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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



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|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

or



| ̈ | 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 000-14050



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THE SANDS REGENT

(exact name of registrant as specified in charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 88-0201135                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|345 North Arlington Avenue, Reno, Nevada                       |  | 89501                               
|(Address of principal executive offices)                       |  | (Zip code)                          

Registrants telephone number, including area code (775) 348-2200



---

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 ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act.

Large Accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

On November 6, 2006, the registrant had outstanding 7,156,801 shares of its common stock, $.10 par value.



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##### Table of Contents

THE SANDS REGENT

FORM 10-Q

TABLE OF CONTENTS



|                             |  |                                                                                       |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I FINANCIAL INFORMATION |  | 3                                                                                    
|                             |  |                                                                                      
|ITEM 1                       |  | Financial Statements                                                                  |  | 3 
|                             |  |                                                                                      
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)                               |  | 3 
|                             |  |                                                                                      
|                             |  | CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)                                     |  | 4 
|                             |  |                                                                                      
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)                           |  | 5 
|                             |  |                                                                                      
|ITEM 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15
|                             |  |                                                                                      
|ITEM 3                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 22
|                             |  |                                                                                      
|ITEM 4                       |  | Controls and Procedures                                                               |  | 23
|                             | 
|PART II OTHER INFORMATION    |  | 24                                                                                   
|                             |  |                                                                                      
|ITEM 1                       |  | Legal Proceedings                                                                     |  | 24
|                             |  |                                                                                      
|ITEM 1A                      |  | Risk Factors                                                                          |  | 24
|                             |  |                                                                                      
|ITEM 2                       |  | Changes in Securities                                                                 |  | 24
|                             |  |                                                                                      
|ITEM 3                       |  | Defaults Upon Senior Securities                                                       |  | 24
|                             |  |                                                                                      
|ITEM 4                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 24
|                             |  |                                                                                      
|ITEM 5                       |  | Other Information                                                                     |  | 25
|                             |  |                                                                                      
|ITEM 6                       |  | Exhibits                                                                              |  | 25
|                             | 
|SIGNATURES                   |  | 26                                                                                   



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##### Table of Contents

PART I FINANCIAL INFORMATION



|ITEM 1 | Financial Statements
|------ | --------------------

THE SANDS REGENT

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)



|                                                     |  |                                      |        |   |      |   |        |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | -
|                                                     |  | Three Months ended September 30,     |       
|                                                     |  | 2006                                 |        |   | 2005 |  
|                                                     |  | (in thousands except per share data) |       
|Operating Revenues                                   |  |                                      |        |   |      |   |        |  
|Gaming                                               |  | $                                    | 14,215 |   |      | $ | 13,420 |  
|Lodging                                              |  |                                      | 3,458  |   |      |   | 3,187  |  
|Food and beverage                                    |  |                                      | 3,541  |   |      |   | 3,046  |  
|Fuel and convenience store                           |  |                                      | 6,418  |   |      |   | 5,964  |  
|Other                                                |  |                                      | 494    |   |      |   | 503    |  
|                                                     |  |                                      |        |   |      |   |        |  
|Gross revenues                                       |  |                                      | 28,126 |   |      |   | 26,120 |  
|Less promotional allowances                          |  |                                      | 2,262  |   |      |   | 1,988  |  
|                                                     |  |                                      |        |   |      |   |        |  
|Net revenues                                         |  |                                      | 25,864 |   |      |   | 24,132 |  
|                                                     |  |                                      |        |   |      |   |        |  
|Operating Expenses                                   |  |                                      |        |   |      |   |        |  
|Gaming                                               |  |                                      | 5,621  |   |      |   | 5,293  |  
|Lodging                                              |  |                                      | 1,119  |   |      |   | 1,074  |  
|Food and beverage                                    |  |                                      | 2,331  |   |      |   | 2,079  |  
|Fuel and convenience store                           |  |                                      | 6,128  |   |      |   | 5,738  |  
|Other                                                |  |                                      | 205    |   |      |   | 165    |  
|Maintenance and utilities                            |  |                                      | 1,833  |   |      |   | 1,575  |  
|General and administrative                           |  |                                      | 4,292  |   |      |   | 3,382  |  
|Depreciation and amortization                        |  |                                      | 1,935  |   |      |   | 1,650  |  
|Loss (gain) on disposition of property and equipment |  |                                      | 10     |   |      |   | (9     | )
|                                                     |  |                                      |        |   |      |   |        |  
|                                                     |  |                                      | 23,474 |   |      |   | 20,947 |  
|                                                     |  |                                      |        |   |      |   |        |  
|Income from operations                               |  |                                      | 2,390  |   |      |   | 3,185  |  
|                                                     |  |                                      |        |   |      |   |        |  
|Interest expense, net of capitalized interest        |  |                                      | (662   | ) |      |   | (428   | )
|                                                     |  |                                      |        |   |      |   |        |  
|Income before income tax provision                   |  |                                      | 1,728  |   |      |   | 2,757  |  
|Income tax provision                                 |  |                                      | (660   | ) |      |   | (933   | )
|                                                     |  |                                      |        |   |      |   |        |  
|Net income                                           |  | $                                    | 1,068  |   |      | $ | 1,824  |  
|                                                     |  |                                      |        |   |      |   |        |  
|Net Income Per Share                                 |  |                                      |        |   |      |   |        |  
|Basic                                                |  | $                                    | 0.15   |   |      | $ | 0.26   |  
|Diluted                                              |  | $                                    | 0.14   |   |      | $ | 0.24   |  
|Weighted Average Shares Outstanding                  |  |                                      |        |   |      |   |        |  
|Basic                                                |  |                                      | 7,140  |   |      |   | 6,996  |  
|Diluted                                              |  |                                      | 7,695  |   |      |   | 7,459  |  

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



3



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THE SANDS REGENT

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                           |  | September 30,2006                    |         |   | June 30,2006 |  
|                                                                                                                                                           |  | (in thousands except per share data) |        
|ASSETS                                                                                                                                                     |  |                                      |         |  
|Current Assets                                                                                                                                             |  |                                      |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                  |  | $                                    | 7,606   |   |              | $ | 6,774   |  
|Accounts receivable, net                                                                                                                                   |  |                                      | 1,714   |   |              |   | 1,141   |  
|Inventories                                                                                                                                                |  |                                      | 622     |   |              |   | 669     |  
|Federal income tax receivable                                                                                                                              |  |                                      |        |   |              |   | 343     |  
|Prepaid expenses and other current assets                                                                                                                  |  |                                      | 1,988   |   |              |   | 2,211   |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total current assets                                                                                                                                       |  |                                      | 11,930  |   |              |   | 11,138  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Property and Equipment                                                                                                                                     |  |                                      |         |   |              |   |         |  
|Land                                                                                                                                                       |  |                                      | 14,576  |   |              |   | 14,576  |  
|Buildings and improvements                                                                                                                                 |  |                                      | 47,604  |   |              |   | 47,243  |  
|Equipment, furniture and fixtures                                                                                                                          |  |                                      | 33,439  |   |              |   | 32,470  |  
|Leasehold improvements                                                                                                                                     |  |                                      | 178     |   |              |   | 178     |  
|Construction in progress                                                                                                                                   |  |                                      | 3,487   |   |              |   | 1,055   |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total property and equipment                                                                                                                               |  |                                      | 99,284  |   |              |   | 95,522  |  
|Less accumulated depreciation and amortization                                                                                                             |  |                                      | 50,214  |   |              |   | 48,502  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Property and equipment, net                                                                                                                                |  |                                      | 49,070  |   |              |   | 47,020  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Other Assets                                                                                                                                               |  |                                      |         |   |              |   |         |  
|Goodwill                                                                                                                                                   |  |                                      | 33,295  |   |              |   | 33,295  |  
|Other intangibles                                                                                                                                          |  |                                      | 11,999  |   |              |   | 12,031  |  
|Other                                                                                                                                                      |  |                                      | 865     |   |              |   | 922     |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total other assets                                                                                                                                         |  |                                      | 46,159  |   |              |   | 46,248  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total assets                                                                                                                                               |  | $                                    | 107,159 |   |              | $ | 104,406 |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                       |  |                                      |         |   |              |   |         |  
|Current Liabilities                                                                                                                                        |  |                                      |         |   |              |   |         |  
|Accounts payable                                                                                                                                           |  | $                                    | 4,593   |   |              | $ | 4,726   |  
|Accrued salaries, wages, and benefits                                                                                                                      |  |                                      | 2,636   |   |              |   | 2,521   |  
|Other accrued expenses                                                                                                                                     |  |                                      | 1,877   |   |              |   | 1,987   |  
|Federal income tax payable                                                                                                                                 |  |                                      | 59      |   |              |   |        |  
|Deferred federal income tax liability                                                                                                                      |  |                                      | 233     |   |              |   | 235     |  
|Current maturities of long-term debt                                                                                                                       |  |                                      | 4,472   |   |              |   | 4,338   |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total current liabilities                                                                                                                                  |  |                                      | 13,870  |   |              |   | 13,807  |  
|Long-term debt                                                                                                                                             |  |                                      | 26,315  |   |              |   | 25,110  |  
|Deferred federal income tax liability                                                                                                                      |  |                                      | 2,960   |   |              |   | 2,700   |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total liabilities                                                                                                                                          |  |                                      | 43,145  |   |              |   | 41,617  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Stockholders Equity                                                                                                                                       |  |                                      |         |   |              |   |         |  
|Common stock; $0.10 par value; 20,000,000 shares authorized; shares issued and outstanding: 9,559,801 at September 30, 2006 and 9,529,391
at June 30, 2006 |  |                                      | 956     |   |              |   | 953     |  
|Additional paid-in capital                                                                                                                                 |  |                                      | 28,236  |   |              |   | 28,082  |  
|Retained earnings                                                                                                                                          |  |                                      | 57,180  |   |              |   | 56,112  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|                                                                                                                                                           |  |                                      | 86,372  |   |              |   | 85,147  |  
|Treasury stock; at cost; 2,403,000 shares                                                                                                                  |  |                                      | (22,358 | ) |              |   | (22,358 | )
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                 |  |                                      | 64,014  |   |              |   | 62,789  |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                 |  | $                                    | 107,159 |   |              | $ | 104,406 |  
|                                                                                                                                                           |  |                                      |         |   |              |   |         |  

