverage grid-based variable amount. At December 31, 2007, the principal amount of borrowings under our credit facility was approximately $817 million. In November 2007, we terminated the interest rate swap that we entered into in January 2007 which covered notional amounts totaling $450 million. Consequently, a hypothetical 1.0% increase in LIBOR would result in an approximately $8.2 million annual increase in interest expense.

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Consolidated Balance Sheets As of December 31, 2006 and 2007

Consolidated Statements of Operations For the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Stockholders’ Equity (Deficiency) For the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Cash Flows For the years ended December 31, 2005, 2006 and 2007

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Herbst Gaming, Inc. and subsidiaries
Las Vegas, Nevada

We have audited the accompanying consolidated balance sheets of Herbst Gaming, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Herbst Gaming, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company’s operating loss, stockholders’ capital deficiency and probable failure to comply with its financial covenants during 2008 raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 14 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 31, 2008

Herbst Gaming, Inc.

Consolidated Balance Sheets

(in thousands)

	December 31
	2006		2007
Assets
Current assets
Cash and cash equivalents	$	65,640	$	94,282
Accounts receivable, net	3,515		7,012
Notes and loans receivable	864		609
Prepaid expenses	6,681		17,134
Inventory	2,553		4,995
Total current assets	79,253		124,032
Property and equipment, net	234,515		548,709
Lease acquisition costs, net	33,162		21,551
Due from related parties	1,627		1,704
Other assets, net	16,419		27,892
Intangibles, net	200,219		244,059
Goodwill	3,255		112,438

Total assets	$	568,450	$	1,080,385

Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	1,105	$	7,634
Accounts payable	10,016		18,429
Accrued expenses	15,408		32,946
Due to related parties	—		—
Total current liabilities	26,529		59,009
Long-term debt, less current portion	521,513		1,138,436
Other liabilities	1,637		1,669
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock (no par value; 2,500 shares authorized; 300 shares issued and outstanding)	2,368		2,368
Additional paid-in-capital	1,631		1,631
Retained earnings(accumulated deficit)	14,772		(122,728		)
Total stockholders’ equity	18,771		(118,729		)

Total liabilities and stockholders’ equity	$	568,450	$	1,080,385

See notes to consolidated financial statements.

Herbst Gaming, Inc.

Consolidated Statements of Operations

(in thousands)

	Year Ended December 31,
	2005			2006			2007
Revenues
Route operations	$	339,401		$	347,041		$	276,946
Casino operations	213,174			237,049			473,248
Other—non gaming	4,923			10,676			98,987

Total revenues	557,498			594,766			849,181
Less promotional allowances	(21,657		)	(32,703		)	(64,241		)

Net revenues	535,841			562,063			784,940
Costs and expenses
Route operations	258,114			271,463			244,086
Casino operations	138,364			152,201			335,252
Depreciation and amortization	33,941			38,124			56,405
General and administrative	15,217			13,324			22,983
Other – non-gaming				6,491			80,184
Loss on impairment of assets	—			—			72,965
Loss on asset retirement	3,360			—			—

Total costs and expenses	448,996			481,603			811,875

Income (Loss) from operations	86,845			80,460			(26,935		)
Other income (expense)
Interest income	740			734			1,481
Interest expense, net of capitalized interest of $0, $101, and $873, respectively	(36,532		)	(39,134		)	(85,631		)
Change in value of derivative instruments	—			—			(16,115		)
Loss on early retirement of debt	(221		)	—			—
Total other expense, Net	(36,013		)	(38,400		)	(100,265		)

Net (loss) income	$	50,832		$	42,060		$	(127,200	)

See notes to consolidated financial statements.

Herbst Gaming, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands)

Balance	Common Stock		Additional Paid-In Capital		Retained Earnings (accumulated deficit)			Total

Balance, January 1, 2005	$	2,368	$	1,631	$	(34,763	)	$	(30,764	)
Net income					50,832			50,832
Stockholders’ distributions	—		—		(12,087		)	(12,087		)
Balance December 31, 2005	$	2,368	$	1,631	$	3,982		$	7,981
Net income					42,060			42,060
Stockholders’ distributions					(31,270		)	(31,270		)
Balance December 31, 2006	$	2,368	$	1,631	$	14,772		$	18,771
Net loss					(127,200		)	(127,200		)
Stockholders’ distributions					(10,300		)	(10,300		)
Balance December 31, 2007	$	2,368	$	1,631	$	(122,728	)	$	(118,729	)

See notes to consolidated financial statements.

Herbst Gaming, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2005			2006			2007
Cash flows from operating activities
Net (loss)income	$	50,832		$	42,060		(127,200		)
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization	33,941			38,124			56,405
Amortization of debt issuance costs	1,801			1,811			3,188
Debt discount amortization	146			143			144
Gain (loss) on sale of property and equipment	(27		)	152			105
Loss on retirement of assets	3,360			—			—
Loss on early retirement of debt	221			—			—
Loss on impairment of assets	—			—			72,965
Decrease (increase) in:
Accounts receivable	(621		)	(1,527		)	3,790
Prepaid expenses	(37		)	(443		)	(4,169		)
Inventory	(1,101		)	77			(239		)
Due from related parties	(3		)	(4		)	(606		)
Other assets	(1,303		)	(1,295		)	(538		)
Increase (decrease) in:
Accounts payable	2,813			848			(1,074		)
Accrued expenses	1,799			1,447			1,994
Due to related parties	(34		)	(2		)	—
Other liabilities	417			102			(492		)
Net cash provided by operating activities	$	92,204		$	81,493		$	4,273
Cash flows from investing activities
Net cash paid for acquisition of riverboat assets, net of cash acquired	(264,457		)	—			—
Net cash paid for acquisition of software assets, net of cash acquired	—			(10,231		)	—
Net cash paid for Sands Regent Acquisition, net of cash acquired	—			(1,542		)	(147,878		)
Net cash paid for Primm Acquisition, net of cash acquired	—			—			(393,682		)
Additions to notes and loans receivable	(1,303		)	(1,090		)	(1,153		)
Collection on notes and loans receivable	1,322			872			1,937
Proceeds from sale of property and equipment	264			378			248
Purchases of property and equipment	(43,893		)	(66,622		)	(32,418		)
Lease acquisition costs	(1,105		)	(1,523		)	(1,180		)

Net cash used in investing activities	$	(309,172	)	$	(79,758	)	$	(574,128	)

See notes to consolidated financial statements.

	Year Ended December 31,
	2005			2006				2007

Cash flows from financing activities
Proceeds from long term debt	$	191,000		$	33,000			$	853,000
Payments on long term debt	(23,965		)	(11,118			)	(229,692			)
Loan origination fees	(2,082		)	(556			)	(14,513			)
Loss on early retirement of debt	(221		)	—				—
Stockholders’ distributions	(12,087		)	(31,270			)	(10,300			)
Net cash provided (used in) by financing activities	152,645			(9,944			)	598,495
Net increase (decrease) in cash and cash equivalents	(64,323		)	(8,209			)	28,642
Cash and cash equivalents
Beginning of year	138,172			73,849				65,640
End of year	$	73,849		$		65,540		$		94,282
Supplemental cash flow information:
Cash paid during the period for interest	$	33,979		$		37,790		$	81,579
Supplemental schedule of non cash investing and financing activities:
Purchase of property and equipment financed through accounts payable	$	3,495		$		1,802		$		1,028

See notes to consolidated financial statements.

Herbst Gaming, Inc.

Notes to consolidated financial statements

1. Description of Business and Summary of Significant Accounting Policies

Description of Business and Principles of Consolidation—The accompanying condensed consolidated financial statements of Herbst Gaming, Inc. (“Herbst” or the “Company”) include the accounts of Herbst and its subsidiaries: E-T-T, Inc. and subsidiaries (“ETT”), Market Gaming, Inc. (“MGI”), E-T-T Enterprises L.L.C. (“E-T-T Enterprises”), Flamingo Paradise Gaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”), HGI-Mark Twain (“HGI-MT”), The Sands Regent and subsidiaries (“The Sands Regent”) and The Primadonna Company LLC (“Primadonna”). The financial statements of ETT are consolidated and include the following wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc. and Corral Country Coin, Inc. The financial statements of The Sands Regent are consolidated and include the following direct and indirect wholly-owned subsidiaries: Zante, Inc., Last Chance, Inc., California Prospectors, Ltd. (which is a wholly owned subsidiary of Last Chance, Inc.), Plantation Investments, Inc. and Dayton Gaming, Inc.

All significant intercompany balances and transactions between and among Herbst, ETT, MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The Sands Regent and Primadonna have been eliminated in the condensed consolidated financial statements. ETT and MGI conduct business in the gaming industry and generate revenue principally from gaming machine route operations and casino operations. Gaming machine route operations involve the installation, operation and service of gaming machines owned by the Company that are located in licensed, leased or subleased space in retail stores (supermarkets, convenience stores, etc.), bars and restaurants throughout the State of Nevada. The Company owns and operates Terrible’s Town Casino & Bowl in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, both of which are located in Pahrump, Nevada. The operations of the subsidiaries of the Company are as follows:

· E-T-T Enterprises develops and leases real estate to ETT.

· FPG owns and operates Terrible’s Hotel & Casino (“Terrible’s Casino”) in Las Vegas, Nevada, which began operations in December 2000.

· HGI-L owns and operates Terrible’s Lakeside Casino (“Lakeside Iowa”), as well as a hotel, gas station and convenience store, all located in Osceola, Iowa, which were acquired in February 2005.

· HGI-SJ owns and operates Terrible’s St. Jo Frontier Casino (“St. Jo”) in St. Joseph, Missouri, which was acquired in February 2005.

· HGI-MT owns and operates Terrible’s Mark Twain Casino in La Grange, Missouri, which was acquired in February 2005.

· The Sands Regent and its direct and indirect wholly-owned subsidiaries, which were acquired on January 3, 2007, own and operate Terrible’s Rail City Casino in Sparks, Nevada, the Sands Regency Casino Hotel in Reno, Nevada, the Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada and Terrible’s Dayton Casino and Red Hawk Sports Bar, each of which is in Dayton, Nevada (all such properties acquired pursuant to the Sands Regent Acquisition, together the “Sands Regent Casinos” see Note 2)).

· Primadonna, which was acquired on April 10, 2007, owns and operates Whiskey Pete’s Hotel and Casino (“Whiskey Pete’s”), Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley,” and together with Whiskey Pete’s and Buffalo Bill’s,

together the “Primm Casinos”), a California lottery station located on the Nevada/California border, three gasoline stations and the Primm Travel Center (such properties, together with the Primm Casinos, the “Primm Properties”), all of which are located in Primm, Nevada (see Note 2).

We have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986. Under those provisions, the owners of the Company pay income taxes on its taxable income. Accordingly, a provision for income taxes is not included in our financial statements. During the first quarter of 2007, The Sands Regent converted to a Subchapter S Corporation from a C Corporation.

The gaming industry in the States of Nevada, Iowa, and Missouri is subject to extensive state and local government regulation. The Company’s gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada Gaming Control Board, the Iowa Race and Gaming Commission, the Missouri Gaming Commission as well as local jurisdictions.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates incorporated into the Company’s consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable and the estimated cash flows in assessing the recoverability of long-lived assets as well as estimated fair values of certain assets related to write downs and impairments. Actual results could differ from those estimates.

Reclassifications—As noted above, during 2007 we completed the acquisitions of the Sands Regent and Primadonna properties. After the acquisitions, we analyzed the operations of our newly acquired properties, in comparison to our previous operational mix between route and casino operations as it related to the classification of certain expenses. As a result of this analysis, certain amounts have been reclassified from general and administrative expenses to route and casino expenses to present the expenses incurred for operations going forward to conform to the current period’s presentation. Expenses for the twelve months ended December 31, 2005 include the following: general and administrative expenses are decreased by $4,372,000, route expenses are increased by $1,142,000, Nevada casino expenses are increased by $3,466,000, Midwest casino expenses are decreased by $236,000. In addition, expenses for the twelve months ended December 31, 2006 include the following: general and administrative expenses are decreased by $5,124,000, route expenses are increased by $1,315,000 and Nevada casino expenses are increased by $3,809,000. Such reclassifications had no impact on net income or equity. There was also a reclassification of revenue in 2005 due to $299 in entertainment revenue being moved from “Other Revenue” to “Casino Revenue” and the movement of $802 Route related service revenue from “Other Revenue” to “Route Revenue”. These reclassifications did not impact “Total Revenue” and conform to the 2007 presentation.

