**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.20549

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Fiscal Year Ended December 31, 2006**

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

**Commission File No. 1-14316**

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

| **Nevada**                                 |   | **88-0446145**                           |
|--------------------------------------------|--------|------------------------------------------|
| (State of  incorporation)                  |   | (I.R.S. Employer  Identification Number) |
|                                       |   |                                     |
| **3440  West Russell Road, Las Vegas, NV** |   | **89118**                                |
| (Address of  principal executive offices)  |   | (Zip Code)                               |

 

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

Securities registered pursuant toSection 12(b) of the Act:

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

 

Securities registered pursuant toSection 12(g) of the Act:  **Not Applicable**

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

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

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x  No  o

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

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seethe definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large Accelerated Filer  o  Accelerated Filer  o  Non-Accelerated Filer  x

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

The aggregate market value of the shares of voting andnon-voting common equity held by non-affiliates of the Registrant as ofDecember 31, 2006, based on the price at which the common equity was sold,was approximately $0.

Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock, as of December 31, 2006.

Common Stock, no par value, 300 outstanding shares.

**DocumentsIncorporated by Reference**

None.

 

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**TABLE OF CONTENTS**
| PART I |   |                                                                                                               |   |   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|
|        |   |                                                                                                               |   |   |
| Item 1.     |   | Business                                                                                                           |   |   |
| Item  1A.   |   | Risk Factors                                                                                                       |   |   |
| Item 1B.    |   | Unresolved Staff Comments                                                                                          |   |   |
| Item  2.    |   | Properties                                                                                                         |   |   |
| Item  3.    |   | Legal  Proceedings                                                                                                 |   |   |
| Item 4.     |   | Submission of Matters to a Vote of Security Holders                                                                |   |   |
|        |   |                                                                                                               |   |   |
| PART II     |   |                                                                                                               |   |   |
|        |   |                                                                                                               |   |   |
| Item 5.     |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |   |
| Item 6.     |   | Selected Financial Data                                                                                            |   |   |
| Item 7.     |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   |   |
| Item 7A.    |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        |   |   |
| Item 8.     |   | Financial Statements and Supplementary Data                                                                        |   |   |
| Item 9.     |   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                              |   |   |
| Item 9A.    |   | Controls and  Procedures                                                                                           |   |   |
| Item 9B.    |   | Other Information                                                                                                  |   |   |
|        |   |                                                                                                               |   |   |
| PART III    |   |                                                                                                               |   |   |
|        |   |                                                                                                               |   |   |
| Item 10.    |   | Directors  and Executive Officers of the Registrant                                                                |   |   |
| Item 11.    |   | Executive  Compensation                                                                                            |   |   |
| Item 12.    |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   |   |   |
| Item 13.    |   | Certain  Relationships and Related Transactions                                                                    |   |   |
| Item 14.    |   | Principal  Accountant Fees and Services                                                                            |   |   |
|        |   |                                                                                                               |   |   |
| PART IV     |   |                                                                                                               |   |   |
|        |   |                                                                                                               |   |   |
| Item 15.    |   | Exhibits and  Financial Statement Schedules                                                                        |   |   |

 

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# **PART I**

## **Item1.****    Business.**

**General**

We are a diversified gaming company that focuses on two business lines:slot route operations and casino operations. Our slot route operations involve the exclusive installation andoperation of slot machines in certain strategic, high traffic, non-casinolocations, such as grocery stores, drug stores, convenience stores, bars andrestaurants.  We currently own andoperate approximately 7,200 slot machines in our slot route business and areone of the largest slot machine operators in Nevada.  As of December 31, 2006, our casinooperations in Nevada consisted of five casinos that focus on local gamingpatrons, and included the ownership and operation of Terrible’sHotel & Casino in Las Vegas, Nevada and four other small casinos insouthern Nevada operated under the Terrible’s name.  As of December 31, 2006, these casinoscontained an aggregate of approximately 2,016 slot machines and 18 tablegames.  At the end of our 2006 fiscalyear, our casino operations outside of Nevada consisted of Terrible’sSt. Jo Frontier Casino in St. Joseph, Missouri (“ St. Jo”),Terrible’s Mark Twain Casino in LaGrange, Missouri (“Mark Twain”), andTerrible’s Lakeside Casino Resort in Osceola, Iowa (“Lakeside Iowa”).  At that time these three properties containedan aggregate of approximately 2,265 slot machines and 44 table games.  As a result of the completion of ouracquisition of The Sands Regent (the “Sands Regent Acquisition”) on January 3,2007 described below, as of that date our casino operations also included theRail City Casino in Sparks, Nevada (“Rail City”); the Sands Regency CasinoHotel in downtown Reno, Nevada (“Sands”); the Gold Ranch Casino and RV Resortin Verdi, Nevada (“Gold Ranch”) and Depot Casino (“Depot Casino”) and Red HawkSports Bar (“Red Hawk”, and together with Rail City, Sands, Gold Ranch andDepot Casino, the “Sands Regent Casinos”) in Dayton, Nevada, which as of thatdate contained an aggregate of approximately 1,661 slot machines and 27 tablegames.

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

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

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

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

**Available Information**

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

**Recent Developments**

**Entry into Primm Acquisition PurchaseAgreement**

On October 31, 2006, the Company and MGM MIRAGE entered into a purchaseagreement whereby the Company will acquire from MGM MIRAGE the Buffalo Bill’s,Primm Valley and Whiskey Pete’s hotel-casinos (collectively known as “PrimmValley Resorts”) located in Primm, Nevada, for $400 million (the “PrimadonnaAcquisition.”). The transaction is subject to customary closing conditions andthe parties anticipate the transaction to close in the second quarter of 2007.

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**Closing of the Sands Regent Acquisition**

On January 3, 2007, we consummated the Sands Regent Acquisition, payingapproximately $119 million in cash for the outstanding securities of The SandsRegent.  The Sands Regent operatescasinos and tourist-based facilities, including Rail City Casino in Sparks,Nevada, which has approximately 16,600 square feet of gaming space housing 622slots and 7 table games; the Sands Regency Casino Hotel in downtown Reno,Nevada, which contains 539 slot machines, 20 table games and an 833-room hotel;the Gold Ranch Casino and RV Resort in Verdi, Nevada, which contains 245 slotmachines, a California lottery station located on the Nevada/California border,a 105-space RV park and an ARCO gas station and convenience store; and DepotCasino and Red Hawk Sports Bar in Dayton, Nevada, which together contain anaggregate of approximately 255 slot machines. We used proceeds from our credit agreement described below to fund theSands Regent Acquisition.

**Amended and Restated Credit Agreement**

On January 3, 2007, we entered into a second amended and restatedcredit agreement (the “credit agreement”) with Bank of America, N.A. (“Bank ofAmerica”), as Administrative Agent, Swing Line Lender and L/C Issuer, LehmanCommercial Paper, Inc. and Wachovia Bank, National Association, as SyndicationAgents, U.S. Bank, National Association, as Documentation Agent and LehmanBrothers Inc. and Wachovia Capital Markets, LLC, as Joint Lead Arrangers andJoint Book Runners. The credit agreement was an amendment and restatement of ourprevious amended and restated credit agreement dated as of October 8, 2004.

We borrowed $375 million in term loans under the credit agreement onJanuary 3, 2007 to finance the Sands Regent Acquisition.  Subject to certain conditions set forth inthe credit agreement, proceeds from delay draw term loans will be available tofinance the Primadonna Acquisition if and when it closes.

**Passage of Anti-Smoking Initiative**

On November 7, 2006, voters in Nevada passed Question 5, an initiativethat prohibits smoking in indoor places of employment, including, but notlimited to, bars and taverns that serve food, grocery stores, malls and otherretail establishments, and that gives future control over smoking regulation toindividual counties or municipalities. The Company had supported a competing initiative which banned smoking inrestaurants and other locations frequented by minors and vested all futuresmoking regulation with the Nevada State Legislature.  Since its adoption, Question 5 has led tosignificant decreased patron play at our route locations.

**Narrative Description of Business**

Our business focuses on attracting and fostering repeat business fromlocal gaming patrons in both our route and casino operations.  Local patrons are typically sophisticatedgaming customers who seek convenient locations, high payouts and a pleasantatmosphere.

*Route Operations*

Our route operations involve the exclusive installation and operationof slot machines in chain store and street account locations.  At December 31, 2006, we operatedapproximately 7,200 slot machines throughout the state of Nevada.  We define chain stores as grocery stores,drug stores, merchandise stores and convenience stores, each with more thanfive locations.  Our chain storecontracts are primarily with large, national retailers such as Albertsons,Vons, Safeway, SavOn, Smith’s, Kmart and Rite Aid, as well as Terrible Herbstgas stations and convenience stores. Street accounts include local bars, restaurants and non-chainconvenience stores.  Nevada law limitsslot route operations to certain types of non-casino locations including bars,taverns, convenience stores, grocery stores and drug stores.  Most locations are limited to offering nomore than 15 slot machines.

We generally enter into two types of route contracts: space leasearrangements and revenue-sharing arrangements. Under space lease arrangements, which we principally enter into withchain stores, we pay a fixed monthly fee for each location in which we placeslot machines.  Under revenue-sharingarrangements, which we typically enter into with street accounts, we pay thelocation owner a percentage of the revenues generated by our

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slot machines located at that particular streetaccount.  In order to enter into arevenue-sharing arrangement, the location owner must hold a gaminglicense.  Both space lease andrevenue-sharing arrangements typically involve long-term contracts that provideus with the exclusive right to install our slot machines at particularlocations.  In the case of chain stores,our contracts give us the exclusive right to install slot machines at storesopened in the future.

*Casino Operations*

Our casino operations consist of eleven casinos in northern andsouthern Nevada, six of which we acquired as of January 3, 2007 pursuantto the Sands Regent Acquisition, and three casinos in Missouri and Iowa.  All of our casino properties focus on localcustomers, with an emphasis on slot play. The following table summarizes our casino assets as of December 31,2006 after giving effect to the Sands Regent Acquisition:
| ** **                                                                       | ** ** | ** **           | ** ** | **Number of** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|------------------|------------|
| **Property**                                                                     | ** ** | **Location**         | ** ** | **Slot  Machines** | ** ** | **Table  Games** | ** ** | **Hotel  Rooms** | ** ** | **Additional** | ** ** |
|                                                                             |       |                 |       |               |       |             |       |   |   |   |   |
| **Herbst  Gaming Casino Properties**(as of December 31, 2006)                    |       |                 |       |               |       |             |       |   |   |   |   |
| Terrible’s  Hotel & Casino                                         |       | Las  Vegas, NV       |       | 1,013              |       | 9                |       | 255 |   | Race  and sports book;  196 seat bingo facility |   |
|                                                                             |       |                 |       |               |       |             |       |   |   |   |   |
|                                                                             |       |                 |       |               |       |             |       |   |   |   |   |
| Terrible’s Town  Casino                                                     |       | Pahrump,  NV         |       | 396                |       | 6                |       | — |   | Race  and sports book;  120 seat bingo facility |   |
| Terrible’s  Lakeside Casino & RV Park                              |       | Pahrump,  NV         |       | 375                |       | 3                |       | 159  RV spaces |   | Race  and sports book;  192-seat bingo facility;  7 acre lake |   |
| Terrible’s  Casino & Bowl                                          |       | Henderson,  NV       |       | 157                |       | —           |       | — |   | 16-lane  bowling alley |   |
| Terrible’s  Searchlight Casino                                              |       | Searchlight,  NV     |       | 75                 |       | —           |       | — |   | — |   |
| Terrible’s  Lakeside Casino Resort                                          |       | Osceola,  IA         |       | 1,095              |       | 19               |       | 60 47 RV spaces |   | 10,000  sq. ft. conference space;  convenience store and gas station;  121 acres (88 acres un-developed;  15 acre lake) |   |
| Terrible’s Mark  Twain Casino                                               |       | LaGrange,  MO        |       | 591                |       | 14               |       | — |   | — |   |
| Terrible’s  St. Jo Frontier Casino                                     |       | St. Joseph,  MO |       | 579                |       | 11               |       | — |   | 2,400  sq. ft. conference space;  40 acres (32 acres undeveloped) |   |
| **Sands  Regent Casino Properties**(acquired as of January 3, 2007)(1) |       |                 |       |               |       |             |       |   |   |   |   |
| Rail City                                                                        |       | Sparks,  NV          |       | 622                |       | 7                |       | — |   | Sports  book |   |
| Sands Regency                                                                    |       | Reno,  NV            |       | 539                |       | 20               |       | 833 |   | Sports  book; 12,000 conference space |   |
| Gold Ranch                                                                       |       | Verdi,  NV           |       | 245                |       | —           |       | 105 RV spaces |   | Sports  book; California lottery station |   |
| Dayton Depot  Casino and Red Hawk Sports Bar                                     |       | Dayton,  NV          |       | 255                |       | —           |       | — |   | Sports  book |   |
| Total                                                                            |       |                 |       | 5,942              |       | 89               |       |   |   |   |   |

 

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(1)          Expectedto be operated under the Terrible’s name.

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### *Terrible’s Hotel & Casino*

Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s”),opened on December 6, 2000. Terrible’s offers a buffet and a 24-hour café.  There are currently 255 rooms with standardamenities as well as a pool and spa. Terrible’s is conveniently located approximately one mile east of theLas Vegas Strip, which we believe appeals to locals who wish to avoid thecongestion of the Strip.  Terrible’sfavorable location has made it popular with Strip casino employees.  Although we are not a tourist destination, wereceive a certain amount of tourist traffic through our casino due to ourlocation near the airport, the Strip and the Las Vegas Convention Center.

### *Terrible’s Lakeside Casino Resort*

Lakeside Iowa, a riverboat casino located on West Lake in Osceola,Iowa, is a facility that opened in January 2000.  Lakeside Iowa offers a 60 room,all-suite hotel, modular conference and meeting facilities that can seatup to 900 people and that are used for meetings, banquets and concerts, afitness center, an outdoor pool and a gift shop.  In addition, Lakeside Iowa offers a newlyrenovated 280-seat restaurant/buffet and lounge located in the main lobby, twobars located in the casino, a convenience store and gas station that arelocated adjacent to the casino and 47 RV spaces with utility hookups.  Lakeside Iowa owns 121 acres of land, 88acres of which are undeveloped.

### *Terrible’s Mark Twain Casino*

Mark Twain, located in a man-made basin adjacent to the MississippiRiver in LaGrange, Missouri, is facility that opened in July 2001.  Mark Twain offers a 165-seat restaurant, an80-seat bar and an additional bar in the casino.  The casino has a locally popular theme basedon Mark Twain, who grew up in and wrote about nearby Hannibal, Missouri.

### *Terrible’s St. Jo Frontier Casino*

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

*Rail City Casino*

Rail City has approximately 16,600 square feet of gaming space housing622 slots, 7 table games, including keno, a sports book operated by anindependent party, a 24-hour family-style restaurant and a bar. Rail City’scustomer base comes primarily from northern Nevada and a majority of itscustomers reside in close proximity to the casino. The casino is currentlyundergoing an expansion that will add over 200 new slot machines as well as anew bar and restaurant.  The renovationbegan in the fourth quarter of 2006 and is expected to be completed early inthe second quarter of 2007.

*Sands Regency Casino Hotel*

The Sands has approximately 29,000 square feet of gaming space and afull selection of gaming alternatives, including 539 slot machines and 20 tablegames, including keno, bingo, live poker and a sports book operated by anindependent party. Additionally, the Sands resort complex has 833 hotel rooms,including 29 suites, a health spa, and a large outdoor swimming pool. Diningoptions at the Sands include Cabana Café, a coffee house/deli-style restaurant,The Buffet at the Sands, and Fuzio’s, a new Italian restaurant, that isscheduled to open in the first quarter of 2007. The property also has a Mels,the Original, diner style restaurant, and an Arby’s restaurant, both of whichare operated by third-parties. The facility also includes an entertainmentcabaret, three cocktail

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lounges, a comedy club operated by a third party andapproximately 12,000 square feet of convention and meeting space. Third-partieslease space from the Sands and operate a wedding chapel, a bicycle and skirental shop, and a beauty shop. The Sands facility contains multiple parkingareas, including a parking garage, with total combined capacity forapproximately 1,100 vehicles. A substantial portion of the Sands business,particularly our hotel customer base, is arranged through travel groups, bothair and motor coach wholesalers, which offer economy rates, and are primarilyfrom Western Canada, the Pacific Northwest and Northern California.

*Gold Ranch Casino and RV Resort*

As of January 3, 2007, we own the business assets and lease the realproperty on which the Gold Ranch is located. The real property lease has atwenty-year term with four five-year extension options ending in 2042. Wepossess the option to purchase the real property on which the Gold Ranch islocated. Gold Ranch offers approximately 245 slot machines in an 8,370 squarefoot casino, a sports book operated by a third party, a family-stylerestaurant, a Jack-in-the-Box restaurant leased to and operated by athird-party, a bar, a 105-space RV park, a California lottery station, an ARCOgas station, and a convenience store. Gold Ranch’s guests include both touristsand local residents with local residents generating over half of the property’scasino patronage. Gold Ranch attempts to attract local residents through mid-weekpromotions geared toward enhancing local play mainly through lottery, casino,and restaurant programs. Tourist programs emphasize the RV Park, casino andrestaurant cross-promotions. Gold Ranch attempts to attract as much traffic aspossible off Interstate 80, the major Nevada/California thoroughfare.

*Dayton Depot Casino and Red Hawk Sports Bar*

As of January 3, 2007, we own Depot Casino and Red Hawk, each of whichis located  in Dayton, Nevada.  This ownership includes, with respect to theDepot Casino, the two buildings that house the Depot Casino and the 4.5 acresof real property on which the Depot Casino is located, and, with respect to RedHawk, the building which houses the Red Hawk and the 0.5 acres of real propertyon which the Red Hawk is located. Depot Casino has 16,000 square feet of casinospace, a family-style restaurant, two bars, 237 slot machines and a sports bookoperated by a third party. Red Hawk, located across Highway 50 from DepotCasino, houses 30 slot machines.

**Financial Information**

The primary source of our revenue and income is from our route andcasino operations, although we view the restaurants, bars and services on ourpremises to be important adjuncts to our casino operations.  The following table sets forth thecontribution to total net revenues on a dollar and percentage basis of ourmajor activities for the years ended December 31, 2004, 2005 and 2006.
| ** **                      | ** ** | **Years Ended December 31,**           | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                              | ** ** | **2005(1)** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Amount**                                            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Revenues:                       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Route operations(2)             |       | $                                                     | 293,244    |   | 78.0 | % | $ | 338,599 |   | 63.2 | % | $ | 347,041 |   | 61.7 | % |
| Casino operations(2)            |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Nevada                          |       | 91,254                                                |       | 24.3 |   | 95,400 |   | 17.8 |   | 95,614 |   | 17.0 |   |
| Other states                    |       | —                                                |       | — |   | 117,475 |   | 21.9 |   | 140,909 |   | 25.1 |   |
| Other                           |       | 3,628                                                 |       | 1.0 |   | 6,024 |   | 1.1 |   | 11,202 |   | 2.0 |   |
| Total  revenues(3)              |       | 388,126                                               |       | 103.3 |   | 557,498 |   | 104.0 |   | 594,766 |   | 105.8 |   |
| Less promotional  allowances(2) |       | (12,514                                               | )          | (3.3 | ) | (21,657 | ) | (4.0 | ) | (32,703 | ) | (5.8 | ) |
| Total net revenues              |       | $                                                     | 375,612    |   | 100.0 | % | $ | 535,841 |   | 100.0 | % | $ | 562,063 |   | 100.0 | % |

 

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(1)          Calendar year 2005 reflects a partialyear of operations of the casinos purchased pursuant to the acquisition of ourcasinos located outside of Nevada from Grace Entertainment, Inc. (the “GraceAcquisition”) in February 2005.  Asa result, the results of operations for calendar year 2005 may not becomparable to the results of operations in 2004 or 2006.

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(2)          Route and casino revenues are the netdifference between gaming wins and losses. Promotional allowances consist primarily of food and beverages furnishedgratuitously to customers.  The retailvalue of such services is included in the respective revenue classificationsand is then deducted as promotional allowances. See “Note 1.  Description ofBusiness and Summary of Significant Accounting Policies” to the accompanyingconsolidated financial statements in “Item 8. Financial Statements and Supplementary Data”.

(3)          Does not include interest income.

See “Item 8.  FinancialStatements and Supplementary Data” for additional financial information aboutus.

**Marketing**

*Nevada Market*

Since we believe that a vast majority of our patrons at our casinos insouthern Nevada are locals, our marketing efforts are primarily focused on thelocal population of Clark County, Nevada. These marketing efforts seek tocapitalize on the strong recognition and high level of quality and valueassociated with the Terrible Herbst trade name and its cowboy logo, which areused in over 80 gasoline stations and convenience stores in southern Nevada and9 gasoline stations and convenience stores in California and Arizona.  The Terrible Herbst brand is prominentlydisplayed in our route and casino operations. We license the Terrible Herbst trade name from TerribleHerbst, Inc., a related party, through 2011.  Subject to mutual consent, we may extendthe term of the agreement for two successive 5-year periods.

In addition, we have implemented a unique players club that rewardscustomers with points for playing at our route and casino locations, as well asfor purchases made at Terrible Herbst gas stations and convenience stores inthe Las Vegas area.  Points may beredeemed for cash as well as free or discounted rooms, food or other goods orservices provided at any such location.

The customer base of the casinos we acquired pursuant to the SandsRegent Acquisition ranges from locals living in northern Nevada, in the case ofRail City, to customers from Western Canada, the Pacific Northwest and NorthernCalifornia, in the case of the Sands. The marketing efforts for the SandsRegent Casinos prior to our acquisition were primarily focused on attractinglocals and value-minded out-of-market visitors through aggressive promotionsand customer loyalty programs.  We expectto continue this focus through the adoption of a players club points programthat is similar to those that have proven successful at our other casinos.

*Midwest Market*

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

**Business Strategy**

Our business strategy focuses on attracting and fostering repeatbusiness from local gaming patrons in both our route and casinooperations.  Local patrons are typicallysophisticated gaming customers who seek convenient locations, high payouts anda pleasant atmosphere.  Because localgaming consumers represent high potential repeat business, generating customersatisfaction and loyalty is a critical component of our strategy.

***Route Operations***

We believe that route patrons choose to play slot machines near their homes.  We attract and retain these players byinstalling state-of-the-art slot machines with popular games, offering a highlevel of customer service and

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providing an attractive, comfortable atmosphere at ourroute locations.  We actively manage ourroute locations as if they were casinos. For example, we extend patrons’ slot play by offering free snacks andbeverages at some of our route locations. We place our gaming machines in locations where they will receivemaximum customer traffic, generally near a store’s entrance.  In addition, we utilize a game trackingsystem and other technology to monitor the play of our patrons.  Upon reviewing and analyzing our customerplay, we adjust the types of games available.

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

***Casino Operations***

Our casino operations strategy is to offer high quality gaming, hoteland dining experiences at affordable prices. Our primary target market consists of value oriented local middle marketgaming patrons who gamble frequently.  Webelieve that we attract our targeted customers and that they return to our casinosbecause of our convenient locations, great food, ample parking and high slotmachine payout rates.  Because localsdemand variety and quality in their slot and video poker machine play, ourcasino properties offer the latest in slot and video poker technology.  Although perceived value initially attracts acustomer to our casino properties, actual value generates customer satisfactionand loyalty.

As part of our commitment to providing a quality entertainmentexperience for our patrons, we are dedicated to ensuring a high level ofcustomer satisfaction and loyalty by providing attentive customer service in afriendly, casual atmosphere.  Werecognize that consistent quality and a comfortable atmosphere stem from thecollective care and friendliness of each employee.

**Competition**

***Nevada Market***

Our slot route operations are subject to substantial direct competitionfor our revenue-sharing and fixed space lease locations from one large routeoperator and numerous small operators, located principally in Las Vegas,Nevada.  The principal method ofcompetition for slot route operators includes the economic terms of therevenue-sharing or space lease arrangement, the services provided and thereputation of the route operator.  Pricecompetition for revenue-sharing or space lease arrangements is intense and webelieve that price competition among slot route operators will continue.  We are one of the largest route operatorswith approximately 7,200 slot machines situated in locations outside of ourcasinos as of December 31, 2006.

With respect to our casino operations in Las Vegas, Terrible’sHotel & Casino competes for local gaming customers with otherlocals-oriented casino-hotels in Las Vegas. We do not believe that we are in direct competition with many of theresort-casino properties on the Las Vegas Strip, which focus primarily onattracting tourist players.  Instead, webelieve that our principal competitors in our casino operations are the twoother local casinos located within a one mile radius.  We compete with these properties on the basisof the desirability of location, payout rates, personalized approach, casinopromotions, comfort and value of restaurants and hotel rooms and the varietyand value of entertainment.  Theconstruction of new casinos or the expansion of existing casinos near ourcasinos could have a negative impact on our casino operations.