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



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THE SANDS REGENT

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



|                                                                                  |  |                                 |        |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                  |  | Three Months endedSeptember 30, |       
|                                                                                  |  | 2006                            |        |   | 2005 |  
|                                                                                  |  | (in thousands)                  |       
|Operating Activities                                                              |  |                                 |        |   |      |   |         |  
|Net income                                                                        |  | $                               | 1,068  |   |      | $ | 1,824   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |        |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 1,935  |   |      |   | 1,650   |  
|Loss (gain) on disposal of property and equipment                                 |  |                                 | 10     |   |      |   | (9      | )
|Amortization of debt issuance costs                                               |  |                                 | 53     |   |      |   |        |  
|Share-based compensation expense                                                  |  |                                 | 177    |   |      |   | 134     |  
|Changes in operating assets and liabilities:                                      |  |                                 |        |   |      |   |         |  
|Accounts receivable                                                               |  |                                 | (573   | ) |      |   | (171    | )
|Inventories                                                                       |  |                                 | 47     |   |      |   | 34      |  
|Prepaid expenses and other current assets                                         |  |                                 | 223    |   |      |   | (197    | )
|Other assets                                                                      |  |                                 | 9      |   |      |   | 79      |  
|Accounts payable                                                                  |  |                                 | 1,390  |   |      |   | (131    | )
|Accrued expenses                                                                  |  |                                 | (16    | ) |      |   | 1,441   |  
|Federal income taxes payable/receivable                                           |  |                                 | 402    |   |      |   | (36     | )
|Deferred federal income taxes                                                     |  |                                 | 258    |   |      |   | 195     |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 4,983  |   |      |   | 4,813   |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Investing Activities                                                              |  |                                 |        |   |      |   |         |  
|Investment in property and equipment                                              |  |                                 | (5,484 | ) |      |   | (1,902  | )
|Net cash paid for wholly owned subsidiary                                         |  |                                 |       |   |      |   | (10,317 | )
|Proceeds from sale of assets                                                      |  |                                 | 3      |   |      |   | 5       |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (5,481 | ) |      |   | (12,214 | )
|                                                                                  |  |                                 |        |   |      |   |         |  
|Financing Activities                                                              |  |                                 |        |   |      |   |         |  
|Payments on long-term debt                                                        |  |                                 | (2,270 | ) |      |   | (2,273  | )
|Issuance of long-term debt                                                        |  |                                 | 3,600  |   |      |   | 11,150  |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                                 | 1,330  |   |      |   | 8,877   |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                                 | 832    |   |      |   | 1,476   |  
|Cash and cash equivalents, beginning of period                                    |  |                                 | 6,774  |   |      |   | 3,272   |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 7,606  |   |      | $ | 4,748   |  
|                                                                                  |  |                                 |        |   |      |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                                 |        |   |      |   |         |  
|Interest paid, net of capitalized interest                                        |  | $                               | 659    |   |      | $ | 374     |  
|Federal income taxes paid                                                         |  | $                               |       |   |      | $ | 774     |  
|Supplemental disclosure of non-cash investing and financing activities            |  |                                 |        |   |      |   |         |  
|Property and equipment acquired by accounts payable                               |  | $                               | 878    |   |      | $ | 130     |  
|Issuance of common stock to acquire subsidiary                                    |  |                                 |        |   |      |   | 551     |  
|Fair value of assets acquired and liabilities assumed in business combinations    |  |                                 |        |   |      |   |         |  
|Current assets, net of cash acquired                                              |  |                                 |        |   |      |   | 234     |  
|Property and equipment                                                            |  |                                 |        |   |      |   | 6,131   |  
|Intangibles                                                                       |  |                                 |        |   |      |   | 4,515   |  
|Current liabilities                                                               |  |                                 |        |   |      |   | (12     | )
|Common stock issued                                                               |  |                                 |        |   |      |   | (551    | )
|                                                                                  |  |                                 |        |   |      |   |         |  
|Cash paid, net of cash acquired                                                   |  |                                 |        |   |      | $ | 10,317  |  
|                                                                                  |  |                                 |        |   |      |   |         |  

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



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NOTE 1BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of The Sands Regent (the Company) and its wholly-owned subsidiaries: Zante, Inc. (Zante), Last Chance, Inc.
(Last Chance), Plantation Investments, Inc. (Plantation), and Dayton Gaming, Inc. (Dayton). The Company and its subsidiaries are incorporated in Nevada. Zante owns and operates the Sands Regency Casino/Hotel
(Sands Regency) in downtown Reno, Nevada. Last Chance owns and operates the Gold Ranch Casino and RV Resort in Verdi, Nevada, and California Prospectors, Ltd. (California Prospectors), a Nevada limited liability company,
which operates a California lottery station. Together, Last Chance and California Prospectors are presented as Gold Ranch. Plantation owns and operates Rail City Casino (Rail City). On September 1, 2005, the Company
acquired, through Dayton Gaming, Inc., the assets of Dayton Depot and Red Hawk Sports Bar (Dayton Depot Casino) in Dayton, Nevada. (See Note 6)

The accounting policies followed in the preparation of the financial information herein are the same as those summarized in the Companys 2006 Annual Report on Form 10-K. The condensed consolidated balance sheet at June 30, 2006
was derived from audited consolidated financial statements at that date. The interim condensed consolidated financial information is unaudited and should be read in conjunction with the Companys 2006 Form 10-K. In the opinion of management,
all adjustments and normally recurring accruals necessary to fairly present the financial condition of the Company as of September 30, 2006 and the results of its operations and its cash flows for the three months ended September 30, 2006
and 2005 have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year due to seasonality and other factors.

NOTE 2EARNINGS PER SHARE

Earnings per share is calculated in accordance with SFAS
No. 128Earnings per Share. SFAS 128 provides for the reporting of basic, or undiluted earnings per share, and diluted earnings per share. Basic earnings per share is computed by dividing net income by
the weighted average number of shares outstanding during the period. Diluted earnings per share reflects the addition of potentially dilutive securities, which for the Company, consist of stock options, convertible debt and warrants. Dilution is
determined based upon the assumption that the options, the convertible debt, and the warrant are exercised or converted. The weighted average number of shares outstanding for the calculation of diluted earnings per share includes the dilutive effect
of the Companys stock options, convertible debt and outstanding warrants unless the associated strike price(s) exceeds the average closing price in the period.

The following shares were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:



|                  |  |                                 |  |        
|----------------- |  | ------------------------------- |  | -------
|                  |  | Three Months endedSeptember 30,
|                  |  | 2006                            |  | 2005   
|Stock options     |  |                                |  | 35,000 
|Restricted shares |  |                                |  | 36,600 
|Convertible debt  |  |                                |  |       
|Warrants          |  |                                |  | 336,000
|                  |  |                                 |  |        
|                  |  |                                |  | 407,600
|                  |  |                                 |  |        



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The following is a reconciliation of the earnings (numerator) and number of shares (denominator) used in the basic and
diluted earnings per share computations:



|                                       |  |                                      |       |      |   |      
|-------------------------------------- |  | ------------------------------------ | ----- | ---- | - | -----
|                                       |  | Three Months endedSeptember 30,     
|                                       |  | 2006                                 |       | 2005
|                                       |  | (in thousands except per share data)
|Basic Earnings per Share Calculation   |  |                                      |       |      |   |      
|Net income                             |  | $                                    | 1,068 |      | $ | 1,824
|                                       |  |                                      |       |      |   |      
|Weighted Average Shares Outstanding:   |  |                                      |       |      |   |      
|Common stock                           |  |                                      | 7,140 |      |   | 6,996
|                                       |  |                                      |       |      |   |      
|Basic earnings per share:              |  | $                                    | 0.15  |      | $ | 0.26 
|                                       |  |                                      |       |      |   |      
|Diluted Earnings per Share Calculation |  |                                      |       |      |   |      
|Net income                             |  | $                                    | 1,068 |      | $ | 1,824
|Interest on convertible debt           |  |                                      | 5     |      |   |     
|                                       |  |                                      |       |      |   |      
|Net income for diluted earnings        |  | $                                    | 1,073 |      | $ | 1,824
|                                       |  |                                      |       |      |   |      
|Weighted Average Shares Outstanding:   |  |                                      |       |      |   |      
|Common stock                           |  |                                      | 7,140 |      |   | 6,996
|Common stock equivalents               |  |                                      | 555   |      |   | 463  
|                                       |  |                                      |       |      |   |      
|Diluted shares                         |  |                                      | 7,695 |      |   | 7,459
|                                       |  |                                      |       |      |   |      
|Diluted earnings per shares            |  | $                                    | 0.14  |      | $ | 0.24 
|                                       |  |                                      |       |      |   |      



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NOTE 3BUSINESS SEGMENTS

In accordance with SFAS No. 131Business Segments and Related Information, the Company reports business segment information based on geographic location. The following is a breakdown of various data by location as of
the respective years ended. Dayton Depot Casino information includes one month of operations for the three months ended September 30, 2005.



