UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2008

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

For the transition period from: to

Commission file number: 0-71094

HERBST GAMING, INC.

(Exact name of registrant as specified in its charter)

NEVADA		88-0446145
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(702) 889-7695
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o	Non-accelerated Filer x	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. YES o NO o Not Applicable x

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value, 300 outstanding shares

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PART I — FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	December 31, 2007			June 30, 2008
	(in thousands)
Assets
Current assets
Cash and cash equivalents	$	94,282		$	117,549
Accounts receivable, net	7,012			7,038
Notes and loans receivable	609			429
Prepaid expenses	17,134			16,083
Inventory	4,995			5,163
Total current assets	124,032			146,262
Property and equipment, net	548,709			565,222
Lease acquisition costs, net	21,551			17,988
Due from related parties	1,704			1,216
Other assets, net	27,892			26,098
Intangibles, net	244,059			236,101
Goodwill	112,438			52,128

Total assets	$	1,080,385		$	1,045,015

Liabilities and stockholders’ deficiency
Current liabilities
Current portion of long-term debt	$	7,634		$	1,178,167
Accounts payable	18,429			15,806
Accrued interest	4,562			18,471
Accrued expenses	28,384			28,316
Due to related party	—			75
Total current liabilities	59,009			1,240,835
Long-term debt, less current portion	1,138,436			1
Other liabilities	1,669			1,761

Commitments and contingencies (Note 8)

Stockholders’ deficiency
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
Accumulated deficit	(122,728		)	(201,581		)

Total stockholders’ deficiency	(118,729		)	(197,582		)

Total liabilities and stockholders’ deficiency	$	1,080,385		$	1,045,015

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

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HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2008			2007			2008
							(in thousands)
Revenues
Route operations	$	71,720		$	63,947		$	146,469		$	128,594
Casino operations	131,278			120,204			210,817			241,200
Other operations	28,615			35,727			36,001			63,505
Total revenues	231,613			219,878			393,287			433,299
Promotional allowances	(17,400		)	(15,349		)	(28,685		)	(30,642		)

Net revenues	214,213			204,529			364,602			402,657

Costs of revenues
Route operations	64,217			54,587			129,089			109,868
Casino operations	90,261			88,525			142,768			177,481
Other operations	24,162			30,027			29,803			52,614
General and administrative	8,303			5,121			12,487			10,313
Depreciation and amortization	16,668			14,214			29,000			28,863
Restructuring costs	—			10,525			—			11,821
Loss on impairment of assets	—			34,298			—			34,298
Total costs and expenses	203,611			237,297			343,147			425,258
Income (loss) from operations	10,602			(32,768		)	21,455			(22,601		)

Other income (expense)
Interest income	388			297			678			545
Interest expense, (net of capitalized interest of $109, $0, $206 and $0, respectively)	(20,418		)	(29,858		)	(34,092		)	(56,797		)
Increase in value of derivative instruments	8,074			—			6,741			—
Total other expense	(11,956		)	(29,561		)	(26,673		)	(56,252		)
Net income (loss)	$	(1,354	)	$	(62,329	)	$	(5,218	)	$	(78,853	)

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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HERBST GAMING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2007			2008
	(in thousands)
Cash flows from operating activities
Net loss	$	(5,218	)	$	(78,853	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	29,000			28,863
Amortization of debt issuance costs	1,663			2,033
Debt discount amortization	71			71
Loss (gain) on sale of property and equipment	16			(160		)
Change in value of derivative instruments	(6,741		)	—
Loss on impairment of assets	—			34,298
Decrease (increase) in operating assets and liabilities
Accounts receivable	1,374			4
Prepaid expenses	(2,582		)	1,051
Inventory	(105		)	(168		)
Due from related parties	(67		)	484
Other assets	(64		)	(76		)
Increase (decrease) in
Accounts payable	1,797			(2,049		)
Accrued interest	148			13,909
Accrued expenses	2,540			(68		)
Due to related parties	187			75
Other liabilities	(246		)	75
Net cash provided by (used in) operating activities	21,773			(511		)
Cash flows from investing activities
Net cash paid for acquisition of Sands	(147,953		)	—
Net cash paid for acquisition of Primadonna	(393,182		)	—
Additions to notes receivable	(465		)	(369		)
Collection on notes receivable	1,140			553
Proceeds from sale of property and equipment	45			394
Purchases of property and equipment	(16,195		)	(8,579		)
Lease acquisition costs	(766		)	(83		)
Net cash used in investing activities	(557,376		)	(8,084		)
Cash flows from financing activities
Proceeds from long-term debt	783,000			35,859
Payments of long-term debt	(200,999		)	(3,832		)
Payment of deferred loan costs	(9,638		)	(165		)
Stockholders’ distributions	(10,300		)	—
Net cash provided by financing activities	562,063			31,862
Net increase in cash and cash equivalents	26,460			23,267
Cash and cash equivalents
Beginning of period	65,640			94,282
End of period	$	92,100		117,549
Supplemental cash flow information
Cash paid for interest	$	32,417		40,783
Supplemental schedule of non-cash investing and financing activities
Purchase of property and equipment included in accounts payable	$	2,295		438

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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HERBST GAMING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 (the “Mark Twain”), 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 (“Rail City”), the Sands Regency Casino Hotel in Reno, Nevada (the “Sands Regency”), the Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada (the “Gold Ranch”) and Terrible’s Depot Casino (“Depot Casino”) and Red Hawk Sports Bar (“Red Hawk”), each of which is in Dayton, Nevada (all such properties acquired pursuant to the Sands Regent Acquisition, together the “Sands Casinos”).

· 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.

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

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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 industries in the States of Nevada, Iowa and Missouri are 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 Racing and Gaming Commission and the Missouri Gaming Commission, as well as local jurisdictions.

Basis of Presentation—The condensed consolidated financial statements of Herbst Gaming, Inc. as of June 30, 2008, and for the six months ended June 30, 2008 and 2007 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of the financial results for the interim periods. Our results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2008. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2007 (the “2007 Form 10-K”).

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. Actual results could differ from those estimates.

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, 2007 and June 30, 2008, the allowance for potential credit losses was $802,000 and $833,000, respectively.

Goodwill and Intangible Assets—The Company has approximately $52,128,000 in goodwill as of June 30, 2008. In the first quarter of 2007, the Company added approximately $48,873,000 in goodwill as a result of the acquisition of The Sands Regent, and in the second quarter of 2007, the Company added approximately $67,198,000 in goodwill as a result of the acquisition of The Primadonna Company, each as described in footnote 2 below. As a result of the completion of the allocation of purchase price for the acquisitions referenced in Note 2, goodwill was reduced in the first quarter of 2008 by $7,594,000 for The Sands Regent and $22,017,000 for The Primadonna Company. As a result of continued deterioration of operating results at the Primm Casinos, the Company determined that as of June 30, 2008, an interim impairment test was necessary for goodwill and intangible assets associated with these properties. As a result of this test, impairment of goodwill of $30,698,000 associated with the Primm Casinos was recognized in the second quarter of 2008.

We had $236,100,000 in other intangible assets on our consolidated balance sheet as of June 30, 2008. Based upon an increase in the number of competitors in the Iowa market as well as a slowdown in the overall economy, there was a continued decline in the operating results at Lakeside Iowa. The Company believed this decline was a triggering event and therefore warranted a review of the value of the intangible assets at the property. This review resulted in an additional impairment of $3.6 million to the value of the license at Lakeside Iowa (see Note 4).

Restructuring Costs—Restructuring costs are comprised of expenses related to the evaluation of financial and strategic alternatives, and include fees for services from financial, legal and accounting advisors as well as fees related to the May 15, 2008 forbearance agreement (see Note 5).