Our casino operations in Pahrump, Henderson, and Searchlight, Nevadaface competition from other casinos located in the vicinity of theseproperties.

Competition among casinos in the markets in which the Sands RegentCasinos are located, particularly the Reno/Sparks market, is intense. Theexpansion and maturation of Native American gaming in Northern California, thePacific Northwest, and British Columbia has had an adverse impact on totalgaming revenues of the greater Reno

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area. Over the last few years, existing NativeAmerican casinos in Northern California have undergone significant expansionsand now offer most of the amenities that casinos in Reno offer, including bigname entertainment and hotel rooms. In addition, Thunder Valley, on theInterstate-80 corridor in California has grown to be one of the country’sbusiest and most profitable casinos. More Native American casinos andexpansions to existing casinos are planned in northern California and many arepartnering with existing gaming companies that have financial resources topromote their facilities.  Many of ourdirect competitors in the Reno market have greater financial and otherresources than we do.

***Midwest Market***

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

Lakeside Iowa is located along Interstate 35, approximately 40 milessouthwest of Des Moines, Iowa.  Theprimary competitors of Lakeside Iowa are Prairie Meadows racino and theMeskwaki Bingo Casino Hotel.  The PrairieMeadows racino is located approximately 60 miles from Lakeside Iowa east of DesMoines.  The Meskwaki Bingo Casino Hotelis located in Tama, Iowa and is approximately 110 miles from LakesideIowa.  Riverside Casino and Golf Resort,a new casino that opened in 2006 in Riverside, Iowa, is approximately 175 milesfrom Osceola.

Mark Twain is the only casino in northeast Missouri and is approximately15 miles from Quincy, Illinois and approximately 25 miles from Hannibal,Missouri. The closest casino to Mark Twain is the Catfish Bend Casino, whichspends the summer docked in Fort Madison, Iowa and spends the winter docked inBurlington, Iowa, which are approximately 55 miles and 75 miles, respectively,from LaGrange.

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

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

**Seasonality**

We do not believe that our business as a whole is seasonal to anysignificant degree.  However, our casinosin the Midwest and in northern Nevada do experience some business interruptionduring the winter months.

**Environmental Laws**

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

**Employees**

As of December 31, 2006, we employed approximately 3,300employees.  None of our current employeesis or will be covered by a collective bargaining agreement.  We believe that our relationship with ouremployees is good.

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**Regulation And Licensing**

***Nevada***

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

Our gaming operations are subject to the licensing and regulatorycontrol of the Nevada Gaming Commission, the Nevada State Gaming Control Board,the Clark County Liquor and Gaming Licensing Board, and the Cities of LasVegas, Reno, Henderson and other local regulatory authorities, or the NevadaGaming Authorities.

The laws, regulations and supervisory procedures of the Nevada GamingAuthorities are based upon declarations of public policy which are concernedwith, among other things:

·                  the preventionof unsavory or unsuitable persons from having a direct or indirect involvementwith gaming at any time or in any capacity;

·                  theestablishment and maintenance of responsible accounting practices andprocedures;

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

·                  the preventionof cheating and fraudulent practices; and

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

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

Corporations and other entities that operate casinos or slot routes inNevada are required to be licensed by the Nevada Gaming Authorities.  A gaming license for such activities requiresthe periodic payment of fees and taxes and is not transferable.  Herbst Gaming is registered by the NevadaGaming Commission as a publicly traded corporation (a “registeredcorporation”).  As a registeredcorporation, we are required periodically to submit detailed financial andoperating reports to the Nevada Gaming Commission and furnish any otherinformation that the Nevada Gaming Commission may require.  Herbst Gaming has been found suitable by theNevada Gaming Commission to own the stock of ETT, which is licensed by theNevada Gaming Commission as a casino and slot route operator, MarketGaming, Inc., which is licensed as a slot route operator, and FlamingoParadise Gaming, LLC, which is licensed as a casino operator.  ETT is also registered by the Nevada GamingCommission as an intermediary holding company (the “Intermediary Company”) andhas been found suitable to own the stock of Corral Country Coin, Inc.,Cardivan Company, and Corral Coin, Inc., all of which are licensed by theNevada Gaming Authorities as slot route operators (all of the foregoing,including Market Gaming, Inc., and Flamingo Paradise Gaming, LLC, arereferred to as the “Gaming Subsidiaries”). No person may become a stockholder of, or receive any percentage ofthe profits from, the Intermediary Company or any of the Gaming Subsidiarieswithout first obtaining licenses and approvals from the Nevada GamingAuthorities.  Herbst Gaming, theIntermediary Company, and all of the Gaming Subsidiaries have obtained from theNevada Gaming Authorities the various registrations, approvals, permits and licensesrequired in order to engage in gaming activities in Nevada.

The Nevada Gaming Authorities may investigate any individual whohas a material relationship to, or material involvement with, Herbst Gaming,the Intermediary Company or the Gaming Subsidiaries in order to determinewhether such individual is suitable or should be licensed as a businessassociate of a gaming licensee. Officers, directors and certain key employees of Herbst Gaming, theIntermediary Company, and the Gaming Subsidiaries must file applications withthe Nevada Gaming Authorities and are required to be licensed by the

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Nevada Gaming Authorities.  The Nevada Gaming Authorities may denyan application for licensing for any cause that they deem reasonable.  A finding of suitability is comparable tolicensing, and both require submission of detailed personal and financialinformation followed by a thorough investigation.  Changes in licensed positions must bereported to the Nevada Gaming Authorities, and, in addition to their authorityto deny an application for a finding of suitability or licensure, the NevadaGaming Authorities have jurisdiction to disapprove a change in a corporateposition.

If the Nevada Gaming Authorities were to find an officer, director orkey employee unsuitable for licensing or unsuitable to continue having arelationship with us, we would have to sever all relationships with thatperson.  In addition, the Nevada GamingCommission may require us to terminate the employment of any person whorefuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensingare not subject to judicial review in Nevada.

Herbst Gaming, the Intermediary Company, and the Gaming Subsidiariesare required to submit detailed financial and operating reports to the NevadaGaming Commission.  Substantially allmaterial loans, leases, sales of securities and similar financing transactionsby Herbst Gaming, the Intermediary Company and the Gaming Subsidiaries must bereported to the Nevada Gaming Commission.

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

Any beneficial holder of Herbst Gaming’s voting securities, regardlessof the number of shares owned, may be required to file an application, beinvestigated, and have his suitability as a beneficial holder of HerbstGaming’s voting securities determined if the Nevada Gaming Commission hasreason to believe that such ownership would otherwise be inconsistent with thedeclared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the NevadaGaming Authorities in conducting such investigation.

Although we do not intend to register or sell any equity securities,Nevada law requires any person who acquires more than 5% of a registeredcorporation’s voting securities to report the acquisition to the Nevada GamingCommission.  Nevada law requires thatbeneficial owners of more than 10% of a registered corporation’s votingsecurities apply to the Nevada Gaming Commission for a finding of suitabilitywithin 30 days after the Chairman of the Nevada State Gaming Control Boardmails the written notice requiring the filing for a finding ofsuitability.  Under certaincircumstances, an “institutional investor,” as defined in the regulations ofthe Nevada Gaming Commission, which acquires more than 10%, but not more than15%, of our voting securities may apply to the Nevada Gaming Commissionfor a waiver of such finding of suitability if that institutional investorholds the voting securities for investment purposes only.  An institutional investor will not be deemedto hold voting securities for investment purposes unless the voting securitieswere acquired and are held in the ordinary course of business as aninstitutional investor and not for the purpose of causing, directly orindirectly, the election of a majority of the members of our board ofdirectors, any change in our corporate charter, bylaws, management, policies oroperations, or any of our gaming affiliates, or any other action which theNevada Gaming Commission finds to be inconsistent with holding our votingsecurities for investment purposes only. Activities which are not deemed to be inconsistent with holding votingsecurities for investment purposes only include:

·                  voting on allmatters voted on by stockholders;

·                  making financialand other inquiries of management of the type normally made by securitiesanalysts for informational purposes and not to cause a change in itsmanagement, policies or operations; and

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·                  other activitiesas the Nevada Gaming Commission may determine to be consistent with suchinvestment intent.

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

Any person who fails or refuses to apply for a finding of suitabilityor a license within 30 days after being ordered to do so by the Nevada GamingCommission or the Chairman of the Nevada State Gaming Control Board,may be found unsuitable.  The samerestrictions apply to a record owner if the record owner, after request, failsto identify the beneficial owner.  Anystockholder found unsuitable and who holds, directly or indirectly, anybeneficial ownership of the common stock of a registered corporation beyond theperiod of time as may be prescribed by the Nevada Gaming Commissionmay be guilty of a criminal offense. Herbst Gaming, the Intermediary Company or the Gaming Subsidiariesmay become subject to disciplinary action if, after receipt of notice thata person is unsuitable to be a stockholder or to have any other relationshipwith Herbst Gaming, the Intermediary Company or the Gaming Subsidiaries, HerbstGaming:

·                  pays that personany dividend or interest upon voting securities;

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

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

·                  fails to pursue all lawful efforts to requirethe unsuitable person to relinquish his voting securities for cash at fairmarket value.

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

Herbst Gaming may be required to disclose to the Nevada StateGaming Control Board and the Nevada Gaming Commission the identities of allholders of its debt securities.  TheNevada Gaming Commission may, in its discretion, require the holder of any debtsecurity of a registered corporation to file applications, be investigated andbe found suitable to own the debt security of a registered corporation.  If the Nevada Gaming Commission determinesthat a person is unsuitable to own a debt security, then pursuant to Nevadalaw, the registered corporation can be sanctioned, including the loss of itsapprovals, if without the prior approval of the Nevada Gaming Commission, it:

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

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

·                  pays theunsuitable person remuneration in any form; or

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

Herbst Gaming is required to maintain a current ledger in Nevada, whichmay be examined by the Nevada Gaming Authorities at any time.  If any securities are held in trust by anagent or by a nominee, the record holder may be required to disclose theidentity of the beneficial holder to the Nevada Gaming Authorities.  A failure to make such disclosure may begrounds for finding the record holder unsuitable.  We are also required to render maximumassistance in determining the identity of the beneficial owner.  The Nevada Gaming Commission has the power torequire our securities to bear a legend indicating that the securities aresubject to the Nevada Act.  However, todate, the Nevada Gaming Commission has not imposed such a requirement on HerbstGaming.

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Herbst Gaming may not make a public offering of securities withoutthe prior approval of the Nevada Gaming Commission if the securities orproceeds from the securities are intended to be used to construct, acquire orfinance gaming facilities in Nevada, or to retire or extend obligationsincurred for the purposes of constructing, acquiring or financing gamingfacilities.  Furthermore, any approval,if granted, does not constitute a finding, recommendation or approval by theNevada Gaming Commission or the Nevada State Gaming Control Board as to theaccuracy or adequacy of the prospectus or the investment merits of thesecurities offered.  Any representationto the contrary is unlawful.

Changes in the control of Herbst Gaming through merger, consolidation,stock or asset acquisitions, management or consulting agreements, or any act orconduct by a person whereby that person obtains control (including foreclosureon the pledged shares), may not occur without the prior approval of theNevada Gaming Commission.  Entitiesseeking to acquire control or ownership of a registered corporation mustsatisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in avariety of stringent standards prior to assuming control of such registeredcorporation.  The Nevada GamingCommission may also require the stockholders, officers, directors andother persons having a material relationship or involvement with the entityproposing to acquire control, to be investigated and licensed as part ofthe approval process relating to the transaction.

License fees and taxes, computed in various ways depending on the typeof gaming or activity involved, are payable to the State of Nevada and to thecounties and cities in which the Nevada licensee’s respective operations areconducted.  Depending upon the particularfee or tax involved, these fees and taxes are payable either monthly, quarterlyor annually and are based upon either:

·                  a percentage ofthe gross revenues received;

·                  the number ofgaming devices operated; or

·                  the number oftable games operated.

Any person who is licensed, required to be licensed, registered,required to be registered, or is under common control with such persons, orLicensees, and who is or who proposes to become involved in a gaming ventureoutside of Nevada, is required to deposit with the Nevada State Gaming ControlBoard, and thereafter maintain, a revolving fund in the amount of $10,000 topay the expenses of investigation by the Nevada State Gaming Control Board ofthe Licensees’ participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretionof the Nevada Gaming Commission. Thereafter, Licensees are also required to comply with certain reportingrequirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada GamingCommission if they knowingly violate any laws of the foreign jurisdictionpertaining to a foreign gaming operation, fail to conduct the foreign gamingoperation in accordance with the standards of honesty and integrity required ofNevada gaming operations, engage in activities or enter into associations thatare harmful to the State of Nevada or its ability to collect gaming taxes andfees, or employ, contract with or associate with a person in the foreignoperation who has been denied a license or a finding of suitability in Nevadaon the ground of personal unsuitability.

***Missouri***

On November 3, 1992, a statewide referendum authorized gaming inthe State of Missouri on the Missouri and the Mississippi Rivers.  On April 29, 1993, Missouri enactedrevised legislation (as amended, the “Missouri Gaming Law”) which amended theexisting legislation.  In a decisionhanded down on January 25, 1994, the Missouri Supreme Court held thatgames of chance were prohibited under the Missouri constitution.  In a statewide election held onNovember 8, 1994, Missouri voters approved the adoption of an amendment tothe Missouri Constitution which permits the legislature to allow games ofchance to be conducted on excursion boats and floating facilities on theMississippi River and the Missouri River. As a result of the amendment, games of chance are also permitted,subject to Missouri Gaming Law.  Pursuantto the Missouri Gaming Law, there are eleven operating riverboat gamingfacility sites in Missouri: one in Caruthersville; one in Boonville; three inthe St. Louis area; four in the Kansas City area; one in LaGrange; and one inSt. Joseph.

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

Under the Missouri Gaming Law, the ownership and operation of riverboatgaming facilities in Missouri are subject to extensive state and localregulation.  Herbst Gaming,HGI—St. Jo, Inc., the subsidiary of Herbst Gaming that owns St. Joand the current licensee and HGI—Mark Twain, Inc., the subsidiary of HerbstGaming that owns Mark Twain and the current licensee, any subsidiaries, andsome of their officers and employees are and will be subject to specificregulations, including ongoing licensing requirements.  As part of the application and licensingprocess for a gaming license, the applicant must submit detailed financial,operating and other reports to the Missouri Gaming Commission.  Each applicant has an ongoing duty to updatethe information provided to the Missouri Gaming Commission in the application,usually within seven days of a material change in the information on file withthe Missouri Gaming Commission.  Each ofSt. Jo and Mark Twain have frequently updated its application materialssince it was initially licensed.  Inaddition to the information required of the applicant, directors, officers,affiliated business entities and other defined “key persons” (which includeindividuals and companies designated by the Missouri Gaming Commission) mustsubmit Personal Disclosure Forms, which include detailed financial information,and are subject to thorough investigations. In addition, some officers and directors of Herbst Gaming, as well asHerbst Gaming itself, have submitted Personal Disclosure Forms and applicationsto the Missouri Gaming Commission.  Allgaming employees must obtain an occupational license issued by the MissouriGaming Commission.  Suppliers are alsosubject to licensing requirements of the Missouri Gaming Commission.

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

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

·                  suitabilityinvestigations into each designated key person or affiliated business entity’scharacter, financial responsibility, experience and qualifications;

·                  disclosure ofrequired financial (see above) and other personal information on each keyperson or designated affiliated business entity;

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

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

·                  an economicdevelopment or impact report.

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

The Missouri Gaming Law and implementing regulations imposerestrictions on the use of and do not permit the transfer of the gaminglicenses as well as limitations on transactions engaged in by licensees.  The licenses issued by the Missouri GamingCommission may not be transferred nor pledged as collateral.  The Missouri

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Gaming Law regulations bar a licensee from taking anyof the following actions without prior notice to, and approval by, the MissouriGaming Commission:

·                  any transfer orissuance of an ownership interest in a gaming licensee that is not a publiclyheld company;

·                  any transfer orissuance of an ownership interest of five percent or more of the issued andoutstanding ownership interest of Herbst Gaming which is publicly traded and isa holding company;

·                  any privateincurrence of debt by the licensee or any holding company of $1,000,000 ormore;

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

·                  defined“significant related party transactions.”

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

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

Missouri statutes and administrative rules contain detailedrequirements and conditions concerning the operation of a licensed excursiongaming boat facility, including but not limited to the following:

·                  a charge of twodollars per gaming customer per excursion that licensees must either collectfrom each customer or pay itself to the Missouri Gaming Commission;

·                  minimum payouts;

·                  the payment of a20% tax on adjusted gross receipts;

·                  prohibitions againstproviding credit to gaming customers;

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

·                  providingsecurity on the excursion gambling boat, including a requirement that eachlicensee reimburse the Missouri Gaming Commission for all costs of any MissouriGaming Commission staff, including Missouri Highway Patrol Officers, necessaryto protect the public on the licensee’s riverboat;

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

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

The Missouri Gaming Commission has the power, as well as broaddiscretion in exercising this power, to revoke or suspend gaming oroccupational licenses and impose other penalties for violations of the MissouriGaming Law and the rules and regulations promulgated thereunder, includingwithout limitation, forfeiture of all gaming equipment used for improper gamingand fines of up to three times a licensee’s highest daily gross receipts duringthe preceding twelve months.

Although the Missouri Gaming Law provides no limit on the amount ofriverboat space that may be used for gaming, the Missouri GamingCommission is empowered to impose space limitations through the adoption of

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rules and regulations.  In addition, the Missouri Gaming Law imposesas to each customer a $500 loss limit per two-hour period established by eachlicensee with the approval of the Missouri Gaming Commission.  In order to establish an excursion schedule,which allows patrons to enter and exit the gaming floor during the excursion,the licensee must prove to the satisfaction of the Missouri Gaming Commissionthat it can enforce the $500 loss limit.

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

***Iowa***

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

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

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

Iowa law permits gaming licensees to offer unlimited stakes gaming ongames approved by the Iowa Gaming Commission on a 24-hour basis.  Dockside casino gaming is authorized by theIowa Gaming Commission and the Iowa Legislature, subject to certain limitationsnot applicable to Lakeside Iowa, eliminated the requirement that gaminglicensees cruise, effective May 6, 2004. The legal age for gaming is 21.

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All Iowa excursion gambling boat licenses were approved for renewal ata March 1, 2007 meeting of the Iowa Gaming Commission.  These licenses are not transferable and willneed to be renewed annually and prior to the commencement of each subsequentannual renewal period.

The ownership and operation of gaming facilities in Iowa are subject toextensive state laws, regulations of the Iowa Gaming Commission and variouscounty and municipal ordinances (collectively, the “Iowa Gaming Laws”),concerning the responsibility, financial stability and character of gamingoperators and persons financially interested or involved in gamingoperations.  Iowa Gaming Laws seekto:  (1) prevent unsavory orunsuitable persons from having direct or indirect involvement with gaming atany time or in any capacity; (2) establish and maintain responsible accountingpractices and procedures; (3) maintain effective control over thefinancial practices of licensees (including the establishment of minimumprocedures for internal fiscal affairs, the safeguarding of assets andrevenues, the provision of reliable record keeping and the filing of periodicreports with the Iowa Gaming Commission); (4) prevent cheating andfraudulent practices; and (5) provide a source of state and local revenuesthrough taxation and licensing fees. Changes in Iowa Gaming Laws could have a material adverse effect on theIowa gaming operations.

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

Officers, directors, managers and employees of the Iowa gamingoperations are required to be licensed by the Iowa Gaming Commission.  Employees associated with gaming must obtaina license and these licenses are subject to immediate suspension under specificcircumstances.  In addition, anyonehaving a material relationship or involvement with the Iowa gaming operationsmay be required to be found suitable or to be licensed, in which case thosepersons would be required to pay the costs and fees of the Iowa GamingCommission in connection with the investigation.  The Iowa Gaming Commission may deny anapplication for a license for any cause deemed reasonable.  In addition to its authority to deny anapplication for license, the Iowa Gaming Commission has jurisdiction todisapprove a change in position by officers or key employees and the power torequire the Iowa gaming operations to suspend or dismiss officers, directors orother key employees or sever relationships with other persons who refuse tofile appropriate applications or whom the Iowa Gaming Commission findsunsuitable to act in such capacities.

The Iowa Gaming Commission may revoke a gaming license if thelicensee:

·                  has beensuspended from operating a gaming operation in another jurisdiction by a boardor commission of that jurisdiction;

·                  has failed todemonstrate financial responsibility sufficient to meet adequately therequirements of the gaming enterprise;

·                  is not the trueowner of the enterprise;

·                  has failed todisclose ownership of other persons in the enterprise;

·                  is a corporation10% of the stock of which is subject to a contract or option to purchase at anytime during the period for which the license was issued, unless the contract oroption was disclosed to the Iowa Gaming Commission and the Iowa GamingCommission approved the sale or transfer during the period of the license;

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

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

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·                  pleads guiltyto, or is convicted of, a felony;

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

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

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

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

The Iowa Gaming Commission may also require any individual who hasa material relationship with the Iowa gaming operations to be investigated andlicensed or found suitable.  The IowaGaming Commission, prior to the acquisition, must approve any person whoacquires 5% or more of a licensee’s equity securities in the event that approvalby the Iowa Gaming Commission is not otherwise contemplated by the operativeacquisition document.  The applicantstockholder is required to pay all costs of this investigation.

Gaming taxes approximating 22% of the adjusted gross receipts above$3,000,000 will be payable by each licensee on its operations to the State ofIowa.  In addition, there was a prepaidassessment due on June 1, 2005 and another prepaid assessment paid onJune 1, 2006, in an aggregate amount equal to 2.152% of each licensee’sestimated adjusted gross receipts for fiscal year 2004.  These assessments will be offset by futurestate gaming taxes paid by each licensee with a credit for 20% of theassessments paid allowed each year beginning July 1, 2010 for fiveconsecutive years.  The state of Iowa isalso reimbursed by the licensees for all costs associated with monitoring andenforcement by the Iowa Gaming Commission and the Iowa Department of CriminalInvestigation.

## **Item1A.  Risk Factors.**

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

***Risks Related to Our Company***

*Ouroperations have been adversely affected by the adoption of certain anti-smokingregulations.*

On November 7,2006, voters in Nevada passed Question 5, an initiative that prohibits smokingin indoor places of employment including, but not limited to, bars and tavernsthat serve food, grocery stores, malls and other retail establishments, andthat gives future control over smoking regulation to individual counties ormunicipalities.  The Company had supported a competing initiative whichbanned smoking in restaurants and other locations frequented by minors and vestedall future smoking regulation with the Nevada State Legislature. Since itsadoption, Question 5 has led to significant decreased patron play at our routelocations.  If we are not able to offsetsuch decreased patron play, or such patron play continues to decrease, theremay be a material adverse effect on our business, financial condition andresults of operations.

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*The success of our routeoperations is dependent on our ability to renew our contracts.*

We conduct our route operations under contracts with thirdparties.  Both contracts with chain andstreet customers are renewable at the option of the owner of the respectivechain store or street account.  As ourroute contracts expire, we are required to compete for renewals.  Although we have historically been able torenew our contracts, if we are unable to renew a material portion of our routecontracts because our competitors offer more favorable terms or for any otherreason, our business, financial condition and results of operations would beadversely affected.  We cannot assure youthat our current chain or street contracts will be renewed.

*We may experience aloss of market share.*

The gaming industry is highly competitive.  Our slot-route operations are subject tosubstantial direct competition for our revenue-sharing and fixed space leaselocations from one large route operator and numerous small operators, locatedprincipally in Las Vegas, Nevada.  Withrespect to our casino operations in Nevada, we compete for local gamingcustomers with other locals-oriented casino-hotels and other casinos located inthe vicinity of these properties.  Ourcasino operations in the Midwest face competitors that include land-basedcasinos, dockside casinos, riverboat casinos, casinos located on NativeAmerican reservations and racing and pari-mutuel operations.  If our competitors operate more successfully,if existing route operations or properties are enhanced or expanded, or ifadditional competitors are established in and around the locations in which weconduct business, we may lose market share.  In particular, the expansion of routeoperations or casino gaming in or near any geographic area from which weattract or expect to attract a significant number of our customers could have amaterial adverse effect on our business, financial condition and results ofoperations.

*Changes to applicable taxlaws could have a material adverse effect on our financial condition.*

We pay substantial taxes and fees in connection with our operations asa gaming company.  From time to time,federal, state and local legislators and other government officials haveproposed and adopted changes in tax laws, or in the administration of thoselaws affecting the gaming industry.  Itis not possible to determine the likelihood of changes in tax laws or in theadministration of those laws.  Ifadopted, changes to applicable tax laws could have a material adverse effect onour business, financial condition and results of operations.  For example, during the 2003 Nevada statelegislative session, there was an increase in the payroll taxes to 0.7% ofpayroll, an increase of the gross casino gaming taxes from 6.25% to 6.75% and a33% increase in fees imposed on the operation of slot machines located in arestricted location (15 machines or less). In addition, in April 2004, the Iowa state legislature approved anincrease on the maximum tax rate on gaming revenues of riverboat casinos from20% to 22%.