|                                           |  |                                 |        |   |      |   |        |  
|------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | Three Months endedSeptember 30, |       
|                                           |  | 2006                            |        |   | 2005 |  
|                                           |  | (in thousands)                  |       
|Net revenues                               |  |                                 |        |   |      |   |        |  
|Rail City Casino                           |  | $                               | 6,205  |   |      | $ | 6,117  |  
|Sands Regency Casino/Hotel                 |  |                                 | 9,908  |   |      |   | 9,550  |  
|Gold Ranch Casino and RV Resort            |  |                                 | 8,580  |   |      |   | 8,102  |  
|Dayton Depot Casino                        |  |                                 | 1,175  |   |      |   | 363    |  
|Corporate                                  |  |                                 | (4     | ) |      |   |       |  
|                                           |  |                                 |        |   |      |   |        |  
|Consolidated net revenues                  |  | $                               | 25,864 |   |      | $ | 24,132 |  
|                                           |  |                                 |        |   |      |   |        |  
|Income (loss) from operations              |  |                                 |        |   |      |   |        |  
|Rail City Casino                           |  | $                               | 1,509  |   |      | $ | 1,772  |  
|Sands Regency Casino/Hotel                 |  |                                 | 1,514  |   |      |   | 1,545  |  
|Gold Ranch Casino and RV Resort            |  |                                 | 462    |   |      |   | 491    |  
|Dayton Depot Casino                        |  |                                 | (32    | ) |      |   | 92     |  
|Corporate                                  |  |                                 | (1,063 | ) |      |   | (715   | )
|                                           |  |                                 |        |   |      |   |        |  
|Consolidated income from operations        |  | $                               | 2,390  |   |      | $ | 3,185  |  
|                                           |  |                                 |        |   |      |   |        |  
|Depreciation and amortization              |  |                                 |        |   |      |   |        |  
|Rail City Casino                           |  | $                               | 535    |   |      | $ | 488    |  
|Sands Regency Casino/Hotel                 |  |                                 | 933    |   |      |   | 876    |  
|Gold Ranch Casino and RV Resort            |  |                                 | 223    |   |      |   | 228    |  
|Dayton Depot Casino                        |  |                                 | 234    |   |      |   | 51     |  
|Corporate                                  |  |                                 | 10     |   |      |   | 7      |  
|                                           |  |                                 |        |   |      |   |        |  
|Consolidated depreciation and amortization |  | $                               | 1,935  |   |      | $ | 1,650  |  
|                                           |  |                                 |        |   |      |   |        |  

NOTE 4RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158. Employers Accounting for Defined Benefit Pension and
Other Postretirement Planan amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or
liability and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. This Statement also requires employers to measure the funded status of a plan as of the date of its year end and is
effective for publicly traded companies as of the end of the fiscal year ending after December 31, 2006. We do not expect the adoption of SFAS No. 158 to have a material effect on our consolidated financial statements as we do not
currently have a defined benefit postretirement plan that meets the criteria specified under SFAS No. 158.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB No. 108), which adds Section
N to Topic 1, Financial Statements. Section N provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. To provide full
disclosure, registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in Topic 1N in their financial statements covering the first fiscal year ending after November 15, 2006. We do not
expect the adoption of SAB No. 108 to have a material effect on our consolidated financial statements.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition



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threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, and applies to all tax
positions accounted for in accordance with SFAS No. 109. We are currently evaluating the impact that the adoption of FIN 48 will have on our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. SFAS No. 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to irrevocably account for the whole instrument on a fair value basis. SFAS No. 155
is effective for all financial instruments acquired or issued after December 31, 2006. We do not expect the adoption of SFAS No. 155 to materially effect our consolidated financial statements, as we do not currently have any financial
instruments that meet the criteria specified under SFAS No. 155.

NOTE 5SHARE-BASED COMPENSATION

The Company has two stock option incentive plans: (1) the Second Amended and Restated Stock Option Plan (the Second Restated Plan) and (2) the 2004
Equity Incentive Plan (the 2004 Plan). The Second Restated Plan provides for the granting of incentive stock options, as well as non-qualified stock options to executives and key independent (non-employee) directors. Generally, stock
options granted to employees fully vest four years from the grant date and in one year for directors and have a term of ten years.

The 2004 Plan provides
for the granting of incentive and non-qualified stock options as well as restricted stock to executives, key employees, consultants and independent directors. During the beginning of fiscal year 2006, management instituted a stock bonus incentive
plan under the 2004 plan. Under the terms of the plan, certain employees could receive a percentage of their annual salary in restricted shares, dependent on results of certain operational measures. On September 1, 2006, the Company issued
11,410 shares of restricted stock pursuant to the 2004 plan to certain employees which vest 25% annually, starting one year from the date of grant. The fair values of share-based compensation for restrictive shares granted during the three months
ended September 30, 2006 were based upon the market price on the date of grant. The Company recognizes share-based compensation expense over the requisite service period of the individual grants and awards which are generally equal to the
vesting period.

The Second Restated Plan

As of
June 30, 2005, there have been no new options granted pursuant to this plan. The fair values of stock-based compensation in vested awards at July 1, 2005 were estimated using a Black-Scholes option pricing model with the following
assumptions:



|                                |  |                                 |  |          
|------------------------------- |  | ------------------------------- |  | ---------
|                                |  | Three Months endedSeptember 30,
|                                |  | 2006                            |  | 2005     
|Expected stock price volatility |  | N/A                             |  | 54%-120% 
|Risk-free interest rate         |  | N/A                             |  | 2.8%-6.3%
|Expected option lives (years)   |  | N/A                             |  | 2.2-2.6  
|Expected dividends              |  | N/A                             |  | 0.0%     



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##### Table of Contents

A summary of the Companys Equity Incentive Plans is presented in the following
table:



|                                              |  |                  |  |                 |  |               
|--------------------------------------------- |  | ---------------- |  | --------------- |  | --------------
|Name of Plan                                  |  | SharesAuthorized |  | SharesAvailable |  | PlanExpiration
|Second Amended and Restated Stock Option Plan |  | 1,100,000        |  | 6,114           |  | 8/14/2010     
|2004 Equity Incentive Plan                    |  | 500,000          |  | 402,090         |  | 8/23/2014     
|                                              |  |                  |  |                 |  |               
|                                              |  |                  |  | 408,204         |  |               
|                                              |  |                  |  |                 |  |               

Incentive and non-qualified stock options

A summary of option activity under the Company incentive and non-qualified stock option plans as of September 30, 2006 and changes during the three months then ended
is presented below:



|                                  |  |         |  |                               |      |                                                 |     |                                       |   |      
|--------------------------------- |  | ------- |  | ----------------------------- | ---- | ----------------------------------------------- | --- | ------------------------------------- | - | -----
|                                  |  | Shares  |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractualTerm(Years) |     | AggregateIntrinsicValue (inthousands)
|Outstanding at July 1, 2006       |  | 652,000 |  | $                             | 3.51 |                                                 |     |                                       | $ | 7,296
|Granted                           |  |        |  |                               |      |                                                 |     |                                       |   |      
|Exercised                         |  |        |  |                               |      |                                                 |     |                                       |   |      
|Forfeited/cancelled               |  |        |  |                               |      |                                                 |     |                                       |   |      
|                                  |  |         |  |                               |      |                                                 |     |                                       |   |      
|Outstanding at September 30, 2006 |  | 652,000 |  | $                             | 3.51 |                                                 | 4.7 |                                       | $ | 7,296
|                                  |  |         |  |                               |      |                                                 |     |                                       |   |      
|Exercisable at September 30, 2006 |  | 580,750 |  | $                             | 3.02 |                                                 | 4.3 |                                       | $ | 6,783
|                                  |  |         |  |                               |      |                                                 |     |                                       |   |      

A summary of the status of the Companys non-vested stock options under the Company incentive and
non-qualified stock option plans as of September 30, 2006 and changes during the three months then ended is presented below:



|                                 |  |        |  |                                      |      |                                       |   |    
|-------------------------------- |  | ------ |  | ------------------------------------ | ---- | ------------------------------------- | - | ---
|                                 |  | Shares |  | Weighted-AverageGrant-Date FairValue |      | AggregateIntrinsicValue (inthousands)
|Non-vested at July 1, 2006       |  | 71,250 |  | $                                    | 7.49 |                                       | $ | 513
|Granted                          |  |       |  |                                      |     |                                       |   |    
|Vested                           |  |       |  |                                      |     |                                       |   |    
|Forfeited                        |  |       |  |                                      |     |                                       |   |    
|                                 |  |        |  |                                      |      |                                       |   |    
|Non-vested at September 30, 2006 |  | 71,250 |  | $                                    | 7.49 |                                       | $ | 513
|                                 |  |        |  |                                      |      |                                       |   |    



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At September 30, 2006, there was less than $0.1 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted pursuant to the Company incentive and non-qualified stock option plans. The cost is expected to be recognized over a weighted-average period of 2.75 years. For the three months ended
September 30, 2006 and 2005, compensation expense of less than $0.1 million and $ 0.1 million, respectively, related to stock options issued and non-vested as of July 1, 2005 is included in general and administrative expenses.