Recently Issued Accounting Standards

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities. This FSP concludes that those unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and must be included in the computation of both basic and diluted earnings per share (the two-class method). This FSP is effective in the first quarter of 2009 and is to be applied on a retrospective basis to all periods presented. The issue shall be effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We do not believe that the adoption of FSP No. EITF 03-6-1 will have an impact on our consolidated financial statements, as our Company has not granted share-based awards.

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In May 2008, the FASB issued FAS No. 162, Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Although we can provide no assurances, we do not believe that the adoption of SFAS 162 will have a material impact on our consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets, and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008. We have not yet determined the effect, if any, that the adoption of FSP 142-3 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133, (“SFAS 161”). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Although we can provide no assurances, we do not believe that the disclosure enhancements related to the adoption of SFAS 161 will have a material impact on the disclosures to our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which defers the effective date of FASB Statement No. 157 (“SFAS 157”), Fair Value Measurements, to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We have not yet determined the effect, if any, that the adoption of SFAS 157 will have 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, which was finalized during the quarter ended March 31, 2008, is as follows:

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

Receivables	$	2,513
Inventory	1,603
Prepaid	4,152
Property, plant and equipment	286,319
Other assets	1,310
Intangible assets
Trade Name	40,600
Customer Loyalty Program	10,950
Goodwill	67,198

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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 above table reflects an adjustment from estimated amounts reported on the 2007 Form 10-K as the final fair values for property, plant and equipment were still based on management’s estimate at the time of the 2007 Form 10-K filing. Management, upon completion of the finalization of the purchase price allocation, determined that the fair value of the amounts for property, plant and equipment was greater than our initial estimate by approximately $24.3 million, and the Customer Loyalty Program was less by approximately $2.3 million, with a corresponding adjustment to goodwill.

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, the Sands Regency, the Gold Ranch, Depot Casino and Red Hawk. 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, which was finalized during the quarter ended March 31, 2008, is as follows:

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

Receivables	$	4,726
Inventory	600
Prepaid	2,132
Property, plant and equipment	73,382
Intangible assets
Trade Name	14,550
Customer Loyalty Program	10,500
Goodwill	48,873

Fair Market Value of liabilities assumed (in thousands):

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

The above table reflects an adjustment from estimated amounts reported on the 2007 Form 10-K as the final fair values for property, plant and equipment were still based on management’s estimate at the time of the 2007 Form 10-K filing. Management, upon completion of the finalization of the purchase price allocation, determined that the fair value of the amounts for property, plant and equipment was greater than our initial estimate by approximately $8.5 million, and the Customer Loyalty Program was less by approximately $0.9 million, with a corresponding adjustment to goodwill.

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3. PROPERTY AND EQUIPMENT

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

	December 31, 2007			June 30, 2008

Building	$	411,730		$	447,184
Gaming equipment	139,212			140,534
Furniture, fixtures, and equipment	81,078			82,812
Leasehold improvements	2,038			2,057
Land	37,528			36,930
Barge	17,160			17,160
Construction-in-progress	10,673			11,640
	699,419			738,317
Less accumulated depreciation	(150,710		)	(173,095		)
	$	548,709		$	565,222

4. GOODWILL AND INTANGIBLE ASSETS

During the first quarter of 2007, we acquired the stock of The Sands Regent and during the second quarter of 2007 we acquired the Primm Properties. In connection with these transactions, we recorded a significant amount of goodwill included in the table below.

SFAS No. 142 requires the Company to test goodwill and other indefinite lived intangible assets 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. As a result of continued deterioration of operating results at the Primm Casinos, the Sands Casinos and Lakeside Iowa, the Company determined that as of June 30, 2008, an interim impairment test was necessary for the goodwill associated with these properties. Based upon significant declines in operating income relative to expectations and expected continuation of those declines, the Company determined a “triggering event” occurred at these properties, requiring interim analysis of intangibles. An analysis of the value of the intangible assets and goodwill was performed in June 2008 for the properties acquired in the Sands Acquisition, the properties acquired in the Primm Acquisition and Lakeside Iowa. The result of that analysis suggested that there was no further impairment as of June 30, 2008 with respect to the properties acquired in the Sands Acquisition. Analysis of goodwill at the Primm Properties resulted in an additional impairment of $30.7 million to goodwill and analysis of the intangible assets at the Lakeside Iowa property resulted in an additional impairment of $3.6 million.

Intangible assets

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, 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 during its annual review of intangible assets in October 2007, which is comprised of $33.3 million in impairment to the gaming license to reduce its carrying value to its estimated fair value. Since that time market conditions and operational performance of Lakeside Iowa continued to deteriorate and as such the Company determined a triggering event had occurred in the second quarter of 2008. After an interim valuation of the license at Lakeside Iowa, the Company recognized additional non-cash impairment charges of $3.6 million.

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

	December 31, 2007					June 30, 2008
	Gross Carrying Amount			Accumulated Amortization		Gross Carrying Amount			Accumulated Amortization
	(dollars in thousands)
Amortized intangible assets
Customer Loyalty Programs	$	27,550		$	3,612	$	24,350		$	4,553
Non-Competition Agreement	2,180			948		2,180			1,166
Total	29,730			4,560		26,530			5,719

Unamortized intangible assets
Gaming License Rights	196,800					196,800
Impairment of intangibles	(33,300		)			(36,900		)
Patent applications	240					240
Tradename	55,150					55,150
Total	$	218,890				$	215,290

Goodwill

The fair market value of intangibles and goodwill are dependant 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 the Primm Casinos, the operating results declined significantly, which management believes is primarily as a result of economic pressures in Primm’s primary markets in Southern California. These declines resulted in the Company recording a non-cash impairment charge in the fourth quarter of 2007 of $36.5 million to reduce the carrying value of goodwill. Subsequent to December 2007, operating results have declined further as economic pressures have continued and competition has increased for Southern California and Southern Nevada customers. Based on the interim impairment test referenced above, at June 30, 2008, the Company recognized a non-cash impairment charge of $30.7 million to reduce to zero the carrying value of goodwill related to the assets acquired in the Primm Acquisition.

The changes in the carrying amount of goodwill for the six months ended June 30, 2008 are as follows (in thousands):

Balance as of January 1, 2008	$	112,438
Adjustment to goodwill from finalization of purchase price allocation of Sands Acquisition	(7,594		)
Adjustment to goodwill from finalization of purchase price allocation of Primm Acquisition	(22,017		)
Impairment of goodwill related to the Primm Properties	(30,698		)
Total	$	52,128

5. LONG-TERM DEBT

We maintain a $860.0 million senior credit facility (the “amended Credit Agreement”). This facility includes a revolving credit facility in the amount of $100.0 million and $751.8 million of term loans that mature on December 2, 2011 if we have not refinanced our 8 1/8% Senior Subordinated Notes due 2012 (the “8 1/8% Notes”), and otherwise on January 3, 2014. Our revolving credit facility was fully drawn at June 30, 2008. Interest accrues on borrowings under the amended Credit Agreement based on a floating rate. This floating rate is based upon a variable interest rate (a base rate or LIBOR, at our option) plus a leverage grid-based spread. Our average floating rate on debt incurred under the amended Credit Agreement was 9.75% at June 30, 2008.

As disclosed in the 2007 Form 10-K, the Company is currently in default under the amended Credit Agreement. In addition to the previously disclosed default due to the “going concern” qualification in our auditors’ report on our annual financial statements, as of the end of the second quarter of 2008, we were not in compliance with financial ratio covenants of the amended Credit Agreement. The amounts outstanding under the amended Credit Agreement are classified as current liabilities in the Company’s balance sheet.

