**UnitedStates**

**Securitiesand Exchange Commission**

###### **Washington, D.C.  20549**

###### ** **

**Form 10-K**

** **

**Annual Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2007**

 

**Commission file number      1-16791**

 

**Dover DownsGaming & Entertainment, Inc.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                    | ** ** | **51-0414140**                        |
|-------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation) |       | (I.R.S. Employer Identification  No.) |

 

| **1131 North DuPont Highway, Dover, Delaware 19901** |
|------------------------------------------------------|
| (Address of principal executive  offices)            |

 

| **(302) 674-4600**                                         |
|------------------------------------------------------------|
| (Registrant’s telephone number,  including area code) |

 

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

 

| **Title of Class**           | ** ** | **Name of Exchange on Which  Registered** |
|------------------------------|------------|-------------------------------------------|
| Common Stock, $.10 Par Value |       | New York Stock Exchange                   |
|                         |       |                                      |

**Securities registered pursuant to Section 12(g) of the Act:**  None.

 

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

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

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(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 ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.x

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the Act).Yeso  Nox

The aggregate market value ofcommon stock held by non-affiliates of the registrant was $212,294,926 as of June 30,2007 (the last day of our most recently completed second quarter).

 

As of February 29, 2008, thenumber of shares of each class of the registrant’s common stock outstanding isas follows:

 

| Common Stock -              |   | 14,768,361 shares |
|-----------------------------|--------|-------------------|
| Class A Common Stock - |   | 17,003,173 shares |

 

**Documents Incorporated byReference**

Portions of the registrant’sProxy Statement in connection with the Annual Meeting of Stockholders to beheld April 23, 2008 are incorporated by reference into Part III,Items 10 through 14 of this report.

 

 

----

 

**Part I**

 

         References in thisdocument to “we,” “us” and “our” mean Dover Downs Gaming &Entertainment, Inc. and/or its whollyowned subsidiaries, as appropriate.

 

**Item 1.            Business**

 

We are a diversified gaming and entertainment company whose operationsconsist of Dover Downs Casino — a 97,000 square-foot video lottery casinocomplex featuring the latest in slot machine offerings, including multi-playerelectronic table games with virtual dealers; the Dover Downs Hotel andConference Center — a 500 room AAA Four Diamond hotel with conference, banquet,fine dining, ballroom, concert hall and spa facilities; and Dover Downs Raceway— a harness racing track with pari-mutuel wagering on live and simulcast horseraces. Our entertainment complex is located in Dover, the capital of the Stateof Delaware.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Management Corp.  DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969.  In June of1994, legislation authorizing video lottery operations in the State of Delaware(the “State”) was adopted. Our video lottery (slots) casino operations began onDecember 29, 1995.  As a result of severalrestructurings, Dover Downs, Inc. became a wholly owned subsidiary ofDover Motorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.)(“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

Dover Downs Gaming & Entertainment, Inc. was incorporatedin the State in December of 2001 as a wholly owned subsidiary of DVD.  Effective March 31, 2002, DVD completeda tax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming &Entertainment, Inc., and subsequently distributing 100% of our issued andoutstanding common stock to DVD stockholders. Immediately following the spin-off, Dover Downs Gaming &Entertainment, Inc. became an independent public company.

 

Dover Downs, Inc. is authorized to conduct video lotteryoperations as one of three “Licensed Agents” under the Delaware State LotteryCode. Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994,the Delaware State Lottery Office administers and controls the operation of thevideo lottery.

 

Our license from the Delaware Harness Racing Commission (the“Commission”) to hold harness race meetings on our premises and to offerpari-mutuel wagering on live and simulcast horse races must be renewed on anannual basis. In order to maintain our license to conduct video lotteryoperations, we are required to maintain our harness horse racing license.  We have received an annual license from theCommission for the past 39 consecutive years and management believes that ourrelationship with the Commission remains good.

 

Due to the nature of our business activities, we are subject to variousfederal, state and local regulations.

 

**DoverDowns Casino**

 

Our video lottery (slot) machine casino opened in December 1995with approximately 500 video lottery (slot) machines.  Due to its popularity, the video lottery(slot) machine casino has expanded five times since its opening and the numberof machines has increased steadily to 2,717at December 31, 2007.  The most recent expansion, which wascompleted in July of 2006, converted 4,000 square-feet of space within ourexisting complex to gaming space and added more than 200 new machines.

 

In the first quarter of 2006, the State of Delaware passed legislationwhich allowed us to expand our operating hours, add additional slot machinesand provide free promotional play through our recently enhanced slots marketingsystem.  Beginning in April 2006, westarted operating 24 hours per day, except on Sunday morning from 6am tonoon.  The legislation increased thenumber of allowable slot machines for each of the three licensed facilities inDelaware from 2,500 to 4,000.  Each slotmachine in excess of 2,500 requires payment of an annual fee 

 

2

----

 

of $1,100 permachine for the first 500 machines added, $700 per machine for the next 500machines added, and $300 per machine for the last 500 machines added.

 

Since legislation now allows us to operate up to 4,000 video lottery(slot) machines, we are proceeding with our plans to expand the casinofacility.  On March 30, 2007, we announced our Phase VI casinoexpansion plan that will add approximately 70,000 square-feet to the DoverDowns Casino and will feature a new main entrance for the casino, a new gamingfloor with room for approximately 500 additional slot machines and the newDover Downs Fire and Ice Lounge — an upscale entertainment lounge that willseat approximately 200 guests.  Theexpansion will also include retail space and three new restaurants.  Construction began in the first quarter of2007 and is expected to be completed during the summer of 2008.