Cash and Cash Equivalents—Cash and cash equivalents include highly liquid investments with a maturity at the date of purchase of three months or less. The carrying value of these investments approximates their fair value due to their short maturities.

Fair Value of Financial Instruments—The carrying value of the Company’s cash, notes and loans receivable, and trade payables approximates fair value primarily because of the short maturities of these instruments. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Based on the borrowing rates currently available to the Company for debt with similar terms and average maturities, the estimated fair value of long-term debt outstanding is approximately $1,025,396,051 as of December 31, 2007.

Accounts Receivable—Receivables consist primarily of amounts due from customers as a result of normal business operations. The Company periodically performs credit evaluations of its customers. The Company reviews accounts receivable balances in order to determine an allowance for potential credit losses based on our collections experience and the age of the receivables. At December 31, 2006 and 2007, the allowance for potential credit losses was $488,000 and $802,000, respectively.

Notes and Loans Receivable—In order to secure various route locations, the Company has provided certain incentives to the location operators in the form of loans. The loans, made for build-outs, tenant improvements, and initial operating expenses, are generally secured by the personal guarantees of the operators and

the locations’ assets. The majority of the loans are non-interest bearing and are expected to be repaid within one year from the locations’ share of net gaming win.

The Company regularly evaluates the collectibility of the loans by individually evaluating each location’s operating results and cash flows. Management provides for the carrying value of loans that are determined to be uncollectible. At December 31, 2006 and 2007, no allowance for potential credit losses was deemed necessary.

Inventory—Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventories include parts, food, liquor, retail items and gasoline.

Property and Equipment—Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Useful lives are as follows:

Building		40 years
Gaming equipment		5 years
Furniture, fixtures, and equipment		5 – 10 years
Leasehold improvements		1 – 20 years

Lease Acquisition Costs— Significant incremental costs associated with the acquisition of location leases are capitalized and amortized using the straight-line method over the term of the related leases. Lease acquisition costs are stated at cost less accumulated amortization of $43,110,000 and $34,129,000 at December 31, 2006 and 2007, respectively.

Debt Issuance Costs—Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements. Debt issuance costs are included in other assets on the balance sheets (see Note 6).

1. Description of Business and Summary of Significant Accounting Policies (continued)

Long-Lived Assets—In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company evaluates the potential impairment of long-lived assets when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If it is determined that the carrying value of long-lived assets may not be recoverable based upon the relevant facts and circumstances, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, the Company will recognize an impairment loss for the difference between the carrying value of the asset and its fair value. The Company believes that no impairment of long-lived assets exists at December 31, 2007.

Goodwill and Intangible Assets— We had approximately $3,255,000 and $112,438,000 in goodwill on our consolidated balance sheet as of December 31, 2006 and December 31, 2007, respectively. Approximately $56,467,000 of the total goodwill for fiscal year 2007 is from the Sands Regent Acquisition, and an additional $89,215,000 is from the Primm Acquisition, each as described in Note 2 below. The amount recorded as of December 31, 2007 also reflects a decrease of $36,500,000 associated with the impairment of goodwill at the casino in Primm, Nevada (see Note 5).

We had $200,219,000 and $244,059,000 in other intangible assets on our consolidated balance sheet as of December 31, 2006 and December 31, 2007, respectively. Approximately $25,950,000 of the total for fiscal year 2007 is from the Sands Regent Acquisition, and an additional $53,850,000 is from the Primm Acquisition, each as described in Note 2 below. The number also reflects a decrease of $33,300,000 associated with the impairment of intangibles at Lakeside Iowa (see Note 5).

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires a review of goodwill and the license rights for impairment at least annually. We complete our annual assessment for impairment in the fourth quarter of each year. The annual evaluation of goodwill and the license rights requires the use of estimates about future operating results of each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates. Once impairment of goodwill or other intangible assets has been recorded, it cannot be reversed.

Revenue and Promotional Allowances—In accordance with industry practice, the Company recognizes as gaming revenues the net win from route operations, which is the difference between gaming wins and losses. The Company recognizes total net win from gaming devices as revenues from gaming routes that operate under revenue-sharing arrangements. Revenue-sharing payments to route locations are recorded as costs of route operations. Revenues from casino operations are gaming wins less losses. Revenues from retail sales are presented net of sales tax. Revenues from casino operations include the retail value of food and beverage and goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is as follows:

	Year Ended December 31,
	2005		2006		2007
	(dollars in thousands)
Room	$	858	$	986	$	8,094
Food and Beverage	6,807		8,096		21,507
Other	10,974		19,824		20,150
Total	$	18,639	$	28,906	$	49,751

These costs are reclassified out of the respective department into the casino department.

Liabilities in respect of the Company’s player’s club program are recognized as points are earned and are included in the “Other liabilities” line of the Company’s balance sheet. Expenses in respect of the Company’s player’s club program are included in the “Promotional allowances” line of the Company’s statement of operations.

Location Rent Expense— Fixed rental payments (including scheduled increases) are recorded on a straight-line basis over the agreement term. Renewal agreements are considered new agreements and are accounted for as described above over the new agreement term.

Income Taxes—Herbst, E-T-T and MGI have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the owners are liable for income tax on the taxable income of the Company as it affects the owners’ individual income tax returns. Therefore, a provision for income taxes has not been included in the accompanying consolidated financial statements.

Concentrations of Credit Risk—The Company maintains cash balances at certain financial institutions located in southern Nevada. The balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At times, cash balances may be in excess of FDIC limits. As of December 31, 2007, the Company does not consider itself to have any significant concentrations of credit risk.

Recently Issued and Adopted Accounting Standards— In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS No. 159 permits all companies to choose to measure eligible items at fair value at specified election dates. At each subsequent reporting date, a company shall report in earnings any unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. The Company does not expect to adopt SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB deferred the adoption of SFAS No. 157 for one year as it applies to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests in accordance with SFAS No. 142 and long-lived assets measured at fair value for impairment assessments under SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets”. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

2. Acquisitions

Primm Acquisition

On April 10, 2007, the Company completed the acquisition of certain gaming assets of MGM MIRAGE (the “Primm Acquisition”) for a net cash purchase price of $394 million. These assets include Buffalo Bill’s Hotel and Casino, Primm Valley Resort and Whiskey Pete’s Hotel and Casino located in Primm, Nevada. The purchase price allocation is described in the following tables. The Company used borrowings under its senior credit facility to fund the purchase price of the Primm Acquisition. The acquisition was recorded under the purchase method of accounting and the results of operations of the Primm Properties have been included in the Company’s consolidated results following the date of acquisition. All of the goodwill associated with the Primm Acquisition is included in the “Casino Operations—Nevada” reporting segment.

The allocation of the purchase price for the Primm Acquisition, is as follows:

Estimated Fair Market Value of assets acquired (in thousands) net of cash:

Receivables	$	2,513
Inventory	1,603
Prepaid expenses	4,152
Property, plant and equipment	262,002
Other assets	1,310
Intangible assets
Trade Name	40,600
Customer Loyalty Program	13,250
Goodwill	89,215

Estimated Fair Market Value of liabilities assumed (in thousands):

Accounts payable	$	(8,112	)
Accrued expenses	(11,582		)
Other Liabilities	(500		)
Total cash purchase price	$	394,451

The purchase price allocation presented above is final as it relates to all amounts except for property, plant and equipment. The Company is finalizing its review of various valuation data and will record final adjustments to the purchase allocation, if any, in the first quarter of 2008. Any adjustment to property, plant and equipment would result in an offsetting adjustment to goodwill.

As further discussed in Note 5, intangible assets presented in the table above reflect the allocation of the purchase price of the Primm assets on April 10, 2007. Due to a continued deterioration in the operating results of the Primm casinos from that date through the date of our annual review of the fair value of the assets acquired on October 31, 2007, management concluded that the assets were impaired and recognized non cash impairment charges of $36.5 million to write down the carrying value of goodwill to its estimated fair value.

Sands Regent Acquisition

On January 3, 2007, the Company completed the acquisition of The Sands Regent (the “Sands Regent Acquisition”), paying approximately $149 million in cash for the outstanding securities of The Sands Regent, the repayment of outstanding debt and related fees. The purchase price allocation is described in the following tables. Pursuant to the Sands Regent Acquisition, the Company acquired Rail City Casino in Sparks, Nevada, Sands Regency Casino Hotel in Reno, Nevada, Gold Ranch Casino and RV Resort in Verdi Nevada and Dayton Casino and Red Hawk Sports Bar, each in Dayton, Nevada. The Company used borrowings under its senior credit facility to fund the purchase price of the Sands Regent Acquisition. The Sands Regent Acquisition was recorded under the purchase method of accounting and the results of operations of the assets of The Sands Regent have been included in the Company’s consolidated results following the date of acquisition. All of the goodwill associated with the Sands Regent Acquisition is included in the “Casino Operations—Nevada” reporting segment.

The allocation of the purchase price for the Sands Regent Acquisition is as follows:

Estimated Fair Market Value of assets acquired (in thousands) net of cash:

Receivables	$	4,726
Inventory	600
Prepaid	2,132
Property, plant and equipment	64,888
Intangible assets
Trade Name	14,550
Customer Loyalty Program	11,400
Goodwill	56,467

Estimated Fair Market Value of liabilities assumed (in thousands):

Accounts payable	$	(2,150	)
Accrued expenses	(3,962		)
Total cash purchase price	$	148,651

The table below reflects unaudited pro forma consolidated results of the Company as if the Sands Regent Acquisition and the Primm Acquisition had taken place at January 1, 2006 (dollars in thousands).

	Year Ended December 31,
	2006		2007
	(dollars in thousands) (unaudited)
Revenue	$	990,433	$	924,943
Income (loss) from operations	108,800		(24,593		)
Net income (loss)	$	29,252	$	(133,179	)

In management’s opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisition had been effective at the beginning of the earliest period presented.

3. Property and Equipment

Property and equipment consist of the following (in thousands):

	December 31,
	2006			2007
Building	$	133,867		$	411,730
Gaming equipment	116,630			139,212
Furniture, fixtures, and equipment	52,248			81,078
Leasehold improvements	2,001			2,038
Land	19,425			37,528
Barge	17,153			17,160
Construction-in-progress	2,344			10,673
	343,668			699,719
Less accumulated depreciation	(109,153		)	(150,710		)
	$	234,515		$	548,709

4. Lease Acquisition Costs

	December 31, 2006				December 31, 2007
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
			(dollars in thousands)

Lease Acquisition Costs	$	76,272	$	43,110	$	55,681	$	34,130

The aggregate amortization expense for the years ended December 31, 2005, 2006 and 2007 was $10,011,000, $10,272,000 and $9,577,731, respectively.

During 2007, the Company recognized the impairment of two of its route space lease contracts in conjunction with the renegotiation of those contracts in response to the Nevada smoking ban. The gross carrying amount of those leases was $21,643,202 and the accumulated amortization was $ 18,478,502, resulting in a net impairment of $3,165,000.

Estimated amortization expense for the years ended 2008, 2009, 2010, 2011 and 2012 is $7,107,000, $6,640,000, $6,478,000, $760,000 and $269,000, respectively.

5. Goodwill and Other Intangible Assets

SFAS No. 142 requires the Company to test intangibles licenses and other indefinite live intangibles on an annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value below the amount reflected in the balance sheet. The annual test, which is performed by the Company as of October 31 in the fourth quarter of each year, requires that the Company compare the carrying amount of the intangibles reflected on the balance sheet to the fair value of the intangibles.