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On May 13, 2008, we received payment blockage notices from the Administrative Agent under the amended Credit Agreement, pursuant to which the Administrative Agent advised us and the trustees under the indentures pursuant to which the Company’s 8 1/8% Notes and 7% Senior Subordinated Notes due 2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”) were issued that, as a result of events of defaults under the amended Credit Agreement, no payments may be made with respect to the Subordinated Notes pursuant to the subordination provisions of the indentures. In accordance with the payment blockage notices, we did not make the interest payments on the 7% Notes due May 15, 2008 and on the 8 1/8% Notes due June 1, 2008 within 30 days of the scheduled payment dates, resulting in events of default under the indentures. As a result, each of the trustees may, or holders of 25% of the outstanding principal amount of notes issued under the relevant indenture may direct such trustee to, accelerate the maturity of the notes issued under that indenture. Under the subordination provisions referenced above, payment may be resumed on the earlier of the date upon which such events of default under the amended Credit Agreement are cured or waived and 180 days after the date on which the payment blockage notices were received, unless the amended Credit Agreement debt has been accelerated. The amounts outstanding under the Subordinated Notes were reclassified as current liabilities in the Company’s balance sheet.

On May 15, 2008, we entered into a forbearance and standstill agreement (the “Forbearance Agreement”) with respect to the amended Credit Agreement, the terms of which are summarized below.

We continue our evaluation of financial and strategic alternatives, which may include a recapitalization, refinancing, restructuring or reorganization of 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 undertaking any such alternative in the near term, including prior to the expiration of the Forbearance Period (as defined below).

If the lenders under the amended Credit Agreement were to accelerate repayment of all amounts outstanding under the amended Credit Agreement upon expiration or termination of the Forbearance Agreement or upon occurrence of an event of default under the amended Credit Agreement, other than the Specified Defaults (as defined below), or the holders of the 7% Notes or the 8 1/8% Notes were to accelerate the indebtedness outstanding under the relevant indenture, we would be required to refinance or restructure the payments on that debt. We cannot assure 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.

The Forbearance Agreement amends the amended Credit Agreement and provides that the lenders and the Administrative Agent will forbear from exercising certain rights and remedies under the amended Credit Agreement and other loan documents as a result of the existing defaults described above and certain other possible defaults (collectively, the “Specified Defaults”) under the amended Credit Agreement through September 30, 2008 or earlier upon the occurrence of one or more events of default other than the Specified Defaults or a breach by the Company of the Forbearance Agreement (the “Forbearance Period”). In addition, the Forbearance Agreement provides, among other things, for the following:

1. the interest rate premium payable in respect of loans available under the Credit Agreement has been increased for Eurodollar loans from LIBOR plus 4.50% to LIBOR plus 6.50% and has been increased for base rate loans from the base rate plus 3.25% to the base rate plus 5.25%;

2. during the Forbearance Period, the default rate shall not apply;

3. during the Forbearance Period, the Company retains the ability to convert Loans into Eurodollar Rate Loans as provided for in the Credit Agreement so long as the Interest Periods for such Eurodollar Rate Loans do not extend beyond September 30, 2008;

4. the Company is prohibited from making payments on account of its Subordinated Debt, other than in accordance with the terms of the subordination provisions and certain payments of certain professional fees and expenses;

5. the Administrative Agent has the ability to approve any engagement letters entered into by the Company with counsel for or advisors to the holders of any Subordinated Debt; and

6. the Company shall pay to the Administrative Agent for the benefit of the Lenders a fee in the amount of approximately $6.4 million.

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Net revenues, income from operations, depreciation and amortization and EBITDA (as defined in footnote 1 below) for these segments are as follows (dollars in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2008			2007			2008
Net revenues
Slot route operations	$	71,709		$	63,930		$	146,433		$	128,549
Casino operations:
Nevada	83,033			75,602			120,847			150,659
Other states	30,856			29,270			61,321			59,944
Other operations—non gaming	28,615			35,727			36,001			63,505
Total net revenues	$	214,213		$	204,529		$	364,602		$	402,657
Income from segment operations

Slot route operations	$	1,788		$	4,807		$	5,962		$	9,484
Casino operations:
Nevada	7,128			(29,174		)	10,971			(28,286		)
Other states	5,615			1,625			10,970			7,582
Total income (loss) from segment operations	14,531			(22,742		)	27,903			(11,220		)
Other	4,374			5,620			6,039			10,753
General and administrative	(8,303		)	(5,121		)	(12,487		)	(10,313		)
Restructuring costs	—			(10,525		)	—			(11,821		)
Total income (loss) from operations	10,602			(36,342		)	21,455			(22,601		)

Depreciation and amortization
Slot route operations	$	5,704		$	4,536		$	11,382		$	9,197
Casino operations:
Nevada	8,046			6,775			11,818			13,877
Other states	2,839			2,823			5,641			5,651
Other expenses	79			80			159			138
Total depreciation and amortization	$	16,668		$	14,214		$	29,000		$	28,863

Segment EBITDA (1)
Slot route operations	$	7,492		$	9,343		$	17,344		$	18,681
Casino operations:
Nevada	15,174			8,299			22,789			16,289
Other states	8,454			8,048			16,611			16,833
Other and corporate	(3,462		)	(9,649		)	(5,611		)	(10,698		)
Depreciation and amortization	(16,668		)	(14,214		)	(29,000		)	(28,863		)
Interest expense, net of capitalized interest	(20,418		)	(29,858		)	(34,092		)	(56,797		)
Loss on impairment of assets	—			(34,298		)	—			(34,298		)
Increase in value of derivative instruments	8,074			—			6,741			—
Net income (loss)	$	(1,354	)	(62,329		)	$	(5,218	)	$	(78,853	)

(1) Segment EBITDA, a non-GAAP measure, is used by management to measure segment profits and losses and consists of income from segment operations plus depreciation and amortization and non-cash impairment charges and is calculated before allocation of overhead and change in value of derivative instruments. The table presents, for the periods indicated, a presentation of non-GAAP financial measures reconciled to the closest GAAP measure, net income (loss). “EBITDA” means earnings before interest, tax, depreciation and amortization.

7. RELATED-PARTY TRANSACTIONS

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 beneficially

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owned by the parents of the Company’s owners. Rent expense of approximately $1.7 million, $1.8 million, $3.4 million and $3.5 million was incurred for the three months ended June 30, 2007 and 2008 and the six months ended June 30, 2007 and 2008, respectively, under the Company’s agreement for the exclusive placement of slot machines in Terrible Herbst convenience store locations. This agreement expires on December 31, 2009 but may be extended at the option of the Company for one additional term of five years at certain increased license fees in accordance with the terms of the agreement.

8. COMMITMENTS AND CONTINGENCIES

On February 17, 2006, the Clark County Circuit 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. This lawsuit is currently on appeal.

Nevada Use Tax Refund Claims

On March 27, 2008, the Nevada Supreme Court issued a decision in Sparks Nugget, Inc. vs. The State of Nevada Department of Taxation (the “Department”), holding that food purchased for subsequent use in the provision of complimentary and/or employee meals was exempt from both sales and use tax. On April 24, 2008, the Department filed a Petition for Rehearing (the “Petition”) on the decision. On July 17, 2008, the Nevada Supreme Court denied the Department’s Petition. We have been paying use tax on food purchased for subsequent use as complimentary and employee meals at our Nevada casino properties and are in the process of quantifying the amount of our potential refund, which we estimate to be approximately $1.8 million, excluding interest, from July 1, 2001 through January 1, 2008. Based on the denial of the petition, as of January 1, 2008, the Company will no longer accrue for these taxes in the current tax year but due to the uncertainty regarding the method for reimbursement to the Company of taxes paid to date, we will not record any gain from previous tax years until the tax refund is realized.

Business Interruption

In June 2008, our property in La Grange, Missouri was closed for a short period due to flooding. The Company maintains business interruption insurance and has been notified by the carrier that we are covered for this incident under the policy and we anticipate a claim settlement of approximately $376,000 that will be recorded as a reduction of expenses and lost profits once the claim settelement is finalized. As of June 30, 2008, the Company was still negotiating the settlement, and as such, no amounts are currently recorded in our consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations. At June 30, 2008, we owned and operated 16 casinos and a slot route operation. Our route operations involve the exclusive installation and, as of June 30, 2008, operation of approximately 6,900 slot machines in strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. Our casino operations consist of sixteen casinos located in Nevada, Iowa and Missouri, all operated or, with respect to our newly acquired properties, expected to be operated, under the “Terrible’s” brand. We are in the process of re-branding the Sands Casinos 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 and Terrible Herbst, 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

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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, interest expense and loss on impairment of assets, 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 of 2007, The Sands Regent elected to be treated as a Subchapter S corporation for federal income tax purposes.