*We face extensiveregulation from gaming and other government authorities.*

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

In Nevada, the Nevada Gaming Commission could request that a statecourt appoint a supervisor to operate any non-restricted gaming establishmentoperated by us if the licenses held by us are revoked, suspended or otherwiselapse.  In such extraordinarycircumstances, earnings generated by gaming operations during a supervisor’s appointment(except for reasonable rental value) could be forfeited to the State ofNevada.  The occurrence of any of theseevents could have a material adverse effect on our business, financialcondition and results of operations.

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

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

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

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

*We depend upon our keyemployees and certain members of our management.*

Our success is substantially dependent upon the efforts and skills ofEdward J. Herbst, our chairman of the board, chief executive officer andpresident, and Mary E. Higgins, our chief financial officer.  We have entered into employment agreementswith Mr. Herbst through 2006 and Ms. Higgins through 2008.  These agreements automatically renew forsuccessive one-year periods unless sooner terminated or unless either party tothe respective agreements notifies the other in writing at least 60 days priorto the date the respective agreement is scheduled to expire.  If we were to lose the services rendered byeither of them, our operations could be adversely affected.  In addition, we compete with other potentialemployers for employees, and we may not succeed in hiring and retaining theexecutives and other employees that we need. An inability to hire quality employees could have a material adverseeffect on our business, financial condition and results of operations.

*Our executive officersand members of our board of directors own 100% of the company and conflicts ofinterests could arise.*

Edward, Timothy and Troy Herbst own all of the outstanding stock ofHerbst Gaming.  This concentration ofownership gives them the power to control the outcome of all matters requiringstockholder approval, including the election of all directors, and will givethem the power to hinder or delay a change of control of the Company.  In addition, Edward, Timothy and Troy Herbstare all officers and directors of Terrible Herbst, Inc., a company ownedby parties related to us.  We currentlyengage in transactions with Terrible Herbst, Inc. and plan to continue todo so in the future.  These related-partytransactions could lead to potential conflicts of interest.  See “Item 13. Certain Relationships and Related Transactions.”

*Thegaming operations and casinos owned by the Company may be adversely impacted ifthe economy of certain markets declines, which could lead to an adverse impacton the operations of the Company*.

Our properties in southern Nevada depend on our customers livingprincipally in southern Nevada, an area that has recently experiencedsignificant population growth.  However,we cannot be certain that this growth will continue.  In addition, these properties are to a largepart dependent on the economy of southern Nevada.  An economic downturn in southern Nevada couldhave a material adverse effect on our operating results, and we cannot assureyou that the economy in southern Nevada will continue to grow.

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

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The Sands Regentheavily markets to and relies upon business from Reno area residents.  Inrecent years, Reno has enjoyed robust business growth and has attracted anumber of technology, product distribution and marketing companies. Thesebusinesses have created jobs and helped fuel residential development, includingthe Reno metropolitan area. Should there be negative changes in the businessand job conditions in Reno, the locals business of The Sands Regent, which is asubstantial part of its overall business, could be adversely impacted, whichcould lead to an adverse impact on the overall results of the Company.

Our properties use significant amounts of electricity, natural gas andother forms of energy.  While noshortages of energy have been experienced, the substantial increases in thecost of electricity, natural gas and gasoline in the United States in general,and in southern and northern Nevada, south central Iowa and northeast andnorthwest Missouri in particular, may negatively affect our operating results.  In addition, further energy price increasesin such areas could result in a decline in disposable income of potentialcustomers and a corresponding decrease in visitation and spending at our routeand casino operations, which could negatively impact revenues.  Gaming industry revenues are sensitive togeneral economic conditions and are influenced by consumer confidence in theeconomy and other factors.  An extendedperiod of reduced discretionary spending could significantly harm ouroperations and we may not be able to lower our costs rapidly enough, or atall, to offset a decrease in revenues.

*Thebusiness of The Sands Regent may be adversely impacted by expanded NativeAmerican gaming operations in California and the Pacific Northwest, which couldlead to an adverse impact on the operations of the Company.*

The largestsources of tourist customers for casinos owned by The Sands Regent areCalifornia and the Pacific Northwest, including a large number who drive toReno from the San Francisco and Sacramento metropolitan areas.  Theexpansion of Native American casinos in California, Oregon and Washingtoncontinues to have an impact on casino revenues in Nevada in general, and someanalysts have predicted the impact will be significant on the Reno-Tahoemarket.

For example,Thunder Valley Casino, a large new Native American casino managed by StationCasinos, Inc., opened June 9, 2003, 110 miles west of Reno in Rocklin,California. California’s well-documented budgetary problems have stateofficials in active negotiations to renegotiate certain compacts with NativeAmerican tribes.  Some Native American casino compacts have already beenchanged to allow for additional slot machines.  The effect of increasedgaming in California and other states is difficult to predict. However, thebusiness of The Sands Regent would be adversely impacted if Thunder Valley andother casinos attract patrons who would otherwise travel to Reno. In addition,a significant portion of The Sands Regent’s customer base is made up of Renoarea residents. If other Reno area casinos lose business due to competitionfrom Native American casinos, they may intensify their marketing efforts toReno area residents as well, which could materially and adversely impact thebusiness and financial results of The Sands Regent and thereby the overallbusiness and financial results of the Company.

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*Adversewinter weather conditions in the Sierra Nevada Mountains and Reno-Lake Tahoearea could have a material adverse effect on the results of operations andfinancial condition of The Sands Regent, which could lead to an adverse impacton the results of operation and financial condition of the Company.*

Adverse winterweather conditions, particularly snowfall, can deter customers of The SandsRegent from traveling or make it difficult for them to frequent its facilities.Adverse winter weather would most significantly affect the drive-in customersof The Sands Regent from northern California and the Pacific Northwest. If the Reno area itself were to experience prolonged adverse winter weatherconditions, the results of operations and financial condition of The SandsRegent could also be materially adversely affected, thereby adversely affectingthe results of operations and financial condition of the Company in the eventthe Sands Regent Merger is consummated.

*We may be unable toobtain slot machines or related technology from our third party supplier on atimely, cost-effective basis.*

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

*Riverboats and docksidefacilities are subject to risks relating to weather or mechanical failure andmust comply with applicable regulations.*

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

Although not required to cruise, to the extent that the casino boat ofLakeside Iowa, the USS Osceola, cruises, it and the gaming and supportfacilities located on board must comply with U.S. Coast Guard requirements asto boat design, on-board facilities, equipment, personnel and safety orrequirements of state and local law, including the requirements of state gamingauthorities, or both.  If the USS Osceolafails to meet these requirements, we might be forced to stop operating LakesideIowa.  The USS Osceola must hold aCertificate of Inspection or must be approved by the American Bureau of Shippingfor stabilization and flotation, and may also be subject to local zoningand building codes, as well as additional requirements mandated by state law orby the gaming regulatory authority with jurisdiction over the facilities.  The U.S. Coast Guard requirements establishdesign standards, set limits on the operation of the cruising vessels andrequire individual licensing of all personnel involved with the operation ofthe cruising vessels.  Loss of aCertificate of Inspection or American Bureau of Shipping approval or otherapproval mandated by state law or by the gaming regulatory authority withrespect to the USS Osceola would preclude its use as a floating casino.

*Thefailure to achieve the anticipated benefits of the past or future acquisitioncould adversely impact our business.*

The Sands Regent Acquisition constitutes a material acquisition on thepart of the Company.  We will incur significant capitalized costs andcommit significant management time in integrating operations, information,communications and other systems, among other items, which will involve feesand expenses of professionals and consultants involved in completing theacquisition process, integrating technology and other transaction costsassociated with the purchase, including financial advisor, attorney, accountantand other fees.  However, despite the incurrence of such costs or thecommission of such resources, difficulties may arise due to factors such asintegrating personnel with disparate corporate cultures, reconciling differentinformation, communications and other systems and managing customerrelationships.  The failure to achieve the anticipated benefits of theSands Regent Acquisition could harm our business and results of operations.

We have spent and may continue to spend significant resourcesidentifying businesses to acquire.  Theefficient and effective integration of any businesses we acquire into ourorganization is critical to our growth. Our

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acquisitions of Lakeside Iowa, Mark Twain andSt. Jo, and any future acquisitions or mergers, involve numerous risksincluding difficulties in integrating the operations, technologies andpersonnel of the acquired companies, the diversion of management’s attentionfrom other business concerns and the potential loss of key employees of theacquired companies and businesses. Additional risks include:

·                  negative impactson employee morale and performance as a result of job changes andreassignments;

·                  difficultiesattracting key personnel;

·                  loss ofcustomers; and

·                  unanticipatedincompatibility of logistics, marketing and administration methods.

Failure to achieve the anticipated benefits of any of our past, pendingand future acquisitions or mergers or to successfully integrate the operationsof the companies we acquire could also harm our business, results of operationsand cash flows.  Additionally, we cannotassure you that we will not incur material charges in future quarters toreflect additional costs associated with any future acquisitions wemay make.

*As we expand our casinooperations into states other than Nevada, we will, among other things, incuradditional management costs, face different regulatory requirements and beaffected by different economic environments and tax laws, any of which couldadversely affect our business.*

Historically, our route and casino operations were located exclusivelyin Nevada.  However, the GraceAcquisition has resulted in casino operations in Iowa and Missouri.  In addition, in the future wemay consummate additional acquisitions outside of Nevada.  As we begin to expand our operations in otherstates, we will face risks that we would not have faced had our operationsremained solely in Nevada.  Certain aspectsinherent in maintaining operations in multiple jurisdictions could negativelyimpact our business results, including:

·                  costs anddifficulties in staffing and managing operations outside of Nevada;

·                  regulatoryrequirements and changes in regulatory requirements;

·                  local politicaland economic conditions; and

·                  changes toapplicable tax laws.

***Risks Related to Our Outstanding Indebtedness***

*Our substantialindebtedness could adversely affect our financial health and prevent us fromfulfilling our obligations under our outstanding indebtedness.*

We have a significant amount of indebtedness.  The following chart shows certain importantstatistics with respect to such indebtedness.
|                                            | ** ** | **As of and for the  Year ended  December 31, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands, except ratio)**                                         | ** ** |
| Long-term debt,  including current portion |       | $                                                                                       | 522,618    |   |
| Stockholders’  equity                 |       | 18,771                                                                                  |       |
| Ratio of earnings to  fixed charges(1)     |       | 2.0x                                                                                    |       |
|                                            |            |                                                                                         |            |  |

 

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

In addition, on January 3, 2007, we entered into asecond amended and restated credit agreement with Bank of America, as AdministrativeAgent, which provides for borrowings in an aggregate principal amount of $875million consisting of (1) a revolving credit facility in an aggregate principalamount of up to $175 million, (2) initial term B loans in an aggregateprincipal amount of $375 million (the “initial term B loans”) and (3) delaydraw term B loans in an aggregate principal amount of $325 million (the “delay draw term B loans”, and togetherwith the initial term B loans, the “termB loans”). We have the option to request further increases to suchfacilities under certain circumstances as set forth in the credit agreement.

The initial term B loans were funded on January 3,2007 to repay the previous facility balance and to finance the Sands RegentAcquisition. Proceeds from the delay draw term B loans on will be available tofinance the Primadonna Acquisition if and when it closes.

Our substantial indebtedness could have importantconsequences.  For example, it could:

·                  make it moredifficult to satisfy our obligations with respect to the instruments governingour outstanding indebtedness;

·                  increase ourvulnerability to general adverse economic and industry conditions;

·                  require us todedicate a substantial portion of our cash flow from operations to debtservice, thereby reducing the availability of our cash flow to fund workingcapital, capital expenditures and other general corporate purposes;

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

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

·                  limit, alongwith the financial and other restrictive covenants in our indebtedness, amongother things, our ability to borrow additional funds.

Furthermore, all of our indebtedness under our credit facility willbear interest at variable rates.  Ifthese rates were to increase significantly, our ability to borrow additionalfunds may be reduced and the risks related to our substantial indebtednesswould intensify.

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

The interest on revolving borrowings and on the term loan under ourcredit facility in effect as of December 31, 2006 is based on a floatingrate (a base rate or LIBOR, at our option), plus a leverage grid-based variableamount.  At December 31, 2006, theprincipal amount of the borrowings under such credit facility was approximately$193 million.  We cannot predict theinterest rate environment or guarantee that interest rates will not rise in thenear future.  A hypothetical 1.0%increase in LIBOR would result in an approximately $1.9 million annualincrease in interest expense.  Shouldinterest rates rise significantly, our ability to satisfy our obligations underthe instruments governing our outstanding indebtedness will be adverselyaffected.

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*Despite our significantindebtedness, we and our subsidiaries may still be able to incursubstantially more debt, which could further exacerbate the risks describedabove.*

We will have the right to incur substantial additional indebtedness inthe future.  The terms of our creditfacility and the indentures governing our indebtedness restrict our ability toincur additional indebtedness, but do not prohibit us from doing so.  Subject to satisfying the conditions forborrowing under our credit facility, we could borrow up to the committed amountin full.  If new debt is added to ourcurrent debt levels, the related risks that we now face could intensify.

*We will require asignificant amount of cash to service our indebtedness.  Our ability to generate cash depends on manyfactors beyond our control.*

Our ability to make payments on and to refinance our indebtedness, andto fund our operations will depend upon our ability to generate cash in thefuture.  This, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control. We cannot assure you that our business will generate sufficient cashflow from operations or that future borrowings will be available to us inamounts sufficient to enable us to pay our indebtedness, or to fund our otherliquidity needs.  In addition, if weconsummate significant acquisitions in the future, our cash requirementsmay increase significantly.  If weare unable to generate sufficient cash flow and are unable to refinance orextend outstanding borrowings, we may have to:

·                  reduce or delayplanned expansion and capital expenditures;

·                  sell assets;

·                  restructuredebt; or

·                  raise additionalcapital.

Furthermore, we may need to refinance all or a portion of our debton or before maturity.  We cannot assureyou that we will be able to refinance any of our debt on commercially reasonableterms or at all.

*Our indebtedness imposesrestrictive covenants on us.*

Our credit facility and the indentures governing our 8 1¤8% senior subordinated notes due2012 and our 7% senior subordinated notes due 2014 impose operational andfinancial restrictions on us and our subsidiaries.  The restrictions imposed under these debtinstruments include, among other obligations, limitation on our and oursubsidiaries’ ability to:

·                  incur additionaldebt;

·                  make payments onsubordinated obligations;

·                  make dividendsor distribution and repurchase stock;

·                  makeinvestments;

·                  grant liens onour property to secure debt;

·                  enter intocertain transactions with affiliates;

·                  sell assets orenter into mergers or consolidations;

·                  sell equityinterests in our subsidiaries;

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·                  create dividendand other payment restrictions affecting subsidiaries;

·                  change thenature of our lines of business;

·                  make capitalexpenditures; and

·                  designaterestricted and unrestricted subsidiaries.

Our credit facility imposes various customary affirmative covenants onus and our subsidiaries, including among others, reporting covenants, covenantsto maintain insurance, comply with laws, maintain properties and othercovenants customary in senior credit financings of this type.  In addition, our credit facility will requireus to comply with various restrictive financial covenants, including interestcoverage and debt to operating cash flow ratios, and capital spending limits.

Our ability to comply with these provisions may be affected bygeneral economic conditions, industry conditions, and other events beyond ourcontrol.  As a result, we cannot assureyou that we will be able to comply with these covenants.  Our failure to comply with the covenantscontained in the instruments governing our indebtedness, including our creditfacility and the indentures governing our outstanding senior subordinatednotes, including failure as a result of events beyond our control, could resultin an event of default, which could materially and adversely affect ouroperation results and our financial condition.

If there were an event of default under one of our debt instruments,the holders of the defaulted debt could cause all amounts outstanding withrespect to that debt to be due and payable, subject to applicable graceperiods.  This could triggercross-defaults under our other debt instruments.  We cannot assure you that our assets or cashflow would be sufficient to fully repay borrowings under our outstanding debtinstruments if accelerated upon an event of default, or that we would be ableto repay, refinance or restructure the payments on any of those debtinstruments.

## **Item 1B. Unresolved Staff Comments.**

None.

## **Item 2.****    Properties.**

Our principal properties consist of the following:

**Nevada**

***Company Headquarters and Warehouse.***

We lease a four-acre site in Las Vegas and own the 50,000 square footbuilding where our executive offices and operational headquarters arelocated.  This facility houses ourexecutive and administrative offices and is used for sub-assembly and warehousespace for our slot route operations.  Thelease between the Herbst Family Limited Partnership II, a Nevada limitedpartnership, and us ends on June 30, 2017, with options to renew the leasefor five additional successive terms of ten years each.

***Office Space and Convenience Store.***

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

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***Terrible’s Searchlight Casino.***

We lease the space in which Terrible’s Searchlight Casino is located inSearchlight, Nevada.  The space is leasedfrom Terrible Herbst, Inc. and the lease ends on June 30, 2022, withoptions to renew the lease for five additional successive terms of ten yearseach.

***Terrible’s Hotel & Casino.***

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

***Terrible’s Town Casino.***

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60miles from Las Vegas, comprises an approximately 30,000 square foot building onapproximately three acres.  We lease theland from the Herbst Family Limited Partnership I, a Nevada limited partnershipand a related party.  The lease expiredon June 30, 2006 and was extended for five additional years.  The new expiration is June 30, 2011.  We also have an option to further extend thelease for three additional successive terms of five years, meaning we canextend the lease through 2026.

***Terrible’s Lakeside Casino & RV Park.***

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

***Terrible’s Town Casino & Bowl.***

We lease the landand building on which our Terrible’s Town Casino & Bowl is located inHenderson, Nevada from an unrelated third party.  The lease ends on February 9, 2014, withoptions to renew the lease for five additional successive terms of ten yearseach.  We own a 0.8-acre lot adjacent toTerrible’s Town Casino & Bowl that we are holding for possible futuredevelopment.

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**Midwest**

*Lakeside Casino Resort.*

We own the land in Osceola, Iowa on which certain facilities ofLakeside Iowa are located, including the all-suite hotel, conventionfacilities, RV park and convenience store and own an additional 121 acres ofland adjacent to or nearby the casino. We lease the use of West Lake and certain real estate surrounding WestLake from the City of Osceola, Iowa.  Thelease ends on March 11, 2009.  Wealso have an option to further extend the lease for seven additional successiveterms of five years each.

***Mark Twain Casino.***

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

***St. Jo Frontier Casino.***

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

## **Item 3.****    Legal Proceedings.**

On February 17, 2006, the Clark County Circuit Court enteredjudgment of a jury verdict delivered against ETT for $4.2 million incompensatory damages and $10.1 million in punitive damages.  The jury verdict was lowered in a post trialruling from $10.1 million to $4.2 to match compensatory damages.  The verdict was delivered in connection withan action brought by the family of an individual that alleged that ETT hadnegligently retained and negligently supervised a temporary employee who in2001 stole a truck from ETT and, while drunk, hit and killed theindividual.  The Company believes theaward of compensatory and punitive damages against ETT, the liability of ETT,and the amount thereof, are not supportable in either law or in fact and plansto vigorously pursue all appropriate post-trial and other remedies, includingexercising its right to appeal.

From time to time, we are a party to various claims arising in thenormal course of business.  Managementbelieves, however, that there are no proceedings pending or threatened againstus which, if determined adversely, would have a material adverse effect on ourfinancial condition, results of operations or liquidity.

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

Not applicable.

# **PART II**

## **Item 5.****    Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

(a)           Market Information

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

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(b)           Holders

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

(c)           Dividends

Dividends of $12.1 million and $31.3 million were paid in respectof our outstanding common stock in fiscal 2005 and 2006, respectively.

Our credit agreement and the indentures governing our 81/8% senior subordinated notes due 2012 andour 7% senior subordinated notes due 2014 restrict our ability to declare ormake distributions on our capital shares. To date, the only distributions that we have made on our common stockare distributions permitted by the instruments governing our outstandingindebtedness.  Subject to contractualrestrictions contained in our credit facility and these indentures, any futuredeterminations as to the payment of dividends will be at the discretion of ourboard of directors, and will depend on our financial condition, results ofoperations, capital requirements, and such other factors as the board ofdirectors deems relevant.  See“Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations — Liquidity andCapital Resources” and “Item 8. Financial Statements and Supplementary Data — Notes to ConsolidatedFinancial Statements.”

## **Item 6.****    Selected Financial Data.**

We derived the selected consolidated financial data as of and for eachof the five years ended December 31, 2006 from our audited consolidatedfinancial statements, as of and for each of the three years ended December 31,2006, which are included elsewhere in this report.  In February 2003, we acquired the slotroute assets of Anchor Coin.  As aresult, the periods beginning on or after January 1, 2003 may not becomparable to prior years.  Similarly, inFebruary 2005, we consummated the Grace Acquisition, and as a result theperiod beginning on January 1, 2005 may not be comparable to prioryears.  The following table summarizescertain selected consolidated financial data, which you should read inconjunction with our consolidated financial statements and the related notescontained elsewhere in this report and under “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

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

30

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| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**                    | ** ** |
| Income statement  data:             |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                    |       | $                                          | 183,877    |   | $ | 241,833 |   | $ | 293,244 |   | $ | 338,599 |   | 347,041 |   |
| Casino operations                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                              |       | 72,498                                     |       | 78,342 |   | 91,254 |   | 95,400 |   | 95,614 |   |
| Other states                        |       | —                                     |       | — |   | — |   | 117,475 |   | 140,909 |   |
| Other                               |       | 3,078                                      |       | 3,049 |   | 3,628 |   | 6,024 |   | 11,202 |   |
| Total revenues                      |       | 259,453                                    |       | 323,224 |   | 388,126 |   | 557,498 |   | 594,766 |   |
| Promotional allowances—route   |       | (305                                       | )          | (371 | ) | (376 | ) | (223 | ) | (86 | ) |
| Promotional allowances—casino  |       | (9,497                                     | )          | (10,878 | ) | (12,138 | ) | (21,434 | ) | (32,617 | ) |
| Net revenues                        |       | 249,651                                    |       | 311,975 |   | 375,612 |   | 535,841 |   | 562,063 |   |
| Costs of  revenues:                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Route operations                    |       | 150,781                                    |       | 192,757 |   | 227,929 |   | 258,114 |   | 270,149 |   |
| Casino operations                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Nevada                              |       | 48,635                                     |       | 51,142 |   | 56,331 |   | 59,125 |   | 60,539 |   |
| Other states                        |       | —                                     |       | — |   | — |   | 79,239 |   | 87,852 |   |
| Depreciation and amortization       |       | 14,562                                     |       | 22,789 |   | 25,407 |   | 33,941 |   | 38,124 |   |
| General and administrative          |       | 10,812                                     |       | 12,514 |   | 14,366 |   | 15,217 |   | 18,448 |   |
| Other                               |       |                                       |       |   |   |   |   |   |   | 6,491 |   |
| Loss on retirement of assets        |       | —                                     |       | — |   | — |   | 3,360 |   | — |   |
| Loss on lease termination           |       | —                                     |       | — |   | 600 |   | — |   | — |   |
| Total costs and  expenses           |       | 224,790                                    |       | 279,202 |   | 324,633 |   | 448,996 |   | 481,603 |   |
| Income from  operations             |       | 24,861                                     |       | 32,773 |   | 50,979 |   | 86,845 |   | 80,460 |   |
| Interest income                     |       | 336                                        |       | 228 |   | 353 |   | 740 |   | 734 |   |
| Interest expense                    |       | (19,964                                    | )          | (24,525 | ) | (22,109 | ) | (36,532 | ) | (39,134 | ) |
| Loss on early retirement of debt(1) |       | —                                     |       | (267 | ) | (37,991 | ) | (221 | ) | — |   |
| Net income (loss)                   |       | $                                          | 5,233      |   | $ | 8,209 |   | $ | (8,768 | ) | $ | 50,832 |   | $ | 42,060 |   |
|                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                           | ** ** | **Year Ended December 31,**       | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2002**                                         | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands, except ratios)** | ** ** |
| Other data:                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Route  EBITDA(2)(3)                                  |       | $                                                | 32,791     |   | $ | 48,705 |   | $ | 64,939 |   | $ | 80,262 |   | $ | 76,808 |   |
| Casino  EBITDA(2)(4)                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Nevada(4)                                            |       | $                                                | 14,366     |   | $ | 16,322 |   | $ | 22,785 |   | $ | 23,747 |   | $ | 21,528 |   |
| Other states(4)                                      |       | —                                           |       | — |   | — |   | $ | 29,330 |   | $ | 33,986 |   |
| Net cash  provided by operating activities           |       | $                                                | 19,323     |   | $ | 34,997 |   | $ | 50,010 |   | $ | 92,204 |   | $ | 81,493 |   |
| Net cash used in  investing activities               |       | $                                                | (8,700     | ) | $ | (74,724 | ) | $ | (17,009 | ) | $ | (309,172 | ) | $ | (79,758 | ) |
| Net cash  provided by (used in) financing activities |       | $                                                | (338       | ) | $ | 38,722 |   | $ | 51,141 |   | $ | 152,645 |   | $ | (9,944 | ) |
| Capital  expenditures                                |       | 8,442                                            |       | 15,117 |   | 15,229 |   | 43,893 |   | 66,622 |   |
| Ratio of earnings to  fixed charges(5)               |       | 1.3                                              | x          | 1.3 | x | 2.3 | x | 2.4 | x | 2.0 | x |

 

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| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)**                    | ** ** |
| Balance sheet  data:                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents              |       | $                                          | 55,035     |   | $ | 54,030 |   | $ | 138,172 |   | $ | 73,849 |   | $ | 65,640 |   |
| Total assets                            |       | $                                          | 183,713    |   | $ | 237,068 |   | $ | 318,431 |   | $ | 534,930 |   | $ | 568,450 |   |
| Total debt(6)                           |       | $                                          | 167,941    |   | $ | 215,269 |   | $ | 333,412 |   | $ | 500,593 |   | $ | 522,618 |   |
| Stockholders’ equity  (deficiency) |       | $                                          | (1,235     | ) | $ | 1,554 |   | $ | (30,764 | ) | $ | 7,981 |   | $ | 18,771 |   |

 

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(1)         Consists of (a) a premium of$267,000 paid in conjunction with the repurchase of $2.0 million of oursenior secured notes in 2003, (b) a loss on early retirement of debt inJune 2004 which consisted of $31.3 million in a debt prepaymentpenalty and $6.7 million in unamortized loan fees and (c) a premiumof $221,000 paid to call the balance of our 10 3⁄4% notes in September 2005.