Restricted shares

A summary of the
Companys outstanding restricted shares as of September 30, 2006, and changes during the three months then ended is presented below:



|                                  |  |        |   |  |                               |       |                                                 |     |                                       |   |    
|--------------------------------- |  | ------ | - |  | ----------------------------- | ----- | ----------------------------------------------- | --- | ------------------------------------- | - | ---
|                                  |  | Shares |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm(Years) |     | AggregateIntrinsicValue (inthousands)
|Outstanding at July 1, 2006       |  | 51,500 |   |  | $                             | 9.86  |                                                 |     |                                       | $ | 747
|Granted                           |  | 11,410 |   |  |                               | 14.68 |                                                 |     |                                       |   |    
|Vested                            |  | (8,500 | ) |  |                               | 10.00 |                                                 |     |                                       |   |    
|Forfeited or expired              |  |       |   |  |                               |      |                                                 |     |                                       |   |    
|                                  |  |        |   |  |                               |       |                                                 |     |                                       |   |    
|Outstanding at September 30, 2006 |  | 54,410 |   |  | $                             | 10.85 |                                                 | 2.2 |                                       | $ | 800
|                                  |  |        |   |  |                               |       |                                                 |     |                                       |   |    

At September 30, 2006, there was $0.3 million of unrecognized compensation cost related to non-vested
share-based compensation arrangements granted pursuant to the Companys restricted stock option plan. Compensation expense of less than $0.1 million and $0.1 million, related to the grant of restricted stocks is included in general and
administrative expenses for the three months ended September 30, 2006 and 2005, respectively. Compensation expense of $0.1 million and less than $0.1 million, related to the performance bonus incentive plan is included in general and
administrative expenses for the three months ended September 30, 2006 and 2005, respectively.

NOTE 6ACQUISITIONS

On September 1, 2005, the Company completed its acquisition of the assets of Dayton Depot and Red Hawk Sports Bar (Dayton Depot Casino) through its
subsidiary, Dayton Gaming, Inc., a Nevada corporation, pursuant to an Asset Purchase Agreement dated February 28, 2005 (the Agreement).

The preliminary purchase price of $10.9 million (including acquisition costs and excluding cash acquired) was calculated based on EBITDA (earnings before interest, taxes, depreciation and amortization) for Dayton Depot for the twelve months
preceding the closing date of acquisition as prescribed in the Agreement. The purchase was funded with the payment of $10.3 million in cash and issuance of 69,438 shares of Company stock with a fair market value equal to $9.91 per share at the date
of issuance. The cash paid in connection with the transaction came primarily from an amended and restated credit facility (Note 8), which, in concert with the stock, funded the acquisition including net working capital. The Company stock issued to
the seller contains a two year trading restriction from the date of the acquisition. The value of the stock issued in the transaction has been recorded at a 20% discount to market value to account for the impact of the trading restriction.



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The acquisition has been accounted for as a purchase and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based upon estimated fair values at the date of acquisition. As of June 30, 2006, the Company completed its valuing of these assets.

The following table summarizes the purchase price and the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:



|                                         |  |                |        |  
|---------------------------------------- |  | -------------- | ------ | -
|                                         |  | (in thousands) |       
|Purchase Price:                          |  |                |        |  
|Cash                                     |  | $              | 374    |  
|Proceeds from credit facility            |  |                | 10,050 |  
|Issuance of common stock                 |  |                | 596    |  
|Costs of acquisition                     |  |                | 231    |  
|                                         |  |                |        |  
|                                         |  | $              | 11,251 |  
|                                         |  |                |        |  
|Assets Acquired and Liabilities Assumed: |  |                |        |  
|Current assets                           |  | $              | 567    |  
|Property, plant and equipment            |  |                | 5,738  |  
|Goodwill and intangibles                 |  |                | 4,958  |  
|Current liabilities                      |  |                | (12    | )
|                                         |  |                |        |  
|                                         |  | $              | 11,251 |  
|                                         |  |                |        |  

The pro forma consolidated results of operations, as if the acquisition of Dayton Depot had occurred on
July 1, 2005 are as follows (in thousands except per share data):



|                             |  |                                      |       
|---------------------------- |  | ------------------------------------ | ------
|                             |  | Three Months endedSeptember 30, 2005
|Net revenues                 |  | $                                    | 25,045
|Net income                   |  | $                                    | 1,905 
|Basic net income per share   |  | $                                    | 0.27  
|Diluted net income per share |  | $                                    | 0.26  
|Basic shares outstanding     |  |                                      | 6,996 
|Diluted shares outstanding   |  |                                      | 7,459 

NOTE 7INTANGIBLES AND GOODWILL

Intangible Balances



|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|----------------------------------- |  | ------------------- | ------ | ----------------------- | - | ----- |  | ------------------- | ------ | ----------------------- | - | ------ |  | - | --- |  | - | ------
|                                    |  | September 30, 2006  |        | June 30, 2006          
|(in thousands)                      |  | GrossCarryingAmount |        | AccumulatedAmortization |   | Net   |  | GrossCarryingAmount |        | AccumulatedAmortization |   | Net   
|Finite-lived intangible assets:     |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|Customer list/relationships         |  | $                   | 1,190  |                         | $ | 1,004 |  | $                   | 186    |                         | $ | 1,190  |  | $ | 975 |  | $ | 215   
|Non-compete agreement               |  |                     | 45     |                         |   | 10    |  |                     | 35     |                         |   | 45     |  |   | 7   |  |   | 38    
|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|                                    |  |                     | 1,235  |                         |   | 1,014 |  |                     | 221    |                         |   | 1,235  |  |   | 982 |  |   | 253   
|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|Indefinite-lived intangible assets: |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|Grandfathered gaming license        |  |                     | 7,205  |                         |   |      |  |                     | 7,205  |                         |   | 7,205  |  |   |    |  |   | 7,205 
|Trademark/tradename                 |  |                     | 4,478  |                         |   |      |  |                     | 4,478  |                         |   | 4,478  |  |   |    |  |   | 4,478 
|Other                               |  |                     | 95     |                         |   |      |  |                     | 95     |                         |   | 95     |  |   |    |  |   | 95    
|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|                                    |  |                     | 11,778 |                         |   |      |  |                     | 11,778 |                         |   | 11,778 |  |   |    |  |   | 11,778
|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       
|Total                               |  | $                   | 13,013 |                         | $ | 1,014 |  | $                   | 11,999 |                         | $ | 13,013 |  | $ | 982 |  | $ | 12,031
|                                    |  |                     |        |                         |   |       |  |                     |        |                         |   |        |  |   |     |  |   |       



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Amortization of Intangibles

Customer lists are amortized over a seven year period, at an accelerated rate, and non-compete agreements are amortized over five years on a straight-line basis. The expense associated with the amortization of intangibles was $32,000 and
$80,000 for the three months ended September 30, 2006 and 2005, respectively. The annual amortization expense is expected to be as follows:



|               |  |            |  |              |   
|-------------- |  | ---------- |  | ------------ | --
|(in thousands) |  | FiscalYear |  | Amortization
|               |  | 2007       |  | $            | 96
|               |  | 2008       |  |              | 62
|               |  | 2009       |  |              | 33
|               |  | 2010       |  |              | 20
|               |  | 2011       |  |              | 10

Goodwill Changes and Balances by Segment



|                            |  |           |        |            |   |             |  |       |       |  |   |       
|--------------------------- |  | --------- | ------ | ---------- | - | ----------- |  | ----- | ----- |  | - | ------
|(in thousands)              |  | Rail City |        | Gold Ranch |   | DaytonDepot |  | Total
|Balance, July 1, 2006       |  |           | 17,624 |            |   | 11,018      |  |       | 4,653 |  |   | 33,295
|Changes                     |  |           |       |            |   |            |  |       |       |  |   |      
|                            |  |           |        |            |   |             |  |       |       |  |   |       
|Balance, September 30, 2006 |  | $         | 17,624 |            | $ | 11,018      |  | $     | 4,653 |  | $ | 33,295
|                            |  |           |        |            |   |             |  |       |       |  |   |       

NOTE 8LONG-TERM DEBT

In connection with the acquisition of Dayton Depot Casino on September 1, 2005, the Company executed an amended and restated syndicated financing arrangement (Credit Agreement) through Wells Fargo
Bank. The Credit Agreement provided for a 5-year $22 million term loan collateralized by substantially all property and equipment of Plantation Investments, Inc., Zante, Inc. and Dayton Gaming, Inc., and the furniture, fixtures and equipment of Last
Chance, Inc. As the term loan is paid down, no additional borrowings may be taken on the loan. The companys current book value of the security interest on the loan is approximately $35 million. The balance of the term loan was $17.7 million
and $18.7 million at September 30, 2006 and June 30, 2006. Terms of this note require that the principal outstanding be reduced to $14.9 million by June 30, 2007, to $10.5 million by June 30, 2008 and to $5.5 million by
June 30, 2009. The note matures on September 1, 2010 with any remaining principal and interest under the note becoming due and payable. The note has a variable interest rate based on LIBOR and/or the U. S. Prime Index plus the applicable
margin as defined in the agreement. The interest rate at September 30, 2006 was LIBOR plus 2.25% or Prime plus 0.75% and at June 30, 2006 was LIBOR plus 2.25% or Prime plus 0.75%. The weighted average interest rate was 7.34% at
September 30, 2006 and 6.52% at June 30, 2006.

Also part of the Credit Agreement, the Company secured a Wells Fargo Bank syndicated, 5-year $25
million revolving credit facility with collateralization and terms which are substantially similar to the term loan. The loan is also collateralized by substantially all property and equipment of Plantation Investments, Inc., Zante Inc., and Dayton
Gaming Inc., as well as the furniture, fixtures and equipment of Last Chance, Inc. Terms of this note require that the variable interest rate based on LIBOR and/or U. S. Prime Index plus the applicable margin defined in the agreement. The interest
rate at September 30, 2006 was LIBOR plus 2.25% or Prime plus 0.75% and at June 30 2006, LIBOR plus 2.25% or Prime plus 0.75%. The weighted average interest rate on the revolving credit facility at September 30, 2006 and June 30,
2006 was 8.19% and 7.24%, respectively. As of September 30, 2006 and June 30, 2006, the unused amounts on the revolver credit facility were $12.4 million and $14.7 million, respectively. This credit facility requires interest only payments
and matures on September 1, 2010, with any unpaid interest or principal due and payable.