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 Rail City, the Sands Regency, the Gold Ranch, a California lottery station located on the Nevada/California border and Depot Casino.

On April 10, 2007, the Company completed the Primm Acquisition for a net cash purchase price of $394 million. The properties purchased include Buffalo Bill’s, Whiskey Pete’s and Primm Valley. Also included in the purchase were a California lottery station located on the Nevada/California border, three gasoline stations and the Primm Travel Center.

We used proceeds from the amended Credit Agreement to fund both acquisitions.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2008

Route Operations

	Three months ended June 30, 2007					Three months ended June 30, 2008
	$			% of revenue		$			% of revenue
				(dollars in thousands)
Slot route revenue	$	71,720		100.0	%	$	63,947		100	%
Promotional allowances	(11		)	0.0		(17		)	0.0
Direct expenses	(64,217		)	89.5		(54,587		)	85.4
EBITDA	7,492			10.5		9,343			14.6
Depreciation and amortization	(5,704		)	8.0		(4,536		)	7.1
Income from slot route operations	$	1,788		2.5	%	$	4,807		7.5	%

Route operations accounted for 29% of total revenues during the three months ended June 30, 2008, compared to 31% of total revenues during the three months ended June 30, 2007. Total revenues from route operations were $63.9 million for the three months ended June 30, 2008, a decrease of $7.8 million, or 11%, from $71.7 million for the three months ended June 30, 2007. At June 30, 2008, we were operating approximately 6,900 slot machines, which is 500 less than the approximately 7,400 we operated at June 30, 2007. The decrease in route revenue in the second quarter of 2008 primarily reflects general economic weakness in Nevada. Although there may have been some continued impact from the smoking ban that took effect in late 2006, we believe the negative effects of such smoking ban on route revenue were relatively consistent between the second quarters of 2008 and 2007 as the ban was in place during the second quarter of 2007.

Route operating costs were $54.6 million, or 85% of route revenues, for the three months ended June 30, 2008. This compares to $64.2 million, or 90% of route revenues, for the same period in 2007. The decline in operating expenses was $9.6 million, or 15%. The decrease in route operating expenses was comprised of a decrease of approximately $5.0 million in space lease expenses negotiated in late summer 2007. The remaining decrease in expenses was associated with the lower revenues at our participation locations, which are route accounts where the operating contract provides for a decrease in revenue share costs in proportion to revenue decline and lower costs associated with other reductions in space lease and direct expenses.

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As a result of these factors, route EBITDA for the three months ended June 30, 2008 was $9.3 million, an increase of $1.8 million, or 24%, from $7.5 million for the three months ended June 30, 2007.

Casino Operations

	Three months ended June 30, 2007					Three months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Casino revenue	$	131,278		100.0	%	$	120,204		100.0	%
Promotional allowances	(17,389		)	13.2		(15,332		)	12.8
Direct expenses	(90,261		)	68.8		(88,525		)	73.6
EBITDA	23,628			18.0		16,347			13.6
Depreciation and amortization	(10,885		)	8.3		(9,598		)	8.0
Impairment of assets	—			—		(34,298		)	(28.5	)
Income (loss) from casino operations	$	12,743		9.7	%	(27,549		)	(22.9	)%

Casino operations accounted for 55% of total revenues for the three-month period ended June 30, 2008 and 57% of total revenues for the three months ended June 30, 2007. Total revenues derived from casino operations were $120.2 million for the three months ended June 30, 2008, a decrease of $11.1 million, or 8%, from $131.3 million for the three months ended June 30, 2007. The decrease is due primarily to the impact of the general weakness of the economy, particularly the economic weaknesses in Nevada and California, the two main feeder markets for our Nevada casinos. The acquisition of the Primm Casinos occurred on April 10, 2007; as a result, the 2008 period includes ten additional days of operations at the Primm Casinos.

The results for the quarter showed an overall decline in casino EBITDA from $23.6 million in the second quarter of 2007 to $16.3 million during the second quarter of 2008. The $7.3 million decline was a result of significant declines at our Primm Casinos, down $5.7 million when compared to the second quarter of 2007, and a decline of $1.9 million at the Sands Regency. Both locations depend to a significant degree on drive-in traffic that was adversely impacted during the quarter as the region experienced rising gasoline costs and difficult economic environments in California and Nevada, their feeder markets. There were some improvements in the results of Rail City, which was renovated in May 2007, as well as a slight rebound in both of the casinos located the Pahrump market. We address these results more fully in the segment discussions below.

Casino Operations — Nevada

	Three months ended June 30, 2007					Three months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Casino revenue	$	95,287		100.0	%	$	86,348		100.0	%
Promotional allowances	(12,254		)	12.9		(10,744		)	12.4
Direct expenses	(67,859		)	71.2		(67,303		)	77.9
EBITDA	15,174			15.9		8,299			9.7
Depreciation and amortization	(8,046		)	8.4		(6,775		)	7.8
Impairment of assets	—					(30,698		)	(35.6	)
Income from casino operations	$	7,128		7.5	%	$	(29,174	)	(33.5	)%

Revenues derived from Nevada casino operations were $86.3 million for the three months ended June 30, 2008, a decrease of $9.0 million, or 9%, from $95.3 million for the three months ended June 30, 2007. Revenues were lower at all our casinos in Nevada except Rail City. The revenues at our casinos located in Southern Nevada, other than the Primm Casinos, declined approximately 5%, or $1.1 million, to $22.9 million in the second quarter of 2008 from $24.0 million during the second quarter of 2007. Promotional costs for these Southern Nevada casinos declined $0.3 million, resulting in net revenue for these casinos decreasing by $0.8 million for the quarter. The Northern Nevada casinos had a significant decline in revenues of 15%, or $3.5 million, from $22.6 million during the second quarter of 2007 to $19.1 million in the second quarter of 2008. The decreases in revenues were primarily at the Sands Regency, at which revenues decreased by $3.7 million, or 32%, and the Gold Ranch, at

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which revenues decreased by $0.3 million, or 15%. In the aggregate net revenues at our Nevada casino locations (other than the Primm Casinos) were down approximately 10%, or $4.1 million, from the second quarter of 2007.

Casino operations at the Primm Casinos had a very challenging second quarter. Revenues declined from $48.6 million in the quarter ended June 30, 2007, to $44.3 million in the second quarter of 2008, a decline of $4.3 million, or 8.8%. The 2008 period includes ten additional days because the Primm Acquisition occurred on April 10, 2007. The decline at the Primm Casinos was primarily a result of a $3.8 million decline in slot revenue, which was associated with a significant downturn in the Southern California economy. Due to the declining results at the Primm Casinos, the Company recorded a further impairment charge of $30.7 million in the second quarter of 2008, reducing the goodwill associated with the Primm Casinos to zero. See Note 4 to the financial statements above for a discussion of impairment of goodwill.

Promotional allowances for our Nevada casinos were down slightly from 12.9% of revenues for the three months ended June 30, 2007 to 12.4% of revenues for the three months ended June 30, 2008. This percentage decrease is the result of $1.5 million in decreased promotional costs, which was related to decreased revenue.

Nevada casino operating costs for the three months ended June 30, 2008 were $67.3 million, down $0.6 million from the second quarter of 2007. Operating costs of the Primm Casinos were $38.1 million, an increase of $2.3 million due mostly to 10 additional days being included in the 2008 quarter. Operating expenses at our other Nevada casinos were down $2.9 million, or 8.9%, from $32.1 million during the second quarter of 2007 to $29.2 million for the second quarter of 2008. Expense reductions were primarily associated with lower volume-related expenses such as cost of sales, as well as reduced payroll due to lower staffing levels in response to reduced business volume.