The Company determines the fair value of the intangible license’s within its markets by relying primarily on a discounted cash flow approach. For purpose of testing the carrying values of its intangible licenses for impairment, the fair value of intangibles contains significant assumptions incorporating variables that are based on past experiences and judgments about future performance using industry normalized information for an average location within a market. These variables include, but are not limited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusted discount rate and (3) expected growth rates for perpetuity to estimated terminal values.

SFAS No. 142 also requires the Company to test goodwill at its reporting units within its market segment on a annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of goodwill below the amount reflected in the balance sheet. The Company performs its annual impairment test as of October 31 in the fourth quarter of each year by comparing the fair value with the amount reflected in the balance sheet. If the fair value of the goodwill is less than the amount reflected in the balance sheet, an indication exists that the amount of goodwill attributed to a reporting unit may be impaired, and the Company is required to perform a second step of the impairment test. In the second step, the Company compares the implied fair value of the reporting units goodwill, determined by allocating the reporting units’ fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to the amount reflected in the balance sheet.

To determine the fair value, the Company uses an income and/or market approach for each reporting unit. The market approach compares recent sales and purchase price multiples of similar businesses. The income approach uses the subject property’s income generated over a specified time and capitalized at an appropriate market rate to arrive at an indication of the most probable selling price. If actual market conditions are less favorable than those projected by the industry or the Company, or if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the Company’s intangibles or goodwill below the carrying amounts of the respective reporting unit, the Company may be required to recognize impairment charges in future periods, which could have a material impact on its consolidated financial condition and results of operations.

On February 2, 2005, the Company acquired the assets of the casino operation located in Osceola, Iowa (the Grace Acquisition). During 2006, four new casino licenses began operations in the state of Iowa. Since those new licensees have begun operations, the casino located in Osceola, Iowa (“Lakeside Iowa”) has experienced significant operational challenges and the earnings of this casino have declined significantly. Fair market values of the Intangibles and goodwill, totaling approximately $122.0 million and $1.2 million respectively, were recorded on our balance sheet and represented a substantial portion of total assets. The fair value of intangibles and goodwill is dependent on both the future cash flows expected to be generated by the assets and other market conditions that impact the value a willing buyer would pay for such assets. Due to a continued deterioration in the operations of Lakeside Iowa and management’s belief that the deterioration in operations is likely to continue, the Company

recognized a non-cash impairment charge of $33.3 million, which is comprised entirely of impairment to the gaming license to reduce its carrying value to its estimated fair value. If market conditions and operational performance of Lakeside Iowa were to continue to deteriorate, or if facts and circumstances change that would more likely than not reduce the estimated fair value of the intangibles and goodwill below their adjusted carrying amounts, the Company may be required to recognize additional non-cash impairment charges in future periods, which could have a material impact on the Company’s financial condition and results of operations.

On April 10, 2007, the Company acquired the equity of the Primadonna Company LLC. Intangibles and goodwill, totaling approximately $53.9 million and $89.2 million, respectively, were recorded as part of the purchase price allocation and represented a substantial portion of total assets. The fair value of intangibles and goodwill is dependent on both the future cash flows expected to be generated by the assets and other market conditions that impact the value a buyer would pay for such assets. Subsequent to the purchase of this company, the operating results declined significantly, primarily as a result of economic pressures in Primm’s primary markets in southern California. At October 31, 2007, (the Company’s annual impairment testing date), the Company recognized a non-cash impairment charge of $36.5 million, which is comprised of $36.5 million in goodwill impairment to reduce the carrying values of the Primm assets to their estimated fair values. If market conditions and operational performance of the Primm Casinos continue to deteriorate, or if facts and circumstances change that would more likely than not reduce the estimated fair value of the intangibles and goodwill below their adjusted carrying amounts, the Company may be required to recognize additional non-cash impairment charges in future periods, which could have a material impact on the Company’s financial condition and results of operations.

During 2007, the Company acquired the equity of both The Sands Regent and The Primadonna Company LLC. In connection with these transactions, we recorded significant amounts of intangible assets and goodwill during the year ended December 31, 2007 that are included in the table below as well as the aforementioned impairment charges.

Intangible assets consist of the following (dollars in thousands):

	December 31, 2006				December 31, 2007
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount			Accumulated Amortization
	(dollars in thousands)
Amortized intangible assets
Customer Loyalty Programs	$	2,900	$	1,389	$	27,550		$	3,612
Non-Competition Agreement	2,180		512		2,180			948
Total	5,080		1,901		29,730			4,560

Unamortized intangible assets
Gaming License Rights	196,800				196,800
Impairment of intangibles	—				(33,300		)
Patent applications	240				240
Tradename	—				55,150
Total	$	197,040			$	218,890

The changes in the carrying amount of goodwill for the year ended December 31, 2007 are as follows:

Balance as of January 1, 2007	$	3,255
Goodwill acquired during the year	145,683
Impairment of goodwill	(36,500		)
Total	$	112,438

License rights are intangible assets acquired from the purchase of gaming entities that operate in gaming jurisdictions where competition is limited, such as states where only a certain number of operators are allowed by law. Intangible license rights are not currently subject to amortization as we have determined they have an indefinite useful life.

Customer loyalty program assets are being ratably amortized over an average life of 9.7 years.

Non-competition agreements were entered with certain previous owners and management and are amortized over five years, which is the contractual life of the agreement.

For the year ended December 31, 2007, amortization expense of intangibles was $2,659,000. The expected annual amortization of those assets for the years ended December 31, 2008, 2009, 2010, 2011 and 2012; the amortization costs will be $2,880,000, $2,216,000, $1,954,000, $1,845,000 and $ 1,719,000, respectively.

6. Other Assets

Other assets consist of the following (dollars in thousands):

	December 31,
	2006		2007
Debt issuance costs, net of accumulated amortization of $4,145, and $7,333, respectively	$	10,475	$	21,799
Other assets	6,174		6,093
Total	$	16,419	$	27,892

7. Accrued Expenses

Accrued expenses consist of the following (dollars in thousands):

	December 31,
	2006		2007
Accrued interest	$	3,635	$	4,562
Progressive jackpot liabilities	2,080		3,003
Accrued payroll and related	4,267		13,312
Slot club point liability	1,201		4,054
Other accrued	4,225		8,015
Total	$	15,408	$	32,946

8. Long-Term Debt

Long-term debt consists of the following (dollars in thousands):

	December 31,
	2006			2007

Revolving credit facility secured by assets of the Company. The draws bear interest at a floating rate based on a spread determined by the Company’s leverage ratio over the base rate or the one-, two-, three- or six-month Eurodollar Rate. The average rate at 12/31/07 was 9.4%. The revolving credit facility matures on June 10, 2009	$	95,000		$	63,000
Term loan secured by substantially all of the assets of the Company. The term loan bears interest an a floating rate based on a spread determined by the Company’s leverage ratio over the base rate or the one-, two-, three- or six-month Eurodollar Rate. The term loan requires $938 principal payments due quarterly, with the balance payable at maturity. The average rate at 12/31/07 was 9.4%. The term loan matures on January 31, 2011	98,250			371,250
Term loan secured by substantially all of the assets of the Company. The term loan bears interest an a floating rate based on a spread determined by the Company’s leverage ratio over the base rate or the one-, two-, three- or six-month Eurodollar Rate. The term loan requires $938 principal payments due quarterly, with the balance payable at maturity. The average rate at 12/31/07 was 9.4%. The term loan matures on January 31, 2011				59,850
Delay draw term loan secured by substantially all of the assets of the Company. The delay draw term loan bears interest at a floating rate based on a spread determined by the Company’s leverage ratio over the base rate or the one-, two-, three- or six-month Eurodollar Rate. The delay draw term loan requires $812 in principal payments due quarterly for the first five years of such term loan, with the balance payable at maturity. The average rate at December 31, 2007 was 9.4%. The delay draw term loan matures on December 2, 2011				322,563
8¹/₈ % senior subordinated notes due June 1, 2012 with interest paid semi-annually on June 1 and December 1, including original issue discount of $1,065	159,221			159,365
7% senior subordinated notes due November 1, 2014 with interest paid semi-annually on May 15 and November 15	170,000			170,000
Notes payable to automobile finance companies secured by vehicles, payable in monthly installments of $10, including interest ranging from 0% to 7.99%	147			42
Total debt	522,618			1,146,070
Less current portion	(1,105		)	(7,634		)
Total long-term debt	$	521,513		$	1,138,436

8 ¹/₈% Senior Subordinated Notes

On June 11, 2004, the Company issued (through a private placement) $160 million in 8 ¹/₈% senior subordinated notes due June 1, 2012 (the “8 ¹/₈% notes”).

The proceeds from the 8 ¹/₈% notes, along with the amended credit facility, were used to retire 97% of the outstanding 10 ³/₄% notes for $242.1 million and to pay a $15.0 million dividend to shareholders. Fees of $4.3 million associated with the 8 ¹/₈% notes and $3.5 million associated with the amended credit facility are included in Other assets at December 31, 2006 and are being amortized over the life of the indebtedness. In connection with the retirement of 97% of the 10 ³/₄% notes in 2004, the Company recorded a loss on the early retirement of debt of $38.0 million. The loss consisted of $31.3 million in debt prepayment premiums and $6.7 million in unamortized loan fees.

The 8 ¹/₈% notes mature on June 1, 2012. Interest is payable in cash at a rate of 8 ¹/₈% per annum on June 1 and December 1 of each year, beginning on December 1, 2005. The indenture under which the 8 ¹/₈% notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on certain payments such as dividends. The Company is in compliance with these covenants as of December 31, 2006.

In August 2005, the Company filed a Form S-4 registration statement with the SEC for the purpose of effecting the exchange of the 8 ¹/₈% notes for identical notes registered for resale under the federal securities laws. This registration statement became effective in November 2005 and the exchange offer was consummated in December 2005.

7% Senior Subordinated Notes

On November 22, 2004, the Company issued (through a private placement) $170 million in 7% senior subordinated notes due November 15, 2014 (the “7% notes”).

The proceeds from the 7% notes, along with borrowings under the amended credit facility were used to finance the Grace Acquisition in February 2005 (see Note 2). Fees of $6.2 million associated with the 7% Notes and amended credit facility are included in other assets at December 31, 2006 and are being amortized over the life of the indebtedness.

The 7% Notes mature on November 15, 2014. Interest is payable in cash at a rate of 7% per annum on May 15 and November 15 of each year, beginning on May 15, 2005. The indenture under which the 7% Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on certain payments such as dividends. The Company is in compliance with these covenants as of December 31, 2006.

The Company’s senior notes are guaranteed by E-T-T, Inc., Cardivan Company, Corral Coin, Inc., Corral Country Coin, Inc., Corral Coin, Inc., E-T-T Enterprises L.L.C., Market Gaming, Inc., and Flamingo Paradise Gaming, LLC, HGI-Lakeside, HGI-St Jo and HGI-Mark Twain, The Sands Regent and The Primadonna Company LLC (100 percent-owned subsidiaries of Herbst Gaming, Inc.) and Zante, Inc., Last Chance, Inc., California Prospectors, Ltd. (which is a wholly owned subsidiary of Last Chance, Inc.), Plantation Investments, Inc. and Dayton Gaming, Inc. (100 percent-owned subsidiaries of The Sands Regent) (collectively, the “Subsidiary Guarantors”). Condensed consolidating financial information with respect to the Subsidiary Guarantors is not provided because the Company has no independent assets or operations, the Subsidiary Guarantees are full and unconditional and joint and several, and there are no other material subsidiaries of the Company other than the Subsidiary Guarantors. There are no significant restrictions on the ability of the Company’s Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.

Credit Facilities

On January 3, 2007, the Company entered into a second amended and restated credit agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as Administrative Agent, Swing Line Lender and L/C Issuer, Lehman Commercial Paper, Inc. and Wachovia Bank, National Association, as Syndication Agents, U.S. Bank, National Association, as Documentation Agent and Lehman Brothers Inc. and Wachovia Capital Markets, LLC, as Joint Lead Arrangers and Joint Book Runners as amended by Amendment No. 1 to the Credit Agreement dated August 14, 2007 and Amendment No. 2 to the Credit Agreement dated as if December 14, 2007.