(2)         Route and Casino segment EBITDA arenon-GAAP measures but are used by management to measure segment profits andlosses in accordance with SFAS 131, “Disclosures about Segments of anEnterprise and Related Information”, and are calculated before allocation ofoverhead.  See “Note 12.  Business Segments” to the accompanyingconsolidated financial statements.

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

(4)         Casino segment EBITDA consists of netincome plus depreciation and amortization, interest expense, net of capitalizedinterest and costs associated with the retirement of assets.  Casino EBITDA for casinos in Nevada and otherstates are calculated before allocation of overhead.

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

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

## **Item 7.****    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

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

**Overview**

We are a diversified gaming company that focuses on two business lines:slot route operations and casino operations. At December 31, 2006, we owned and operated approximately 11,000slot machines.  Our route operations involvethe exclusive installation and operation of approximately 7,200 slot machines asof December 31, 2006 in strategic, high traffic, non-casino locations,such as grocery stores, drug stores, convenience stores, bars andrestaurants.  Our casino operationsconsist of eight casinos located in Nevada, Iowa and Missouri, all operatedunder the “Terrible’s” brand.

We generally enter into two types of route contracts.  With chain store customers, such asAlbertsons, Vons, Safeway, SavOn, Smith’s, Kmart, Terrible Herbst and Rite Aid,we pay a fixed monthly fee for each location in which we place slotmachines.  With our street accounts, suchas bars, restaurants and non-chain convenience stores, we share in the revenueson a percentage basis with the location owner.

Our revenues are primarily derived from gaming revenues, which includerevenues from slot machines and table games. Gaming revenues is generally defined as gaming wins less gaminglosses.  Our largest component ofrevenues is from our slot machines. Promotional allowances consist primarily of food and beverages furnished

32

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gratuitously to customers.  The retail value of such services is includedin the respective revenue classifications and is then deducted as promotionalallowance.  We calculate income fromoperations as net revenues less total operating costs and expenses.  Income from operations represents only thoseamounts that relate to our operations and excludes interest income, interestexpense, and other non-operating income and expenses.  Segment EBITDA consists of income fromsegment operations plus depreciation and amortization, and is calculated beforean allocation of overhead.

We have elected to be taxed under the provisions of Subchapter S of theInternal Revenue Code of 1986.  Underthose provisions, the owners of our company pay income taxes on our taxableincome.  Accordingly, a provision forincome taxes is not included in our financial data.

**Year 2006 Compared to Year 2005**
|                                    | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                         | ** ** | **(dollars in thousands)**         | ** ** |
| Slot route  revenue                |       | $                                            | 338,599    |                                         | 100.0      | % | $ | 347,041 |   | 100.0 | % |
| Promotional  allowances            |       | (223                                         | )          | 0.1                                          |       | (86 | ) | 0.0 |   |
| Direct expenses                    |       | (258,114                                     | )          | 76.2                                         |       | (270,149 | ) | 77.8 |   |
| EBITDA                             |       | 80,262                                       |       | 23.7                                         |       | 76,806 |   | 22.2 |   |
| Depreciation and  amortization     |       | (20,114                                      | )          | 5.9                                          |       | (21,431 | ) | 6.2 |   |
| Income from slot route  operations |       | $                                            | 60,148     |                                         | 17.8       | % | $ | 55,375 |   | 16.0 | % |

 

*Route Operations*

Route operations accounted for 58% of total revenues during the yearended December 31, 2006.  This was adecrease from 61% of total revenues for the year ended December 31,2005.  Total revenues from routeoperations were $347.0 million for the year ended December 31, 2006, anincrease of $8.4 million, or 2.0%, from $338.6 million for the yearended December 31, 2005.  Theincrease in route revenue was a result of increased number of games during2006.  At December 31, 2006, we wereoperating approximately 7,200 slot machines, which is 100 greater than the7,100 we operated at December 31, 2005.

Route operating costs were $270.1 million, or 78%, of route revenuesfor the year ended December 31, 2006. This compares to $258.1 million and 76% of route revenues for thesame period in 2005.  The increase inroute operating expenses was primarily associated with expenses that correlatewith increases in revenue such as participation costs and payroll. In addition,partly due to staff additions to our systems and operations departments,  payroll and insurance costs grew during theyear, which increase is unrelated to growth in revenue.

As a result of the increased expenses, Route EBITDA for the year endedDecember 31, 2006 was $76.8 million, a decrease of $3.5 million, or4%, from $80.3 million for the year ended December 31, 2005.

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*Casino Operations*
|                                | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Casino revenue                 |       | $                                            | 212,875    |                                         | 100.0      | % | $ | 236,523 |   | 100.0 | % |
| Promotional  allowances        |       | (21,434                                      | )          | 10.1                                         |       | (32,617 | ) | 13.8 |   |
| Direct expenses                |       | (138,364                                     | )          | 65.0                                         |       | (148,391 | ) | 62.7 |   |
| EBITDA                         |       | 53,077                                       |       | 24.9                                         |       | 55,515 |   | 23.5 |   |
| Depreciation and  amortization |       | (13,509                                      | )          | 6.3                                          |       | (16,375 | ) | 6.9 |   |
| Income from casino  operations |       | $                                            | 39,568     |                                         | 18.6       | % | $ | 39,140 |   | 16.6 | % |

 

Casino operations accounted for 40% of total revenues for the yearended December 31, 2006 and 38% of revenues for the year endedDecember 31, 2005.  Total revenuesderived from casino operations were $236.5 million for the year endedDecember 31, 2006, an increase of $23.6 million, or 11%, from $212.9 millionfor the year ended December 31, 2005. This increase was due to growth from the Midwest properties,  particularly at St. Jo and Lakeside Iowa,where we made extensive casino renovations.

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

As a result of the factors mentioned above, Casino EBITDA was $55.5million for the year ended December 31, 2006, an increase of $2.4 million,or 5%, from $53.1 million from the year ended December 31, 2005.

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

*Casino Operations —Nevada*
|                                | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Casino revenue                 |       | $                                            | 95,400     |                                         | 100.0      | % | $ | 95,614 |   | 100.0 | % |
| Promotional  allowances        |       | (12,528                                      | )          | 13.1                                         |       | (13,546 | ) | 14.2 |   |
| Direct expenses                |       | (59,125                                      | )          | 62.0                                         |       | (60,539 | ) | 63.3 |   |
| EBITDA                         |       | 23,747                                       |       | 24.9                                         |       | 21,529 |   | 22.5 |   |
| Depreciation and  amortization |       | (6,359                                       | )          | 6.7                                          |       | (6,408 | ) | 6.7 |   |
| Income from casino  operations |       | $                                            | 17,388     |                                         | 18.2       | % | $ | 15,121 |   | 15.8 | % |

 

Nevada casino operations accounted for 16% of total Company revenuesfor the year ended December 31, 2006 and 17% of total revenues for theyear ended December 31, 2005. Revenues derived from Nevada casino operations were $95.6 millionfor the year ended December 31, 2006 compared with $95.4 million forthe year ended December 31, 2005. These results reflect the slightdecrease in revenue at Terrible’s Hotel & Casino in Las Vegas as aresult of the disruption to operations caused by the demolition of one-third ofits hotel rooms in connection with the construction of its new parkingstructure and casino floor expansion, which was completed in the fourth quarterof 2006.

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Nevada casino operating costs were $60.5 million, or 63%, ofrevenues for the year ended December 31, 2006, compared to$59.1 million, or 62%, of revenues for the year ended December 31,2004.  This increase in costs was due toan increase in spending at Terrible’s to maintain business during the disruptionfrom the construction described in the previous paragraph as well as increasein payroll and insurance costs..

*Casino Operations — Otherstates*
|                                | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Other state  casino revenue    |       | $                                            | 117,475    |                                         | 100.0      | % | $ | 140,909 |   | 100.0 | % |
| Promotional  allowances        |       | (8,906                                       | )          | 7.6                                          |       | (19,071 | ) | 13.5 |   |
| Direct expenses                |       | (79,239                                      | )          | 67.5                                         |       | (87,852 | ) | 62.3 |   |
| EBITDA                         |       | 29,330                                       |       | 24.9                                         |       | 33,986 |   | 24.2 |   |
| Depreciation and  amortization |       | (7,150                                       | )          | 6.1                                          |       | (9,967 | ) | 7.1 |   |
| Income from casino  operations |       | $                                            | 22,180     |                                         | 18.8       | % | $ | 24,019 |   | 17.1 | % |

 

Casino operations in other states accounted for 24% of total companyrevenues for the year ended December 31, 2006, which is up from 21% in2005.  Total revenues derived from casinooperations located in states other than Nevada were $140.9 million, an increaseof $ 23.4 million, or 20%, compared to $117.5 million for the year endedDecember 31, 2005.  Other statecasino operating costs were $ 87.9 million, or 62% of revenues, for the yearended December 31, 2006 compared to $79.2 million, or 67% of revenues, forthe year ended December 31, 2005. We began floor improvements at our casinos in other states in the secondquarter of 2005.  The floor renovationsconsisted of over 1,200 new machines, new “ticket-in, ticket-out” software ateach casino, new carpet and entirely new slot bases.  The revenues during these periods were helpedby significant increases in our cash promotions, player point promotions andfood specials, which were incurred to offset the disruption from, and to keepplayer loyalty during, these extensive floor renovations.  As these renovations were completed duringthe last quarter of 2006, these costs should begin to normalize.

*Other Revenue*

Other revenue consists of revenue items such as ATM fees, pay phonecharges, rental income, gas and convenience store revenue and othermiscellaneous items unrelated to route and casino operations.  Other revenues were $11.2 million forthe year ended December 31, 2006 compared to $6.0 million for theyear ended December 31, 2005.  Thegrowth in this revenue was primarily due to a full year of gasoline sales atLakeside Iowa.

*Promotional Allowances*

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

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*Other Costs*
|                                        | ** ** | **Year  ended  December 31, 2005** | ** ** | **Year  ended  December 31, 2006** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**         | ** ** |
| General and  administrative            |       | $                                            | 15,217     |                                         | 2.7        | % | $ | 18,448 |   | 3.1 | % |
| Depreciation and  amortization         |       | $                                            | 33,941     |                                         | 6.1        | % | $ | 38,124 |   | 6.4 | % |
| Loss on retirement of  debt and assets |       | $                                            | 3,360      |                                         | 0.6        | % | $ | 0 |   |   |   |

 

General and administrative expenses, or G&A, were$18.4 million for the year ended December 31, 2006, an increase of$3.2 million, or 21%, from $15.2 million for the year endedDecember 31, 2005.  The increase wasprimarily due to increase in payroll, utilities and insurance costs.  G&A expenses as a percentage of revenuewere 3.1% of the revenue for the year ended December 31, 2006, compared to2.7% of revenue during fiscal year ended December 31, 2005.

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

*Other Non-Gaming Expense*

Other non-gaming expense consists of expenses related to the operationsof our gasoline and convenience stories. In 2006, this expense was $6.5 million. This amount is primarily related to the cost of gasoline and conveniencestore operations.

*Income from Operations*

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

*Other Expenses*

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

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

*Net Income*

Net income for the year ended December 31, 2006 was $42.1 millioncompared to the net income of $50.8 million recorded for year endedDecember 31, 2005.  The year overyear decrease was primarily the result of the increased expenses discussedabove.

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**Year 2005 Compared to Year 2004**

|                                    | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                         | ** ** | **(dollars in thousands)**         | ** ** |
| Slot route  revenue                |       | $                                            | 293,244    |                                         | 100.0      | % | $ | 338,599 |   | 100.0 | % |
| Promotional  allowances            |       | (376                                         | )          | .1                                           |       | (223 | ) | 0.1 |   |
| Direct expenses                    |       | (227,929                                     | )          | 77.7                                         |       | (258,114 | ) | 76.2 |   |
| EBITDA                             |       | 64,939                                       |       | 22.2                                         |       | 80,262 |   | 23.7 |   |
| Depreciation and  amortization     |       | (19,362                                      | )          | 6.6                                          |       | (20,114 | ) | 5.9 |   |
| Income from slot route  operations |       | $                                            | 45,577     |                                         | 15.6       | % | $ | 60,148 |   | 17.8 | % |

 

*Route Operations*

Route operations accounted for 61% of total revenues during the yearended December 31, 2005.  This was adecrease from 76% of total revenues for the year ended December 31, 2004.  Total revenues from route operations were$338.6 million for the year ended December 31, 2005, an increase of$45.4 million, or 15%, from $293.2 million for the year endedDecember 31, 2004.  The increase inroute revenue was a result of growth from the strong Las Vegas market during2005.  At December 31, 2005, we wereoperating approximately 7,100 slot machines, which is 300 greater than the6,800 we operated at December 31, 2004.

Route operating costs were $258.1 million, or 76%, of routerevenues for the year ended December 31, 2005.  This compares to $227.9 million and 78%of route revenues for the same period in 2004. The dollar increase in route operating expenses was primarily associatedwith expenses that correlate with increases in revenue such as participationcosts and payroll.

Route EBITDA for the year ended December 31, 2005 was$80.3 million, an increase of $15.4 million, or 24%, from$64.9 million for the year ended December 31, 2004.  The increase in EBITDA was a direct result ofrevenue increases from our existing locations.

*Casino Operations*
|                                | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Casino revenue                 |       | $                                            | 91,254     |                                         | 100.0      | % | $ | 212,875 |   | 100.0 | % |
| Promotional  allowances        |       | (12,138                                      | )          | 13.3                                         |       | (21,434 | ) | 10.1 |   |
| Direct expenses                |       | (56,331                                      | )          | 61.7                                         |       | (138,364 | ) | 65.0 |   |
| EBITDA                         |       | 22,785                                       |       | 25.0                                         |       | 53,077 |   | 24.9 |   |
| Depreciation and  amortization |       | (5,727                                       | )          | 6.3                                          |       | (13,509 | ) | 6.3 |   |
| Income from casino  operations |       | $                                            | 17,058     |                                         | 18.7       | % | $ | 39,568 |   | 18.6 | % |

 

Casino operations accounted for 38% of total revenues for the yearended December 31, 2005 and 23% of revenues for the year endedDecember 31, 2004.  Total revenuesderived from casino operations were $212.9 million for the year endedDecember 31, 2005, an increase of $121.6 million, or 133%, from $91.3million for the year ended December 31, 2004.  This increase was due to the inclusion of theresults from the assets acquired in February 2005 pursuant to the GraceAcquisition, as well as growth from our existing operations.

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Casino operating costs were $138.4 million, or 65%, of casino revenuesfor the year ended December 31, 2005, compared to $56.3 million, or 62%,of casino revenues for the year ended December 31, 2004.  The increase in expenses was due to theinclusion of expenses incurred by the casinos acquired pursuant to the GraceAcquisition.

As a result of the factors described above, Casino EBITDA was $53.1million for the year ended December 31, 2005, an increase of $30.3million, or 133%, from $22.8 million from the year ended December 31,2004.  The following paragraphs dividethe results from our casino operations geographically between casinos in Nevadaand those in other states.

*Casino Operations —Nevada*

|                                | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Casino revenue                 |       | $                                            | 91,254     |                                         | 100.0      | % | $ | 95,400 |   | 100.0 | % |
| Promotional  allowances        |       | (12,138                                      | )          | 13.3                                         |       | (12,528 | ) | 13.1 |   |
| Direct expenses                |       | (56,331                                      | )          | 61.7                                         |       | (59,125 | ) | 62.0 |   |
| EBITDA                         |       | 22,785                                       |       | 25.0                                         |       | 23,747 |   | 24.9 |   |
| Depreciation and  amortization |       | (5,727                                       | )          | 6.3                                          |       | (6,359 | ) | 6.7 |   |
| Income from casino  operations |       | $                                            | 17,058     |                                         | 18.7       | % | $ | 17,388 |   | 18.2 | % |

 

Nevada casino operations accounted for 17% of total Company revenuesfor the year ended December 31, 2005 and 23% of total revenues for theyear ended December 31, 2004. Revenues derived from Nevada casino operations were $95.4 millionfor the year ended December 31, 2005 compared with $91.3 million forthe year ended December 31, 2004, an increase of $4.1 million or4%.  Each of the Nevada properties otherthan Terrible’s contributed to this increase of revenues.  These results reflect the slight decrease inrevenue at Terrible’s as a result of the disruption to operations caused by thedemolition of one-third of its hotel rooms in connection with the constructionof its new parking structure and casino floor expansion.  This construction should be completed bySeptember 2006.

Nevada casino operating costs were $59.1 million, or 62%, ofrevenues for the year ended December 31, 2005, compared to$56.3 million, or 62%, of revenues for the year ended December 31,2004.

*Casino Operations — Otherstates*
|                                | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**         | ** ** |
| Other state  casino revenue    |       | $                                            | —     |                                         | —     |   | $ | 117,475 |   | 100.0 | % |
| Promotional  allowances        |       | —                                       |       | —                                       |       | (8,906 | ) | 7.6 |   |
| Direct expenses                |       | —                                       |       | —                                       |       | (79,239 | ) | 67.5 |   |
| EBITDA                         |       | —                                       |       | —                                       |       | 29,330 |   | 24.9 |   |
| Depreciation and  amortization |       | —                                       |       | —                                       |       | (7,150 | ) | 6.1 |   |
| Income from casino  operations |       | $                                            | —     |                                         | —     |   | $ | 22,180 |   | 18.8 | % |

 

Casino operations in other states accounted for 21% of total companyrevenues for the year ended December 31, 2005.  Total revenues derived from casino operationslocated in states other than Nevada were $117.5 million for the year endedDecember 31, 2005.  Other statecasino operating costs were $79.2 million, or

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67%, of revenues for the year ended December 31,2005.  We began floor improvements at ourcasinos in other states in the second quarter of 2005.  The floor renovations consisted of over 1,200new machines, new “ticket-in, ticket-out” software at each casino, new carpetand entirely new slot bases.  Therevenues during these periods were helped by significant increases in our cash,player point promotions and food specials, which were incurred to offset thedisruption and to keep player loyalty during these extensive floorrenovations.  As these renovations arecompleted and the gaming floor stabilizes, these costs should be reduced.  We anticipate the improvements to the gamingfloors to be completed early in the first quarter of 2006, after which we willbegin renovating the land-based facilities of these casinos, by upgradingamenities such as the restaurants and common areas.  These renovations should be completed by late2006.

*Other Revenue*

Other revenue consists of revenue items such as ATM fees, pay phonecharges, rental income, gas and convenience store revenue and othermiscellaneous items unrelated to route and casino operations.  Other revenues were $6.0 million for theyear ended December 31, 2005 compared to $3.6 million for the yearended December 31, 2004.  The growthin this revenue was primarily due to the addition of ancillary revenue sourcesfrom the assets acquired pursuant to the Grace Acquisition.

*Promotional Allowances*

Promotional allowances were $21.7 million, or 3.9% of totalrevenues, for the year ended December 31, 2005, an increase of$9.2 million, or 74%, from $12.5 million, or 3.2% of total revenuesfor the year ended December 31, 2004. The increase was due to heavier promotional spending at the Nevadacasinos, and the inclusion of the new casino properties acquired pursuant to theGrace Acquisition.

*Other Costs*
|                                        | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **$**                                        | ** ** | **% of  revenue**                       | ** ** | **$** | ** ** | **% of  revenue** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**         | ** ** |
| General and  administrative            |       | $                                            | 14,366     |                                         | 3.7        | % | $ | 15,217 |   | 2.7 | % |
| Depreciation and  amortization         |       | $                                            | 25,407     |                                         | 6.5        | % | $ | 33,941 |   | 6.1 | % |
| Loss on retirement of  debt and assets |       | $                                            | 37,991     |                                         | 10.1       | % | $ | 3,360 |   | 0.6 | % |

 

General and administrative expenses, or G&A, were$15.2 million for the year ended December 31, 2005, an increase of$0.8 million, or 6.0%, from $14.4 million for the year endedDecember 31, 2004.  The increase wasprimarily due to the overhead associated with the casinos acquired pursuant tothe Grace Acquisition.  G&A expensesas a percentage of revenue were 2.7% of the revenue for the year endedDecember 31, 2005, compared to 3.7% of revenue during fiscal year endedDecember 31, 2004.

Depreciation and amortization expense was $33.9 million for theyear ended December 31, 2005, an increase of $8.5 million, or 33.0%,from $25.4 million for the year ended December 31, 2004.  The increase was due primarily to thedepreciation and amortization expenses associated with the acquired casinoassets of Grace Entertainment, Inc.

For the year ended December 31, 2005, we incurred approximately$3.4 million in expense related to the demolition of a portion ofTerrible’s Hotel & Casino in Las Vegas in connection with theconstruction of its new parking structure and casino floor expansion.

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*Income from Operations*

As a result of the factors discussed above, income from operations was$86.8 million for the year ended December 31, 2005, an increase of$35.8 million, from $51.0 million for the year endedDecember 31, 2004.  This was a 70%increase.  As a percentage of totalrevenues, income from operations increased from 13.1% during 2004 to 15.6%during the same period in 2005.

*Other Expenses*

Other expense was $36.0 million for the year endedDecember 31, 2005, a decrease of $23.7 million from expenses of$59.7 million for the year ended December 31, 2004.  This decrease was a primarily a result of$38.0 million costs incurred in 2004 for the early retirement of debt.

Our interest costs increased from $22.1 million during the year endedDecember 31, 2004 to $36.5 million during the year endedDecember 31, 2005 due to the debt incurred in connection with the GraceAcquisition in February 2005.  TheCompany’s debt grew from $333.4 million at December 31, 2004 to$500.6 million at December 31, 2005.

The Company incurred approximately $0.2 million in earlyretirement of debt charges associated with the repayment of the remainingprincipal amount of the Company’s 10 3⁄4% senior subordinated notes due 2008.

*Net Income*

Net income for the year ended December 31, 2005 was $50.8million.  This is an improvement of$59.6 million from a net loss of $8.8 million recorded for year endedDecember 31, 2004.  The year overyear increase was primarily the result of a $38.0 million loss on theearly retirement of debt in 2004 and is also attributable to increased profitabilityof existing businesses and income provided by the casinos acquired in 2005pursuant to the Grace Acquisition.

**Liquidity and Capital Resources**

*Cash Flows*

At December 31, 2006, we had cash and cash equivalents ofapproximately $65.6 million on hand and approximately $79.4 millionavailable under our revolving credit facility. Based upon our anticipated future operations, we believe that cash onhand, available cash flow and borrowings under our revolving credit facilitywill be adequate to meet our anticipated working capital requirements, capitalexpenditures, and scheduled payments of interest on our outstandingindebtedness for at least the next 12 months.  We cannot assure you, however, that thesesources will be sufficient for that purpose or that additional financing, ifrequired, will be available or, if available, will be on terms favorable to us.

On January 3, 2007, we entered into the credit agreement, which was anamendment and restatement of our previous amended and restated credit agreementdated as of October 8, 2004.  We borrowed$375.0 million in term loans under the credit agreement on the date of theagreement to finance the Sands Regent Acquisition.  Subject to certain conditions set forth inthe credit agreement, proceeds from delay draw term loans will be available tofinance the Primadonna Acquisition if and when it closes.

*Operating Activities*

During the year ended December 31, 2006, operating activitiesprovided $ 81.5 million in cash flows on net income of $42.1 million.

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*Investing Activities andCapital Expenditures*

For the year ended December 31, 2006, we had net cash used forinvesting activities of $79.8 million of which $66.6 million related tothe net cash used to purchase of new property and equipment including gamingdevices.