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The bank term loan and revolving credit facility (Credit Agreement), which totals $30.3 million at September 30,
2006, requires the Company to be in compliance with certain financial and other covenants, restricts future encumbrances, and limits situations where a change in control in the Company may occur. The financial covenants include the requirement for a
maximum tolerable leverage ratio of 3.00:1.00 during this period. This ratio is computed by the ratio of total debt to EBITDA (earnings before interest expense, taxes, depreciation and amortization) and certain other financial ratios must be
maintained. The Company believes that it is in compliance with all covenants and restrictions at September 30, 2006.

The Company currently has a
convertible debt promissory note held by David R. Belding, an investor. The note, issued on March 25, 2004, has a security interest in furniture, fixtures and equipment of Last Chance, Inc., and was convertible into 246,012 shares of company
common stock at a conversion price of $6.52 per share. In October 2004 and December 2004, Mr. Belding converted $1.1 million of the original $1.6 million convertible debt into 168,711 shares. He currently has 77,301 shares still remaining with
a balance on his debt of $0.5 million. The note bears a fixed interest rate of 7.5%, an effective rate of 9.6% and requires no principal payment until maturity on March 25, 2007 at which time all principal and interest is due and payable unless
extended at Mr. Beldings option for up to two additional years. The amount outstanding is discounted by $57,635 at September 30, 2006 and $63,398 at June 30, 2006 which represents the unamortized value of a warrant issued to
Mr. Belding. Additionally, $2,360 and $3,540 represent the unamortized value of the premium on the Belding note at September 30, 2006 and June 30, 2006, respectively.

The balances and types of debt for September 30, 2006 and June 30, 2006 are listed below:



|                                                                  |  |                   |        |              |   |       
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ | - | ------
|                                                                  |  | September 30,2006 |        | June 30,2006
|                                                                  |  | (in thousands)   
|Wells Fargo Bank syndicated term loan                             |  | $                 | 17,738 |              | $ | 18,700
|Wells Fargo Bank syndicated revolving credit facility             |  |                   | 12,600 |              |   | 10,300
|Convertible promissory note held by David R. Belding, an investor |  |                   | 444    |              |   | 437   
|Other                                                             |  |                   | 5      |              |   | 11    
|                                                                  |  |                   |        |              |   |       
|                                                                  |  |                   | 30,787 |              |   | 29,448
|Less current maturities                                           |  |                   | 4,472  |              |   | 4,338 
|                                                                  |  |                   |        |              |   |       
|Long-term portion                                                 |  | $                 | 26,315 |              | $ | 25,110
|                                                                  |  |                   |        |              |   |       

NOTE 9MERGER AGREEMENT

On May 16, 2006, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Herbst, Inc. (Herbst) and HGI-Casinos, Inc., a Nevada corporation and wholly-owned
subsidiary of Herbst (Merger Subsidiary), pursuant to which, Merger Subsidiary will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Herbst. Under the terms of
the Merger Agreement each outstanding share of the Companys common stock will be converted into the right to receive $15 in cash, without interest. Each option to purchase the Companys common stock that is outstanding and unexercised
immediately prior to the effective time of the merger shall be cancelled in exchange for the right to receive from the surviving corporation a lump sum cash payment (without interest) equal to the product of (x) the excess (if any) of
(A) $15 over (B) the exercise price per share of the Companys common stock for such option and (y) the number of shares of the Companys common stock underlying such option, less applicable withholding taxes. Subject to the
consent of the warrant holders, each warrant to purchase the Companys common stock that is outstanding and unexercised immediately prior to the effective time of the merger shall be cancelled in exchange for the right to receive from the
surviving corporation a lump sum cash payment (without interest) equal to the product of (x) the excess (if any) of (A) $15 over (B) the exercised price per share of the Companys common stock for such warrant and (y) the
number of shares of the Companys common stock underlying such warrant, and, if applicable, less withholding taxes.

The completion of the merger is
subject to several conditions, including the absence of any material adverse effect on the Companys business and the receipt of gaming approvals. However, no assurance can be given that all conditions to the consummation of the merger will be
satisfied or that the merger will be consummated.



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##### Table of Contents

On August 28, 2006, our shareholders, met to approve the adjournment of the special shareholders meeting or if
necessary, to solicit additional proxies if there were insufficient votes at the time of the special shareholders meeting set for September 1, 2006. On September 1, 2006, our shareholders approved the proposed acquisition by Herbst,
at a special shareholders meeting. Votes to approve the proposed acquisition represented approximately 76% of the Companys outstanding shares.

The Sands Regent anticipates closing the acquisition, pending receipt of gaming approvals and other applicable conditions, by the first quarter of the calendar year 2007.



|ITEM 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------ | -------------------------------------------------------------------------------------

Results of Operations and Basis of Presentation

The Sands Regent and its subsidiaries (the Company,
we, our, or us) operate Rail City Casino (Rail City) in Sparks, Nevada the Sands Regency Casino Hotel (the Sands) in downtown Reno, Nevada, the Gold Ranch Casino and RV Resort (the
Gold Ranch) on Interstate-80 in Verdi, Nevada, and Dayton Depot Casino and Red Hawk Sports Bar (the Dayton Depot Casino) in Dayton, Nevada.

On May 1, 2004, the Company acquired Rail City in Sparks, Nevada. Rail City has approximately 16,600 square feet of gaming space housing 645 slots, 8 table games, including keno, a sports book operated by a third-party, and a 24-hour
family-style restaurant and a bar.

The Sands has 833 hotel rooms and 5 restaurants, including Tony Romas Famous for Ribs, Mels the Original
diner, and an Arbys chain restaurant. It has a full selection of gaming options, including 548 slot machines, 26 table games, including live poker, keno, bingo, and a sports book operated by an independent party. Additionally, the Sands has a
comedy club operated by a third party, a cabaret lounge, and a health spa.

On June 1, 2002, the Company acquired Gold Ranch. Gold Ranchs gaming
options include 245 slot machines, a California lottery station on Gold Ranchs property which straddles the Nevada/California border, and a sports book operated by a third-party. Additionally, Gold Ranch has a 105 space RV park, 2 restaurants
(a 24-hour family style restaurant and a Jack-in-the-Box chain restaurant), and an ARCO gas station and convenience store.

On March 31, 2005, the
Company formed Dayton Gaming, Inc. for the purpose of acquiring the assets of the Depot Casino and Red Hawk Sports Bar (together, the Dayton Depot) in Dayton, Nevada. On September 1, 2005, the Company completed the acquisition and,
accordingly, results of operations for the Depot for one month are included in the Companys condensed consolidated financial statements for the three months ended September 30, 2005.

On September 1, 2006, our shareholders approved the proposed acquisition by Herbst, at a special shareholders meeting. Votes to approve the proposed
acquisition represented approximately 76% of the companys outstanding shares.

The Sands Regent anticipates closing the acquisition, pending receipt
of gaming approvals and other applicable conditions, by the first quarter of fiscal year 2007.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158. Employers Accounting for Defined
Benefit Pension and Other Postretirement Planan amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the over-funded or under-funded status of a defined benefit postretirement
plan as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. This Statement also requires employers to measure the funded status of a plan as of the date of
its year end and is effective for publicly traded companies as of the end of the fiscal year ending after December 31, 2006. We do not expect the adoption of SFAS No. 158 to have a material effect on our consolidated financial statements
as we do not currently have a defined benefit postretirement plan that meets the criteria specified under SFAS No. 158.

In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our consolidated financial
statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB No. 108), which
adds Section N to Topic 1, Financial Statements. Section N provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. To
provide full disclosure, registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in Topic 1N in their financial statements covering the first fiscal year ending after November 15, 2006. We
do not expect the adoption of SAB No. 108 to have a material effect on our consolidated financial statements.



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In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, and applies to all tax positions accounted for in
accordance with SFAS No. 109. We are currently evaluating the impact that the adoption of FIN 48 will have on our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to irrevocably account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after December 31, 2006. We do not expect the adoption of SFAS No. 155 to materially effect our consolidated financial statements, as we do not currently have any financial instruments that meet the
criteria specified under SFAS No. 155.

Critical Accounting Policies and Estimates

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Certain of our
policies, including the estimated lives assigned to long-lived assets, asset impairment, goodwill and other intangibles impairment, the adequacy of our allowance for uncollectible receivables, self insurance reserves, litigation reserves, and
customer rewards program liability, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The
Companys judgments are based on historical experience, terms of existing contracts, of trends in the industry, information provided by customers and information available from other outside sources, however, there have been no changes in
critical accounting policies reflected in the annual report of the Companys Form 10-K. There can be no assurance that actual results will not differ from our estimates.

Results of OperationsComparison of fiscal three months ended September 30, 2006 to three months ended September 30, 2005

CONSOLIDATED RESULTS. For the three months ended September 30, 2006, the Companys net operating revenues were $25.9 million compared to $24.1 million for the three months ended September 30, 2005,
a 7.1% increase. On a property-by-property basis, the net revenue for Rail City increased by 1.4% from the corresponding quarter of the prior year, Sands Regency net revenue increased by 3.7%, and Gold Ranch net revenue increased by 5.9%.
Consolidated net revenue for Dayton Depot Casino includes a full quarter for the three months ended September 30, 2006 of $1.2 million and a partial quarter for the three months ended September 30, 2005.

Our consolidated income from operations was $2.4 million for the three months ended September 30, 2006, compared to $3.2 million compared to the same period of the
prior year or a 24.9% decrease. For the first quarter ended September 30, 2006, Rail Citys income from operations decreased 14.8%, Sands Regencys income from operations decreased 2% and Gold Ranchs income from operations
decreased 5.9%. Consolidated income from operations for Dayton Depot Casino showed a slight loss for the quarter ended September 30, 2006 and a partial quarter for the three months ended September 30, 2005. Corporate expenses increased
$0.3 million primarily due to merger related expenses.