The Credit Agreement was an amendment and restatement of our previous amended and restated Credit Agreement dated as of October 8, 2004.

The Company borrowed $375 million in term loans under the Credit Agreement on January 3, 2007 to finance the Sands Regent Acquisition. The Company also borrowed $325.0 million in delay draw term loans drew on the revolving credit facility in an amount of $75.0 million to finance the Primm Acquisition.

On December 14, 2007, the Company entered into Amendment No. 2 to the Credit Agreement (the “Amendment”). The Amendment provided for a waiver from compliance with the financial covenants set forth in the Credit Agreement for the fiscal quarter ended September 30, 2007. In addition, the Amendment provided for, among other modifications, the following changes to the terms of the Credit Agreement:

· the interest rate premium payable in respect of loans available under the Credit Agreement was increased for Eurodollar loans from LIBOR plus 3.50% to LIBOR plus 3.50%, 4.00% or 4.50% depending on the Company’s Senior Debt to EBITDA Ratio (as defined in the Amendment), and was increased for base rate loans from the base rate plus 3.25% to the base rate plus 2.25%, 2.75% or 3.25% depending on the Company’s Senior Debt to EBITDA Ratio;

· the definition of EBITDA was modified so that EBITDA will be increased (i) for any period that includes the fiscal year ending December 31, 2007, to the extent of the loss associated with the Company’s previously announced termination of interest rate swap agreements and (ii) for certain fiscal quarters, by amounts equal to the anticipated savings resulting from the Company’s previously announced renegotiation of material route agreements;

· the threshold for cash to qualify as “Excess Cash” for purposes of calculating the Total Debt to EBITDA Ratio (as defined in the Credit Agreement) and the Senior Debt to EBITDA Ratio was increased;

· $60,000,000 of outstanding revolving loans were converted into term loans and the revolving commitments in respect thereof have been permanently reduced, and additionally the Company further reduced the revolving commitments by an additional $15,000,000, resulting in an aggregate reduction of the revolving commitments under the Credit Agreement from $175,000,000 to $100,000,000;

· the Company’s right to request increases to the aggregate revolving commitments and additional term loans was terminated;

· the indebtedness and lien covenants were modified to allow the Company to incur up to an additional $275,000,000 of second lien, senior or senior subordinated indebtedness, subject to the terms set forth in the Amendment;

· the Senior Debt to EBITDA Ratio and the Total Debt to EBITDA Ratio have each been adjusted for future measurement periods and the Interest Charge Coverage Ratio (as defined in the Amendment) was decreased for future measurement periods;

· prior to the issuance of any Qualified Additional Debt Capital (as defined in the Amendment) other than subordinated obligations, the Company agreed to enter into control agreements in respect of substantially all of its deposit, brokerage, or other similar account maintained by the Company or its subsidiaries;

· the Company received a waiver of compliance for a specified period of time with the provision of the Credit Agreement requiring that the Company have in place swap contracts on or prior to December 31, 2008 with one or more of the lenders resulting in not less than 50% of its indebtedness for borrowed money having a fixed interest rate;

· in addition to any prepayment premiums required by the Credit Agreement, upon any voluntary prepayment of term loans prior to December 15, 2010, the Company will pay an additional premium of 1%, provided that it will not have to pay any such prepayment premiums required under the Credit Agreement for any prepayments that are in an aggregate principal amount not in excess of $275,000,000 and are made on or prior to December 31, 2008 using proceeds of any qualifying additional debt capital or the proceeds of equity securities issued by the Company;

· the Company used $25,000,000 of its cash on hand to reduce the outstanding principal balance of the revolving loans; and

· after December 31, 2007, cash dividends may be declared and paid only in an aggregate amount not to exceed the Company’s percentage of Excess Cash Flow (as defined in the Amendment) for the preceding fiscal year so long as the Company is in compliance with those financial covenants set forth in the Amendment.

Long-term debt is expected to mature as follows (dollars in thousands):

	December 31,
	2007

2008	$	7,634
2009	7,609
2010	7,600
2011	7,600
2012	166,965
Thereafter	948,662
Total	$	1,146,070

9. Asset Retirement Obligation.

The Company has adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it was incurred if a reasonable estimate of fair value could be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the estimated useful life of the related assets. The Company recognized this obligation in association with a lease for real property in Primm, Nevada, which was a liability assumed under the Primm Acquisition in April 2007. The Company recorded a liability of $0.5 million related to expected costs to return leased land to its original state at the end of the lease agreement (using a 6.7% discount rate and a 3.0% inflation rate). The information below reconciles the value of the asset retirement obligation for the periods presented.

December 31,	2006		2007
Balance, beginning of period	$	0	$	0
Liabilities incurred	—		500
Accretion expense	—		24
Balance, end of period	$	0	$	524

10. Related-Party Transactions

General.

Edward Herbst, Timothy Herbst and Troy Herbst are brothers and are the officers and directors of Herbst Gaming, Inc. and its wholly-owned subsidiaries. In addition, they are officers and directors of Terrible Herbst, Inc. There is no cross ownership between Herbst Gaming, Inc. and Terrible Herbst, Inc. Terrible Herbst, Inc. is owned

solely by Jerry and Maryanna Herbst, the parents of the Herbst brothers. Sean Higgins, the Company’s general counsel, is also the general counsel of Terrible Herbst, Inc.

Slot route contract with Terrible Herbst, Inc.

The Company rents space for certain slot machine route operations in convenience stores owned by Terrible Herbst, Inc. (“Terrible Herbst”), a corporation in which the owners of the Company are officers and which is owned by the parent of the Company’s owners. Rent expense of $5,909,000, $6,623,000 and $6,954,000 was incurred under this agreement for the years ended December 31, 2005, 2006 and 2007, respectively, for the exclusive placement of slot machines in Terrible Herbst convenience store locations. This contract expires in 2010 but may be extended at the option of the Company for two additional terms of five years.

Other arrangements with Terrible Herbst, Inc.

The Company has entered into a servicing arrangement with Terrible Herbst pursuant to which it provides accounting and administrative services related to the collection of daily deposits from Terrible Herbst convenience stores. The Company also provides personnel to Terrible Herbst to count, maintain and safeguard large amounts of coin and currency. Terrible Herbst reimburses the Company’s expenses in providing these services. Under this servicing arrangement, the Company was paid approximately $205,800 for services rendered for each of the years ended December 31, 2005, 2006 and $246,004 for the Year ended December 31, 2007.

The Company has entered into a nonexclusive trademark and license agreement with Terrible Herbst for the use of the Terrible Herbst brand name and its cowboy logo which extends through 2011. Subject to mutual consent, the agreement provides for the ability to renew the agreement for two additional successive terms of five years each. Pursuant to this trademark and license agreement, the Company paid approximately $1,412,000, $1,483,000 and $1,557,064 to Terrible Herbst in the years ended December 31, 2005, 2006 and 2007, respectively.

Lease agreements.

Pursuant to a lease agreement that expires in 2067, including renewal periods, the Company leases the real property on which its corporate headquarters is located from The Herbst Family Limited Partnership II, or Herbst FLP II. The general partners of the Herbst FLP II are Jerry and Maryanna Herbst. The lease requires monthly rental payments of $14,416. In each of 2005, 2006 and 2007, the Company paid $172,992 under this lease.

Pursuant to a lease agreement that expires in 2026, including renewal periods, the Company leases the real property on which Terrible’s Town Casino in Pahrump is located from The Herbst Family Limited Partnership. The lease requires monthly rental payments of $15,000. In each of 2004, 2005, the Company paid $150,000 under this lease. During 2006, the company paid $165,000 under this lease. During 2007, the company paid $180,000 under this lease.

The Company leases land and office space in certain of its facilities to Terrible Herbst under various lease agreements with terms ranging from monthly to 20 years. Monthly rental income is $29,000. Under these leases, in 2005 the Company received rental income of $762,000 and in 2006 the Company received rental income of $640,500. In 2007 the Company received rental income of $348,000.

The Company subleases the real property on which Terrible’s Searchlight Casino in Searchlight is located from Terrible Herbst for $15,000 per month, pursuant to a lease agreement entered into on June 30, 2002 that expires in 2022, with options to renew the lease for five additional successive terms of ten years each. Terrible Herbst leases that real property from an unrelated third party, pursuant to a lease agreement entered into on June 30, 2002 that expires in 2042, including renewal periods. In each of 2005, 2006 and 2007, amounts paid under this lease was $180,000.

The Company leases a warehouse located in Las Vegas, Nevada for its employment center and purchasing departments from the Herbst’s Grandchildren’s Trust. The lease began in November 2002 and requires payments of

$46,500 per month through November 2012. Rent expense incurred under this lease arrangement was $522,300 for the year ended December 31, 2005, $558,000 during 2006 and $560,500 during 2007.

Future rental income under related-party agreements is as follows (dollars in thousands):

2008	$	348
2009	348
2010	348
2011	348
2012	348
Thereafter	1,736
Total	$	3,476

Related-party transactions.

Mr. Higgins is the Company’s General Counsel, the General Counsel of Terrible Herbst, Inc. and the brother of Mary E. Higgins, the Company’s Chief Financial Officer. Mr. Higgins received a salary for services rendered to us in 2005, 2006 and 2007 of $426,763, $625,851 and $$658,694 , respectively.

In 2003, the Company entered into a slot route contract to install, operate and service slot machines at a tavern owned by HIGCO, Inc., a company owned and operated by Mr. Higgins and two of his brothers. Pursuant to this revenue-sharing contract, HIGCO, Inc. paid the Company $155,804 in 2005, $154,220 in 2006 and $147,524 in 2007.

In 2004, E-T-T entered into a slot route contract with SamCon, Inc., a company owned and operated by Mr. Higgins, to install, operate and service slot machines at a new location. Terms of this revenue-sharing contract are similar to the terms of the contract the Company entered into with HIGCO in 2003. Pursuant to this revenue-sharing contract, SamCon, Inc. paid E-T-T $40,800 in 2005, $21,112 in 2006 and $0 in 2007.

In March 2006, E-T-T entered into a slot route contract to install, operate and service slot machines at a tavern owned by Prescott’s Bar LLC, a company owned and operated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, one of the owners of the Company. Pursuant to this revenue-sharing contract, Prescott’s Bar LLC paid E-T-T $52,844 in 2006 and $105,665 in 2007.

John N. Brewer, a member of the Company’s board of directors, is a partner with Kummer Kaempfer Bonner & Renshaw. The Company retained Kummer Kaempfer Bonner & Renshaw as outside legal counsel through December 31, 2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legal services in the amount of $3,500, $5,673 and $5,160 for 2005, 2006 and 2007, respectively.

The balance sheet item “due from related parties” includes receivables of $167,000 and $711,000 at December 31, 2006 and 2007, respectively, from Terrible Herbst, which are non-interest bearing.

The balance sheet item “due from related parties” also includes balances from employees. These amounts were $1,459,000 and $930,000 for 2006 and 2007, respectively.

Obligations due to related parties at December 31, 2005, 2006 and 2007 consisted of balances due to Terrible Herbst for expenditures made on behalf of the Company, accrued rent, and accrued administrative fees. The balances are non-interest bearing and payable on demand.

11. Commitments and Contingencies

At December 31, 2007, the Company has non-cancelable location license agreements for space leases at groups of affiliated stores that expire on various dates from 2006 through 2011, with certain options for renewal. Revenues from gaming machines in these stores accounted for approximately 15.9% of the Company’s total revenues for the year ended December 31, 2007.

Future minimum lease payments under non-cancelable operating leases and location license agreements are as follows (dollars in thousands):

2008	59,900
2009	57,443
2010	56,908
2011	37,812
2012	32,613
Thereafter	197,493
Total	$	422,170

Rent expense related to non-cancelable leases with terms exceeding one year was $74,378,000, $74,852,000 and $70,350,000 for the years ended December 31, 2005, 2006 and 2007, respectively.