For the year ended December 31, 2006, we made expenditures of$26.6 million in order to complete the construction of a new parkingstructure, casino expansion and general property renovations at Terrible’sHotel & Casino in Las Vegas. In addition, we made expenditures in 2006totaling $18.0 million in connection with renovations at the casinosacquired pursuant to the Grace Acquisition that consisted of adding new andupdating existing slot machines and remodeling each property’s casino floor.

On January 3, 2007, we consummated the Sands Regent Acquisition, payingapproximately $119.0 million in cash for the outstanding securities of TheSands Regent.

On October 31, 2006, we announced that we had entered into a purchaseagreement to acquire from MGM MIRAGE the Buffalo Bill’s, Primm Valley andWhiskey Pete’s hotel-casinos for $400 million. We anticipate the transactionwill close in the second quarter of 2007.

Capital projects for 2007 are anticipated to be approximately $34.0million plus general maintenance and capital expenditures costs ofapproximately $12 million. This includes the expansion at Rail City inSparks, Nevada as well as a conversion to the IGT Advantage slot system atTerrible’s, Terrible’s Town Pahrump, Terrible’s Lakeside in Pahrump and thePrimm Valley Resorts should the Primm Acquisition close.

*Financing Activities*

Cash flows used by financing activities were $9.9 million duringthe year ended December 31, 2006. Also in 2006, we made distributions to our stockholders of$31.3 million.  The distributionincluded $25.2 million for S-corporation taxes and $6.1 million forrecurring annual distributions.

We may from time to time seek to retire our outstanding debtthrough cash purchases, in open market purchases, privately negotiatedtransactions or otherwise.  Suchrepurchases, if any, will depend on prevailing market conditions, our liquidityrequirements, contractual restrictions and other factors.  The amounts involved may be material.

Our ability to service our debt will be dependent on our futureperformance, which will be affected by, among other things, prevailing economicconditions and financial, business and other factors, certain of which arebeyond our control.

*Contractual Obligations*

The following table summarizes our contractual obligations as ofDecember 31, 2006.  
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5  years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                   | ** ** |
| Contractual  Obligations:           |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                      |       | $                                         | 522,618    |   | $ | 1,105 |   | $ | 97,041 |   | $ | 95,250 |   | $ | 329,222 |   |
| Estimated  interest payments (1)    |       | 208,498                                   |       | 38,685 |   | 73,438 |   | 57,269 |   | 39,106 |   |
| Operating leases                    |       | 215,880                                   |       | 73,867 |   | 86,135 |   | 43,527 |   | 12,351 |   |
| Total contractual cash  obligations |       | $                                         | 946,996    |   | $ | 113,657 |   | $ | 256,614 |   | $ | 196,046 |   | $ | 380,679 |   |

 

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(1) Estimated interest for variable rate debt is based on rates atDecember 31, 2006

On October 31, 2006, we entered into a purchaseagreement to purchase from MGM MIRAGE the Primm Valley Resorts for $400.0million. The transaction is subject to customary closing conditions and theparties anticipate the transaction to close in the second quarter of 2007.

On January 3, 2007, we consummated the Sands RegentAcquisition, paying approximately $119.0 million in cash for the outstandingsecurities of The Sands Regent.

Other significant operating uses of cash in 2006 include interest anddistributions made to stockholders for payment of S corporation taxes anddiscretionary distributions.  Our cashpayments for interest were $37.8 million for the year endedDecember 31, 2006 and cash distributions to stockholders were$31.3 million for the year ended December 31, 2006.  The distributions to stockholders included $25.2 millionin distributions for S corporation taxes and the recurring annualdistributions of approximately $6.1 million.

Recurring stockholder distributions in 2007 should be approximately thesame as 2006.  Stockholder distributionsfor S corporation taxes will be lower in 2007 as net income will besignificantly lower due to the recent Sands Regent Acquisition and the pendingPrimm Acquisition. Interest costs will increase significantly when and if thePrimm acquisition takes place.

**Critical Accounting Policies**

The preparation of our financial statements requires our management toadopt accounting policies and make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  We prepare our financial statements inconformity with accounting principles generally accepted in the United Statesof America.  Our business and industry ishighly regulated.  The majority of ourrevenue is counted in the form of cash, chips and tokens and therefore, isnot subject to any significant or complex estimation procedures.

We have determined that the following accounting policies and relatedestimates are critical to the preparation of our consolidated financialstatements:

*Long-Lived Assets*

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

We assess the recoverability of long-lived assets when circumstancesindicate that the carrying amount of an asset may not be fullyrecoverable.  If undiscounted expectedcash flows to be generated by a long-lived asset or asset group are less thanits carrying amount, we record an impairment to write down the long-lived assetor asset group to its estimated fair value. Fair value is determined based on undiscounted expected future cashflows.  An adverse change to the estimateof these undiscounted future cash flows could necessitate an impairment chargethat could adversely affect operating results.

*Goodwill and Intangible Assets*

We have a significant investment in goodwill and other intangibleassets on our consolidated balance sheet as of December 31, 2006.  The purchase price of an acquisition isallocated to the underlying assets acquired and liabilities assumed based upontheir estimated fair values at the date of acquisition.  The estimated fair values of the assets acquiredpursuant to the Grace Acquisition, a substantial portion of which consisted ofintangible assets comprised of license rights, were arrived at by managementafter consideration of an independent appraisal and other consideration of fairvalues.  To the

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extent that the purchase price exceeds the fair valueof the net identifiable tangible and intangible assets acquired, such excess isallocated to goodwill.

We review the investment in goodwill and license rights for impairmentannually.  The annual evaluation ofgoodwill and license rights requires the use of estimates about futureoperating results of each reporting unit to determine their estimated fairvalue.  Changes in forecasted operationscan materially affect these estimates. Once impairment of goodwill or other intangible assets has beenrecorded, it cannot be reversed.  Anadverse change to the estimate of these future cash flows could necessitate animpairment charge that could adversely affect operating results.

**Recently Issued and Adopted AccountingStandards**

In February 2007, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities”.* SFAS No. 159 permitscompanies to choose to measure many financial instruments and certain otheritems at fair value. The objective is to improve financial reporting byproviding companies with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. The fair value optionestablished by SFAS No. 159 permits all companies to choose to measure eligibleitems at fair value at specified election dates. At each subsequent reporting date,a company shall report in earnings any unrealized gains and losses on items forwhich the fair value option has been elected. SFAS No. 159 is effective as ofthe beginning of a company’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the company also elects toapply the provisions of SFAS No. 157, *“Fair Value Measurements”*(see below). We are currently evaluating whether to adopt the fair value optionunder this SFAS No. 150 and evaluating what impact such adoption would have onour consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, *“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASBStatements No. 87, 88, 106 and 132(R)”.* SFAS No. 158 requires employers to recognize the over-funded orunder-funded status of a defined benefit postretirement plan as an asset orliability and to recognize changes in that funded status in the year in whichthe changes occur through other comprehensive income. This Statement alsorequires employers to measure the funded status of a plan as of the date of itsyear end and is effective for publicly traded companies as of the end of thefiscal year ending after December 31, 2006. The adoption of SFASNo. 158 did not have a material effect on our consolidated financialstatements as we do not currently have a defined benefit postretirement planthat 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 expandsdisclosures about fair value measurements. This Statement applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. We are currently evaluating theimpact that the adoption of SFAS No. 157 will have on our consolidatedfinancial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), which addsSection N to Topic 1, *“Financial Statements”.*SectionN provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. To provide full disclosure, registrants electing not torestate prior periods should reflect the effects of initially applying theguidance in Topic 1N in their financial statements covering the first fiscalyear ending after November 15, 2006. The adoption of SAB No. 108 did not have amaterial effect on our consolidated financial statements.

In June 2006, the Emerging Issues Task Force reached aconsensus on Issue No. 06-3 (“EITF 06-3”), “*Disclosure Requirementsfor Taxes Assessed by a Governmental Authority on Revenue-ProducingTransactions*.” The consensus allows companies to choose between twoacceptable alternatives based on their accounting policies for transactions inwhich the company collects taxes on behalf of a governmental authority, such assales taxes.

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Underthe gross method, taxes collected are accounted for as a component of salesrevenue with an offsetting expense. Conversely, the net method allows a reductionto sales revenue. If such taxes are reported gross and are significant,companies should disclose the amount of those taxes. The guidance should beapplied to financial reports through retrospective application for all periodspresented, if amounts are significant, for interim and annual reportingbeginning February 1, 2007. We have historically presented sales net of taxcollected and we do not intend to change our policy; therefore, we do notexpect the adoption of EITF 06-3 to have a material effect on our consolidatedfinancial statements.

In February 2006, the FASB issued SFAS No. 155, *“Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB Statements No. 133 and 140”*. SFAS No. 155 allowsfinancial instruments that have embedded derivatives to be accounted for as awhole (eliminating the need to bifurcate the derivative from its host) if theholder elects to irrevocably account for the whole instrument on a fair valuebasis. SFAS No. 155 is effective for all financial instruments acquired orissued after December 31, 2006. We do not expect the adoption of SFASNo. 155 to have a material effect on our consolidated financialstatements, as we do not currently have any financial instruments that meet thecriteria specified under SFAS No. 155.

**Statement on Forward-Looking Information**

We make statements in this report that relate to matters that are nothistorical facts that we refer to as “forward-looking statements” regarding,among other things, our business strategy, our prospects and our financialposition.  These statements may beidentified by the use of forward-looking terminology such as “believes,”“estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” orthe negative or other variation of these or similar words, or by discussions ofstrategy or risks and uncertainties. Forward-looking statements in this report include, among other things,statements concerning:

·                  projections offuture results of operations or financial condition;

·                  expectations forour route operations and our casino properties; and

·                  expectations ofthe continued availability of capital resources.

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

·                  Our substantialindebtedness could adversely affect our financial health and prevent us fromfulfilling our obligations under the instruments governing our outstandingindebtedness.

·                  We will requirea significant amount of cash to service our indebtedness.  Our ability to generate cash depends on manyfactors beyond our control.

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

·                  Our indebtednessimposes restrictive covenants on us.

·                  We may notbe able to successfully integrate the operations of casinos we acquire into ourbusiness.

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

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·                  We faceextensive regulation from gaming and other government authorities.

·                  Changes toapplicable tax laws could have a material adverse effect on our financialcondition.

·                  Our operationscould be adversely affected due to the recent adoption of anti-smokingregulations.

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

·                  Our executiveofficers and members of our board of directors own 100% of the Company, whichcould lead to conflicts of interest.

·                  Our businessrelies heavily on certain markets and an economic downturn in these marketscould have a material adverse effect on our results.

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

**Industry and Market Data**

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

## **Item7A.  Quantitative and QualitativeDisclosures About Market Risk.**

Market risk is the risk of loss arising from adverse changes in marketrates and prices, such as interest rates, foreign currency exchange rates, andcommodity prices.  We do not have anycash or cash equivalents as of December 31, 2006 that are subject tomarket risk based on changes in interest rates. As a result of borrowings under our credit facility in existence as ofDecember 31, 2006, we are exposed to some market risk due to floating orvariable interest rates.  The interest onrevolving borrowings and on the additional term loan under our credit facilityis based on a floating rate (a base rate or LIBOR, at our option), plus aleverage grid-based variable amount.  AtDecember 31, 2006, the principal amount of borrowings under our creditfacility was approximately $193.0 million. A hypothetical 1.0% increase in LIBOR would result in an approximately$1.9 million annual increase in interest expense.

## **Item8.    Financial Statements andSupplementary Data.**

| **Report of Independent Registered  Public Accounting Firm**                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                          |
| **Consolidated  Financial Statements**                                                                                        |
|                                                                                                                          |
| Consolidated  Balance Sheets  As of December 31, 2005 and 2006                                                           |
|                                                                                                                          |
| Consolidated  Statements of Operations  For the years ended December 31, 2004, 2005 and 2006                             |
|                                                                                                                          |
| Consolidated  Statements of Stockholders’ Equity (Deficiency)  For the years ended December 31, 2004, 2005 and 2006 |
|                                                                                                                          |
| Consolidated  Statements of Cash Flows  For the years ended December 31, 2004, 2005 and 2006                             |

 

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# **REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders ofHerbst Gaming, Inc. and subsidiariesLas Vegas, Nevada

We have audited theaccompanying consolidated balance sheets of Herbst Gaming, Inc. andsubsidiaries (the “Company”) as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity(deficiency), and cash flows for each of the three years in the period endedDecember 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Herbst Gaming, Inc. and subsidiaries as ofDecember 31, 2006 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.
| /s/ Deloitte & Touche LLP |   |   |   |
|------------------------------------|--------|--------|--------|
|                               |   |   |   |
| Las Vegas, Nevada                  |   |   |
| March 30, 2007                |   |   |
|                               |   |   |
|                                    |        |        |        |  |  |

 

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**HerbstGaming, Inc.****Consolidated BalanceSheets(in thousands)**
| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2005**             | ** ** | **2006** | ** ** |
| **Assets**                                                                               |       |                 |       |   |   |
| Current assets                                                                           |       |                 |       |   |   |
| Cash and cash  equivalents                                                               |       | $                    | 73,849     |   | $ | 65,640 |   |
| Accounts  receivable, net                                                                |       | 2,001                |       | 3,515 |   |
| Notes and loans  receivable                                                              |       | 597                  |       | 2,093 |   |
| Prepaid expenses                                                                         |       | 6,238                |       | 6,681 |   |
| Inventory                                                                                |       | 2,351                |       | 2,553 |   |
| Total current assets                                                                     |       | 85,036               |       | 80,482 |   |
| Property and equipment,  net                                                             |       | 189,648              |       | 234,515 |   |
| Lease acquisition  costs, net                                                            |       | 41,921               |       | 33,162 |   |
| Due from related  parties                                                                |       | 164                  |       | 168 |   |
| Other assets, net                                                                        |       | 14,972               |       | 16,649 |   |
| Intangibles, net                                                                         |       | 199,934              |       | 200,219 |   |
| Goodwill                                                                                 |       | 3,255                |       | 3,255 |   |
|                                                                                     |       |                 |       |   |   |
| Total assets                                                                             |       | $                    | 534,930    |   | $ | 568,450 |   |
|                                                                                     |       |                 |       |   |   |
| **Liabilities and stockholders’  equity**                                           |       |                 |       |   |   |
| Current liabilities                                                                      |       |                 |       |   |   |
| Current portion  of long-term debt                                                       |       | $                    | 1,117      |   | $ | 1,105 |   |
| Accounts payable                                                                         |       | 10,858               |       | 10,016 |   |
| Accrued expenses                                                                         |       | 13,961               |       | 15,408 |   |
| Due to related  parties                                                                  |       | 2                    |       | — |   |
| Total current  liabilities                                                               |       | 25,938               |       | 26,529 |   |
| Long-term debt, less  current portion                                                    |       | 499,476              |       | 521,513 |   |
| Other liabilities                                                                        |       | 1,535                |       | 1,637 |   |
| Commitments and  contingencies (Note 10)                                                 |       |                 |       |   |   |
| Stockholders’ equity                                                                |       |                 |       |   |   |
| Common stock (no  par value; 2,500 shares authorized; 300 shares issued and outstanding) |       | 2,368                |       | 2,368 |   |
| Additional  paid-in-capital                                                              |       | 1,631                |       | 1,631 |   |
| Retained  earnings                                                                       |       | 3,982                |       | 14,772 |   |
| Total stockholders’  equity                                                         |       | 7,981                |       | 18,771 |   |
|                                                                                     |       |                 |       |   |   |
| Total liabilities and stockholders’ equity                                          |       | $                    | 534,930    |   | $ | 568,450 |   |

 

See notes to consolidatedfinancial statements.

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**HerbstGaming, Inc.****Consolidated Statements ofOperations(in thousands)**
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenues                                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Route operations                                                                   |       | $                                          | 293,244    |   | $ | 338,599 |   | $ | 347,041 |   |
| Casino operations                                                                  |       | 91,254                                     |       | 212,875 |   | 236,523 |   |
| Other—non gaming                                                              |       | 3,628                                      |       | 6,024 |   | 11,202 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total revenues                                                                     |       | 388,126                                    |       | 557,498 |   | 594,766 |   |
| Less promotional allowances                                                        |       | (12,514                                    | )          | (21,657 | ) | (32,703 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net revenues                                                                       |       | 375,612                                    |       | 535,841 |   | 562,063 |   |
| Costs and  expenses                                                                |       |                                       |       |   |   |   |   |
| Route operations                                                                   |       | 227,929                                    |       | 258,114 |   | 270,149 |   |
| Casino operations                                                                  |       | 56,331                                     |       | 138,364 |   | 148,391 |   |
| Depreciation and amortization                                                      |       | 25,407                                     |       | 33,941 |   | 38,124 |   |
| General and administrative                                                         |       | 14,366                                     |       | 15,217 |   | 18,448 |   |
| Other – non-gaming                                                            |       |                                       |       |   |   | 6,491 |   |
| Loss on lease termination                                                          |       | 600                                        |       | — |   | — |   |
| Loss on asset retirement                                                           |       | —                                     |       | 3,360 |   | — |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Total costs and  expenses                                                          |       | 324,633                                    |       | 448,996 |   | 481,603 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Income from  operations                                                            |       | 50,979                                     |       | 86,845 |   | 80,460 |   |
| Other income  (expense)                                                            |       |                                       |       |   |   |   |   |
| Interest income                                                                    |       | 353                                        |       | 740 |   | 734 |   |
| Interest expense, net of capitalized interest of $0,  $101, and $873, respectively |       | (22,109                                    | )          | (36,532 | ) | (39,134 | ) |
| Loss on early retirement of debt                                                   |       | (37,991                                    | )          | (221 | ) | — |   |
| Total other  expense                                                               |       | (59,747                                    | )          | (36,013 | ) | (38,400 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| Net (loss) income                                                                  |       | $                                          | (8,768     | ) | $ | 50,832 |   | $ | 42,060 |   |

 

See notes to consolidatedfinancial statements.

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**Herbst Gaming, Inc.Consolidated Statements of Stockholders’ Equity (in thousands)**
| **Balance**                       | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In   Capital** | ** ** | **Retained   Earnings** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------|------------|-----------|------------|
|                              |       |              |       |                                   |       |                         |       |      |       |
| Balance, January  1, 2004         |       | $                 | 2,368      |                                   | $          | 1,631                        |       | $         | (2,445     | ) | $ | 1,554 |   |
| Net loss                          |       | —            |       | —                                 |       | (8,768                       | )          | (8,768    | )          |
| Stockholders’  distributions |       | —            |       | —                                 |       | (23,550                      | )          | (23,550   | )          |
| Balance, January  1, 2005         |       | $                 | 2,368      |                                   | $          | 1,631                        |       | $         | (34,763    | ) | $ | (30,764 | ) |
| Net income                        |       | —            |       | —                                 |       | 50,832                       |       | 50,832    |       |
| Stockholders’  distributions |       | —            |       | —                                 |       | (12,087                      | )          | (12,087   | )          |
| Balance,  December 31, 2005  |       | $                 | 2,368      |                                   | $          | 1,631                        |       | $         | 3,982      |   | $ | 7,981 |   |
| Net income                        |       | —            |       | —                                 |       | 42,060                       |       | 42,060    |       |
| Stockholders’  distributions |       | —            |       | —                                 |       | (31,270                      | )          | (31,270   | )          |
| Balance,  December 31, 2006  |       | $                 | 2,368      |                                   | $          | 1,631                        |       | $         | 14,772     |   | $ | 18,771 |   |

 

See notes to consolidatedfinancial statements.

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**Herbst Gaming, Inc.Consolidated Statements of Cash Flows(in thousands)**
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Cash flows from  operating activities                                                    |       |                                       |       |   |   |   |   |
| Net (loss) income                                                                        |       | $                                          | (8,768     | ) | $ | 50,832 |   | $ | 42,060 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 25,407                                     |       | 33,941 |   | 38,124 |   |
| Amortization of debt issuance costs                                                      |       | 1,260                                      |       | 1,801 |   | 1,811 |   |
| Debt discount amortization                                                               |       | 100                                        |       | 146 |   | 143 |   |
| Gain (loss) on sale of property and equipment                                            |       | 41                                         |       | (27 | ) | 152 |   |
| Loss on retirement of assets                                                             |       | —                                     |       | 3,360 |   | — |   |
| Loss on early retirement of debt                                                         |       | 37,991                                     |       | 221 |   | — |   |
| Decrease (increase) in:                                                                  |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                      |       | (6                                         | )          | (621 | ) | (1,527 | ) |
| Prepaid expenses                                                                         |       | (1,112                                     | )          | (37 | ) | (443 | ) |
| Inventory                                                                                |       | (41                                        | )          | (1,101 | ) | 77 |   |
| Due from related parties                                                                 |       | 402                                        |       | (3 | ) | (4 | ) |
| Other assets                                                                             |       | (84                                        | )          | (1,303 | ) | (1,295 | ) |
| Increase (decrease) in:                                                                  |       |                                       |       |   |   |   |   |
| Accounts payable                                                                         |       | (712                                       | )          | 2,813 |   | 848 |   |
| Accrued expenses                                                                         |       | (4,703                                     | )          | 1,799 |   | 1,447 |   |
| Due to related parties                                                                   |       | 36                                         |       | (34 | ) | (2 | ) |
| Other liabilities                                                                        |       | 199                                        |       | 417 |   | 102 |   |
| Net cash  provided by operating activities                                               |       | 50,010                                     |       | 92,204 |   | 81,493 |   |
| Cash flows from  investing activities                                                    |       |                                       |       |   |   |   |   |
| Net cash paid for acquisition of riverboat assets                                        |       | —                                     |       | (264,457 | ) | — |   |
| Net cash paid for acquisition of software assets                                         |       | —                                     |       | — |   | (10,231 | ) |
| Net cash paid toward casino acquisition                                                  |       | —                                     |       | — |   | (1,542 | ) |
| Additions to notes and loans receivable                                                  |       | (914                                       | )          | (1,303 | ) | (1,090 | ) |
| Collection on notes and loans receivable                                                 |       | 699                                        |       | 1,322 |   | 872 |   |
| Proceeds from sale of property and equipment                                             |       | 260                                        |       | 264 |   | 378 |   |
| Purchases of property and equipment                                                      |       | (15,229                                    | )          | (43,893 | ) | (66,622 | ) |
| Lease acquisition costs                                                                  |       | (1,825                                     | )          | (1,105 | ) | (1,523 | ) |
| Net cash used in  investing activities                                                   |       | (17,009                                    | )          | (309,172 | ) | (79,758 | ) |
|                                                                                          |            |                                            |            |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

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| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  financing activities                                       |       |                                       |       |   |   |   |   |
| Proceeds from long term debt                                                |       | $                                          | 428,022    |   | $ | 191,000 |   | $ | 33,000 |   |
| Reduction of long term debt                                                 |       | (310,098                                   | )          | (23,965 | ) | (11,118 | ) |
| Loan origination fees                                                       |       | (11,904                                    | )          | (2,082 | ) | (556 | ) |
| Prepayment penalty on retired debt                                          |       | (31,329                                    | )          | (221 | ) | — |   |
| Stockholders’ distributions                                            |       | (23,550                                    | )          | (12,087 | ) | (31,270 | ) |
| Net cash  provided by (used in) financing activities                        |       | 51,141                                     |       | 152,645 |   | (9,944 | ) |
| Net increase  (decrease) in cash and cash equivalents                       |       | 84,142                                     |       | (64,323 | ) | (8,209 | ) |
| Cash and cash  equivalents                                                  |       |                                       |       |   |   |   |   |
| Beginning of year                                                           |       | 54,030                                     |       | 138,172 |   | 73,849 |   |
| End of year                                                                 |       | $                                          | 138,172    |   | $ | 73,849 |   | 65,640 |   |
| Supplemental  cash flow information:                                        |       |                                       |       |   |   |   |   |
| Cash paid during the period for interest                                    |       | $                                          | 25,918     |   | $ | 33,979 |   | $ | 37,790 |   |
| Supplemental  schedule of non cash investing and financing activities: |       |                                       |       |   |   |   |   |
| Purchase of property and equipment financed through  accounts payable       |       | $                                          | 1,343      |   | $ | 3,495 |   | $ | 1,802 |   |
| Purchase of  assets through direct financing                                |       | $                                          | 119        |   | — |   | — |   |

 

See notes toconsolidated financial statements.

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**HerbstGaming, Inc.Notes to consolidated financial statements**

**1.****             Description ofBusiness and Summary of Significant Accounting Policies**

***Description ofBusiness and Principles of Consolidation***—The accompanyingconsolidated financial statements of Herbst Gaming, Inc. (“Herbst” or the“Company”) include the accounts of Herbst and its subsidiaries: E-T-T, Inc. andSubsidiaries (“E-T-T”), Market Gaming, Inc. (“MGI”), E-T-T Enterprises L.L.C.(“E-T-T Enterprises”), Flamingo Paradise Gaming, LLC (“FPG”), HGI-Lakeside,Inc. (“ HGI-L ”), HGI-St Jo, Inc. (“ HGI-ST ”) and HGI-MarkTwain, Inc. (“HGI-MT ”). The financial statements of E-T-T areconsolidated and include the following wholly-owned subsidiaries: CardivanCompany, Corral Coin, Inc., and Corral Country Coin, Inc.