The Companys consolidated net income was $1.1 million, or $0.15 per share ($0.14 diluted),
for the three months ended September 30, 2006 and 2005, compared to $1.8 million, or $0.26 per share ($0.24 diluted) for the three months ended September 30, 2005.



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RAIL CITY CASINO. Rail Citys net revenues for the three months ended September 30, 2006 increased by $0.1
million, or 1.4%, to $6.2 million from $6.1 million for the three months ended September 30, 2005. For the three months ended September 30, 2006, Rail Citys gaming revenues increased by $0.1 million to $5.7 million from $5.6 million
for the three months ended September 30, 2005. Total coin-in, an indicator of total slot machine wagering, increased 7.1% in the first quarter of fiscal 2007 over the first quarter of fiscal 2006. Table games net revenue increased slightly,
1.4% or less than $0.1 million in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006. Keno net revenues for the three months ended September 30, 2006 were up 32.6% or less than $0.1 million as compared to the previous
period. Food and beverage revenues increased slightly in the first quarter of fiscal 2006 by less than $0.1 million, or 2.1%, compared to the first quarter of fiscal 2005. Rail City had income from operations of $1.5 million in for the three months
ended September 30, 2006 as compared to $1.8 million for the three months ended September 30, 2005, a 14.8% decrease. General and administrative expenses increased 29.3% for the three months ended September 30, 2006 as compared to the
same period ended September 30, 2005, primarily due to increases in the marketing promotions and direct mailings necessary to offset the impact of construction related disruption. Professional fees increased $0.2 million and increases in gaming
taxes and casino expenses were less than $0.1 million.

Because of its location, capacity utilization, and other factors, the Company has determined that
expansion of the facilities is necessary for significant revenue growth into the future and plans to add approximately 23,500 square feet of the current facility, adding capacity to all revenue centers. Plantation Investments Inc., a subsidiary of
the Company purchased 2.58 acres of land adjacent to the Rail City Casino on December 20, 2005. The land will be utilized in the expansion of the casino and food and beverage operations. The propertys current 645 slot machines will be
increased to 850 with ultimate plans for a total of 1,000 games. On April 3, 2006, Plantation Investments, Inc., a subsidiary of the Company purchased a 0.5 acre site that is adjacent to the casino. All of the motel units on the site were
demolished for additional customer parking during construction and continuing once the expansion is completed. Currently, budgeted project costs have been estimated at approximately $13.8 million Completion of the expansion is expected during the
first quarter of calendar year 2007. To date, the Company has borrowed approximately $1.3 million and has capitalized interest of approximately $12,000 in association with the expansion. The following table highlights Rail Citys sources of
revenues and expenses for the year.



|                           |  |                                 |       |   |      |   |       |               |  |      |  
|-------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ---- | -
|                           |  | Three Months EndedSeptember 30, |       |   |      |  
|(dollars in thousands)     |  | 2006                            |       |   | 2005 |   |       | Percentchange | 
|Gaming revenues            |  | $                               | 5,733 |   |      | $ | 5,599 |               |  | 2.4  | %
|Gaming expenses            |  | $                               | 2,098 |   |      | $ | 2,025 |               |  | 3.6  | %
|Expense margin             |  |                                 | 36.6  | % |      |   | 36.2  | %             |  |      |  
|Food and beverage revenues |  | $                               | 1,206 |   |      | $ | 1,181 |               |  | 2.1  | %
|Food and beverage expenses |  | $                               | 827   |   |      | $ | 811   |               |  | 2.0  | %
|Expense margin             |  |                                 | 68.6  | % |      |   | 68.7  | %             |  |      |  
|Total net revenues         |  | $                               | 6,205 |   |      | $ | 6,117 |               |  | 1.4  | %
|Total operating expenses   |  | $                               | 4,696 |   |      | $ | 4,345 |               |  | 8.1  | %
|Expense margin             |  |                                 | 75.7  | % |      |   | 71.0  | %             |  |      |  
|Maintenance and utilities  |  | $                               | 392   |   |      | $ | 374   |               |  | 4.8  | %
|Percent of net revenues    |  |                                 | 6.3   | % |      |   | 6.1   | %             |  |      |  
|General and administrative |  | $                               | 820   |   |      | $ | 634   |               |  | 29.3 | %
|Percent of net revenues    |  |                                 | 13.2  | % |      |   | 10.4  | %             |  |      |  

SANDS REGENCY HOTEL AND CASINO. Net revenues for the Sands increased $0.3 million for the three months ended
September 30, 2006 from $9.6 million to $9.9 million for the three months ended September 2006 and 2005, an increase of 3.8%.



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Gaming revenues for the Sands decreased to $5.8 million for the three months ended September 30, 2006 from $5.9
million in the three months ended September 30, 2005, a decrease of 1.2%. For the three months ended September 30, 2006 and September 30, 2005, revenue from slot machines increased slightly. Table games revenue for the three months
ended September 30, 2006 and 2005 decreased by $0.1 million or 10.8%. Net revenues from bingo decreased overall by 2.5% for the three months ended September 30, 2006 from the three months ended September 30, 2005.

For the three months ended September 30, 2006, lodging revenues for the Sands increased to $3.3 million up from $3.0 million an increase of 8.9%. For the three
months ended September 30, 2006 and 2005, the Sands average daily room rate increased 7.3% with occupancy increasing 1.3% both of which contributing to the increase in revenue for three months ended September 30, 2006 as compared to
the three months ended September 30, 2005.

Food and beverage revenues increased 12.5% for the three months ended September 30, 2006 as compared
to the same period in 2005. In fiscal 2006, the Sands changed its restaurant venue, going from Antonias, Very Italian Buffet (Antonias), to The Buffet at the Sands serving cooked-to-order steak. At September 30, 2006, revenues from
The Buffet at the Sands were for the three month period, as the restaurant was not open during the same period in 2005.

Income from operations decreased
to slightly less than $0.1 million, or 2.0%, for the three months ending September 30, 2006 compared to the same period in 2005. Maintenance and utilities increased by $0.2 million for the three months ended September 30, 2006 compared to
the same period in 2005. This was due primarily to increases in utility and sewer rates of $0.1 million coupled with normal repairs and maintenance of $0.05 million. General and administrative expenses increased 7.2% for the three months ended
September 30, 2006 compared to the same period in 2005 due primarily to increases in the expenses for the management bonus incentive program and the company stock incentive plan of $0.05 million and increases in normal operating expenses such
as audit fees, payroll and postage of $0.05 million.

The following table highlights our various sources of revenues and expenses as compared to the prior
year for the Sands.



|                           |  |                                 |       |   |      |   |       |               |  |      |  
|-------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ---- | -
|                           |  | Three Months EndedSeptember 30, |       |   |      |  
|(dollars in thousands)     |  | 2006                            |       |   | 2005 |   |       | Percentchange | 
|Gaming revenues            |  | $                               | 5,875 |   |      | $ | 5,947 |               |  | -1.2 | %
|Gaming expenses            |  | $                               | 2,544 |   |      | $ | 2,608 |               |  | -2.5 | %
|Expense margin             |  |                                 | 43.3  | % |      |   | 43.9  | %             |  |      |  
|Lodging revenues           |  | $                               | 3,273 |   |      | $ | 3,005 |               |  | 8.9  | %
|Lodging expense            |  | $                               | 1,069 |   |      | $ | 1,022 |               |  | 4.6  | %
|Expense margin             |  |                                 | 32.7  | % |      |   | 34.0  | %             |  |      |  
|Food and beverage revenues |  | $                               | 1,434 |   |      | $ | 1,275 |               |  | 12.5 | %
|Food and beverage expenses |  | $                               | 997   |   |      | $ | 915   |               |  | 9.0  | %
|Expense margin             |  |                                 | 69.5  | % |      |   | 71.8  | %             |  |      |  
|Other revenues             |  | $                               | 336   |   |      | $ | 368   |               |  | -8.7 | %
|Other expenses             |  | $                               | 147   |   |      | $ | 136   |               |  | 8.1  | %
|Expense margin             |  |                                 | 43.8  | % |      |   | 37.0  | %             |  |      |  
|Total net revenues         |  | $                               | 9,908 |   |      | $ | 9,550 |               |  | 3.7  | %
|Total operating expenses   |  | $                               | 8,394 |   |      | $ | 8,009 |               |  | 4.8  | %
|Expense margin             |  |                                 | 84.7  | % |      |   | 83.9  | %             |  |      |  
|Maintenance and utilities  |  | $                               | 1,137 |   |      | $ | 996   |               |  | 14.2 | %
|Percent of net revenues    |  |                                 | 11.5  | % |      |   | 10.4  | %             |  |      |  
|General and administrative |  | $                               | 1,561 |   |      | $ | 1,456 |               |  | 7.2  | %
|Percent of net revenues    |  |                                 | 15.8  | % |      |   | 15.2  | %             |  |      |  



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##### Table of Contents

GOLD RANCH CASINO AND RV RESORT. For the three months ended September 30, 2006, Gold Ranch had net revenues of
$8.6 million, compared to $8.1 million for the same period in 2005. The increase was primarily attributable to an increase in fuel revenues due to higher gas prices for the three months ending September 30, 2006 compared to September 30,
2005. The average retail price of a gallon of gas was $3.10 for the first quarter of fiscal 2007 as compared to $2.73 for the first quarter of fiscal 2006. However the volume of gas gallons sold increased slightly by 1.4%.

Gaming revenue for Gold Ranch is comprised of slot machine revenue and, to a lesser degree, revenue from a California lottery station. Gaming revenue increased by 3.4%
for the three months ended September 30, 2006 as compared to the same period in 2005 or $0.05 million.