On February 17, 2006, the Clark County District Court entered judgment of a jury verdict delivered on January 14, 2006 against ETT for $4.1 million in compensatory damages and $10.1 million in punitive damages. The jury verdict was delivered in connection with an action brought by the family of an individual that alleged that ETT had negligently retained and negligently supervised a temporary employee who in 2001 stole a truck from ETT and, while drunk, hit and killed the individual. The punitive damage award was subsequently lowered to $4.1 million in a post-trial ruling. The Company believes the award of compensatory and punitive damages against ETT, the liability of ETT, and the amount thereof, is not supportable in either law or in fact and plans to vigorously pursue all appropriate post-trial and other remedies, including exercising its right to appeal. Based on a review of the legal opinions and facts available to the Company at this time, the Company has not reserved for this lawsuit. The lawsuit is currently on appeal.

The Company is a party to certain other claims, legal actions, and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by the Company. Management believes that its defenses are substantial in each of these matters and that the Company’s legal position can be successfully defended without material adverse effect on its consolidated financial statements.

12. DERIVATIVE INSTRUMENTS

We use interest rate swaps to manage the risk related to variable rate of our debt between fixed and variable rate instruments entered into in January 2007. In the fourth quarter of 2007, we terminated all interest rate swap agreements. The termination costs were $16,115,000. As of December 31, 2007, we had no interest rate swap agreements.

During the year we accounted for the derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and all amendments thereto. SFAS No. 133 requires that all derivative instruments be recognized in the financial statements at fair value.

13. Revenue Derived From Major Locations

Route operations revenues at three groups of affiliated store chains in the year ended December 31, 2005 accounted for more than 10 percent of the Company’s total route revenues.

The total of such revenues were approximately $150,933,000 in the year ended December 31, 2005. Each individual store chain included in such affiliated group of store chains has a separate lease with the Company. No one chain accounted for more than 10% in either 2006 or 2007.

14. Going Concern

The Company’s route business in Southern Nevada and the results of the Primm Casinos have been adversely affected by the downturn in the economies of Nevada and Southern California, respectively, causing the Company to realize operating losses and impairment charges.

As a result of the default under the credit agreement due to the “going concern” qualification in the opinion of the Company’s independent auditors with respect to the financial statements for the fiscal year ended December 31, 2007, the Company’s lenders could declare an event of default under the credit agreement and require repayment of all outstanding borrowings ($860 million ). Although the Company is currently in compliance with its financial covenants, it does not expect to remain in compliance throughout 2008. The Company expects to enter into discussions with its credit agreement lenders to negotiate a forbearance agreement pursuant to which they would agree not to declare, for a specified period of time, an event of default under the credit agreement as a result of the going concern opinion or the probable failure to comply with financial covenants in the future. The Company has engaged Goldman, Sachs & Co. as its financial advisor to assist us with our evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of the Company’s obligations or a sale of some or all of our businesses.

If the Company is not successful in obtaining a forbearance or entering into a transaction to address its liquidity and capital structure, the lenders under the credit agreement would have the ability to accelerate repayment of all amounts outstanding under the credit agreement ($853 million at March 15, 2008). If the lenders under the credit agreement were to require repayment of the outstanding borrowings upon a default, the holders of our subordinated indebtedness would have the ability to declare a default, and accelerate repayment of, the subordinated indebtedness ($330 million principal amount at March 15, 2008). If either the credit agreement indebtedness or the subordinated indebtedness were to be accelerated upon a default, the Company would be required to refinance or restructure the payments on that debt. If the Company is unable do so, it may be required to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

15. Business Segments

The Company operates through two business segments: slot route operations and casino operations. The slot route operations involve the installation, operation, and service of slot machines at strategic, high traffic non-casino locations, such as grocery stores, drug stores, convenience stores, bars, and restaurants. Casino operations consist of two geographic areas, Nevada and Other States. The Nevada locations include: Terrible’s Town Casino (Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada, Terrible’s Town Casino and Terrible’s Lakeside Casino, both of which are located in Pahrump, Nevada, Terrible’s Hotel & Casino in Las Vegas, Nevada, Rail City Casino in Sparks, Nevada, the Sands Regency Casino Hotel in Reno, Nevada, Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada, Terrible’s Dayton Casino and Red Hawk Sports Bar, both located in Dayton, Nevada, and Buffalo Bill’s Hotel and Casino, Primm Valley Resort and Casino and Whiskey Pete’s Hotel and Casino, all located in Primm, Nevada. Casinos located in other states are Terrible’s Lakeside Casino in Osceola, Iowa, Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri and Terrible’s Mark Twain Casino in La Grange, Missouri. These segments results are regularly provided to the Executive Committee of the Company, who are the chief operating decision makers of the Company.

Revenues and income for these segments are as follows (dollars in thousands):

	Year Ended December 31,
	2005			2006			2007

Net revenues
Slot route operations	$	339,178		$	346,955		$	276,882
Casino operations
Nevada	82,872			82,068			289,058
Other States	108,868			122,364			120,013
Other—non gaming	4,923			10,676			98,987
Total net revenues	$	535,841		$	562,063		$	784,940
Depreciation and amortization
Slot route operations	20,114			21,431			21,979
Casino operations
Nevada	6,359			6,408			22,765
Other States	7,150			9,967			11,316

Other	318			318			345
Total depreciation and amortization	$	33,941		$	38,124		56,405
Segment EBITDA(2)
Slot route operations	$	79,922		75,492			32,796
Casino operations
Nevada	20,281			17,719			43,551
Other states	29,865			34,512			30,268
Other and corporate(1)	(5,182		)	(8,405		)	(2,700		)
Depreciation and amortization	(33,941		)	(38,124		)	(56,405		)
Interest expense, net of capitalized interest (capitalized interest of $102, $873 and $873 respectively)	(36,532		)	(39,134		)	(85,631		)
Loss on impairment of assets	—			—			(72,965		)
Change in value of derivatives	—			—			(16,114		)
Loss on early retirement of debt	(221		)	—			—
Net income (loss)	$	50,832		$	42,060		$	(127,200	)

(1) Represents non-gaming revenues, general and administrative expenses, interest income and loss on lease termination.

(2) Segment EBITDA is used by management to measure segment profits and losses and consists of income from segment operations plus depreciation and amortization and is calculated before allocation of overhead.

Selected Quarterly Financial Information (Unaudited)
(in thousands)

	Mar. 31			June 30		Sept. 30			Dec. 31			Total
Year Ended December 31, 2007
Net revenues—Route operations	$	74,749		$	71,720	$	66,072		$	64,341		$	276,882
Net revenues—Casino operations
Nevada	37,814			83,033		89,341			78,870			289,058
Other states	30,465			30,856		30,784			27,908			120,013
Net revenues—Other	7,386			28,615		32,808			30,178			98,987
Operating income	11,464			12,537		10,208		(1)	(61,144		)(2)	(26,935		)
Net income	(3,253		)	581		(26,682		)	(97,846		)	(127,200		)
Year Ended December 31, 2006
Net revenues—Route operations	$	90,858		$	86,999	$	83,707		$	85,391		$	346,955
Net revenues—Casino operations
Nevada	21,345			19,999		19,950			20,774			82,068
Other states	30,791			29,511		31,131			30,930			122,363
Net revenues—Other	1,914			2,286		3,309			3,167			10,676
Operating income	26,243			20,655		17,905			15,657			80,460
Net income	17,222			11,286		8,200			5,352			42,060
Year Ended December 31, 2005
Net revenues—Route operations	$	81,640		$	85,231	$	83,719		$	88,587		$	339,178
Net revenues—Casino operations
Nevada	21,600			20,877		19,425			20,970			82,872
Other states	21,175			29,371		29,602			28,721			108,869
Net revenues—Other	1,140			1,144		1,212			1,427			4,923
Operating income	24,175			23,466		17,065			22,139			86,845
Net income	16,147			14,236		7,574		(3)	12,875			50,832

(1) Amount includes $3.2 million impairment of lease acquisition costs.

(2) Amount includes $73.0 million impairment of intangible assets and $16.1 million change in value of derivatives.

(3) Amount includes $3.4 million loss on retirement of assets

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures

utilizing criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Conclusion Regarding the effectiveness of disclosure Controls and Procedures

As previously disclosed in our prior public filings, our Chief Executive Officer and Chief Financial Officer identified a material weakness in our internal control for the quarter ended March 31, 2007, which consisted of a failure to have in place sufficient documentation as required by generally accepted accounting principles in order to permit interest rate swaps in the notional amount of $350.0 million to properly qualify as a hedge of a corresponding principle amount under our Credit Agreement. During the fourth quarter of 2007, the Company terminated this interest rate swap. Prior to the institution of any new interest rate swap arrangements, the remediation of this material weakness requires the Company to develop an internal policy regarding hedging transactions that sets forth the required procedures and documentation in order to permit such transactions undertaken by us to qualify for hedge accounting.

Management believes that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows.

Nevertheless, there can be no assurance that either this evaluation process or our existing disclosure controls and procedures will prevent or detect all errors and all fraud, if any, or result in accurate and reliable disclosure. A control system can provide only reasonable and not absolute assurance that the objectives of the control system are met. 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, have been detected. Additionally, judgments in decision-making can be faulty and breakdowns in internal control can occur because of simple errors or mistakes that are not detected on a timely basis.

Based on the evaluation and findings, discussed above the Company’s management concluded that internal controls over financial reporting was effective as of December 31, 2007

There has been no change in our internal controls over financial reporting during the fourth quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reports.

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The following information is furnished with respect to each member of the board of directors, each of whom, unless otherwise indicated, has served as a director continuously since the year set forth below. Directors are elected annually. Each director serves until his successor has been elected and qualified. Similar information is provided for our executive officers.

Directors and Executive Officers

The following is a list of our directors and executive officers:

Name	Age	Position
Edward J. Herbst	46	Chairman of the Board and Chief Executive Officer
Ferenc Szony	51	President and Chief Operating Officer
Timothy P. Herbst	44	Executive Vice President and Director
Troy D. Herbst	41	Executive Vice President, Secretary, Treasurer and Director
Mary E. Higgins	50	Chief Financial Officer
John N. Brewer	50	Director
John F. O’Reilly	62	Director
Sean Higgins	44	General Counsel

Edward, Timothy and Troy Herbst are brothers. Timothy and Troy Herbst are members of our Executive Committee and Troy Herbst is a member of our Audit Committee, but they are not involved in day-to-day operations.

Edward J. Herbst has served as the Chief Executive Officer and Chairman of the Board of Directors of our company and its predecessors since their inception in 1987. Edward oversees all aspects of our business, including gaming route operations, casino operations, new business initiatives and the solicitation of new contracts. Edward also serves as a Vice President of Terrible Herbst, Inc. and sits as a member of U.S. Bank of Nevada’s advisory board of directors.

Timothy P. Herbst has served as Executive Vice President and a Director of our company and its predecessors since their inception in 1987. Timothy is a member of our Executive Committee. He also serves as a Vice President of Terrible Herbst, Inc.

Troy D. Herbst has served as Executive Vice President, Secretary, Treasurer and a Director of our company and its predecessors since their inception in 1987. Troy is a member of our Executive and Audit Committees. He also serves as a Vice President of Terrible Herbst, Inc.

Ferenc Szony is the newly elected President and Chief Operating Officer of Herbst Gaming, Inc. Mr. Szony was previously the President and Chief Executive Officer of The Sands Regent from 1997 until its acquisition by Herbst Gaming in January 2007. Prior to joining the Sands, Mr. Szony served in several executive positions within the Hilton Hotel Corporation, last serving as President at the Reno Hilton Resort from 1994 to 1997.

Mary E. Higgins has been the Chief Financial Officer of our company since May 2000. Prior to joining our company, from March 1997 to June 2000, Ms. Higgins was the Chief Financial Officer of Camco, Inc., a Las Vegas based specialty finance company. From August 1987 to October 1996, Ms. Higgins was the Commercial Lending Division Manager of Southern Nevada for Wells Fargo Bank in Las Vegas.