All significant intercompany balances andtransactions between Herbst, E-T-T, MGI, E-T-T Enterprises, FPG, HGI-L,HGI-ST and HGI- MT have been eliminated inthe consolidated financial statements.

Herbst Gaming, Inc. was incorporated in Nevada on January 21, 1997. InAugust of 2001, a restructuring occurred, wherein E-T-T, MGI, FPG and E-T-TEnterprises became wholly-owned subsidiaries of Herbst. This restructuringoccurred in conjunction with the $170.0 million offering of senior securednotes that was used to retire the majority of the existing debt of theconsolidated entities. Prior to August of 2001, the newly consolidated entitieswere combined for presentation purposes.

E-T-T and MGI conduct business in the gamingindustry and generate revenue principally from gaming machine route operationsand casino operations. Gaming machine route operations involve theinstallation, operation, and service of gaming machines owned by the Companythat are located in licensed, leased, or subleased space in retail stores(supermarkets, convenience stores, etc.), bars, and restaurants throughout theState of Nevada. The Company operates Terrible’s Town Casino & Bowl inHenderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada, andTerrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, both ofwhich are located in Pahrump, Nevada, a community 60 miles west of Las Vegas.

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

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

HGI-L owns and operates Terrible’s Lakeside Casino in Osceola, Iowa,which was acquired in February 2005.

HGI-ST owns and operates Terrible’s St Jo Frontier Casino in St Joseph,Missouri, which was acquired in February 2005.

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

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

***Use of Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of 

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the financial statements and the reported amounts ofrevenues and expenses during the period. Significant estimates incorporatedinto the Company’s consolidated financial statements include the estimateduseful lives for depreciable and amortizable assets, the estimated allowancefor doubtful accounts receivable and the estimated cash flows in assessing therecoverability of long-lived assets. Actual results could differ from those estimates.

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

***Reclassifications***—Certainprior period amounts have been reclassified in the consolidated financialstatements to conform to the current period’s presentation. Suchreclassifications had no impact on net income (loss), or equity.

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

***Fair Value of FinancialInstruments***—The carrying value of the Company’s cash,notes and loans receivable, and trade payables approximates fair valueprimarily because of the short maturities of these instruments. The fair valueof the Company’s long-term debt is estimated based on the quoted market pricesfor the same or similar issues or on the current rates offered to the Companyfor debt of the same remaining maturities. Based on the borrowing ratescurrently available to the Company for debt with similar terms and averagematurities, the estimated fair value of long-term debt outstanding isapproximately $527,709,000 as of December 31, 2006.

***Accounts Receivable***—Receivablesconsist primarily of amounts due from customers as a result of normal businessoperations. The Company periodically performs credit evaluations of itscustomers. The Company reviews accounts receivable balances in order todetermine an allowance for potential credit losses based on our collectionsexperience and the age of the receivables. At December 31, 2005 and 2006, anallowance for potential credit losses was $626,000 and $488,000, respectively.

***Notes and Loans Receivable***—Inorder to secure various route locations, the Company has provided certainincentives to the location operators in the form of loans. The loans, made forbuild-outs, tenant improvements, and initial operating expenses, are generallysecured by the personal guarantees of the operators and the locations’ assets.The majority of the loans are non-interest bearing and are expected to berepaid within one year from the locations’ share of net gaming win.

The Company regularly evaluates the collectibility of the loans byindividually evaluating each location’s operating results and cash flows.Management provides for the carrying value of loans that are determined to beuncollectible. At December 31, 2005 and 2006, no allowance for potential creditlosses was deemed necessary.

***Inventory***—Inventoriesare stated at the lower of cost or market value. Cost is determined using thefirst-in, first-out method.

***Property and Equipment***—Propertyand equipment are stated at cost and depreciated using the straight-line methodover the estimated useful lives of the assets. Leasehold improvements areamortized using the straight-line method over the shorter of the lease term orestimated useful life of the asset. Useful lives are as follows:
| Building                            |   | 40 years          |   |
|-------------------------------------|--------|-------------------|--------|
| Gaming equipment                    |   | 5 years           |   |
| Furniture, fixtures,  and equipment |   | 5 – 10 years |   |
| Leasehold improvements              |   | 1 – 20 years |   |

 

***Lease Acquisition Costs***—Significant incremental costs associated with the acquisition of locationleases are capitalized and amortized using the straight-line method over theterm of the related leases. Lease acquisition 

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costs are stated at cost less accumulated amortizationof $35,833,000 and $43,110,000 at December 31, 2005 and 2006, respectively.

***Debt Issuance Costs***—Debtissuance costs incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense over the terms of the relateddebt agreements. Debt issuance costs are included in other assets on thebalance sheets (see Note 6).

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

***Long-Lived Assets***—Inaccordance with the provisions of SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” the Company evaluates the potentialimpairment of long-lived assets when events or changes in circumstancesindicate that the carrying amount of a long-lived asset may not be recoverable.If it is determined that the carrying value of long-lived assets may not berecoverable based upon the relevant facts and circumstances, the Companyestimates the future undiscounted cash flows expected to result from the use ofthe asset and its eventual disposition. If the sum of the expected undiscountedfuture cash flows is less than the carrying value of the asset, the Companywill recognize an impairment loss for the difference between the carrying valueof the asset and its fair value. The Company believes that no impairment oflong-lived assets exists at December 31, 2006.

***Goodwill and Intangible Assets***—Wehad approximately $3,255,000 in goodwill on our consolidated balance sheet asof December 31, 2005 and December 31, 2006. We had $199,934,000 and$200,219,000 in other intangible assets on our consolidated balance sheet as ofDecember 31, 2005 and December 31, 2006, respectively. These amounts areprimarily a result of the Grace Acquisition in 2005 (see Note 2). The purchaseprice of an acquisition is allocated to the underlying assets acquired andliabilities assumed based upon their estimated fair values at the date ofacquisition. The estimated fair values of the assets acquired pursuant to theGrace Acquisition were arrived at by management after consideration of anindependent appraisal and other consideration of fair values. To the extentthat the purchase price exceeds the fair value of the net identifiable tangibleand intangible assets acquired, such excess is allocated to goodwill.

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires a reviewof goodwill, license rights and indefinite-lived intangibles for impairment atleast annually. We complete our annual assessment for impairment in the fourthquarter of each year. The annual evaluation of goodwill and the license rightsrequires the use of estimates about future operating results of each reportingunit to determine their estimated fair value. Changes in forecasted operationscan materially affect these estimates. Once impairment of goodwill or otherintangible assets has been recorded, it cannot be reversed.

***Revenue and PromotionalAllowances***—In accordance with industry practice, theCompany recognizes as gaming revenues the net win from route operations, whichis the difference between gaming wins and losses. The Company recognizes totalnet win from gaming devices as revenues from gaming routes that operate underrevenue-sharing arrangements. Revenue-sharing payments to route locations arerecorded as costs of route operations. Revenues from casino operations are gamingwins less losses. Revenues from retail sales are presented net of sales tax.Revenues from casino operations include the retail value of food and beverageand goods and services provided to customers on a complimentary basis. Suchamounts are then deducted as promotional allowances. The estimated cost ofproviding these promotional allowances is as follows:
|                    | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **         | ** ** | **(dollars in thousands)**       | ** ** |
| Room               |       | $                                          | 502        |   | $ | 858 |   | $ | 986 |   |
| Food and  Beverage |       | 5,677                                      |       | 6,701 |   | 8,096 |   |
| Other              |       | 4,299                                      |       | 10,766 |   | 19,824 |   |
| Total              |       | $                                          | 10,478     |   | $ | 18,325 |   | $ | 28,906 |   |

 

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

Liabilities in respect of the Company’s player’s club program are recognizedas points are earned and are included in the “Other liabilities” line of theCompany’s balance sheet.  Expenses inrespect of the Company’s player’s club program are included in the “Promotionalallowances” line of the Company’s statement of operations.

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

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

***Concentrations of Credit Risk***—TheCompany maintains cash balances at certain financial institutions located insouthern Nevada. The balances are insured by the Federal Deposit InsuranceCorporation (“FDIC”) up to $100,000. At times, cash balances may be in excessof FDIC limits. As of December 31, 2006, the Company does not consider itselfto have any significant concentrations of credit risk.

***Recently Issued and Adopted Accounting Standards***

In February 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities”.* SFAS No. 159 permitscompanies to choose to measure many financial instruments and certain otheritems at fair value. The objective is to improve financial reporting byproviding companies with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. The fair value optionestablished by SFAS No. 159 permits all companies to choose to measure eligibleitems at fair value at specified election dates. At each subsequent reportingdate, a company shall report in earnings any unrealized gains and losses onitems for which the fair value option has been elected. SFAS No. 159 iseffective as of the beginning of a company’s first fiscal year that beginsafter November 15, 2007. Early adoption is permitted as of the beginning of afiscal year that begins on or before November 15, 2007, provided the companyalso elects to apply the provisions of SFAS No. 157, *“Fair ValueMeasurements”* (see below). We are currently evaluating whether toadopt the fair value option under this SFAS No. 150 and evaluating what impactsuch adoption would have on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, *“Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)”.* SFAS No. 158 requires employers to recognize the over-funded orunder-funded status of a defined benefit postretirement plan as an asset orliability and to recognize changes in that funded status in the year in whichthe changes occur through other comprehensive income. This Statement alsorequires employers to measure the funded status of a plan as of the date of itsyear end and is effective for publicly traded companies as of the end of thefiscal year ending after December 31, 2006. The adoption of SFASNo. 158 did not have a material effect on our consolidated financialstatements as we do not currently have a defined benefit postretirement planthat meets the criteria specified under SFAS No. 158.

In September 2006, the FASB issued SFAS No. 157, *“Fair ValueMeasurements”*, which defines fair value, establishes a framework formeasuring fair value in GAAP, and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the FASB having previously concludedin those accounting pronouncements that fair value is the relevant measurementattribute. SFAS No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. We are currently evaluating the impact that the adoption of SFASNo. 157 will have on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 108 (“SAB No. 108”), which adds Section N to Topic 1, *“Financial Statements”.*Section N provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. To provide fulldisclosure, registrants electing not to restate prior periods should reflectthe effects of initially applying the guidance in Topic 1N in their financialstatements covering the first fiscal year ending after November 15, 2006. Theadoption of SAB No. 108 did not have a material effect on our consolidatedfinancial statements.

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In June 2006, the Emerging Issues Task Force reached a consensus onIssue No. 06-3 (“EITF 06-3”), “*Disclosure Requirementsfor Taxes Assessed by a Governmental Authority on Revenue-ProducingTransactions*.” The consensus allows companies to choose between twoacceptable alternatives based on their accounting policies for transactions inwhich the company collects taxes on behalf of a governmental authority, such assales taxes. Under the gross method, taxes collected are accounted for as acomponent of sales revenue with an offsetting expense. Conversely, the netmethod allows a reduction to sales revenue. If such taxes are reported grossand are significant, companies should disclose the amount of those taxes. Theguidance should be applied to financial reports through retrospectiveapplication for all periods presented, if amounts are significant, for interimand annual reporting beginning February 1, 2007. We have historically presentedsales net of tax collected and we do not intend to change our policy;therefore, we do not expect the adoption of EITF 06-3 to have a material effecton our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, *“Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140”*.SFAS No. 155 allows financial instruments that have embedded derivativesto be accounted for as a whole (eliminating the need to bifurcate thederivative from its host) if the holder elects to irrevocably account for thewhole instrument on a fair value basis. SFAS No. 155 is effective for allfinancial instruments acquired or issued after December 31, 2006. We donot expect the adoption of SFAS No. 155 to have a material effect on ourconsolidated financial statements, as we do not currently have any financialinstruments that meet the criteria specified under SFAS No. 155.

**2.****             Acquisitions**

OnFebruary 1, 2005, the Company consummated the purchase of assets consisting ofthree casinos from Grace Entertainment, Inc. for an aggregate cash purchaseprice of $266.8 million (the “Grace Acquisition”). The purchase price does notinclude $2.4 million in fees associated with the consummation of the GraceAcquisition that are included in the table below. The acquired assets consistof the Lakeside Casino Resort, located in Osceola, Iowa, or Lakeside Iowa,which contains 921 slot machines, 31 table games and an adjacent 60 roomall-suite hotel, the Mark Twain Casino, located in LaGrange, Missouri, or MarkTwain, which contains 505 slot machines and 17 table games, and the St. JoFrontier Casino, located in St. Joseph, Missouri, or St. Jo, which contains 487slot machines and 15 table games. The Company used proceeds from a $170.0million 7% senior subordinated notes offering along with borrowings under itsamended and restated credit facility to fund the purchase price of the GraceAcquisition. The Grace Acquisition was recorded under the purchase method ofaccounting and the results of operations of the Grace assets will be includedin the Company’s consolidated results from the date of acquisition.

The allocation of the purchase price is as follows:

Estimated Fair Market Value of assets acquired (in thousands) net ofcash
| Inventory                      |   | $       | 170     |   |
|--------------------------------|--------|---------|---------|--------|
| Receivables                    |   | 57      |    |
| Prepaid                        |   | 1,032   |    |
| Property, plant  and equipment |   | 62,409  |    |
| Intangibles                    |   | 204,055 |    |
| Total                          |   | $       | 267,723 |   |

 

Estimated Fair Market Value of liabilities assumed (in thousands)
| Accrued expenses           |   | (3,266 | )       |
|----------------------------|--------|--------|---------|
| Total cash purchase  price |   | $      | 264,457 |   |
|                            |        |        |         |  |

 

The table below reflects unaudited pro forma consolidated results ofthe Company as if the Grace Acquisition had taken place at January 1, 2005(dollars in thousands). 

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|                                   | ** ** | **Year ended  December 31, 2005  Pro Forma** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------|------------|
|                              |       |                                                             |       |
| Net Revenues                      |       | $                                                                | 543,927    |   |
| Loss on  retirement of assets     |       | $                                                                | (3,360     | ) |
| Income from  operations           |       | $                                                                | 88,699     |   |
| Loss on early  retirement of debt |       | $                                                                | (221       | ) |
| Net income                        |       | $                                                                | 51,259     |   |

 

In management’s opinion, these unaudited pro forma amounts are notnecessarily indicative of what the actual combined results of operations mighthave been if the acquisition had been effective at the beginning of theearliest period presented.

A third-party valuation firm was engaged by the Company to value theassets acquired pursuant to this acquisition and to assist in the allocation ofthe purchase price.  These tasks includedthe identification and valuation of any intangible assets acquired and resultedin the recognition of certain intangible assets, such as gaming licenses,customer lists and an executive non-competition agreement, as well asgoodwill.  The Company allocatedapproximately $200.8 million to intangible assets acquired pursuant to theGrace Acquisition.  For a description ofthe nature of the intangibles acquired, as well as whether they areamortizable, and if so, over what period of time, see “Note 5—Goodwill andOther Intangible Assets”.

The Company has allocated $3.3 million to goodwill, which the Companybelieves is attributable to the strong cash flows generated by these propertiesas well as the enhancement and diversification of the Company’s base businessesoutside the state of Nevada.

**3.****             Property andEquipment**

Property and equipment consist of the following (inthousands):
|                                     | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Building                            |       | $                     | 84,972     |   | $ | 133,867 |   |
| Gaming equipment                    |       | 101,074               |       | 116,630 |   |
| Furniture,  fixtures, and equipment |       | 33,871                |       | 52,248 |   |
| Leasehold  improvements             |       | 1,929                 |       | 2,001 |   |
| Land                                |       | 19,425                |       | 19,425 |   |
| Barge                               |       | 16,886                |       | 17,153 |   |
| Construction-in-progress            |       | 17,004                |       | 2,344 |   |
|                                |       | 275,161               |       | 343,668 |   |
| Less accumulated  depreciation      |       | (85,513               | )          | (109,153 | ) |
|                                |       | $                     | 189,648    |   | $ | 234,515 |   |

 

**4.****             LeaseAcquisition Costs**
|                          | ** ** | **December 31, 2005**      | ** ** | **December 31, 2006** | ** ** |
|--------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Gross  Carrying  Amount**          | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| Lease  Acquisition Costs |       | $                                    | 77,754     |                            | $          | 35,833 |   | $ | 76,272 |   | $ | 43,110 |   |
|                          |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

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The aggregate amortization expense for the years endedDecember 31, 2004, 2005 and 2006 was $10,036,000 $10,011,000 and $10,272,000 respectively.

Estimated amortization expense for the years ended 2007,2008, 2009, 2010 and 2011 is $10,262,000, $8,625,000, $6,774,000, $6,607,000and $583,000, respectively.

**5.****             Goodwilland Other Intangible Assets**

During 2005 we acquired the casino assets of GraceEntertainment, Inc. pursuant to the Grace Acquisition.  In connection with this transaction, werecorded significant amounts of intangible assets and goodwill during the yearended December 31, 2005 that are included in the table below.

Intangible assets consist of the following (dollars inthousands):
|                                | ** ** | **December 31, 2005**      | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Gross  Carrying  Amount**          | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)** | ** ** |
| Amortized  intangible assets   |       |                                 |       |                            |       |   |   |   |   |
| Customer List                  |       | $                                    | 2,900      |                            | $          | 664 |   | $ | 2,900 |   | $ | 1,390 |   |
| Non-Competition Agreement      |       | 1,100                                |       | 202                             |       | 2,180 |   | 512 |   |
| Total                          |       | 4,000                                |       | 866                             |       | 5,080 |   | 1,812 |   |
| Unamortized  intangible assets |       |                                 |       |                            |       |   |   |   |   |
| Gaming License Rights          |       | 196,800                              |       | —                          |       | 196,800 |   | — |   |
| Patent applications            |       |                                 |       |                            |       | 240 |   |   |   |
| Total                          |       | $                                    | 196,800    |                            | $          | — |   | $ | 197,040 |   | $ | — |   |

 

The changes in the carrying amount of goodwill for theyear ended December 31, 2006 are as follows:
| Balance as of  January 1, 2006 |   | $      | 3,255  |   |
|-------------------------------------|--------|--------|--------|--------|
| Goodwill  acquired during the year  |   | — |   |
| Total                               |   | $      | 3,255  |   |

 

License rights are intangible assets acquired from the purchase ofgaming entities that operate in gaming jurisdictions where competition islimited, such as states where only a certain number of operators are allowed bylaw.  Intangible license rights are notcurrently subject to amortization as we have determined they have an indefiniteuseful life.

Customer lists are being ratably amortized over a four year period.

Non-competition agreements were entered with the previous owners andmanagement and are amortized over five years.

Goodwill represents the excess of total acquisition costs over the fairmarket value of net assets acquired in a business combination.  Goodwill has been determined to have anindefinite life and is therefore not amortized.

For the year ended December 31, 2006, amortizationexpense of intangibles was $1,035,000. The expected annual amortization of those assets for the years endedDecember 31, 2007, 2008, 2009, 2010 and 2011, the amortization costs willbe $1,161,000, $1,161,000, $496,000, $234,000 and $126,000, respectively.

During 2005, we had a third party valuation completedon all intangible assets acquired from Grace 

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Entertainment.  Additionally, we prepared a direct valuemethod valuation to test for impairment of all of those indefinite livedassets.  There was no impairment notedfor the year ended December 31, 2005.

Pursuant to the Grace Acquisition, the Company also acquired two leaseagreements with the City of LaGrange, Missouri and the City of Osceola, Iowa(see “Note 10. ─ Commitments and Contingencies”).  However, because such agreements are notmaterial to our business operations and are essentially a payment obligation toeach such locality, the Company believes such leases have no value.  As a result, such leases are not subject toamortization.

**6.****             Other Assets**

Otherassets consist of the following (dollars in thousands):
|                                                                                          | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Debt issuance  costs, net of accumulated amortization of $2,334, and $4,145 respectively |       | $                     | 11,730     |   | $ | 10,475 |   |
| Other assets                                                                             |       | 3,242                 |       | 6,174 |   |
| Total                                                                                    |       | $                     | 14,972     |   | $ | 16,649 |   |

 

**7.****             Accrued Expenses**

Accrued expenses consist of the following (dollars inthousands):
|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Accrued interest                 |       | $                     | 3,373      |   | 3,635 |   |
| Progressive  jackpot liabilities |       | 2,047                 |       | 2,080 |   |
| Accrued payroll  and related     |       | 3,678                 |       | 4,267 |   |
| Other accrueds                   |       | 4,863                 |       | 5,426 |   |
| Total                            |       | $                     | 13,961     |   | $ | 15,408 |   |
|                                  |            |                       |            |  |  |  |  |

 

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**8.****             Long-Term Debt**

Long-term debt consists of the following (dollars inthousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Revolving credit  facility secured by assets of the Company. The draws bear interest at a  floating rate based on a spread determined by the Company’s leverage ratio  over the base rate or the one-, two-, three- or six-month Eurodollar Rate.  The average rate at 12/31/06 was 6.95%. The revolving credit facility matures  on June 10, 2009                                                                                                                         |       | $                     | 72,000     |   | $ | 95,000 |   |
| Term loan  secured by assets of the Company. The term loan bears interest an a floating  rate based on a spread determined by the Company’s leverage ratio over the  base rate or the one-, two-, three- or six-month Eurodollar Rate. The term  loan requires $250 principal payments due quarterly for the first five years  of the term loan, with the balance payable at maturity. The average rate at  12/31/06 was 7.37%. The term loan matures on January 31, 2011. |       | 99,250                |       | 98,250 |   |
| 8 1¤8%  senior subordinated notes due June 1, 2012 with interest paid semi-annually  on June 1 and December 1, including original issue discount of $922 and $779  as of December 31, 2005 and 2006, respectively.                                                                                                                                                                                                                                                         |       | 159,078               |       | 159,221 |   |
| 7% senior  subordinated notes due November 15, 2014 with interest paid semi-annually on  May 15 and November 15.                                                                                                                                                                                                                                                                                                                                                                |       | 170,000               |       | 170,000 |   |
| Notes payable to  automobile finance companies secured by vehicles, payable in monthly  installments of $10, including interest ranging from 0% to 7.99%                                                                                                                                                                                                                                                                                                                        |       | 265                   |       | 147 |   |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 500,593               |       | 522,618 |   |
| Less current  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 1,117                 |       | 1,105 |   |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | $                     | 499,476    |   | $ | 521,513 |   |

 

*8*1¤8*% Senior Subordinated Notes*

On June 11, 2004, the Company issued (through aprivate placement) $160 million in 8 1¤8% seniorsubordinated notes due June 1, 2012 (the “8 1¤8% notes”). 

Theproceeds from the 8 1¤8 %notes, along with borrowings under the credit facility of the Company existingat the time, were used to retire 97% of its outstanding 10 3¤4% notes for$242.1 million and to pay a $15.0 million dividend to shareholders. Fees of$4.3 million associated with the 8 1¤8% notes and $3.5 million associated with suchcredit facility are included in other assets at December 31, 2006 and are beingamortized over the life of the indebtedness. In connection with the retirementof 97% of the 10 3¤4%notes in 2004, the Company recorded a loss on the early retirement of debt of$38.0 million. The loss consisted of $31.3 million in debt prepayment premiumsand $6.7 million in unamortized loan fees.

The 8 1¤8% notes mature on June 1, 2012. Interest ispayable in cash at a rate of 8 1¤8% per annum on June 1 and December 1 of each year,beginning on December 1, 2004. The indenture under which the 8 1¤8% notes were issued contains various limitationsand restrictions including (i) change in control provisions, (ii) limitationson indebtedness and (iii) limitations on certain payments such as dividends.The Company is in compliance with these covenants as of December 31, 2006.

In August 2004, the Company filed a Form S-4 registration statementwith the SEC for the purpose of effecting the exchange of the 8 1¤8%notes for identical notes registered for resale under the federal securitieslaws. 

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This registration statementbecame effective in November 2004 and the exchange offer was consummated inDecember 2004.

*7% Senior Subordinated Notes*

On November 22, 2004, the Company issued (througha private placement) $170 million in 7% senior subordinated notes due November15, 2014 (the “7% notes”).

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

The 7% notes mature on November 15, 2014. Interest is payable in cash at a rate of7% per annum on May 15 and November 15 of each year, beginning on May 15, 2005.The indenture under which the 7% noteswere issued contains various limitations and restrictions including (i) changein control provisions, (ii) limitations on indebtedness and (iii) limitationson certain payments such as dividends. The Company is in compliance with thesecovenants as of December 31, 2006.

In February 2005, the Company filed a Form S-4 registration statementwith the Securities and Exchange Commission for the purpose of effecting theexchange of the 7% notes for identical notes registered for resale under thefederal securities laws. This registration statement became effective in April2005 and the exchange offer was consummated in May 2005.