Lodging revenues of the RV Park increased
slightly to 1.6% for the three months ended September 30, 2006 compared to the same period in 2005. Occupancy for the three months ended September 30, 2006 was 67.6% compared to 67.5% for the same period in 2005. Food and beverage revenue
increased $0.1 million for the three months ended September 30, 2006 compared to the same period in 2005. The increase is attributable to an increase in bar revenues. Fuel and convenience store revenues increased 7.6% for the three months ended
September 30, 2006 compared to September 30, 2005 primarily due to the increase in the price of gasoline in 2006. However, fuel and convenience store expenses increased by 6.8% leaving profit up slightly by $0.6 million.

Gold Ranchs income from operations decreased by 5.9% for the three months ended September 30, 2006 as compared to September 30, 2005. General and
administrative expenses increased 10.8% for the three month period ended September 30, 2006 as compared to the same period in 2005. This was primarily as a result of additional audit and professional fees. Maintenance and utility fees increased
by 5.7% for the three months ended September 30, 2006 compared to 2005 primarily due to increased custodial costs.

The following table highlights
Gold Ranchs sources of revenues and expenses for the:



|                                    |  |                                 |       |   |      |   |       |               |  |      |  
|----------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ---- | -
|                                    |  | Three Months EndedSeptember 30, |       |   |      |  
|(dollars in thousands)              |  | 2006                            |       |   | 2005 |   |       | Percentchange | 
|Gaming revenues                     |  | $                               | 1,615 |   |      | $ | 1,562 |               |  | 3.4  | %
|Gaming expenses                     |  | $                               | 573   |   |      | $ | 528   |               |  | 8.5  | %
|Expense margin                      |  |                                 | 35.5  | % |      |   | 33.8  | %             |  |      |  
|Lodging revenues                    |  | $                               | 185   |   |      | $ | 182   |               |  | 1.6  | %
|Lodging expense                     |  | $                               | 50    |   |      | $ | 52    |               |  | -3.8 | %
|Expense margin                      |  |                                 | 27.0  | % |      |   | 28.6  | %             |  |      |  
|Food and beverage revenues          |  | $                               | 583   |   |      | $ | 516   |               |  | 13.0 | %
|Food and beverage expenses          |  | $                               | 321   |   |      | $ | 319   |               |  | 0.6  | %
|Expense margin                      |  |                                 | 55.1  | % |      |   | 61.8  | %             |  |      |  
|Fuel and convenience store revenues |  | $                               | 6,418 |   |      | $ | 5,964 |               |  | 7.6  | %
|Fuel and convenience store expenses |  | $                               | 6,128 |   |      | $ | 5,738 |               |  | 6.8  | %
|Expense margin                      |  |                                 | 95.5  | % |      |   | 96.2  | %             |  |      |  
|Total net revenues                  |  | $                               | 8,580 |   |      | $ | 8,102 |               |  | 5.9  | %
|Total operating expenses            |  | $                               | 8,118 |   |      | $ | 7,616 |               |  | 6.6  | %
|Expense margin                      |  |                                 | 94.6  | % |      |   | 94.0  | %             |  |      |  
|Maintenance and utilities           |  | $                               | 204   |   |      | $ | 193   |               |  | 5.7  | %
|Percent of net revenues             |  |                                 | 2.4   | % |      |   | 2.4   | %             |  |      |  
|General and administrative          |  | $                               | 613   |   |      | $ | 553   |               |  | 10.8 | %
|Percent of net revenues             |  |                                 | 7.1   | % |      |   | 6.8   | %             |  |      |  



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##### Table of Contents

DAYTON DEPOT CASINO. The Company acquired Dayton Depot Casino on September 1, 2005. Upon the purchase of Dayton
Depot, the company installed new slot machines and a slot tracking system. In addition, renovation of an existing restaurant was completed in July 2006. In January 2006, a new competitor opened in Dayton which has impacted property operating results
for the three months ended September 30, 2006 in comparison to the same period in 2005.

Comparison of the results for the three months ended
September 30, 2006 as compared to September 30, 2005 reflect three months of results in the first quarter of fiscal 2007 and only one month of the first quarter of fiscal 2006.



|                           |  |                                 |       |   |      |      |   |               |       |  
|-------------------------- |  | ------------------------------- | ----- | - | ---- | ---- | - | ------------- | ----- | -
|                           |  | Three Months EndedSeptember 30, |       |   |      |     
|(dollars in thousands)     |  | 2006                            |       |   | 2005 |      |   | Percentchange |      
|Gaming revenues            |  | $                               | 992   |   |      | 312  |   |               | 217.9 | %
|Gaming expenses            |  | $                               | 406   |   |      | 132  |   |               | 207.6 | %
|Expense margin             |  |                                 | 40.9  | % |      | 42.3 | % |               |       |  
|Food and beverage revenues |  | $                               | 318   |   |      | 74   |   |               | 329.7 | %
|Food and beverage expenses |  | $                               | 186   |   |      | 34   |   |               | 447.1 | %
|Expense margin             |  |                                 | 58.5  | % |      | 45.9 | % |               |       |  
|Total net revenues         |  | $                               | 1,175 |   |      | 363  |   |               | 223.7 | %
|Total operating expenses   |  | $                               | 1,207 |   |      | 271  |   |               | 345.4 | %
|Expense margin             |  |                                 | 102.7 | % |      | 74.7 | % |               |       |  
|Maintenance and utilities  |  | $                               | 100   |   |      | 12   |   |               | 733.3 | %
|Percent of net revenues    |  |                                 | 8.5   | % |      | 3.3  | % |               |       |  
|General and administrative |  | $                               | 248   |   |      | 31   |   |               | 700.0 | %
|Percent of net revenues    |  |                                 | 21.1  | % |      | 8.5  | % |               |       |  

CORPORATE COSTS. Corporate costs include the salaries and benefits of corporate officers, and other corporate
level management, public company reporting costs, and public company related legal, accounting and directors fees. Corporate operating costs were $1.0 million for the three months ended September 30, 2006, compared to $.7 million for the three
months ended September 30, 2005. The increases in corporate costs resulted from merger related expenses of $0.2 million. The Company has determined itself to be a non-accelerated filer, and as such is subject to rules, which provide the date of
full SOX 404 compliance to be June 30, 2008. The full amount needed to attain SOX 404 compliance is not specifically known, but future costs are anticipated to be material.

INTEREST EXPENSE. Interest expense, net of capitalized interest, was $0.7 million for the three months ended September 30, 2006, compared to $0.4 million for the three months ended September 30, 2005.
The increase was due to higher weighted average interest rates for the revolving credit facility and the term loan of 8.19% and 7.34% in the first quarter of fiscal 2007 compared to 6.88% and 6.06% respectively in first quarter of fiscal 2006.



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##### Table of Contents

Commitments and Contingencies

The following table summarizes the Companys contractual obligations as of September 30, 2006:



|                               |  |                                        |        |                 |   |            |  |            |        |              |   |        |  |   |      
|------------------------------ |  | -------------------------------------- | ------ | --------------- | - | ---------- |  | ---------- | ------ | ------------ | - | ------ |  | - | -----
|                               |  | Payments due by period( in thousands )
|                               |  | Total                                  |        | Less than 1year |   | 1 - 3years |  | 4 - 5years |        | After 5years
|Long term debt                 |  | $                                      | 30,787 |                 | $ | 4,472      |  | $          | 9,590  |              | $ | 16,725 |  | $ |     
|Interest on long-term debt (1) |  |                                        | 8,759  |                 |   | 2,303      |  |            | 3,947  |              |   | 2,509  |  |   |     
|Operating leases (2)           |  |                                        | 8,769  |                 |   | 527        |  |            | 1,198  |              |   | 1,150  |  |   | 5,894
|Other (3) (5)                  |  |                                        | 5,243  |                 |   | 240        |  |            | 546    |              |   | 515    |  |   | 3,942
|Construction projects (4)      |  |                                        | 6,677  |                 |   | 6,677      |  |            |       |              |   |       |  |   |     
|                               |  |                                        |        |                 |   |            |  |            |        |              |   |        |  |   |      
|                               |  | $                                      | 60,235 |                 | $ | 14,219     |  | $          | 15,281 |              | $ | 20,899 |  | $ | 9,836
|                               |  |                                        |        |                 |   |            |  |            |        |              |   |        |  |   |      



|1) | Interest is calculated by assuming the Company keeps its line of credit fully advanced and the table assumes a weighted average interest rate of 7.5% until maturity. All long-term
debt matures within 5 years.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents contractual lease obligations to Prospector Gaming Enterprises (PGE) on real property in connection with the Gold Ranch acquisition agreement. Amounts reflect
a minimum base payment schedule. The lease is subject to escalation based on the property meeting certain revenue thresholds. Management does not believe these thresholds will be met without major expansion of the gaming facilities. Rent expense was
$575,000 for fiscal 2006, 2005, and 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents management fees due to PGE in connection with the RV Park at Gold Ranch. Future amounts payable are subject to adjustment based on changes in interest rates.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents contracted construction projects for the remodel of the restaurant at Dayton Depot and the expansion of Rail City.
|--- | -----------------------------------------------------------------------------------------------------------------------------



|(5) | On May 3, 2004, the Company entered into a contract with Bally Gaming Inc. for the lease of gaming machines. This agreement is effective until the earlier of 8 years and 60
days (July 2, 2012) or meeting the minimum lease requirement of 146,000 machine days (which covers all leased gaming machines). In the event that the Company fails to satisfy the minimum lease requirement prior to the end of the term, the Company
shall pay the average gross revenues that Bally received for each gaming machine day during the term. The Company has analyzed this contract and is confident that it will meet the minimum lease requirement prior to the lease termination. As such, no
contingency has been recorded on the books of the Company.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital Resources and Liquidity

At September 30, 2006, the Companys cash and cash equivalents were $7.6 million, an increase of $0.8 million from June 30, 2006. We had negative working
capital of $1.9 million at September 30, 2006, which is consistent with our policy to use any available cash which is not needed in operations to pay down our line of credit to minimize interest expense. At September 30, 2006, the Company
had $12.4 million of borrowings available under its revolving credit facility.