John N. Brewer has served as a Director of our company since December 2001. Mr. Brewer is also a member of our Audit Committee. Mr. Brewer is a partner with the law firm of Kummer Kaempfer Bonner Renshaw & Ferrario in Las Vegas, Nevada, where he has practiced principally in corporate and securities law since its inception in 1994.

John F. O’Reilly has served as a Director of our company since November 2004. Mr. O’Reilly is the Chairman and Chief Executive Officer of the law firm of O’Reilly Law Group, LLC, in Las Vegas, Nevada, a position which he has held since 1999 and where he has practiced since its inception in 1977 and also serves as the Chairman and Chief Executive Officer of the O’Reilly Gaming Group, in Las Vegas, Nevada, which he has served since its inception in 1999. Mr. O’Reilly is also Chairman and an officer and/or Director of various family-owned business entities and related investments. Mr. O’Reilly has served as a Director of Nevada Power Company since 1995 and Sierra Pacific Resources and Sierra Pacific Power Company since 1999.

Sean T. Higgins has served as the Company’s General Counsel since 1993. He oversees all legal matters for the Company including gaming regulatory matters and governmental affairs. Prior to joining the Company, Mr. Higgins worked at the law firm of Cohen, Lee & Johnson in Las Vegas. Mr. Higgins obtained a law degree from Santa Clara University in 1990 and received his undergraduate degree in Business Administration from Southern Methodist University in 1987. He is licensed to practice law in the States of Nevada and Missouri, as well as, the Ninth Circuit Court of Appeals.

Code of Ethics

We have adopted a Code of Ethics for the senior management of the Company including the Chief Executive Officer and President, and our Chief Financial Officer and Chief Accounting Officer. This Code of Ethics is reasonably designed to deter wrongdoing and to promote:

· honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

· full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by us;

· compliance with applicable governmental laws, rules and regulations;

· the prompt internal reporting of violations of the code to an appropriate person or persons identified in the Code of Ethics; and

· accountability for adherence to the Code of Ethics.

Committees of our Board of Directors

Our board of directors has an Audit Committee and an Executive Committee. The Audit Committee’s functions are as follows:

· to review reports of our independent public accountants;

· to review our financial practices, internal controls and policies with officers and key employees;

· to review such matters with our auditors to determine scope of compliance with any deficiencies;

· to consider selection of independent public accountants;

· to review related party transactions; and

· to make periodic reports on such matters to the board of directors.

Our Audit Committee is comprised of Messrs. Troy Herbst and John Brewer. Mr. Brewer is the Chairman of the Audit Committee. Our board of directors has determined that Mr. Brewer is qualified as an audit committee financial expert as defined by Item 401(h) of Regulation S-K and is independent under the listing standards of the New York Stock Exchange.

The Executive Committee’s function is to review and make recommendations to our board of directors with respect to the salaries and bonuses of our executive officers and key employees. Directors Edward Herbst, Timothy Herbst and Troy Herbst serve on the Executive Committee.

Item 11. Executive Compensation.

Overview of Compensation

The Executive Committee, or Committee, of the Board of Directors has the responsibility for establishing, implementing and monitoring adherence to the Company’s compensation programs. The Committee’s goal is to provide a compensation package that attracts, motivates and retains executive talent and is designed to align executives’ interest with the Company’s corporate strategies and business objectives. We refer to our chief executive officer, or CEO, our chief financial officer, or CFO, and our chief operating officer, or COO, as well as the other two individuals included in the Summary Compensation Table, as our “named executive officers” or “NEOs.” The Committee is comprised of the CEO and two Executive Vice Presidents, all members of which are officers, and the owners, of Herbst Gaming. The Committee has establishes the compensation for all the NEOs, including the members of the Committee. (The new employment agreements executed in March 2008 discussed under the heading “Executive Compensation and Bonus Plan” were approved by the entire Board).

We provide compensation to our CEO, CFO and COO primarily through written employment agreements that set forth base compensation, cash bonus, employee benefit plans and perquisites due to such officers. Prior to this year, our CEO had been employed under an employment agreement entered into in 2001, while our CFO had been employed under an employment agreement that was entered into in 2005. Our COO was newly appointed to his position in the 2007 fiscal year, upon our completion of the Sands Regent Acquisition. In March 2008 we entered into new employment agreements with each of our CEO, CFO and COO.

We also have an Executive Officer and Cash Bonus Plan (the “Plan”), which was established in 2001. This Plan is available to provide additional incentive-based compensation to our Executive Vice Presidents upon the achievement of performance targets should the Committee determine to use it.

Our compensation program is to designed to promote and reward leadership and commitment, in addition to performance improvement, with a focus on growth and productivity to drive financial performance. The main components of our executive compensation program include base salary and broad-based retirement, health and welfare employee benefits, subject to the terms and conditions of each benefit program. Our compensation program is designed to remain competitive with market practices, which is necessary to attract and retain talented executives. Our compensation program does not include an equity component, as our CEO and two Executive Vice Presidents collectively own all of the outstanding stock of the Company.

Role of the Executive Officers and of the Committee in Determining Compensation

Each year the CEO evaluates the performance of the other NEOs and makes recommendations to the Committee with respect to compensation, including recommendations with respect to base salary levels and targets under the Plan, as applicable. The Committee takes these recommendations into advisement, but also conducts its own independent review of the CEO and the other NEOs prior to determining base salary increases and target incentive payments. Moreover, the administration of the Plan and the actual declaration of any cash bonus payments under the Plan must be approved by a committee consisting of not less than two independent directors.

2007 Elements of Executive Compensation

The Company’s 2007 compensation program for executive officers was primarily comprised of a base salary and employee benefits broadly available to all employees of the Company.

Base Salary

The Company provides our named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. Base salaries are essential for the attraction and retention of talented executives and are determined consistent with the factors set forth below. In determining the base salary amount for each named executive officer, the Committee primarily considers:

· industry experience, knowledge and qualifications;

· salary levels in effect for comparable positions within the Company’s principal industry marketplace competitors;

· internal review of the executive’s compensation, both individually and relative to other officers;

· individual performance of the executive;

· expected future contributions;

· historical compensation;

· ability to impact corporate and/or business unit results; and

· retention risks.

Prior to the execution of the new employment agreements for our CEO and CFO in March 2008, the employment agreement for the CEO provided for a salary at an annualized rate of $465,000 subject to 5% increases on January 1 of each year during the term of the agreement ($831,991 in 2007). The CFO’s employment agreement provided for a salary at an annualized rate of $325,625 and $25,000 non-discretionary semi-annual bonuses payable in June and December. The salary was subject to a 5% increase each year at January 1 for the term of the contract ($366,377 in 2007). The new employment agreements for our CEO and CFO provide for an annual salary of, respectively, $973,845 and $500,000. The increase in base salary is due to a recognition of the long-time dedication, service, leadership and direction provided to the Company during the past 8 years.

Other Elements of Compensation

In order to attract, retain and pay market levels of compensation, we aim to provide benefits to our NEOs that are consistent with market practices and include broad-based retirement, health and welfare employee benefits, subject to the terms and conditions of each benefit program. Our NEOs are eligible to participate in these benefits on the same basis as other full-time employees. In addition, the Company provides each NEO with an automobile. The value of the automobile is shown in the “All Other Compensation” column in the Summary Compensation Table on page 79.

Severance Benefits

Each employment agreement for the named executive officers provides that in the event that we choose to terminate the executive’s employment for any reason other than Cause, the executive will receive a severance payment equal to one year’s salary. “Cause” is defined as: (i) the conviction of, or judgment against, the Executive by a civil or criminal court of competent jurisdiction for a felony or any other offense involving embezzlement or misappropriation of funds, or any act of moral turpitude, dishonesty or lack of fidelity; (ii) the indictment of the Executive by a state or federal grand jury of competent jurisdiction or the filing of a criminal complaint or information, for a felony or any other offense involving embezzlement or misappropriation of funds, or any act of moral turpitude, dishonesty or lack of fidelity; (iii) the confession by the Executive of embezzlement or misappropriation of funds, or any act of moral turpitude, dishonesty or lack of fidelity; (iv) the payment (or, by the operation solely of the effect of a deductible, the failure of payment) by a surety or insurer of a claim under a fidelity bond issued for the benefit of the Company reimbursing the Company for a loss due to the wrongful act, or wrongful omission to act, of the Executive; (v) the denial, revocation or suspension of a license, qualification or certificate of suitability to the Executive by any of the Gaming Authorities; and (vi) any action or failure to act by the Executive that the Company reasonably believes, as a result of a communication or action by the Gaming Authorities or on the basis of consultations with its gaming counsel and/or other professional advisors, will likely cause any of the Gaming Authorities to: (A) fail to license, qualify and/or approve the Company to own and operate a gaming business; (B) grant any such licensing, qualification and/or approval only upon terms and conditions that are

unacceptable to the Company; (C) significantly delay any such licensing, qualification and/or approval process; or (D) revoke or suspend any existing license.

Executive Compensation and Bonus Plan

Our board of directors has adopted the Executive Compensation and Bonus Plan for our executive officers who are also stockholders (our CEO and two Executive Vice Presidents). Any payments to be made under this plan must be approved by our independent directors. Commencing with calendar year 2003 and each succeeding calendar year, the maximum aggregate amount of annual compensation and cash bonuses increases by 5%. To date, there have been no cash bonuses paid to the executive officers under this plan. If any cash bonus plan is implemented it will be administered by our independent directors.

Equity Compensation

The Company does not make equity awards to its NEOs.

CEO Employment Agreement

On August 1, 2001, we entered into an employment agreement with Edward J. Herbst, our Chairman, Chief Executive Officer and President, in which we agreed to pay him annual base compensation of $465,000, which may be increased annually by five percent. This agreement commenced on August 1, 2001. The initial term ended July 31, 2006, and the agreement automatically was renewed for a one-year period. For fiscal year 2007, Mr. Herbst’s annual base salary was $831,991.

In March of 2008, we entered into a new employment agreement with Mr. Herbst. In Mr. Herbst’s new agreement, we agreed to pay an annual base salary of $973,845, which may be increased annually by five percent. Mr. Herbst’s contract expires on December 31, 2009.

Employment Agreements of Other Named Executive Officers

In January 2005, we entered into an employment agreement with Mary E. Higgins, our Chief Financial Officer, in which we agreed to pay her an annual base salary of $325,625 plus a non-discretionary bonus of $50,000 per year (in equal semi-annual installments). That agreement terminates on December 31, 2008. In March 2008, we entered into new employment agreement with Ms. Higgins. In Ms. Higgins’ new agreement, we agreed to pay annual base salary of $500,000, plus a discretionary bonus of up to 30% of her salary per year. Ms. Higgins’ contract expires on December 31, 2009.

In addition, we entered into an employment agreement with Ferenc Szony, our President and COO in March 2008. His employment agreement provides for an annual base salary of $500,000, which may be increased annual by five percent, and expires on December 31, 2009. Both Ms. Higgins’ and Mr. Szony’s agreements automatically renew for successive one-year periods unless sooner terminated or unless either party to the respective agreements notifies the other in writing at least 60 days prior to the date the respective agreement is scheduled to expire. Each employment agreement provides that in the event that we choose to terminate the executive’s employment for any reason other than Cause (as defined above), the executive will receive a severance payment equal to one year’s salary. The employment agreements with these executives also contain a covenant to protect confidential information.

FISCAL YEAR 2007 SUMMARY COMPENSATION TABLE

The following table sets forth the total compensation awarded, paid to or earned by the Company’s Chief Executive Officer, Chief Financial Officer and the next three most highly compensated executive officers during 2007.