The Company’s senior notes are guaranteed by E-T-T, Inc., CardivanCompany, Corral Coin, Inc., Corral Country Coin, Inc., Corral Coin, Inc., E-T-TEnterprises L.L.C., Market Gaming, Inc., and Flamingo Paradise Gaming, LLC,HGI-Lakeside, HGI-St Jo and HGI-Mark Twain (100 percent-owned subsidiaries ofHerbst Gaming, Inc.) (collectively, the “subsidiary guarantors”). Condensedconsolidating financial information with respect to the subsidiary guarantorsis not provided because the Company has no independent assets or operations,the subsidiary guarantees are full and unconditional and joint and several, andthere are no other material subsidiaries of the Company other than thesubsidiary guarantors.  There are no significantrestrictions on the ability of the Company’s subsidiary guarantors to transferfunds to the Company in the form of cash dividends, loans or advances.

*Credit Facilities*

On October 8, 2004, the Company amended and restated thesenior secured credit facility it entered into on June 10, 2004 (the “amendedcredit facility”). The amendment provided for a $175 million revolving creditfacility and included the ability to issue $100 million under a term facilityfor the acquisition of the Grace Entertainment assets.  The facility was further amended in August of2005 to revise pricing.  Borrowingsunder the senior secured credit facility bear interest, selected monthly at theCompany’s option, at a premium over the base rate or the one-, two-, three-, orsix-month Eurodollar Rate (“Eurodollar”). The premium depends on a leverageratio and can vary, if determined by reference to the base rate, between 0.0%and 1.125% and, if determined by reference to Eurodollar, between .875% and2.375%. As of December 31, 2006, using the one-month Eurodollar option, thepremium over Eurodollar was 1.75%. The Company incurs a commitment fee, payablequarterly in arrears, on the unused portion of the senior secured creditfacility. This fee varies depending on a leverage ratio and can vary between0.25% and 0.40% per annum. As of December 31, 2006, the fee was 0.35% perannum times the average unused portion of the facility.

Theamended credit facility contains various limitations and restrictions,including with respect to leverage covenants (both senior and total) as well asa minimum fixed charge coverage ratio. The Company is in compliance with thesecovenants as of December 31, 2006.

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

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|            | ** ** | **December 31,** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** |
|       |       |                  |       |
| 2007       |       | $                     | 1,105      |   |
| 2008       |       | 1,034                 |       |
| 2009       |       | 96,007                |       |
| 2010       |       | 1,000                 |       |
| 2011       |       | 94,250                |       |
| Thereafter |       | 329,222               |       |
| Total      |       | $                     | 522,618    |   |

 

**9.****             Related-PartyTransactions**

***General.***

Edward Herbst, Timothy Herbst and Troy Herbst are brothers and are theofficers and directors of Herbst Gaming, Inc. and its wholly-ownedsubsidiaries.  In addition, they areofficers and directors of Terrible Herbst, Inc. (“Terrible Herbst”).  There is no cross ownership between HerbstGaming, Inc. and Terrible Herbst. Terrible Herbst is owned solely by Jerry and Maryanna Herbst, theparents of the Herbst brothers.  SeanHiggins, the Company’s general counsel, is also the general counsel of TerribleHerbst.

***Slot route contract with Terrible Herbst,Inc.***

The Company rents space for certain slot machine route operations inconvenience stores owned by Terrible Herbst. Rent expense of $5,599,500, $5,909,000 and $6,623,000 was incurred underthis agreement for the years ended December 31, 2004, 2005 and 2006,respectively, for the exclusive placement of slot machines in Terrible Herbstconvenience store locations.  Thiscontract expires in 2010 but may be extended at the option of the Company fortwo additional terms of five years.

***Other arrangements with Terrible Herbst, Inc.***

The Company has entered into a servicing arrangement with TerribleHerbst pursuant to which it provides accounting and administrative servicesrelated to the collection of daily deposits from Terrible Herbst conveniencestores.  The Company also providespersonnel to Terrible Herbst to count, maintain and safeguard large amounts ofcoin and currency.  Terrible Herbstreimburses the Company’s expenses in providing these services.  Under this servicing arrangement, the Companywas paid approximately $205,800 for services rendered for each of the yearsended December 31, 2004, 2005 and 2006.

The Company has entered into a nonexclusive trademark and licenseagreement with Terrible Herbst for the use of the Terrible Herbst brand nameand its cowboy logo which extends through 2011. Subject to mutual consent, the agreement provides for the ability torenew the agreement for two additional successive terms of five yearseach.  Pursuant to this trademark andlicense agreement, the Company paid approximately $1,345,000, $1,412,000 and$1,483,000 to Terrible Herbst in the years ended December 31, 2004, 2005and 2006, respectively.

***Lease agreements.***

Pursuant to a lease agreement that expires in 2067, including renewalperiods, the Company leases the real property on which its corporateheadquarters is located from The Herbst Family Limited Partnership II, orHerbst FLP II.  The general partners ofthe Herbst FLP II are Jerry and Maryanna Herbst.  The lease requires monthly rental payments of$14,416.  In each of 2004, 2005 and 2006,the Company paid $172,992 under this lease.

Pursuant to a lease agreement that expires in 2026, including renewalperiods, the Company leases the real property on which Terrible’s Town Casinoin Pahrump is located from The Herbst Family Limited Partnership.  The 

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lease requires monthly rental payments of$15,000.  In each of 2004, 2005, theCompany paid $150,000 under this lease. During 2006, the company paid $165,000under this lease.

The Company leases land and office space in certain of its facilitiesto Terrible Herbst under various lease agreements with terms ranging frommonthly to 20 years.  Monthly rental incomeis $39,000 at year end.  Under theseleases, in each of 2004 and 2005 the Company received rental income of $762,000and in 2006 the Company received rental income of $640,500.

The Company subleases the real property on which Terrible’s SearchlightCasino in Searchlight is located from Terrible Herbst for $15,000 per month,pursuant to a lease agreement entered into on June 30, 2002 that expiresin 2022, with options to renew the lease for five additional successive termsof ten years each.  Terrible Herbstleases that real property from an unrelated third party, pursuant to a leaseagreement entered into on June 30, 2002 that expires in 2042, includingrenewal periods.  In each of 2004, 2005and 2006, amounts paid under this lease was $180,000.

The Company leases a warehouse located in Las Vegas, Nevada for itsemployment center and purchasing departments from the Herbst’s Grandchildren’sTrust.  The lease began in November 2002and requires payments of $46,500 per month through November 2012.  Rent expense incurred under this leasearrangement was $522,300 for each of the years ended December 31, 2004, 2005and $558,000 during 2006.

Future rental income under related-party agreements isas follows (dollars in thousands):
| 2007       |   | $     | 348    |   |
|------------|--------|-------|--------|--------|
| 2008       |   | 348   |   |
| 2009       |   | 348   |   |
| 2010       |   | 348   |   |
| 2011       |   | 348   |   |
| Thereafter |   | 2,084 |   |
| Total      |   | $     | 3,824  |   |

 

***Related-party transactions.***

Mr. Higgins is the Company’s General Counsel, the General Counselof Terrible Herbst, Inc. and the brother of Mary E. Higgins, the Company’sChief Financial Officer. Mr. Higgins received a salary for services rendered to us in 2004,2005 and 2006 of $339,394, $426,763 and $625,851, respectively.

In 2003, the Company entered into a slot route contract to install,operate and service slot machines at a tavern owned by HIGCO, Inc., a companyowned and operated by Mr. Higgins and two of his brothers.  Pursuant to this revenue-sharing contract,HIGCO, Inc. paid the Company $118,756 in 2004, $155,804 in 2005 and $154,220 in2006.

In 2004, E-T-T entered into a slot route contract with SamCon, Inc., acompany owned and operated by Mr. Higgins, to install, operate and serviceslot machines at a new location.  Termsof this revenue-sharing contract are similar to the terms of the contract theCompany entered into with HIGCO in 2003. Pursuant to this revenue-sharing contract, SamCon, Inc. paid E-T-T $0 in2004, $40,800 in 2005 and $21,112 in 2006.

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

John N. Brewer, a member of the Company’s board of directors, is apartner with Kummer Kaempfer Bonner & Renshaw.  The Company retained Kummer Kaempfer Bonner& Renshaw as outside legal counsel 

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through December 31, 2004, and Kummer KaempferBonner & Renshaw has received fees for legal services in the amount of$274,310, $3,500 and $5,673 for 2004, 2005 and 2006, respectively

The balance sheet item “due from related parties” includes receivablesof $160,000, $164,000 and $168,000 at December 31, 2004, 2005 and 2006,respectively, from Terrible Herbst, which are non-interest bearing.

Obligations due to related parties at December 31, 2004, 2005 and2006 consisted of balances due to Terrible Herbst for expenditures made onbehalf of the Company, accrued rent, and accrued management fees.  The balances are non-interest bearing andpayable on demand.

**10.****          Commitments and Contingencies**

At December 31, 2006, the Company has non-cancelablelocation license agreements for space leases at groups of affiliated storesthat expire on various dates from 2006 through 2011, with certain options forrenewal. Revenues from gaming machines in these stores accounted forapproximately 33.5% of the Company’s total revenues for the year endedDecember 31, 2006.

Futureminimum lease payments under non-cancelable operating leases and locationlicense agreements are as follows (dollars in thousands):
| 2007       |   | $      | 73,867  |   |
|------------|--------|--------|---------|--------|
| 2008       |   | 52,963 |    |
| 2009       |   | 33,172 |    |
| 2010       |   | 32,711 |    |
| 2011       |   | 10,816 |    |
| Thereafter |   | 12,351 |    |
| Total      |   | $      | 215,880 |   |

 

Rent expense related to non-cancelable leases with termsexceeding one year was $72,228,000, $74,378,000 and $ 74,852,000 for theyears ended December 31, 2004, 2005 and 2006, respectively.

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

TheCompany is a party to certain other claims, legal actions, and complaints arisingin the ordinary course of business or asserted by way of defense orcounterclaim in actions filed by the Company. Management believes that itsdefenses are substantial in each of these matters and that the Company’s legalposition can be successfully defended without material adverse effect on itsconsolidated financial statements.

**11.****          Revenue Derived FromMajor Locations**

Route operations revenues at three groups of affiliated store chains inthe years ended December 31, 2004 and 2005 each accounted for more than 10percent of the Company’s total route revenues. The total of such revenues wereapproximately $137,468,000, $150,933,000 and $0. in the years ended December31, 2004, 2005 and 2006, respectively. Each individual store chain included insuch affiliated group of store chains has a separate lease with the Company. Noone chain accounted for more than 10% in 2006.

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**12.****          Business Segments**

TheCompany operates through two business segments: slot route operations and casino operations. The slot route operationsinvolve the installation, operation, and service of slot machines at strategic,high traffic non-casino locations, such as grocery stores, drug stores,convenience stores, bars, and restaurants. Casino operations consist of twogeographic areas, Nevada and Other States. The Nevada locations include the following five casinos: Terrible’s TownCasino (Henderson) in Henderson, Nevada, Terrible’s Searchlight Casino inSearchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino,both of which are located in Pahrump, Nevada, and Terrible’s Hotel & Casinoin Las Vegas, Nevada.  Casinos located inother states are Terrible’s Lakeside Casino in Osceola, Iowa, Terrible’s St. JoFrontier Casino in St. Joseph, Missouri and Terrible’s Mark Twain Casino inLa Grange, Missouri.

Revenues and income for these segments are as follows(dollars in thousands):
| ** **                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                                                     |       |                                       |       |   |   |   |   |
| Net revenues                                                                                             |       |                                       |       |   |   |   |   |
| Slot route  operations                                                                                   |       | $                                          | 292,868    |   | $ | 338,376 |   | $ | 346,955 |   |
| Casino  operations                                                                                       |       |                                       |       |   |   |   |   |
| Nevada                                                                                                   |       | 79,116                                     |       | 82,872 |   | 82,068 |   |
| Other States                                                                                             |       | —                                     |       | 108,569 |   | 121,838 |   |
| Other—non gaming                                                                                    |       | 3,628                                      |       | 6,024 |   | 11,202 |   |
| Total net  revenues                                                                                      |       | $                                          | 375,612    |   | $ | 535,841 |   | $ | 562,063 |   |
| Depreciation and  amortization                                                                           |       |                                       |       |   |   |   |   |
| Slot route  operations                                                                                   |       | 19,362                                     |       | 20,114 |   | 21,431 |   |
| Casino  operations                                                                                       |       |                                       |       |   |   |   |   |
| Nevada                                                                                                   |       | 5,727                                      |       | 6,359 |   | 6,408 |   |
| Other States                                                                                             |       | —                                     |       | 7,150 |   | 9,967 |   |
|                                                                                                     |       |                                       |       |   |   |   |   |
| Other                                                                                                    |       | 318                                        |       | 318 |   | 318 |   |
| Total  depreciation and amortization                                                                     |       | $                                          | 25,407     |   | $ | 33,941 |   | $ | 38,124 |   |
| Segment  EBITDA(2)                                                                                       |       |                                       |       |   |   |   |   |
| Slot route  operations                                                                                   |       | $                                          | 64,939     |   | $ | 80,262 |   | 76,806 |   |
| Casino  operations                                                                                       |       |                                       |       |   |   |   |   |
| Nevada                                                                                                   |       | 22,785                                     |       | 23,747 |   | 21,529 |   |
| Other states                                                                                             |       | —                                     |       | 29,330 |   | 33,986 |   |
| Other and  corporate(1)                                                                                  |       | (10,985                                    | )          | (11,813 | ) | (13,003 | ) |
| Depreciation and  amortization                                                                           |       | (25,407                                    | )          | (33,941 | ) | (38,124 | ) |
| Interest  expense, net of capitalized interest (capitalized interest of $0,$102, and  $873 respectively) |       | (22,109                                    | )          | (36,532 | ) | (39,134 | ) |
| Loss on early  retirement of debt                                                                        |       | (37,991                                    | )          | (221 | ) | — |   |
| Net (loss) income                                                                                        |       | $                                          | (8,768     | ) | $ | 50,832 |   | $ | 42,060 |   |

 

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(1)   Representsnon-gaming revenues, general andadministrative expenses, interest income and loss on lease termination.

(2)   SegmentEBITDA is used by management to measure segment profits and losses and consistsof income from segment operations plus depreciation and amortization and iscalculated before allocation of overhead.

**13.          Subsequent Events**

**               **OnJanuary 3, 2007, the Company consummated the acquisition of The Sands Regent(the “Sands Regent Acquisition”), paying approximately $119.0 million in cashfor the outstanding securities of The Sands Regent.  The Company used proceeds from the creditagreement it entered into concurrently with the Sands Regent Acquisition tofund such transaction.

 

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**SelectedQuarterly Financial Information (Unaudited)(in thousands)**
| ** **                           | ** ** | **Mar. 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
| **Year  Ended December 31, 2006**    |       |             |       |             |       |              |       |             |       |      |       |
| Net  revenues—Route operations  |       | $                | 90,858     |             | $          | 86,999            |       | $                | 83,707     |      | $          | 85,391 |   | $ | 346,955 |   |
| Net  revenues—Casino operations |       |             |       |             |       |              |       |             |       |      |       |
| Nevada                               |       | 21,345           |       | 19,999           |       | 19,950            |       | 20,774           |       | 82,068    |       |
| Other states                         |       | 30,635           |       | 29,378           |       | 31,063            |       | 30,762           |       | 121,838   |       |
| Net  revenues—Other             |       | 2,070            |       | 2,420            |       | 3,376             |       | 3,336            |       | 11,202    |       |
| Operating income                     |       | 26,243           |       | 20,655           |       | 17,905            |       | 15,657           |       | 80,460    |       |
| Net income                           |       | 17,222           |       | 11,286           |       | 8,200             |       | 5,352            |       | 42,060    |       |
| **Year  Ended December 31, 2005**    |       |             |       |             |       |              |       |             |       |      |       |
| Net  revenues—Route operations  |       | $                | 81,481     |             | $          | 85,043            |       | $                | 83,512     |      | $          | 88,340 |   | $ | 338,376 |   |
| Net  revenues—Casino operations |       |             |       |             |       |              |       |             |       |      |       |
| Nevada                               |       | 21,600           |       | 20,877           |       | 19,425            |       | 20,970           |       | 82,872    |       |
| Other states                         |       | 21,138           |       | 29,312           |       | 29,492            |       | 28,627           |       | 108,569   |       |
| Net  revenues—Other             |       | 1,337            |       | 1,390            |       | 1,528             |       | 1,769            |       | 6,024     |       |
| Operating income                     |       | 24,175           |       | 23,466           |       | 17,065            |       | 22,139           |       | 86,845    |       |
| Net income                           |       | 16,147           |       | 14,236           |       | 7,574             | (1)        | 12,875           |       | 50,832    |       |
| **Year  Ended December 31, 2004**    |       |             |       |             |       |              |       |             |       |      |       |
| Net  revenues—Route operations  |       | $                | 68,835     |             | $          | 72,674            |       | $                | 73,472     |      | $          | 77,887 |   | $ | 292,868 |   |
| Net  revenues—Casino operations |       | 19,985           |       | 19,699           |       | 19,460            |       | 19,972           |       | 79,116    |       |
| Net  revenues—Other             |       | 823              |       | 1,003            |       | 847               |       | 955              |       | 3,628     |       |
| Operating income                     |       | 11,632           |       | 13,805           |       | 11,766            |       | 13,776           |       | 50,979    |       |
| Net income (loss)                    |       | 5,486            |       | (29,831          | )(2)       | 7,163             |       | 8,414            |       | (8,768    | )          |

 

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(1)   Amount includes $3.4 million loss on retirement ofassets.

(2)   Amount includes a loss on early retirement of debt consistingof $31.3 million in a debt prepayment penalty and $6.7 million inunamortized loan fees.

## **Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

None.

## **Item 9A. Controls and Procedures.**

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

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

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Based on the foregoing, our Chief Executive Officerand Chief Financial Officer concluded that, as of the Evaluation Date, ourdisclosure controls and procedures were effective at the reasonable assurancelevel.

There has been no change in our internal controls over financialreporting during the fourth quarter ended December 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reports.

## **Item 9B. Other Information.**

None.

# **PART III**

## **Item 10. Directors and Executive Officers of the Registrant.**

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

**Directors and Executive Officers**

The following is a list of our directors and executiveofficers:
| Name                  | ** ** | **Age** | ** ** | **Position**                                                  |
|-----------------------|------------|---------|------------|---------------------------------------------------------------|
| Edward J. Herbst      |       | 45      |       | Chairman of the Board, Chief Executive Officer and  President |
| Timothy P.  Herbst    |       | 43      |       | Executive Vice President and Director                         |
| Troy D. Herbst        |       | 40      |       | Executive Vice President, Secretary, Treasurer and  Director  |
| Mary E. Higgins       |       | 49      |       | Chief Financial Officer                                       |
| John N. Brewer        |       | 49      |       | Director                                                      |
| John F. O’Reilly |       | 61      |       | Director                                                      |

 

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

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

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

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

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

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

*John F. O’Reilly* has served as aDirector of our company since November 2004. Mr. O’Reilly is the Chairman and Chief Executive Officer of the lawfirm of O’Reilly Law Group, LLC, in Las Vegas, Nevada, a position which he hasheld since 1999 and where he has practiced since its inception in 1977 and alsoserves as the Chairman and Chief Executive Officer of the O’Reilly GamingGroup, in Las Vegas, Nevada, which he has served since its inception in1999.  Mr. O’Reilly is also Chairmanand an officer and/or Director of various family-owned business entities andrelated investments.  Mr. O’Reillyhas served as a Director of Nevada Power Company since 1995 and Sierra PacificResources and Sierra Pacific Power Company since 1999.

**Code of Ethics**

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

·      honestand ethical conduct, including the ethical handling of actual or apparentconflicts of interest between personal and professional relationships;

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

·      compliance with applicablegovernmental laws, rules and regulations;

·      the prompt internalreporting of violations of the code to an appropriate person or personsidentified in the Code of Ethics; and

·      accountability for adherenceto the Code of Ethics.

**Committees of our Board of Directors**

Our board of directors has an Audit Committee and an ExecutiveCommittee.  The Audit Committee’sfunctions are as follows:

·                  to reviewreports of our independent public accountants;

·                  to review ourfinancial practices, internal controls and policies with officers and keyemployees;

·                  to review suchmatters with our auditors to determine scope of compliance with anydeficiencies;

·                  to considerselection of independent public accountants;

·                  to reviewrelated party transactions; and

·                  to make periodicreports on such matters to the board of directors.

Our Audit Committee is comprised of Messrs. Troy Herbst and JohnBrewer.  Mr. Brewer is the Chairmanof the Audit Committee.  Our board ofdirectors has determined that Mr. Brewer is qualified as an auditcommittee financial expert as defined by Item 401(h) ofRegulation S-K and is independent under the listing standards of the NewYork Stock Exchange.

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

## **Item 11. Executive Compensation.**

**Executive Compensation**

The following table lists all compensation we paid oraccrued for services rendered by our executive officers whose aggregate cashcompensation exceeded $100,000 for the last three fiscal years:
|                                                | ** ** | **Annual Compensation** | ** ** | **Compensation  ($)—** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Name and Principal Position** | ** ** | **Fiscal  Year**             | ** ** | **Salary**                  | ** ** | **Bonus** | ** ** | **Other Annual  Compensation(2)** | ** ** | **Stockholder Tax  Distribution(3)** | ** ** |
| Edward J. Herbst(1),                           |       | 2006                         |       | $                           | 572,505    |   | $ | — |   | $ | 2,010,893 |   | $ | 8,412,500 |   |
| *Chairman of the Board, Chief Executive*       |       | 2005                         |       | 538,296                     |       | $ | — |   | 1,857,693 |   | 2,179,250 |   |
| *Officer and President*                        |       | 2004                         |       | 512,663                     |       | — |   | 6,752,769 |   | 1,100,000 |   |
| * *                                       | * *   | * *                     | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * |
| Timothy P. Herbst,                             |       | 2006                         |       | 187,469                     |       | — |   | 2,012,393 |   | 8,411,000 |   |
| *Executive Vice President*                     |       | 2005                         |       | 173,644                     |       | — |   | 1,852,519 |   | 2,179,250 |   |
|                                                |       | 2004                         |       | 165,375                     |       | — |   | 6,753,126 |   | 1,100,000 |   |
|                                           |       |                         |       |                        |       |   |   |   |   |   |   |
| Troy D. Herbst,                                |       | 2006                         |       | 187,469                     |       | — |   | 2,012,393 |   | 8,411,000 |   |
| *Executive Vice President, Secretary and*      |       | 2005                         |       | 173,644                     |       | — |   | 1,856,874 |   | 2,179,250 |   |
| *Treasurer*                                    |       | 2004                         |       | 165,375                     |       | — |   | 6,753,130 |   | 1,100,000 |   |
|                                           |       |                         |       |                        |       |   |   |   |   |   |   |
| Mary E. Higgins(1),                            |       | 2006                         |       | 354,281                     |       | 250,000 |   | — |   | — |   |
| *Chief Financial Officer*                      |       | 2005                         |       | 330,625                     |       | 50,000 |   | 3,699 |   | — |   |
|                                                |       | 2004                         |       | 269,052                     |       | 153,000 |   | 3,262 |   | — |   |
|                                                |            |                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)   We have entered into employment agreements with EdwardJ. Herbst and Mary E. Higgins.

(2)   Includes stockholders’ distributions and fringebenefits, such as automobiles.

(3)   We are an S corporation and taxes on our income arepaid by the stockholders.

**Employment Agreements**

On August 1, 2001, we entered into an employment agreement withEdward J. Herbst, our Chairman, Chief Executive Officer and President, in whichwe agreed to pay him annual base compensation of $465,000, which may beincreased annually by five percent.  Thisagreement commenced on August 1, 2001 and terminates on July 31, 2006,with the automatic renewal periods described below.  In January of 2005, we entered into an a newemployment agreement with Mary E. Higgins, our Chief Financial Officer, inwhich we agreed to pay her an annual base salary of $325,625 plus anon-discretionary bonus of $50,000 per year. That agreement terminates on December 31, 2008.  Both of these agreements automatically renewfor successive one-year periods unless sooner terminated or unless either partyto the respective agreements notifies the other in writing at least 60 daysprior to the date the respective agreement is scheduled to expire.  Each employment agreement provides that ifthe executive’s employment is terminated for Cause (as defined in theemployment agreement), such executive will receive no severance payment of anykind.  If the executive voluntarilyterminates employment, the executive will receive no severance payment of anykind.  In the event that we choose toterminate the executive’s employment for 

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any reason other than Cause, the executive willreceive a severance payment equal to one year’s salary.  The employment agreements with theseexecutives also contain a covenant to protect confidential information.