The decrease in depreciation and amortization in the quarter was primarily a result of the finalization of the purchase price allocation of both the Primm and the Sands Acquisitions. The depreciation number in 2007 was an estimate prior to the final valuation.

Nevada casino EBITDA (excluding impairment charges for the Primm Casinos of $30.7 million) was $8.3 million for the three months ended June 30, 2008 compared to $15.2 million for the three months ended June 30, 2007.

The Primm Casinos’ EBITDA (excluding impairment charges of $30.7 million) of $0.9 million was $5.7 million lower than the same period in 2007. The Northern Nevada properties had EBITDA of $2.9 million, down $1.6 million from the second quarter of 2007. With significant expense reductions in food costs and payroll, the remaining Nevada casinos showed an overall increase with an EBITDA of $4.5 million in the second quarter of 2008 compared to $4.2 million in the second quarter of 2007. This increase was primarily attributable to a relatively flat performance at the Las Vegas property, while the two Pahrump properties and Rail City showed an improvement from 2007.

Casino Operations — Other states

	Three months ended June 30, 2007					Three months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Casino revenue	$	35,991		100.0	%	$	33,858		100.0	%
Promotional allowances	(5,135		)	14.3		(4,588		)	13.6
Direct expenses	(22,402		)	62.2		(21,222		)	62.7
EBITDA	8,454			23.5		8,048			23.7
Depreciation and amortization	(2,839		)	7.9		(2,823		)	8.3
Impairment of assets	—			—		(3,600		)	(10.6	)
Income from casino operations	$	5,615		15.6	%	$	1,625		4.8	%

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Casino operations in other states accounted for 15% of total revenues for the three months ended June 30, 2008 and 16% of total revenues for the three months ended June 30, 2007. Total revenues derived from casino operations located in states other than Nevada were $33.9 million for the three months ended June 30, 2008, a decrease of $2.1 million, or 6%, from $36.0 million for the three months ended June 30, 2007.

Promotional allowances for the three months ended June 30, 2008 were $4.6 million compared to $5.1 million for the three months ended June 30, 2007, a decrease of $0.5 million, or 11%, which was related to decreased revenues.

Other state casino operating costs were $21.2 million, or 63% of revenues, for the three months ended June 30, 2008, a decrease of $1.2 million, compared to $22.4 million, or 62% of revenues, for the three months ended June 30, 2007. Expense reductions were primarily associated with lower volume-related expenses such as cost of sales, as well as with reduced payroll resulting from lower staffing levels implemented in response to reduced business volume.

Operating results at Lakeside Iowa have continued to decline as economic pressures have continued and competition has intensified in the Iowa market. An interim impairment test was performed at June 30, 2008, and as a result the Company recognized a non-cash impairment charge of $3.6 million to reduce the carrying value of the license acquired in the acquisition of this property. See Note 4 to the financial statements for further discussion of impairment of these intangible assets.

Other state casino EBITDA excluding impairment charges was $8.0 million for the three months ended June 30, 2008, a decrease of $0.5 million, or 3%, from $8.5 million for the three months ended June 30, 2007. All these facilities were impacted by flooding in the region during June, with the Mark Twain being closed for approximately two weeks. The Company expects an insurance recovery of approximately $0.3 million related to the closure.

Other Operations

Revenue from other operations consists of revenue from sources such as gasoline and convenience store sales, ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations. Our gas station operations include our gas station and convenience store located in Osceola, Iowa, the Gold Ranch and the three gas stations acquired pursuant to the Primm Acquisition. Revenues from other operations were $35.7 million for the three months ended June 30, 2008 compared to $28.6 million for the three months ended June 30, 2007, an increase of $7.1 million, substantially all of which was associated with the revenue from gas station and other operations at the Primm facilities due to higher gasoline prices, 10 additional days of operations in the 2008 period when compared to the 2007 period, as well as higher diesel sales due to aggressive pricing.

Costs associated with these revenues were $30.0 million for the three months ended June 30, 2008 and $24.2 million for the three months ended June 30, 2007, an increase of $5.8 million, primarily the result of increases in the cost of gasoline.

Promotional Allowances

Promotional allowances were $15.3 million, or 7% of total revenues, for the three months ended June 30, 2008, a decrease of $2.1 million, or 12%, from $17.4 million, or 7.5% of total revenues, for the three months ended June 30, 2007. The decrease occurred across all properties except Rail City, where revenue and promotional allowances increased over the same quarter last year. Decreases in promotional allowances were primarily the result of revenue declines.

Costs of Revenues

	Three months ended June 30, 2007					Three months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Other operations	$	(24,162	)	10.4	%	$	(30,027	)	13.6	%
General and administrative	(8,303		)	3.6	%	(5,121		)	2.3	%
Depreciation and amortization	(16,668		)	7.2	%	(14,214		)	6.5	%
Restructuring costs	—					(10,525		)	4.8	%

General and administrative (“G&A”) expenses were $5.1 million for the three months ended June 30, 2008, or $3.2 million lower than the $8.3 million for the three months ended June 30, 2007. The decrease was due to higher G&A

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expenses incurred during the second quarter of 2007 with regard to the acquisition of the Primm Casinos. G&A expenses as a percentage of revenue were 2.3% for the second quarter of 2008 compared to 3.6% for the second quarter of 2007.

During the quarter, the Company also incurred costs associated with its restructuring process, which is described in “Liquidity and Capital Resources.” These costs were $10.5 million for the quarter ended June 30, 2008 and are primarily associated with legal and advisory fees.

Depreciation and amortization expense was $14.2 million for the three months ended June 30, 2008, a decrease of $2.5 million, from $16.7 million for the three months ended June 30, 2007. The decrease in depreciation and amortization in the quarter was primarily a result of the finalization of the purchase price allocation of both the Primm and the Sands Acquisitions; the depreciation number in 2007 was an estimate prior to the final valuation. Additionally, the carrying value of certain route contracts was reduced in the second half of 2007 as a result of impacts from the smoking ban on our route operations, thus reducing associated amortization in 2008.

Income (Loss) from Operations

As a result of the factors discussed above, most notably the decline in revenues due to the general economic downturn, the impairment of goodwill and intangible assets and restructuring costs, the Company had a loss from operations of $32.8 million for the three months ended June 30, 2008, compared to income from operations of $10.6 million for the three months ended June 30, 2007.

Other Expenses

Other expense was $29.6 million for the three months ended June 30, 2008, an increase of $17.6 million from $12.0 million for the three months ended June 30, 2007.

Our interest costs increased from $20.4 million during the three months ended June 30, 2007 to $29.9 million during the three months ended June 30, 2008. This increase was primarily due to a higher average borrowing rate on floating rate debt.

Net Loss

Net loss for the three months ended June 30, 2008 was $62.3 million compared to net loss of $1.4 million for the three months ended June 30, 2007.

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2008

Route Operations

	Six months ended June 30, 2007					Six months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Slot route revenue	$	146,469		100.0	%	$	128,594		100.0	%
Promotional allowances	(36		)	0.0		(45		)	0.0
Direct expenses	(129,089		)	88.1		(109,868		)	85.4
EBITDA	17,344			11.9		18,681			14.6
Depreciation and amortization	(11,382		)	7.8		(9,197		)	7.2
Income from slot route operations	$	5,962		4.1	%	$	9,484		7.4

Route operations accounted for 30% of total revenues during the six months ended June 30, 2008 compared with 37% of total revenues for the six months ended June 30, 2007. Total revenues from route operations were $128.6 million for the six months ended June 30, 2007, a decrease of $17.9 million, or 12%, from $146.5 million for the six months ended June 30, 2007. At June 30, 2008, we were operating approximately 6,900 slot machines, which is 500 less than the approximately 7,400 we were operating as of June 30, 2007. The decrease in route revenue in the first half of 2008 primarily reflects general economic weakness in Nevada. Although there may have been some continued impact from the smoking ban that took effect in late 2006 on our route operations for the first six months of 2008, we believe the negative effects of the smoking ban on route revenue for the six months ended

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June 30, 2007 and June 30, 2008 were relatively consistent in both periods as the ban was in place during the first six months of 2007.