Name and Principal Position	Year	Salary ($)		Bonus ($)(1)		All Other Compensation ($)(2)		Total ($)
Edward J. Herbst, Chairman, Chief Executive Officer and President	2007	$	831,991	—		$	3,433,333	$	4,265,324

Mary Higgins, Chief Financial Officer	2007	$	366,377	$	275,000	—		$	641,377

Tim Herbst Executive Vice President	2007	$	427,140	—		$	3,433,333	$	3,860,473

Troy Herbst Executive Vice President	2007	$	427,810	—		$	3,433,333	$	3,861,143

Michael Puggi Regional General Manager	2007	$	399,491	$	2,068,797	—		$	2,378,426

(1) Represents bonus payments made to Ms. Higgins and Mr. Puggi under the terms of their employment contracts, as well as a $2,059,935 signing bonus paid to Mr. Puggi upon the completion of the Primm Acquisition.

(2) Represents the value of distributions made to owners.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

As described in the sections entitled “Severance Benefits,” “CEO Employment Agreement” and “Employment Agreements of other Named Executive Officers,” the employment agreement agreements with each of Mr. Herbst, Ms. Higgins and Mr. Szony provide for severance payments equal to one years’ base salary in the event of termination of employment by the Company without Cause (as defined above on page 77). Accordingly, upon a termination without Cause on December 1, 2007, Mr. Herbst, Ms. Higgins and Mr. Szony would have been entitled to receive the following amounts, respectively: $927,472, $409,000, and $0. All other amounts payable or other benefits (such as accrued vacation, vested amounts payable under the Company’s 401(k) plan, etc.) are the same as for other salaried employees.

FISCAL YEAR 2007 DIRECTOR COMPENSATION

The following table provides information related to the compensation of our non-employee directors during fiscal 2007.

Name	Fees Earned or Paid in Cash ($)			Total ($)
John F. O’Reilly	$	35,000	(1)	$	35,000
John N. Brewer	$	39,500	(2)	$	39,500

(1) $10,000 of this amount was for attendance at 2 Board meetings.

(2) $10,000 of this amount was for attendance at 2 Board meetings and $4,500 of this amount was for meetings of the audit committee.

Directors who are employees of the Company do not receive any additional compensation for their services as a director. Our independent directors will receive compensation in the amount of $25,000 per year for serving on our board and in addition will receive $5,000 per board meeting attended and $1,500 per committee meeting attended, and are reimbursed for expenses incurred in attending board or committee meetings and while representing the Company in conducting certain business.

Compensation Committee Interlocks and Insider Participation

Relationships and Independence of the Compensation Committee Members

During the fiscal year ended December 31, 2007, Edward Herbst, Timothy Herbst and Troy Herbst were members of the Executive Committee of our board of directors. Our executive compensation is determined by the Executive Committee, all members of which are officers, and the owners, of Herbst Gaming.

Compensation Committee Report

The Compensation Committee reviewed the Compensation Discussion and Analysis and discussed its contents with Company management. Based on the review and discussions, the Committee has recommended that this Compensation Discussion and Analysis be included in this annual report.

Section 16(a) Beneficial Ownership Reporting Compliance

Not Applicable.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The securities entitled to vote consist of shares of our common stock, no par value, with each share entitling its owner to one vote. Common stock is the only outstanding class of voting securities authorized by our articles of incorporation. The number of outstanding shares of common stock as of December 31, 2007 was 300.

Name and Address(1)	Number of Shares of Common Stock Beneficially Owned	Percentage of Outstanding Shares
Edward J. Herbst (2)	100	331/3	%
Timothy P. Herbst (2)	100	331/3	%
Troy D. Herbst (2)	100	331/3	%
John N. Brewer	—	—
Mary E. Higgins	—	—
John F. O’Reilly	—	—
All executive officers and directors as a group (6 persons)	300	100.0	%

(1) The address of each such person is c/o Herbst Gaming, Inc., 3440 West Russell Road, Las Vegas, Nevada 89118.

(2) Includes shares held in trusts for the benefit of each of Edward J. Herbst, Timothy P. Herbst and Troy D. Herbst.

Item 13. Certain Relationships and Related Transactions.

We believe that all of the transactions mentioned below are on terms at least as favorable to us as would have been obtained from an unrelated third party.

General. Edward Herbst, Timothy Herbst and Troy Herbst are brothers and are the officers and directors of Herbst Gaming, Inc. and its wholly-owned subsidiaries. In addition, they are officers and directors of Terrible Herbst, Inc. There is no cross ownership between Herbst Gaming, Inc. and Terrible Herbst, Inc. Terrible Herbst, Inc. is owned solely by Jerry and Maryanna Herbst, the parents of the Herbst brothers. Sean Higgins, our general counsel, is also the general counsel of Terrible Herbst, Inc.

Slot route contract with Terrible Herbst, Inc. We rent space for certain slot machine route operations in convenience stores owned by Terrible Herbst, Inc., a corporation in which our owners are officers and which is owned by the father of our owners. Rent expense of $5,909,000, $6,623,000 and $6,954,000 was incurred under this agreement for the years ended December 31, 2005, 2006 and 2007, respectively, for the exclusive placement of slot machines in Terrible Herbst convenience store locations. This contract expires in 2010 but may be extended at our option for two additional terms of five years.

Other arrangements with Terrible Herbst, Inc. We have also entered into a servicing arrangement with Terrible Herbst pursuant to which we provide accounting and administrative services related to the collection of daily deposits from Terrible Herbst convenience stores. We also provide personnel to Terrible Herbst to count, maintain and safeguard large amounts of coin and currency. Terrible Herbst reimburses our expenses in providing these services. Under this servicing arrangement, we were paid approximately $205,800 for services rendered for each of the years ended December 31, 2005 and 2006 and $246,004 in 2007.

We have entered into a nonexclusive trademark and license agreement with Terrible Herbst for the use of the Terrible Herbst brand name and its cowboy logo which extends through 2011. Subject to mutual consent, the agreement provides for the ability to renew the agreement for two additional successive terms of five years each. Pursuant to this trademark and license agreement, we paid approximately $1,412,000, $ 1,483,000 and $1,557,064 to Terrible Herbst in the years ended December 31, 2005, 2006 and 2007, respectively.

Lease agreements. Pursuant to a lease agreement that expires in 2067, including renewal periods, we lease the real property on which our corporate headquarters is located from The Herbst Family Limited Partnership II, or Herbst FLP II. The general partners of the Herbst FLP II are Jerry and Maryanna Herbst. In each of 2005, 2006 and 2007 we paid $172,992 under this lease.

Pursuant to a lease agreement that expires in 2026, including renewal periods, we lease the real property on which Terrible’s Town Casino in Pahrump is located from The Herbst Family Limited Partnership. The lease requires monthly rental payments of $15,000. In 2005, we paid $150,000 under this lease and in 2006 we paid $165,000 under this lease. In 2007, we paid $180,000 under this lease.

We lease land and office space in certain of our facilities to Terrible Herbst under various lease agreements with terms ranging from month-to-month to 20 years. Monthly rental income is $63,500. In 2005, we received rental income of $762,000 under these leases. In 2006 we received rental income of $641,000 under these leases. In 2007 we received rental income of $348,000 under these leases.

We lease the real property on which Terrible’s Searchlight Casino in Searchlight is located from Terrible Herbst for $15,000 per month, pursuant to a lease agreement entered into on June 30, 2002 that expires in 2022, with options to renew the lease for five additional successive terms of ten years each. Terrible Herbst leases that real property from an unrelated third party, pursuant to a lease agreement entered into on June 30, 2002 that expires in 2042, including renewal periods. In each of 2005, 2006 and 2007, we paid $180,000 under this lease.

We lease a warehouse located in Las Vegas, Nevada for our employment center and purchasing departments from the Herbst’s Grandchildren’s Trust. The lease began in November 2002 and requires payments of

$46,500 per month through November 2012. In 2005, we incurred rent expense of $522,300 under this lease. In 2006 this expense was $558,000, while in 2007 it was $560,500.

Related-party transactions. Mr. Higgins is our general counsel, the general counsel of Terrible Herbst and the brother of Mary E. Higgins, our chief financial officer. Mr. Higgins received a salary for services rendered to us in 2005, 2006 and 2007 of $426,763, $625,851 and $658,694, respectively.

In 2003, we entered into a slot route contract to install, operate and service slot machines at a tavern owned by HIGCO, Inc., a company owned and operated by Mr. Higgins and two of his brothers, G. Michael Higgins and Kevin J. Higgins. Pursuant to this revenue-sharing contract, HIGCO, Inc. paid us $155,804 in 2005, $154,220 in 2006 and $147,524 in 2007.

In 2004, ETT entered into a slot route contract with SamCon, Inc., a company owned and operated by Mr. Higgins, to install, operate and service slot machines at a new location. Terms of this revenue-sharing contract are similar to the terms of the contract we entered into with HIGCO in 2003. Pursuant to this revenue-sharing contract, SamCon, Inc. paid ETT $40,800 in 2005, $21,112 in 2006 and $0 in 2007.

In 2005, ETT entered into a slot route contract to install, operate and service slot machines at a tavern owned by Prescott’s Bar LLC, a company owned and operated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, one of the owners of the Company. Pursuant to this revenue-sharing contract, Prescott’s paid ETT $0 in 2005, $52,844 in 2006 and $105,665 in 2007.

The amount due from related party balance includes $1,459,000 and $930,000 due from employees at December 31, 2006 and 2007, respectively.

John N. Brewer, a member of our board of directors, is a partner with Kummer Kaempfer Bonner & Renshaw. We retained Kummer Kaempfer Bonner & Renshaw as outside legal counsel through December 31, 2004, and Kummer Kaempfer Bonner & Renshaw has received fees for legal services in the amount of $3,500, $5,673 and $5,160 for 2005, 2006 and 2007, respectively.

Indemnification of Directors and Officers. Section 78.7502 of the Nevada Revised Statutes, Article VIII of our articles of incorporation and Article IX of our by-laws contain provisions for indemnification of our officers, directors, employees and agents. Our articles require us to indemnify such persons to the full extent permitted by Nevada law. Each person will be indemnified in any proceeding if he acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, our best interests. Indemnification would cover expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of the registrants pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Item 14. Principal Accountant Fees and Services.

The aggregate accounting fees billed and services provided by our principal accountants for the years ended December 31, 2006 and 2007 are as follows:

	2006		2007
Audit fees(1)	$	309,000	$	497,074
Audit-related fees(2)	61,700		714,250
Tax fees	—		—
All other fees	—		55,236
Total fees	$	370,700	1,266,560

(1)	Represents the aggregate fees Deloitte & Touche LLP billed us in each of the last two fiscal years for professional services for the audits of our annual financial statements and review of financial statements included in our periodic filings with the SEC and for services that are normally provided by Deloitte & Touche LLP in connection with those filings.

(2)	Represents the aggregate fees Deloitte & Touche LLP billed us in each of the last two fiscal years for assurance and related services that are reasonably related to the performance of the audit, including audit-related services in conjunction with the Primm properties.

It is our practice that all services provided to us by our independent auditors be pre-approved either by the Audit Committee or by the Chairman of the Audit Committee pursuant to authority delegated by the Audit Committee. No part of the independent auditor services related to the audit fees, audit-related fees, tax fees, or other fees listed in the table above was approved by the Audit Committee pursuant to the exemption from pre-approval provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements

1. List of Financial Statements

Included in Part II of this report:

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Consolidated Balance Sheets As of December 31, 2006 and 2007

Consolidated Statements of Operations For the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Stockholders’ Equity (Deficiency) For the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Cash Flows For the years ended December 31, 2005, 2006 and 2007

Notes to Consolidated Financial Statements

2. Financial Statements Schedules

All schedules are omitted given the absence of conditions under which they are required to be included or because the required information is included in the financial statements or notes thereto.

Index No.		Description

2.1(3)		Asset Purchase Agreement between Anchor Coin and Herbst Gaming, Inc. and Market Gaming, Inc. and E-T-T, Inc. dated as of November 21, 2002.

2.2(3)		First Amendment to Asset Purchase Agreement by and among Anchor Coin and Herbst Gaming, Inc. and Market Gaming, Inc. and E-T-T, Inc. dated as of January 14, 2003.