**Executive Compensation and Bonus Plan**

The board of directors has adopted the Executive Compensation and BonusPlan for our executive officers who are also stockholders.  Any payments to be made under this plan mustbe approved by our independent directors. Commencing with calendar year 2003 and each succeeding calendar year,the maximum aggregate amount of annual compensation and cash bonuses increasesby 5%.  To date, there have been no cashbonuses paid to the executive officers. If any cash bonus plan is implemented it will be administered by ourindependent directors.

**Executive Committee Interlocks and InsiderParticipation**

During the fiscal year ended December 31, 2006, Edward, Timothyand Troy Herbst were members of the Executive Committee of our board ofdirectors.  Our executive compensation isdetermined by the Executive Committee, all members of which are officers, andthe owners, of Herbst Gaming.

**Compensation of Directors**

Our independent directors will receive compensation in the amount of$25,000 per year for serving on our board and in addition will receive $5,000per board meeting attended and $1,500 per committee meeting attended.

**Section 16(a) Beneficial Ownership ReportingCompliance**

Not Applicable.

## **Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

The securities entitled to vote consist of shares of ourcommon stock, no par value, with each share entitling its owner to onevote.  Common stock is the onlyoutstanding class of voting securities authorized by our articles ofincorporation.  The number of outstandingshares of common stock as of December 31, 2006 was 300.
| Name and   Address(1)                                   | ** ** | **Number of  Shares of  Common Stock  Beneficially  Owned** | ** ** | **Percentage of  Outstanding  Shares** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Edward J. Herbst  (2)                                             |       | 100                                                                        |       | 331¤3                                  | %          |
| Timothy P.  Herbst (2)                                            |       | 100                                                                        |       | 331¤3                                  | %          |
| Troy D. Herbst  (2)                                               |       | 100                                                                        |       | 331¤3                                  | %          |
| John N. Brewer                                                    |       | —                                                                     |       | —                                      |       |
| Mary E. Higgins                                                   |       | —                                                                     |       | —                                      |       |
| John F. O’Reilly                                             |       | —                                                                     |       | —                                      |       |
| All executive officers  and directors as a group (6 persons) |       | 300                                                                        |       | 100.0                                       | %          |

 

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(1)   The address of each such person isc/o Herbst Gaming, Inc., 3440 West Russell Road, Las Vegas, Nevada89118.

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

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## **Item 13. Certain Relationships and Related Transactions.**

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

*General. *EdwardHerbst, Timothy Herbst and Troy Herbst are brothers and are the officers anddirectors of Herbst Gaming, Inc. and its wholly-owned subsidiaries.  In addition, they are officers and directorsof Terrible Herbst, Inc.  There is nocross ownership between Herbst Gaming, Inc. and Terrible Herbst, Inc.  Terrible Herbst, Inc. is owned solely byJerry and Maryanna Herbst, the parents of the Herbst brothers.  Sean Higgins, our general counsel, is alsothe general counsel of Terrible Herbst, Inc.

*Slot route contract with Terrible Herbst, Inc. *We rent space for certainslot machine route operations in convenience stores owned by Terrible Herbst,Inc., a corporation in which our owners are officers and which is owned by thefather of our owners.  Rent expense of$5,599,500, $5,909,000 and $6,623,000 was incurred under this agreement for theyears ended December 31, 2004, 2005 and 2006, respectively, for theexclusive placement of slot machines in Terrible Herbst convenience storelocations.  This contract expires in 2010but may be extended at our option for two additional terms of five years.

*Other arrangements with Terrible Herbst, Inc.*Wehave also entered into a servicing arrangement with Terrible Herbst pursuant towhich we provide accounting and administrative services related to thecollection of daily deposits from Terrible Herbst convenience stores.  We also provide personnel to Terrible Herbstto count, maintain and safeguard large amounts of coin and currency.  Terrible Herbst reimburses our expenses inproviding these services.  Under thisservicing arrangement, we were paid approximately $205,800 for servicesrendered for each of the years ended December 31, 2004, 2005 and 2006.

We have entered into a nonexclusive trademark and license agreementwith Terrible Herbst for the use of the Terrible Herbst brand name and itscowboy logo which extends through 2011. Subject to mutual consent, the agreement provides for the ability torenew the agreement for two additional successive terms of five yearseach.  Pursuant to this trademark andlicense agreement, we paid approximately $1,345,000, $1,412,000 and $ 1,483,000to Terrible Herbst in the years ended December 31, 2004, 2005 and 2006,respectively.

*Lease agreements. *Pursuant to a lease agreement that expires in 2067,including renewal periods, we lease the real property on which our corporateheadquarters is located from The Herbst Family Limited Partnership II, orHerbst FLP II.  The general partnersof the Herbst FLP II are Jerry and Maryanna Herbst.  In each of 2003, 2004 and 2005, we paid$172,992 under this lease.

Pursuant to a lease agreement that expires in 2026, including renewalperiods, we lease the real property on which Terrible’s Town Casino in Pahrumpis located from The Herbst Family Limited Partnership.  The lease requires monthly rental payments of$15,000.  In each of 2004 and 2005, wepaid $150,000 under this lease and in 2006 we paid $165,000 under this lease.

We lease land and office space in certain of our facilities to TerribleHerbst under various lease agreements with terms ranging from month-to-month to20 years.  Monthly rental income is $39,000at year end.  In each of 2004 and 2005,we received rental income of $762,000 under these leases. In 2006 we receivedrental income of $641,000 under these leases.

We lease the real property on which Terrible’s Searchlight Casino inSearchlight is located from Terrible Herbst for $15,000 per month, pursuant toa lease agreement entered into on June 30, 2002 that expires in 2022, withoptions to renew the lease for five additional successive terms of ten yearseach.  Terrible Herbst leases that realproperty from an unrelated third party, pursuant to a lease agreement enteredinto on June 30, 2002 that expires in 2042, including renewalperiods.  In each of 2004, 2005 and 2006,we paid $180,000 under this lease.

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

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$46,500 per month through November 2012.  In each of 2004 and 2005, we incurred rentexpense of $522,300 under this lease. In 2006 this expense was $558,000

*Related-party transactions. *Mr. Higgins is ourgeneral counsel, the general counsel of Terrible Herbst and the brother of MaryE. Higgins, our chief financial officer. Mr. Higgins received a salary for services rendered to us in 2004,2005 and 2006 of $339,394, $426,763 and $625,851, respectively.

In 2003, we entered into a slot route contract to install, operate andservice slot machines at a tavern owned by HIGCO, Inc., a company owned andoperated by Mr. Higgins and two of his brothers, G. Michael Higginsand Kevin J. Higgins.  Pursuant to thisrevenue-sharing contract, HIGCO, Inc. paid us $118,756 in 2004 and $155,804 in2005 and $154,220 in 2006

In 2004, ETT entered into a slot route contract with SamCon, Inc., acompany owned and operated by Mr. Higgins, to install, operate and serviceslot machines at a new location.  Termsof this revenue-sharing contract are similar to the terms of the contract weentered into with HIGCO in 2003. Pursuant to this revenue-sharing contract, SamCon, Inc. paid ETT $0 in2004, $40,800 in 2005 and $21,112 in 2006.

In 2005, ETT entered into a slot route contract to install, operate andservice slot machines at a tavern owned by Prescott’s Bar LLC, a company ownedand operated by Mr. Todd Sosey, the brother-in-law of Troy D. Herbst, oneof the owners of the Company.  Pursuantto this revenue-sharing contract, Prescott’s paid ETT $0 in 2004 and 2005 and$52,844 in 2006.

John N. Brewer, a member of our board of directors, is a partner withKummer Kaempfer Bonner & Renshaw.  Weretained Kummer Kaempfer Bonner & Renshaw as outside legal counsel throughDecember 31, 2004, and Kummer Kaempfer Bonner & Renshaw has receivedfees for legal services in the amount of $274,310, $3,500 and $5,673 for 2004,2005 and 2006, respectively.

*Indemnification of Directors and Officers. *Section 78.7502 of theNevada Revised Statutes, Article VIII of our articles of incorporation andArticle IX of our by-laws contain provisions for indemnification of ourofficers, directors, employees and agents. Our articles require us to indemnify such persons to the full extentpermitted by Nevada law.  Each personwill be indemnified in any proceeding if he acted in good faith and in a mannerthat he reasonably believed to be in, or not opposed to, our bestinterests.  Indemnification would coverexpenses, including attorneys’ fees, judgments, fines and amounts paid insettlement.

Insofar as indemnification for liabilities arisingunder the Securities Act may be permitted to directors, officers or controllingpersons of the registrants pursuant to the foregoing provisions, we have beeninformed that in the opinion of the SEC such indemnification is against publicpolicy as expressed in the Securities Act and is, therefore, unenforceable.

## **Item 14. Principal Accountant Fees and Services.**

The aggregate accounting fees billed and servicesprovided by our principal accountants for the years ended December 31,2005 and 2006 are as follows:
|                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees(1)          |       | $        | 210,100    |     | $          | 309,000 |   |
| Audit-related  fees(2) |       | 80,870   |       | 61,700   |       |
| Tax fees               |       | —   |       | —   |       |
| All other fees         |       | —   |       | —   |       |
| Total fees             |       | $        | 290,970    |     | $          | 370,700 |   |

 

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(1)   Represents the aggregate fees Deloitte & ToucheLLP billed us in each of the last two fiscal years for professional servicesfor the audits of our annual financial statements and review of financialstatements 

73

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included in our periodic filings with the SEC and forservices that are normally provided by Deloitte & Touche LLP in connectionwith those filings.

(2)   Represents the aggregate fees Deloitte & ToucheLLP billed us in each of the last two fiscal years for assurance and relatedservices that are reasonably related to the performance of the audit, includingaudit-related services in conjunction with the acquisition of the Graceproperties and our debt offerings.

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

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# **PART IV**

## **Item 15. Exhibits and Financial Statement Schedules.**

(a)           FinancialStatements

**1.**             Listof Financial Statements

Included in Part II ofthis report:

Report of IndependentRegistered Public Accounting Firm

Consolidated FinancialStatements

Consolidated BalanceSheets As of December 31, 2005 and 2006

Consolidated Statementsof Operations For the years ended December 31, 2004, 2005 and 2006

Consolidated Statements of Stockholders’ Equity(Deficiency) For the years ended December 31, 2004, 2005 and 2006

Consolidated Statementsof Cash Flows For the years ended December 31, 2004, 2005 and 2006

Notes to ConsolidatedFinancial Statements

**2.**             FinancialStatements Schedules

All schedules are omittedgiven the absence of conditions under which they are required to be included orbecause the required information is included in the financial statements ornotes thereto.

(c)           Exhibits
| Index No. | ** ** | **Description**                                                                                                                                                           |
|-----------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                      |
| 2.1(3)    |       | Asset Purchase Agreement between Anchor Coin and  Herbst Gaming, Inc. and Market Gaming, Inc. and E-T-T, Inc. dated as of  November 21, 2002.                        |
|      |       |                                                                                                                                                                      |
| 2.2(3)    |       | First Amendment to Asset Purchase Agreement by and  among Anchor Coin and Herbst Gaming, Inc. and Market Gaming, Inc. and E-T-T,  Inc. dated as of January 14, 2003. |
|      |       |                                                                                                                                                                      |
| 2.3(5)    |       | Asset Purchase and Sale Agreement, dated  July 20, 2004, made by and between Mark Twain Casino, L.L.C. and Herbst  Gaming, Inc.                                      |
|      |       |                                                                                                                                                                      |
| 2.4(5)    |       | Asset Purchase and Sale Agreement, dated July 20,  2004, made by and between St. Joseph Riverboat Partners and Herbst  Gaming, Inc.                             |
|      |       |                                                                                                                                                                      |
| 2.5(5)    |       | Asset Purchase and Sale Agreement, dated  July 20, 2004, made by and between Southern Iowa Gaming Company and  Herbst Gaming, Inc.                                   |

 

75

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| Index No.  | ** ** | **Description**                                                                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                       |
| 2.6(7)     |       | Amendment to Asset Purchase and Sale Agreement, made  by and between Mark Twain Casino, L.L.C. and Herbst Gaming, Inc. dated as of  December 2004.                                                                         |
|       |       |                                                                                                                                                                                                                       |
| 2.7(7)     |       | Amendment to Asset Purchase and Sale Agreement, made  by and between St. Joseph Riverboat Partners and Herbst Gaming, Inc.  dated as of December 2004.                                                                |
|       |       |                                                                                                                                                                                                                       |
| 2.8(7)     |       | Amendment to Asset Purchase and Sale Agreement, made  by and between Southern Iowa Gaming Company and Herbst Gaming, Inc. dated as  of December 2004.                                                                      |
|       |       |                                                                                                                                                                                                                       |
| 2.9(7)     |       | Second Amendment to Asset Purchase and Sale  Agreement made by and between Southern Iowa Gaming Company and Herbst Gaming,  Inc., dated as of January 25, 2005.                                                       |
|       |       |                                                                                                                                                                                                                       |
| 2.10(9)    |       | Agreement and Plan of Merger, dated as of May 16,  2006, by and among The Sands Regent, Herbst Gaming, Inc. and HGI-Casinos,  Inc.                                                                                         |
|       |       |                                                                                                                                                                                                                       |
| 2.11(10)   |       | Amendment No. 1 to the Agreement and Plan of Merger  among The Sands Regent, Herbst Gaming, Inc. and HGI-Casinos, Inc. dated as of  August 24, 2006                                                                   |
|       |       |                                                                                                                                                                                                                       |
| 2.12(11)   |       | Purchase Agreement, dated as of October 31, 2006, by  and among New York-New York Hotel & Casino, LLC, PRMA Land Development  Company, The Primadonna Company, LLC, and Herbst Gaming, Inc.                            |
|       |       |                                                                                                                                                                                                                       |
| 3.1(1)     |       | Articles of Incorporation of Herbst Gaming, Inc.                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                       |
| 3.2(2)     |       | By-laws of Herbst Gaming, Inc.                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                       |
| 4.1(6)     |       | Indenture dated November 22, 2004 by and among  Herbst Gaming, Inc., the guarantors identified therein and U.S. Bank National  Association, as trustee, relating to 7% Senior Subordinated Notes due 2014.            |
|       |       |                                                                                                                                                                                                                       |
| 4.2(6)     |       | Specimen Form of 7% Senior Subordinated Notes due  2014 (included as part of the Indenture at Exhibit 4.1).                                                                                                           |
|       |       |                                                                                                                                                                                                                       |
| 4.3(5)     |       | Indenture dated June 11, 2004 by and among  Herbst Gaming, Inc., the guarantors identified therein and U.S. Bank National  Association, as trustee, relating to 8 1¤8%  Senior Subordinated Notes due 2012. |
|       |       |                                                                                                                                                                                                                       |
| 10.1(1)    |       | Trademark License Agreement dated August 24,  2001 by and between Herbst Gaming, Inc. and Terrible Herbst, Inc.                                                                                                       |
|       |       |                                                                                                                                                                                                                       |
| 10.2++ (5) |       | Gaming Devices License Agreement dated October 26,  2004 by and between The Vons Companies, Inc. and Market Gaming, Inc.                                                                                              |
|       |       |                                                                                                                                                                                                                       |
| 10.3(1)    |       | Letter Agreement dated May 31, 2006 among  Albertson’s, Inc., SUPERVALU, Inc., AB Acquisition LLC and Cardivan  Company.                                                                               |

 

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| Index No. | ** ** | **Description**                                                                                                                                                                                                                                   |
|-----------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                              |
| 10.4++(1) |       | Gaming License Agreement dated as of June 2,  2006 among Cardivan Company, Nevada CVS Pharmacy, L.L.C., Henderson CVS,  L.L.C., Desert Eastern CVS, L.L.C., Maryland Parkway CVS, L.L.C., CVS 2989  Las Vegas, L.L.C. and Senip CVS, L.L.C.* |
|      |       |                                                                                                                                                                                                                                              |
| 10.5+(1)  |       | License Agreement dated April 24, 1997 between  American Drug Stores, Inc. and Cardivan Company.                                                                                                                                             |
|      |       |                                                                                                                                                                                                                                              |
| 10.6+(1)  |       | License Agreement dated April 24, 1997 between  American Drug Stores, Inc. and Corral United, Inc. II-13                                                                                                                                     |
|      |       |                                                                                                                                                                                                                                              |
| 10.7+(1)  |       | License Agreement dated March 12, 1999 between  Rite Aid Corporation and Cardivan Company.                                                                                                                                                   |
|      |       |                                                                                                                                                                                                                                              |
| 10.8+(1)  |       | First Amendment to Cardivan License Agreement dated  March 27, 2000 between Rite Aid Corporation and Cardivan Company.                                                                                                                       |
|      |       |                                                                                                                                                                                                                                              |
| 10.9+(1)  |       | License Agreement dated March 12, 1999 between  Rite Aid Corporation and Corral Coin, Inc.                                                                                                                                                   |
|      |       |                                                                                                                                                                                                                                              |
| 10.10+(1) |       | First Amendment to Corral Coin License Agreement  dated March 27, 2000 between Rite Aid Corporation and Corral Coin, Inc.                                                                                                                    |
|      |       |                                                                                                                                                                                                                                              |
| 10.11+(1) |       | Gaming Devices License Agreement dated  December 20, 1999 by and between Terrible Herbst, Inc. and E-T-T, Inc.                                                                                                                               |
|      |       |                                                                                                                                                                                                                                              |
| 10.12(1)  |       | Amendment to Gaming Device License Agreement dated  May , 2001 by and between E-T-T, Inc. and Terrible Herbst, Inc.                                                                                                                          |
|      |       |                                                                                                                                                                                                                                              |
| 10.13+(1) |       | Agreement dated May 1, 1998 by and between  Kmart Corporation and Cardivan Company.                                                                                                                                                          |
|      |       |                                                                                                                                                                                                                                              |
| 10.14+(1) |       | License Agreement dated April 24, 1997 between  Lucky Stores, Inc. and Cardivan Company.                                                                                                                                                     |
|      |       |                                                                                                                                                                                                                                              |
| 10.15+(4) |       | Lease and Sublease Agreement dated July 28,  1993, by and between Smith’s Food & Drug Centers, Inc. and Anchor  Coin, as amended.                                                                                              |
|      |       |                                                                                                                                                                                                                                              |
| 10.16(4)  |       | Hold Harmless Agreement dated as of  September 2, 1993 executed by Anchor Coin in favor of Smith’s  Food & Drug Centers, Inc.                                                                                                  |
|      |       |                                                                                                                                                                                                                                              |
| 10.17+(4) |       | Letter Agreement and Consent to Assignment dated  January 16, 2003.                                                                                                                                                                          |
|      |       |                                                                                                                                                                                                                                              |
| 10.18(1)  |       | Lease Agreement dated July 1, 1997 by and  between The Herbst Family Limited Partnership II and E-T-T Enterprises,  L.L.C.                                                                                                                   |
|      |       |                                                                                                                                                                                                                                              |
| 10.19(1)  |       | Lease Agreement dated July 1, 1996 by and  between The Herbst Family Limited Partnership and E-T-T, Inc.                                                                                                                                     |
|      |       |                                                                                                                                                                                                                                              |
| 10.20(1)  |       | Lease extension dated April 30, 2001 between  The Herbst Family Limited Partnership and E-T-T, Inc.                                                                                                                                          |

 

77

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| Index No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.21(1)  |       | Lease dated September 3, 1993 between The 1993  Samuel Josephson Revocable Family Trust and Phoenix Associates.                                                                                                                                                                                                                                           |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.22(1)  |       | Agreement for Sale dated August 1, 1995 between  Phoenix Associates and Market Gaming, Inc.                                                                                                                                                                                                                                                               |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.23(4)  |       | Lease Agreement dated November 27, 2002 by and  between Herbst Grandchildren’s Trust and Herbst Gaming, Inc.                                                                                                                                                                                                                                         |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.24(4)  |       | Lease dated June 2002 by and between Centennial  Acquisitions, LLC and Terrible Herbst, Inc.                                                                                                                                                                                                                                                                   |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.25(4)  |       | Amendment to Lease dated July 30, 2002 by and  between Centennial Acquisitions, LLC and Terrible Herbst, Inc.                                                                                                                                                                                                                                             |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.26(4)  |       | Lease Agreement dated July 1, 2002 by and  between Terrible Herbst, Inc. and E-T-T, Inc.                                                                                                                                                                                                                                                                  |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.27(1)  |       | Employment Agreement with Edward J. Herbst dated  August 1, 2001.                                                                                                                                                                                                                                                                                         |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.28(8)  |       | Employment Agreement with Mary E. Higgins dated  January 1, 2005.                                                                                                                                                                                                                                                                                              |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.29(1)  |       | Form of Executive Compensation and Bonus Plan.                                                                                                                                                                                                                                                                                                                 |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.30(4)  |       | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.31(13) |       | Second Amended and Restated Credit Agreement dated  as of January 3, 2007 by and among Herbst Gaming, Inc., Bank of America,  N.A., as administrative agent and the other lending parties thereto.                                                                                                                                                             |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.32*    |       | Gold Ranch Casino Lease, dated as of December 27,  2001, by and between Last Chance, Inc., Prospector Gaming Enterprises, Inc.  and Target Investments, L.L.C.                                                                                                                                                                                                 |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 10.33*    |       | Option to Purchase the Gold Ranch Casino Property  and Improvements, The Leach Field Property, the Frontage Parcel, the  California Lottery Station and the California Lottery Property, and the Right  of First Refusal, dated as of December 27, 2001, by and among Prospector  Gaming Enterprises, Inc., Target Investments, L. L. C. and Last Chance, Inc. |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 12.1*     |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                             |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 21.1*     |       | Subsidiaries of Herbst Gaming, Inc.                                                                                                                                                                                                                                                                                                                            |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*     |       | Certification of Edward J. Herbst under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                   |
|      |       |                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*     |       | Certification of Edward J. Herbst under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                   |

 

78

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| Index No. | ** ** | **Description**                                                                                                         |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                    |
| 32.1*     |       | Certifications of Edward J. Herbst and Mary E.  Higgins pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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| +    | Confidential Treatment for a portion of this  document has been granted pursuant to Rule 406 under the Securities Act.  The omitted portions have been separately filed with the Commission.   |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ++   | Confidential Treatment for a portion of this  document has been requested pursuant to Rule 406 under the Securities  Act. The omitted portions have been separately filed with the Commission. |
| (1)  | Incorporated herein by reference from our  registration statement on Form S-4 (SEC No. 33-71094), Part II,  Item 21.                                                                 |
| (2)  | Incorporated herein by reference from our quarterly  report on Form 10-Q filed with the SEC on November 14, 2002.                                                                         |
| (3)  | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on March 10, 2003.                                                                               |
| (4)  | Incorporated herein by reference from our annual  report on Form 10-K filed with the SEC on March 24, 2003.                                                                               |
| (5)  | Incorporated herein by reference from our registration  statement on Form S-4 (SEC No. 333-118068-05).                                                                                         |
| (6)  | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on November 23, 2004.                                                                                 |
| (7)  | Incorporated herein by reference from our  registration statement on Form S-4 (SEC No. 333-122837).                                                                                            |
| (8)  | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on March 15, 2006.                                                                                         |
| (9)  | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on May 16, 2006.                                                                                           |
| (10) | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on August 28, 2006.                                                                                        |
| (11) | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on November 2, 2006.                                                                                       |
| (12) | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on August 7, 2006.                                                                                         |
| (13) | Incorporated herein by reference from our current  report on Form 8-K filed with the SEC on January 9, 2007.                                                                                        |
| *    | Filed herewith.                                                                                                                                                                                     |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|        | **HERBST GAMING, INC.** |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     |   | /s/  Edward J. Herbst |   |
|   | Name:                   | Edward  J. Herbst |
|   | Title:                  | Chairman  of the Board, Chief |
|   |                    | Executive Officer and  President |
|        |                         |  |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| NAME                      | ** ** | **TITLE**                                           | ** ** | **DATE**            |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------|
| ** **                | ** ** | ** **                                          | ** ** | ** **          |
| /s/ Edward J. Herbst      |       | Chairman of the Board, Chief Executive              |       | April 2,  2007 |
| Edward J. Herbst          |       | Officer and President (Principal Executive Officer) |       |                |
|                      |       |                                                |       |                |
| /s/ Mary E. Higgins       |       | Chief Financial Officer (Principal                  |       | April 2,  2007 |
| Mary E. Higgins           |       | Financial and Accounting Officer                    |       |                |
|                      |       |                                                |       |                |
| /s/ Timothy P. Herbst     |       | Executive Vice President and Director               |       | April 2,  2007 |
| Timothy P. Herbst         |       |                                                |       |                |
|                      |       |                                                |       |                |
| /s/ Troy D. Herbst        |       | Executive Vice President, Secretary,                |       | April 2,  2007 |
| Troy D. Herbst            |       | Treasurer and Director                              |       |                |
|                      |       |                                                |       |                |
| /s/ John N. Brewer        |       | Director                                            |       | April 2,  2007 |
| John N. Brewer            |       |                                                |       |                |
|                      |       |                                                |       |                |
| /s/ John F. O’Reilly |       | Director                                            |       | April 2,  2007 |
| John F. O’Reilly     |       |                                                |       |                |

 

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