Route operating costs were $109.9 million, or 85% of route revenues, for the six months ended June 30, 2008. This compares to $129.1 million, or 88% of route revenues, for the same period in 2007. The decrease in route operating expenses was primarily associated with the decrease of approximately $10.0 million in space lease expenses negotiated in late summer 2007. The remaining decrease in expenses was associated with the lower revenues at our participation locations, which are route accounts where the operating contract provides for a decrease in revenue share costs in proportion to revenue decline and lower costs associated with other reductions in space lease and direct expenses. Route EBITDA for the six months ended June 30, 2008 was $18.7 million, an increase of $1.4 million, or 8.0%, from $17.3 million for the six months ended June 30, 2007.

Casino Operations

	Six months ended June 30, 2007					Six months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Casino revenue	$	210,817		100.0	%	$	241,200		100.0	%
Promotional allowances	(28,649		)	13.6		(30,597		)	12.7
Direct expenses	(142,768		)	67.7		(177,481		)	73.6
EBITDA	39,400			18.7		33,122			13.7
Depreciation and amortization	(17,459		)	8.3		(19,528		)	8.1
Impairment	—			—		(34,298		)	(14.2	)
Income (loss) from casino operations	$	21,941		10.4		$	(20,704	)	(8.6	)

Casino operations accounted for 55% of total revenues for the six months ended June 30, 2008 and 54% of revenues for the six months ended June 30, 2007. Total revenues derived from casino operations were $241.2 million for the six months ended June 30, 2008, an increase of $30.4 million, or 14%, from $210.8 million for the six months ended June 30, 2007. The increase is due to the inclusion of the results of the Primm Casinos, which were acquired on April 10, 2007 and contributed an additional $39.1 million in revenues for the first six months of 2008 relative to the comparable period in 2007.

The results from the casino segment are mixed for the six-month period. The addition of the Primm Casinos provided for much of the year-over-year increase as they were not acquired until April 2007; however, revenues and income from the Primm Casinos in 2008 were significantly below the 2007 results for the period from April 10, 2007 (the date of acquisition) through June 30, 2007. The results for the 2008 six-month period showed some improvement in the results at Rail City. However, the first six months of 2008 also saw significant weakness at the Primm Casinos as discussed above and at the Sands Regency. We address these results more fully in the segment discussions below.

Casino Operations — Nevada

	Six months ended June 30, 2007				Six months ended June 30, 2008
	$			% of revenue	$			% of revenue
	(dollars in thousands)
Casino revenue	$	139,220		100.0	$	172,010		100.0
Promotional allowances	(18,373		)	13.2	(21,351		)	12.4
Direct expenses	(98,058		)	70.4	(134,370		)	78.1
EBITDA	22,789			16.4	16,289			9.5
Depreciation and amortization	(11,818		)	8.5	(13,877		)	8.1
Impairment	—			—	(30,698		)	(17.8	)
Income (loss) from casino operations	$	10,971		7.9	$	(28,286	)	(16.4	)

Nevada casino operations accounted for 40% of total revenues for the six months ended June 30, 2008 and 35% of total revenues for the six months ended June 30, 2007. Revenues derived from Nevada casino operations were $172 million for the six months ended June 30, 2008, an increase of $32.8 million, or 24%, from $139.2 million for the six months ended

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June 30, 2007. The increase is attributable primarily to the inclusion of revenue from the Primm Casinos, which were acquired on April 10, 2007. Revenues were flat or decreased at our other casinos in Nevada, except Rail City, which was renovated in May 2007.

Nevada casino operating costs were $134.4 million, or 78% of revenues, for the six months ended June 30, 2008, compared to $98.1 million, or 70% of revenues, for the six months ended June 30, 2007. Nevada casino promotional spending was up $3.0 million, or 16%, due to the inclusion of the Primm Casinos as of April 10, 2007. The Primm Casinos incurred $4.6 million in additional promotional allowances in the first six months of 2008 relative to the comparable period in 2007. Promotional allowances decreased from 13.2% of revenues for the six months ended June 30, 2007 to 12.4% of revenues for the six months ended June 30, 2008.

Depreciation and amortization expense was $19.5 million for the six months ended June 30, 2008, an increase of $2.0 million, or 11 %, from $17.5 million for the six months ended June 30, 2007. The increase was primarily associated with the acquisition of the Primm Casinos in April 2007. Depreciation and amortization expense reflects a final purchase price adjustment in the first quarter of 2008 to the estimated depreciation and amortization expense associated with the properties acquired pursuant to the Primm and Sands Acquisitions.

Operating results at the Primm casinos have continued to decline as economic pressures have continued and competition has increased for Southern California and Southern Nevada customers. An interim impairment test was performed at June 30, 2008, and as a result the Company recognized a non-cash impairment charge of $30.7 million to reduce to zero the carrying value of goodwill related to the assets acquired in the Primm Acquisition. See Note 4 to the financial statements for further discussion of impairment of goodwill.

Nevada Casino EBITDA (excluding the impairment charge of $30.7 million) was $16.3 million for the six months ended June 30, 2008, a decrease of $6.5 million, or 29%, from $22.8 million from the six months ended June 30, 2007.

The Primm Casinos’ EBITDA (excluding impairment charges of $30.7 million) of $1.2 million for the six months ended June 30, 2008 was $5.3 million lower than the same period in 2007. The Northern Nevada properties had EBITDA of $5.0 million, down $2.2 million from the six months ended June 30, 2007. With significant expense reductions in food costs and payroll, the remaining Nevada casinos showed an overall increase with an EBITDA of $9.4 million in the six months ended June 30, 2008 compared to $8.4 million in the first six months of 2007. This increase was primarily attributable to a relatively flat performance at the Las Vegas property, while the two Pahrump properties and Rail City showed an improvement from 2007.

Casino Operations — Other states

	Six months ended June 30, 2007					Six months ended June 30, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)
Casino revenue	$	71,597		100.0	%	$	69,190		100.0	%
Promotional allowances	(10,276		)	14.4		(9,246		)	13.4
Direct expenses	(44,710		)	62.4		(43,111		)	62.3
EBITDA	16,611			23.2		16,833			24.3
Depreciation and amortization	(5,641		)	7.9		(5,651		)	8.2
Impairment of assets	—			—		(3,600		)	(5.2	)
Income from casino operations	$	10,970		15.3		$	7,582		10.9

Casino operations in other states accounted for 16% of total revenues for the six months ended June 30, 2008 and 18% of total revenues for the six months ended June 30, 2007. Total revenues derived from casino operations located in states other than Nevada were $69.2 million, a decrease of $2.4 million from $71.6 million for the six months ended June 30, 2007.

Other state casino operating costs were $43.1 million, or 62% of revenues, for the six months ended June 30, 2008, a decrease of $1.9 million, or 4%, from $44.7 million, or 62% of revenues, for the six months ended June 30, 2007. Expense reductions were primarily associated with lower volume related expenses such as cost of sales, as well as reduced payroll due to lower staffing levels in response to reduced business volume.

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Other state casino EBITDA (excluding impairment charges) was $16.8 million for the six months ended June 30, 2008, an increase of $0.6 million, or 1.2%, from $16.6 million from the six months ended June 30, 2007.