2.3(5)		Asset Purchase and Sale Agreement, dated July 20, 2004, made by and between Mark Twain Casino, L.L.C. and Herbst Gaming, Inc.

2.4(5)		Asset Purchase and Sale Agreement, dated July 20, 2004, made by and between St. Joseph Riverboat Partners and Herbst Gaming, Inc.

2.5(5)		Asset Purchase and Sale Agreement, dated July 20, 2004, made by and between Southern Iowa Gaming Company and Herbst Gaming, Inc.

2.6(7)		Amendment to Asset Purchase and Sale Agreement, made by and between Mark Twain Casino, L.L.C. and Herbst Gaming, Inc. dated as of December 2004.

Index No.		Description

2.7(7)		Amendment to Asset Purchase and Sale Agreement, made by and between St. Joseph Riverboat Partners and Herbst Gaming, Inc. dated as of December 2004.

2.8(7)		Amendment to Asset Purchase and Sale Agreement, made by and between Southern Iowa Gaming Company and Herbst Gaming, Inc. dated as of December 2004.

2.9(7)		Second Amendment to Asset Purchase and Sale Agreement made by and between Southern Iowa Gaming Company and Herbst Gaming, Inc., dated as of January 25, 2005.

2.10(9)		Agreement and Plan of Merger, dated as of May 16, 2006, by and among The Sands Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc.

2.11(10)		Amendment No. 1 to the Agreement and Plan of Merger among The Sands Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc. dated as of August 24, 2006

2.12(11)		Purchase Agreement, dated as of October 31, 2006, by and among New York-New York Hotel & Casino, LLC, PRMA Land Development Company, The Primadonna Company LLC, and Herbst Gaming, Inc.

3.1(1)		Articles of Incorporation of Herbst Gaming, Inc.

3.2(2)		By-laws of Herbst Gaming, Inc.

4.1(6)		Indenture dated November 22, 2004 by and among Herbst Gaming, Inc., the guarantors identified therein and U.S. Bank National Association, as trustee, relating to 7% Senior Subordinated Notes due 2014.

4.2(6)		Specimen Form of 7% Senior Subordinated Notes due 2014 (included as part of the Indenture at Exhibit 4.1).

4.3(5)		Indenture dated June 11, 2004 by and among Herbst Gaming, Inc., the guarantors identified therein and U.S. Bank National Association, as trustee, relating to 8¹/₈% Senior Subordinated Notes due 2012.

10.1(1)		Trademark License Agreement dated August 24, 2001 by and between Herbst Gaming, Inc. and Terrible Herbst, Inc.

10.2++ (5)		Gaming Devices License Agreement dated October 26, 2004 by and between The Vons Companies, Inc. and Market Gaming, Inc.

10.3(1)		Letter Agreement dated May 31, 2006 among Albertson’s, Inc., SUPERVALU, Inc., AB Acquisition LLC and Cardivan Company.

10.4++(1)		Gaming License Agreement dated as of June 2, 2006 among Cardivan Company, Nevada CVS Pharmacy, L.L.C., Henderson CVS, L.L.C., Desert Eastern CVS, L.L.C., Maryland Parkway CVS, L.L.C., CVS 2989 Las Vegas, L.L.C. and Senip CVS, L.L.C.*

Index No.		Description

10.5+(1)		License Agreement dated April 24, 1997 between American Drug Stores, Inc. and Cardivan Company.

10.6+(1)		License Agreement dated April 24, 1997 between American Drug Stores, Inc. and Corral United, Inc. II-13

10.7+(1)		License Agreement dated March 12, 1999 between Rite Aid Corporation and Cardivan Company.

10.8+(1)		First Amendment to Cardivan License Agreement dated March 27, 2000 between Rite Aid Corporation and Cardivan Company.

10.9+(1)		License Agreement dated March 12, 1999 between Rite Aid Corporation and Corral Coin, Inc.

10.10+(1)		First Amendment to Corral Coin License Agreement dated March 27, 2000 between Rite Aid Corporation and Corral Coin, Inc.

10.11+(1)		Gaming Devices License Agreement dated December 20, 1999 by and between Terrible Herbst, Inc. and E-T-T, Inc.

10.12(1)		Amendment to Gaming Device License Agreement dated May , 2001 by and between E-T-T, Inc. and Terrible Herbst, Inc.

10.13+(1)		Agreement dated May 1, 1998 by and between Kmart Corporation and Cardivan Company.

10.14+(1)		License Agreement dated April 24, 1997 between Lucky Stores, Inc. and Cardivan Company.

10.15+(4)		Lease and Sublease Agreement dated July 28, 1993, by and between Smith’s Food & Drug Centers, Inc. and Anchor Coin, as amended.

10.16(4)		Hold Harmless Agreement dated as of September 2, 1993 executed by Anchor Coin in favor of Smith’s Food & Drug Centers, Inc.

10.17+(4)		Letter Agreement and Consent to Assignment dated January 16, 2003.

10.18(1)		Lease Agreement dated July 1, 1997 by and between The Herbst Family Limited Partnership II and E-T-T Enterprises, L.L.C.

10.19(1)		Lease Agreement dated July 1, 1996 by and between The Herbst Family Limited Partnership and E-T-T, Inc.

10.20(1)		Lease extension dated April 30, 2001 between The Herbst Family Limited Partnership and E-T-T, Inc.

10.21(1)		Lease dated September 3, 1993 between The 1993 Samuel Josephson Revocable Family Trust and Phoenix Associates.

10.22(1)		Agreement for Sale dated August 1, 1995 between Phoenix Associates and Market Gaming, Inc.

Index No.		Description

10.23(4)		Lease Agreement dated November 27, 2002 by and between Herbst Grandchildren’s Trust and Herbst Gaming, Inc.

10.24(4)		Lease dated June 2002 by and between Centennial Acquisitions, LLC and Terrible Herbst, Inc.

10.25(4)		Amendment to Lease dated July 30, 2002 by and between Centennial Acquisitions, LLC and Terrible Herbst, Inc.

10.26(4)		Lease Agreement dated July 1, 2002 by and between Terrible Herbst, Inc. and E-T-T, Inc.

10.27(18)		Employment Agreement with Edward J. Herbst dated March 7, 2008.

10.28(18)		Employment Agreement with Mary E. Higgins dated March 7, 2008.

10.29(1)		Form of Executive Compensation and Bonus Plan.

10.30(4)		Code of Ethics.

10.31(13)		Second Amended and Restated Credit Agreement dated as of January 3, 2007 by and among Herbst Gaming, Inc., Bank of America, N.A., as administrative agent and the other lending parties thereto.

10.32 (14)		Gold Ranch Casino Lease, dated as of December 27, 2001, by and between Last Chance, Inc., Prospector Gaming Enterprises, Inc. and Target Investments, L.L.C.

10.33 (14)		Option to Purchase the Gold Ranch Casino Property and Improvements, The Leach Field Property, the Frontage Parcel, the California Lottery Station and the California Lottery Property, and the Right of First Refusal, dated as of December 27, 2001, by and among Prospector Gaming Enterprises, Inc., Target Investments, L. L. C. and Last Chance, Inc.

10.34 (15)		Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of August 14, 2007 with reference to the Second Amended and Restated Credit Agreement dated as of January 3, 2007 among Herbst Gaming, Inc., the lenders party thereto, and Bank of America, N.A., as administrative agent

10.35 (16)		Amendment No. 2 to Second Amended and Restated Credit Agreement dated as of December 14, 2007 with reference to the Second Amended and Restated Credit Agreement dated as of January 3, 2007 among Herbst Gaming, Inc., the lenders referred to therein, and Bank of America, N.A., as administrative agent

10.36 (17)		Amendment to Gaming Device License Agreement dated as of September 30, 2007, between Market Gaming, Inc. (“MGI”) and Safeway, Inc. to the Gaming Device License Agreement between MGI and Safeway, Inc. dated as of October 25, 2004

Index No.		Description

10.37 (17)		Amendment to Gaming Device License Agreement dated as of September 30, 2007, between MGI and The Vons Companies, Inc. to the Gaming Device License Agreement between MGI and The Vons Companies, Inc. dated as of October 25, 2004

10.38 (17)		Gaming License Agreement dated as of September 30, 2007 among Cardivan Company (“Cardivan”), Nevada C.V.S. Pharmacy, L.L.C., Henderson CVS, L.L.C., Desert Eastern, CVS, L.L.C., Maryland Parkway CVS, L.L.C., CVS 2989 Las Vegas, L.L.C. and Senip CVS L.L.C.

10.39 (17)		Gaming License Agreement dated as of October 22, 2007 between Cardivan and New Albertson’s, Inc.

10.40 (17)		Gaming License Agreement dated as of August 24, 2007 between Cardivan and SaveMart Supermarkets dba Albertson’s

10.41 (17)		Gaming License Agreement dated as of July 1, 2007 among Cardivan, RITE AID HDQTRS. CORP., and Thrifty Payless Corp.

10.42(18)		Employment Agreement with Ferenc Szony, dated March 7, 2008.

10.43*		Shared Services Agreement dated as of January 1, 2008 between Herbst Gaming, Inc. Berry-Hinckley Industries and Terrible Herbst, Inc.

10.44*		Advertising Purchasing Agreement dated as of March 1, 2008 between Herbst Gaming, Inc. and Terrible Herbst, Inc.

10.45*		Master ATM Agreement dated as of March 1, 2008 by and between E-T-T, Inc. and Terrible Herbst, Inc.

12.1*		Computation of Ratio of Earnings to Fixed Charges.

21.1(19)		Subsidiaries of Herbst Gaming, Inc.

31.1*		Certification of Edward J. Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Edward J. Herbst under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certifications of Edward J. Herbst and Mary E. Higgins pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidential Treatment for a portion of this document has been granted pursuant to Rule 406 under the Securities Act. The omitted portions have been separately filed with the Commission.

++ Confidential Treatment for a portion of this document has been requested pursuant to Rule 406 under the Securities Act. The omitted portions have been separately filed with the Commission.

(1) Incorporated herein by reference from our registration statement on Form S-4 (SEC No. 33-71094), Part II, Item 21.

(2) Incorporated herein by reference from our quarterly report on Form 10-Q filed with the SEC on November 14, 2002.

(3) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on March 10,

2003.

(4) Incorporated herein by reference from our annual report on Form 10-K filed with the SEC on March 24, 2003.

(5) Incorporated herein by reference from our registration statement on Form S-4 (SEC No. 333-118068-05).

(6) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on November 23, 2004.

(7) Incorporated herein by reference from our registration statement on Form S-4 (SEC No. 333-122837).

(8) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on March 15, 2006.

(9) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on May 16, 2006.

(10) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on August 28, 2006.

(11) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on November 2, 2006.

(12) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on August 7, 2006.

(13) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on January 9, 2007.

(14) Incorporated herein by reference from our annual report on Form 10-K filed with the SEC on April 2, 2007.

(15) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on August 17, 2007.

(16) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on December 20, 2007.

(17) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on November 7, 2007.

(18) Incorporated herein by reference from our current report on Form 8-K filed with the SEC on March 11, 2008.

(19) Incorporated herein by reference from our annual report on Form 10-K filed with the SEC on April 2, 2007.

* Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the annual report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.

HERBST GAMING, INC.


By:		/s/ Edward J. Herbst
Name:	Edward J. Herbst
Title:	Chairman of the Board, Chief
	Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE

/s/ Edward J. Herbst	Chairman of the Board, Chief Executive	March 31, 2008
Edward J. Herbst	Officer and President (Principal Executive Officer)

/s/ Mary E. Higgins	Chief Financial Officer (Principal	March 31, 2008
Mary E. Higgins	Financial and Accounting Officer

/s/ Timothy P. Herbst	Executive Vice President and Director	March 31, 2008
Timothy P. Herbst

/s/ Troy D. Herbst	Executive Vice President, Secretary,	March 31, 2008
Troy D. Herbst	Treasurer and Director

/s/ John N. Brewer	Director	March 31, 2008
John N. Brewer

/s/ John F. O’Reilly	Director	March 31, 2008
John F. O’Reilly