Cash flow from operating activities provided $5.0 million during the three
months ended September 30, 2006. Net income of $1.1 million was increased by non-cash items of depreciation ($1.9 million), compensation expense for share-based options ($0.2 million).

Investing activities accounted for $5.5 million in use of cash for the three months ended September 30, 2006, the largest individual items consisting of the Dayton
Depot restaurant expansion ($0.3 million) and the Rail City expansion project ($2.4 million).

Financing activities provided $1.3 million of cash flow.
Long-term debt of $3.6 million was issued primarily to fund the Rail City expansion and working capital. Long-term debt was reduced by payments of $2.3 million during the three months ended September 30, 2006 and during the quarter ended
September 30, 2005.

Our amended and restated bank term loan and revolving credit facility fully funded, totaled $42.7 million as of
September 30, 2006, and requires the Company to be in compliance with certain financial and other covenants, restricts future encumbrances and limits situations where a change in control in the Company may occur. The financial covenants include
the requirement for a maximum leverage ratio of 3.00:1.00 during this period. This ratio is computed by the ratio of total debt to EBITDA (earnings before interest expense, taxes, depreciation and amortization) and certain other financial ratios
must be maintained. The Company believes that it is in compliance with all covenants and restrictions at September 30, 2006.



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The Company believes that its cash funds, cash generated from operations, and available borrowing capacity will be
sufficient to fund its operations, meet current debt obligations, and fulfill its capital expenditure obligations for the next 12 months; however, the Companys operations are subject to financial, economic, competitive, regulatory, and other
factors, many of which are beyond its control. If the Company is unable to generate sufficient cash flow, it could be required to adopt one or more alternatives, such as reducing or delaying planned capital expenditures, selling assets,
restructuring debt, or obtaining additional equity capital.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements used in this annual report on Form 10-K that relate to future plans, events, financial results or performance are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our managements current expectations and projections about future events. In some
cases you can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as may, will, project,
might, expect, believe, anticipate, intend, could, would, estimate, continue or pursue, or the negative of these terms or other
comparable terminology. In particular, they include statements relating to, among other things, future actions, strategies, future performance, and future financial results. We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are only predictions and may be inaccurate. Actual events or results may differ materially from those expressed or implied by such forward-looking statements. In evaluating these
statements, you should specifically consider various factors including the factors listed in ITEM 1A RISK FACTORS of the Companys 2006 Annual Report on Form 10-K, as well as elsewhere in this report and in other SEC filings. These
risk factors include, without limitation, the following items:



| |  |  | the effect of economic, credit and capital market conditions on the economy in general, and on gaming and hotel companies in particular;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to timely and cost-effectively integrate into our operations the companies and assets that we acquire;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | access to available and feasible financing;
| | - |  | -------------------------------------------



| |  |  | changes in laws or regulations, third party relations and approvals, and decisions of courts, regulators and governmental bodies; including judicial actions and gaming legislative
action, referenda and taxation;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | abnormal gaming holds; and
| | - |  | --------------------------



| |  |  | the effects terrorists attacks or war may have on the gaming industry;
| | - |  | -----------------------------------------------------------------------



| |  |  | the uncertainty concerning the effects of our pending transaction with Herbst; and;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the effects of competition, including locations of competitors and operating and market competition; and
| | - |  | --------------------------------------------------------------------------------------------------------

Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.



|ITEM 3 | Quantitative and Qualitative Disclosures about Market Risk
|------ | ----------------------------------------------------------

With
the amended and restated Credit Agreement executed in September 2005, in conjunction with the acquisition of the Depot in Dayton, the Company has substantial variable interest rate debt. Assuming the credit facilities are fully advanced, a one
percent increase in interest rates would result in an increase in interest expense of approximately $0.3 million annually.



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Additionally, terms of the Companys RV park management agreement with Prospector Gaming Enterprises
(PGE), referenced as (3) in Note 9- Commitments and Contingencies in the accompanying financial statements, state that the Company pay monthly an amount equal to 120% of PGEs debt service on the underlying
RV park note, which varies directly with changes in the Prime index. The financial impact to the Company of a full one percent increase in the Prime index is less than $30,000 per year.

The Company does not use interest rate derivative instruments to manage exposure to interest rate changes.



|ITEM 4 | Controls and Procedures
|------ | -----------------------

Evaluation of Disclosure Controls
and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

As required by SEC rule 13a15(b), our Chief Executive Officer and Chief Financial Officer carried out an
evaluation with the participation of other members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and have concluded that as of such
date, our disclosure controls and procedures were not effective for the reasons set forth below.

Subsequent to the issuance of the Companys quarterly
reports on Form 10-Q for the quarters ended September 30, 2005 and December 31, 2005, the Company determined that errors were made as more fully described in the respective Form 10-Q/As dated June 27, 2006. Management has
concluded that the conditions giving rise to the restatements of the financial statements included in the Form 10-Q/As for the quarters ended September 30, 2005 and December 31, 2005, each dated June 27, 2006, still exist.
Management has determined that the following material weaknesses existed as of September 30, 2006: the lack of sufficient number of personnel with an appropriate level of accounting knowledge related to the application of generally accepted
accounting principles; the lack of a properly designed and implemented closing and financial reporting process to provide reasonable assurance that the financial statements were prepared in accordance with generally accepted accounting principles;
and the lack of effective controls to ensure that a sufficient review of the financial statements was performed. These weaknesses were reported in the Form 10-Q/As for the quarters ended September 30, 2005 and December 31, 2005 and
Form 10-K for the year ended June 30, 2006, each of which resulted in adjustments or reclassifications to the condensed consolidated financial statements included in the aforementioned documents.

However, as described below, the Company believes it has performed sufficient procedures to prepare and issue its consolidated financial statements.

Changes in Internal Control over Financial Reporting

In conjunction with the preparation of the Form 10-Q for the period ended September 30, 2006, the Company instituted additional control activities and utilized additional outside resources and personnel it deemed to have the
appropriate skill level to assist in the closing and financial reporting process. The Company instituted additional review procedures related to the reconciliation of balance sheet general ledger accounts, the recording and disclosures for
share-based payments, and standardized templates for the computations and classifications on the Statement of Cash Flows. Management is continuing to assess the required level of personnel, the thoroughness and related documentation of its closing
and financial reporting processes, and the related review processes. Management has discussed the material weaknesses and related actions described above with the Audit Committee.



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Other than as disclosed in the preceding paragraph, there has been no change in our internal control over financial
reporting 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
|------ | -----------------

The Company is also party to
various lawsuits, which have arisen in the normal course of its business. At the time of this filing, the liability arising from unfavorable outcomes of these lawsuits is not expected to have a material impact on the Companys financial
condition or financial results.

Item 1a. Risk Factors

There have been no material changes in the risk factors previously disclosed in the
Companys Form 10-K for the year ended June 30, 2006.



|ITEM 2 | Changes in Securities
|------ | ---------------------

None.



|ITEM 3 | Defaults Upon Senior Securities
|------ | -------------------------------

None.



|ITEM 4 | Submission of Matters to a Vote of Security Holders
|------ | ---------------------------------------------------

On August 28, 2006, our shareholders met to approve the adjournment of the special shareholders meeting or if necessary, to solicit additional proxies if there were insufficient votes at the time of the special shareholders
meeting set for September 1, 2006. On September 1, 2006, The Sands Regent held a special meeting of shareholders to vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of May 16, 2006, by and among The
Sands Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc. a wholly owned subsidiary of Herbst Gaming, Inc. The number of shares represented and voting in person or by proxy at the August 28 and September 1 meetings totaled 5,435,687 shares
equaling 76% of the total shares issued and outstanding, thereby constituting a quorum.

Proposal 1

To approve the adjournment of the special meeting, or if necessary, to solicit additional proxies if there were insufficient votes at the time of the
special meeting to adopt the merger agreement.



|           |  |           |  |         |  |         |  |          
|---------- |  | --------- |  | ------- |  | ------- |  | ---------
|Proposal 1
|           |  | For       |  | Against |  | Abstain |  | Total    
|           |  | 4,720,526 |  | 707,270 |  | 7,891   |  | 5,435,687



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Proposal 2

To approve and adopt the Agreement and Plan of Merger, dated as of May 16, 2006, by and among The Sands Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc. a wholly owned subsidiary of Herbst Gaming, Inc.



|           |  |           |  |         |  |         |  |          
|---------- |  | --------- |  | ------- |  | ------- |  | ---------
|Proposal 2 |  |           |  |         |  |         |  |          
|           |  | For       |  | Against |  | Abstain |  | Total    
|           |  | 4,765,989 |  | 666,131 |  | 3,567   |  | 5,435,687



|ITEM 5 | Other Information
|------ | -----------------

None.



|ITEM 6 | Exhibits
|------ | --------



31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32

Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.




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THE SANDS REGENT AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |  |  |                  |  |                        |  |                                                                     
|----------------------- |  |  |  | ---------------- |  | ---------------------- |  | --------------------------------------------------------------------
|                        |  |  |  | THE SANDS REGENT
|                        |  |  |  | (Registrant)    
|                        |  |  | 
|Date: November 14, 2006 |  |  |  | By:              |  | /S/ Ferenc B. Szony   
|                        |  |  |  |                  |  |                        |  | Ferenc B. Szony, President and Chief Executive Officer              
|                        |  |  | 
|Date: November 14, 2006 |  |  |  | By:              |  | /S/ Cornelius T. Klerk
|                        |  |  |  |                  |  |                        |  | Cornelius T. Klerk, Chief Financial and Principal Accounting Officer



26