Other Operations

Revenue from other operations consists of revenue from sources such as gasoline and convenience store sales, ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations. Our gas station operations include our gas station and convenience store located in Osceola, Iowa, the Gold Ranch and the three gas stations we acquired pursuant to the Primm Acquisition. Revenues from other operations were $63.5 million for the six months ended June 30, 2008 compared to $36.0 million for the six months ended June 30, 2007, an increase of $27.5 million, $24.2 million of which was associated with the revenue from the gas station operations at the Primm Properties, which were acquired in April 2007 and therefore the 2008 period included six months of revenue whereas the 2007 period included less than three months of revenue from the Primm Properties.

Costs associated with other revenues were $52.6 million for the six months ended June 30, 2008 and $29.8 million for the six months ended June 30, 2007, an increase of $22.8 million, $21.7 million of which were costs associated with the gas station convenience store operations at the Primm facilities.

Promotional Allowances

Promotional allowances were $30.6 million, or 7.1% of total revenues, for the six months ended June 30, 2008, an increase of $1.9 million, or 7%, from $28.7 million, or 7.3% of total revenues, for the six months ended June 30, 2007. The increase consisted of $4.6 million of promotional spending associated with the Primm Casinos, offset by a decrease in promotional spending at all other Nevada casinos of $1.6 million. For the six months ended June 30, 2008, promotional spending in Nevada increased $3.0 million, or 16.2%, while promotional spending in other states decreased $1.0 million, or 10%.

Costs of Revenues

	Six months ended June 30, 2007				Six months ended June 30, 2008
	$		% of total revenues		$		% of total revenues
	(dollars in thousands)
Other operations	$	29,803	7.6	%	$	52,614	12.1	%
General and administrative	$	12,487	3.2	%	$	10,313	2.4	%
Depreciation and amortization	$	29,000	7.4	%	$	28,863	6.7	%
Restructuring costs	—				$	11,821	2.7	%

G&A expenses were $10.3 million for the six months ended June 30, 2008, a decrease of $2.2 million, or 18%, from $12.5 million for the six months ended June 30, 2007. The decrease was due to higher G&A expenses incurred during the second quarter of 2007 associated with the acquisition of the Primm Casinos. G&A expenses as a percentage of revenue were 2.4% for the first half of 2008 compared to 3.2% for the same period in 2007.

During the first half of 2008, the Company also incurred costs associated with its restructuring process, described in “Liquidity and Capital Resources.” These costs were $11.8 million for the six months ended June 30, 2008 and are primarily associated with bank, legal and advisory fees.

Depreciation and amortization expense was $28.9 million for the six months ended June 30, 2008, a decrease of $0.1 million from $29.0 million for the six months ended June 30, 2007. The increase was primarily associated with the acquisition of the Primm Casinos in April 2007. Depreciation and amortization expense reflects a final purchase price adjustment in the first quarter of 2008 to the estimated depreciation and amortization expense associated with the properties acquired pursuant to the Primm and Sands Acquisitions.

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The costs represented in “other operations” consist of costs related to the gasoline service station and convenience store operations at Osceola, Iowa, the gas station and lottery at Verdi, Nevada and the gas stations at Primm, Nevada and lottery operations at Stateline, California. Costs of other operations increased $22.8 million in the first half of 2008 as a result of the acquisition of the Primm properties and the significant increase in the cost of gasoline during the first half of 2008.

Income (Loss) from Operations

As a result of the factors discussed above, the Company had a loss from operations of $22.6 million for the six months ended June 30, 2008, a decrease of $44.1 million from income from operations of $21.5 million for the six months ended June 30, 2007. The loss for the six months ended June 30, 2008 includes $30.7 million in impairment charge to goodwill at the Primm properties, a $3.6 million impairment charge to the gaming license at the Lakeside Iowa property and $11.4 million in restructuring costs.

Other Expenses

Other expense was $56.3 million for the six months ended June 30, 2008, an increase of $29.6 million from the six months ended June 30, 2007 when other expense was $26.7 million. This increase was due to interest costs increasing from $34.1 million during the first six months of 2007 to $56.8 million during the first six months of 2008 as a result of higher average outstanding debt balance for the current-year period as well as a higher average borrowing rate on floating rate debt. The Company’s debt increased from $1.1 billion at June 30, 2007 to $1.18 billion at June 30, 2008.

Net Loss

Net loss for the six months ended June 30, 2008 was $78.9 million. This compares to a net loss of $5.2 million recorded for the six months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows; Restructuring

At June 30, 2008, we had $117.5 million in cash and cash equivalents. We are fully drawn on our revolving line of credit. We expect to fund our existing operations, debt service and capital needs from operating cash flow and cash on hand. Based upon our anticipated future operations, we believe that cash on hand, together with available cash flow, will be adequate through September 30, 2008 or, if earlier, the termination of the Forbearance Period described below. No assurances can be given, however, that our cash flow will be adequate to meet our anticipated working capital requirements, capital expenditures for existing operations and scheduled payments of interest on our indebtedness outstanding under the amended Credit Agreement. There can be no assurance that our estimates of our cash needs in respect of existing operations are accurate or other unforeseeable events will not occur.

As disclosed in the 2007 Form 10-K, the Company is currently in default under its amended Credit Agreement. The amounts outstanding under the amended Credit Agreement are classified as current liabilities on the Company’s balance sheet.

On May 13, 2008, we received payment blockage notices from the Administrative Agent under the amended Credit Agreement, pursuant to which the Administrative Agent advised us and the trustees under the indentures pursuant to which the Company’s Subordinated Notes were issued that, as a result of events of default under the amended Credit Agreement, no payments may be made with respect to the Subordinated Notes pursuant to the subordination provisions of the indentures. In accordance with the payment blockage notices, we did not make the interest payments on the 7% Notes due May 15, 2008 and on the 8 1/8% Notes due June 1, 2008 within 30 days of the scheduled payment dates, resulting in events of default under the indentures. As a result, each of the trustees may, or holders of 25% of the outstanding principal amount of notes issued under the relevant indenture may direct such trustee to, accelerate the maturity of the notes issued under that indenture. Under the subordination provisions referenced above, payment may be resumed on the earlier of the date upon which such events of default under the amended Credit Agreement are cured or waived and 180 days after the date on which the payment blockage notices were received, unless the amended Credit Agreement debt has been accelerated. The amounts outstanding under the Subordinated Notes were reclassified as current liabilities in the Company’s balance sheet.

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On May 15, 2008, we entered into the Forbearance Agreement with respect to the amended Credit Agreement, the terms of which are described below.

If the lenders under the amended Credit Agreement were to accelerate repayment of all amounts outstanding under the amended Credit Agreement upon expiration or termination of the Forbearance Agreement or upon occurrence of an event of default under the amended Credit Agreement, other than the Specified Defaults, or the holders of the 7% Notes or the 8 1/8% Notes were to accelerate the indebtedness outstanding under the relevant indenture, 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.

2. during the Forbearance Period, the default rate shall not apply;

3. during the Forbearance Period, the Company retains the ability to convert Loans into Eurodollar Rate Loans as provided for in the Credit Agreement so long as the Interest Periods for any such Eurodollar Rate Loans do not extend beyond September 30, 2008;

5. the Administrative Agent has the ability to approve any engagement letters entered into by the Company with counsel for or advisors to the holders of any Subordinated Debt; and

6. the Company shall pay to the Administrative Agent for the benefit of the Lenders a fee in the amount of approximately $6.4 million.

Operating Activities

During the six months ended June 30, 2008, operating activities used $0.5 million in cash flows on $78.9 million in net loss. This compares to net cash provided by operating activities of $22.3 million for the six-month period ended June 30, 2007. The net loss for the period ended June 30, 2008 included a $34.3 million non-cash impairment charge. The decline was a result of $11.8 million in expenses related to restructuring and $8.3 million in additional cash paid for interest.

Investing Activities and Capital Expenditures

For the six months ended June 30, 2008, we used net cash of $8.1 million for investing activities, primarily related to the capital expenditures of $8.6 million spent for the refurbishment of our casino properties, completion of the purchase of a new slot accounting and players club system and purchase of gaming machines for our route operations, offset in part by $0.2 million in net collections on notes receivable and $0.4 million in proceeds the sale of assets.

Capital expenditures for the remainder of the year are anticipated to be approximately $18 million.

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Financing Activities

Cash flows provided by financing activities were $31.9 million in the first six months of 2008. During the six months ended June 30, 2008, the Company repaid debt of $3.8 million while borrowing $35.9 million.

The amended Credit Agreement provides for a $860.0 million senior credit facility. This facility includes a revolving credit facility in the amount of $100.0 million and $751.8 million of term loans that mature on December 2, 2011 if we have not refinanced our 8 1/8% notes, and otherwise on January 3, 2014. Our revolving credit facility was fully drawn at June 30, 2008. Interest accrues on borrowings under the amended Credit Agreement based on a floating rate. This floating rate is based upon a variable interest rate (a base rate or LIBOR, at our option) plus a leverage grid-based spread. Our average floating rate on debt incurred under the amended Credit Agreement was 9.75% at June 30, 2008.

At June 30, 2008, our debt included approximately $159.4 million of our 8 1/8% Notes and $170.0 million of our 7% Notes. After giving effect to indebtedness under our Subordinated Notes and borrowings under our amended Credit Agreement, our total debt is approximately $1.18 billion.

The Company is currently in default under its amended Credit Agreement and has received payment blockage notices from the Administrative Agent under the amended Credit Agreement, pursuant to which the Administrative Agent advised us and the trustees under the indentures pursuant to which the Company’s Subordinated Notes were issued that, as a result of events of default under the amended Credit Agreement, no payments may be made with respect to the Subordinated Notes pursuant to the subordination provisions of the indentures. In accordance with the payment blockage notices, we did not make the interest payments on the 7% Notes due May 15, 2008 and on the 8 1/8% Notes due June 1, 2008 within 30 days of the scheduled payment dates, resulting in events of default under the indentures. As a result, each of the trustees may, or holders of 25% of the outstanding principal amount of notes issued under the relevant indenture may direct such trustee to, accelerate the maturity of the notes issued under that indenture. For a more detailed discussion of our evaluation of financial and strategic alternatives, refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring.”

Other significant uses of cash in the six months ended June 30, 2008 include interest expense. Our cash payments for interest were $40.8 million for the six months ended June 30, 2008. There were no distributions to stockholders in the first half of 2008.

Cash interest payments for the remainder of 2008 are expected to be approximately $20 million greater than in the same period in 2007. The Company does not expect to make cash payments for non-tax related stockholder distributions for the remainder of the 2008.

CRITICAL ACCOUNTING POLICIES

A description of our critical accounting policies can be found in our 2007 Form 10-K. There have been no material changes to our critical accounting polices during the six months ended June 30, 2008.

CERTAIN FORWARD-LOOKING STATEMENTS

We make statements in this report that relate to matters that are not historical facts, which 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;

· expectations of the continued availability of capital resources; and

· expectations regarding our restructuring efforts.

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

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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:

· We may not be able to negotiate a restructuring of our outstanding indebtedness.

· 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 renegotiate and renew our contracts.

· Our indebtedness imposes restrictive covenants on us.

· 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 business relies heavily on certain markets and an economic downturn in these markets could have a material adverse effect on our results.

· Our operations have been adversely effected by the anti-smoking regulations in Nevada.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, primarily related to interest rate exposure of our debt obligations that bear interest based on floating rates. We do not have any cash or cash equivalents as of June 30, 2008 that are subject to market risk based on changes in interest rates. As a result of our senior credit facility, we are exposed to market risk due to floating or variable interest rates. The interest on revolving borrowings and on the term loan under our senior credit facility is based on a floating rate (a base rate or LIBOR), plus a leverage grid-based variable amount. At June 30, 2008, the principal amount of the related borrowings under our senior credit facility was $849.9 million, all of which was subject to variable interest rates. A hypothetical 1.0% increase in LIBOR (or base rate) would result in an approximately $8.5 million annual increase in interest expense.

The carrying value of our cash, trade, notes and loans receivable and trade payables approximates fair value primarily because of the short maturities of these instruments. The fair value of our long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similar terms and average maturities, the estimated fair value of current debt outstanding is approximately $700.9 million as of June 30, 2008.

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ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On February 17, 2006, the Clark County Circuit 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. The Company has appealed this decision. 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 Company is a party to certain 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.

ITEM 1A. RISK FACTORS

Risk Factors Associated with the Company’s Existing Business

We are currently in default under our amended Credit Agreement and the indentures under which our 8 1/8% Notes and 7% Notes were issued. We continue 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.

Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a discussion of this risk factor.

Our operations have been adversely affected by the general economic downturn in Southern California and Nevada.

Beginning in the last quarter of 2007, the results of operations of our route business have been negatively impacted by the general 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 and the general economic downturn.

In addition, since the third quarter 2007, the results of the operations of the Primm Casinos have been negatively impacted by the general economic downturn in Southern California. 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 Company’s Northern Nevada casinos’ operating results were also impacted by the general economic decline in

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Northern Nevada and Northern California, as well as higher gasoline costs.

Risk Factors Associated with Recent Acquisitions

The failure to achieve the anticipated benefits of either of the Primm Acquisition or the Sands Regent Acquisition could adversely impact our business.

Each of the Primm Acquisition and the Sands Regent Acquisition constitutes a material acquisition on the part of the Company. In each case, we have and will continue to incur significant capitalized costs and commit significant management time in integrating operations, information, communications and other systems, among other items, which will include fees and expenses of professionals and consultants involved in completing the acquisition process, integrating technology and other transaction costs associated with the purchase, including financial advisor, attorney, accountant and other fees. However, despite the incurrence of such costs or the commission of such resources, difficulties may arise 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 achieve the anticipated benefits of either the Primm Acquisition or the Sands Regent Acquisition could harm our business and results of operations.

The business of the Primm Casinos has been adversely impacted by the decline in the economy of Southern California, which could lead to an adverse impact on the operations of the Company.

The results of the operations of the Primm Casinos continue to be negatively impacted by the weakness in the economy of certain areas of Southern California. As discussed above, 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. To the extent that gasoline costs remain high and the overall economic weakness of the value sector of the business continues or worsens, the results of the Company are expected to continue to be adversely affected. The decline in operating results for the Primm Casinos in 2008 resulted in the Company recording a non-cash impairment charge of $30.7 million at June 30, 2008 to reduce to zero the carrying value of goodwill related to the Primm Casinos.

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

The largest sources of tourist 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 Primm Casinos operate.

California’s state officials are in active negotiations to renegotiate certain compacts with Native American tribes. Some Native American casino compacts have already been changed to allow for additional slot machines. In addition, several initiatives have been proposed which would, if approved, further expand the scope of gaming in California. While the effect of increased gaming in California and other states is difficult to predict, the business of the Primm Casinos would be adversely impacted if such competing casinos attract patrons who would otherwise travel to Primm.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We are in default under of our amended Credit Agreement and the indentures under which our 8 1/8% Notes and 7% Notes were issued. For a more detailed discussion of our evaluation of financial and strategic alternatives, refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring.”

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6.		EXHIBITS

	(a)	Exhibits.

	The following exhibits are filed as part of this Form 10-Q:

	31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Date: August 14, 2008	HERBST GAMING, INC.
	(Registrant)


	By:	/s/ Mary E. Higgins
		Mary E. Higgins
	Its:	Chief Financial Officer

Exhibit
Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART I —	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS (UNAUDITED)

	CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2008 AND DECEMBER 31, 2007

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 & 2007

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.	CONTROLS AND PROCEDURES

PART II —OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

ITEM 1A.	RISK FACTORS

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.	OTHER INFORMATION

ITEM 6.	EXHIBITS

	June 30, 2008

2009	1,178,167
2010	1
2011	—
2012	—
2013	—
Thereafter	—
Total	$	1,178,168