 

Our video lottery (slot) machines range from our popular penny machinesto $100 machines in the Premium Slots area and include most popular games foundin the country’s major gaming jurisdictions. We have added multi-player electronic table games, such as Blackjack andPoker, which accommodate up to five players in an interactive setting thatfeatures a virtual dealer. The Las Vegas style video lottery casino housing thegaming equipment was designed and built using expertise from Caesars WorldGaming Development Corporation (“Caesars”), a leader in the gaming industry.  Our facilities are open every day of theyear, except Christmas and Easter, and we estimated that the facility wasvisited by 3 million patrons in 2007.

 

The Delaware State Lottery Office administers and controls our videolottery (slot) machine operations. We are a LicensedAgent authorized to conduct video lottery operations under the DelawareState Lottery Code and one of only three locations permitted to do so in theState of Delaware. We are permitted by law to set the payout to customersbetween 87% and 95%.

 

We use sophisticated database marketing to enable us to developlong-term relationships with our patrons and to target promotions to specificcustomer segments. Our Capital Club®, a slots players club and trackingsystem, allows us to identify customers and to reward their level of playthrough various marketing programs. Membership in this club currently stands atapproximately 147,000 active patrons.

 

We have implemented extensive procedures for financial and accountingcontrols, safekeeping and accounting of monies, and security provisions.Security over the gaming operations involves the integration of surveillancecameras, observation and oversight by employees, security and gaming staff, andvarious security features built into the video lottery (slot) machines. The above,when combined with proper internal control procedures and daily monitoring ofeach video lottery (slot) machine by the Delaware State Lottery Office, areintended to maintain the security, integrity and accountability of the videolottery operations.

 

Legislation has been introducedin Delaware to consider the resumption of sports betting.  Recently, three Delaware state agencies (theOffice of Management and Budget, the Department of Finance, and the ControllerGeneral’s office) participated in a report issued January 10, 2008which concludes as follows: “[W]hile all the options for theimplementation of sports betting in the State of Delaware are feasible, themost reasonable option for phased-in legalization is a racino based operation.”  By Federal law, Delaware is the only stateeast of Montana, and one of only four states in the United States, where sportsbetting is legally permitted.

 

**DoverDowns Hotel**

 

Our luxury hotel facility, the Dover Downs Hotel, connects to ourcasino.  The recently expanded facility includes 500 rooms, includingeleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and a luxurious 6,000 square-foot full-servicespa.  When we built the original hotel wealso built a 425-seat buffet restaurant and renovated our enclosed harnessracing grandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers,live boxing, gourmet dining, spa facilities, trade shows and conferences, webelieve we are able to attract new patrons and lengthen the stay of currentpatrons.  Since opening the Dover DownsHotel in 2002, we have managed its operations ourselves.  In 2007, hotel occupancy averaged 90.5% andthe hotel was awarded the AAA Four Diamond Award for the fifth consecutiveyear.

 

3

----

 

**DoverDowns Raceway**

 

Dover Downs Raceway has presented pari-mutuel harness racing events for39 consecutive years. Live harness races are conducted at Dover Downs Racewayfrom late October until April and are simulcast to more than 400tracks and other off-track betting locations across North America on each ofour more than 130 live race dates.  Theharness horse racing track is a 5/8-mile track and is lighted for nighttimeoperations.  The track is adjacent to ourcasino and hotel on land owned by DVD on the inside of DVD’s auto racingsuperspeedway.  Use of the track ispursuant to an easement granted by DVD which does not require the payment ofany rent.

 

Within our main grandstand is the simulcast parlor where our patronscan wager on harness and thoroughbred races received by satellite into DoverDowns Raceway year round from numerous tracks across North America.  Television monitors throughout the parlorarea provide views of all races simultaneously and the parlor’s betting windowsare connected to a central computer allowing bets to be received on all racesfrom all tracks.  Additional amenitiesinclude the Winners Circle® Restaurantoverlooking the horse racing track.

 

Harness racing in the State of Delaware is governed by the DelawareHarness Racing Commission. We hold a license from the Commission authorizing usto hold harness race meetings on our premises and to offer pari-mutuel wageringon live and simulcast horse races.

 

In harness racing competing horses are harnessed to a two-wheeledsulky, which carries the driver. Pari-mutuel wagering is pooled betting by which the wagering public, notthe track, determines the odds and the payoff. The track retains a commission,which is a percentage of the total amount wagered, or the “handle.”  Simulcasting is the transmission of livehorse racing by television, cable or satellite signal from one race track toanother with pari-mutuel wagering being conducted at the sending and receivingtrack and a portion of the handle being shared by the sending and receivingtracks.

 

The legislation authorizing video lottery operations in the State ofDelaware was adopted in June 1994, and is referred to as the “Horse RacingRedevelopment Act.” The Delaware General Assembly’s stated purpose in approvingthe legislation was to (i) provide non-state supported assistance in theform of increased economic activity and vitality for Delaware’s harness andthoroughbred horse racing industries, which activity and vitality will enablethe industry to improve its facilities and breeding stock, and cause increasedemployment; and (ii) restrict the location of such lottery to locationswhere wagering is already permitted and controls exist. A portion of theproceeds from the wagering on the video lottery (slot) machines is allocated toincrease the purses for harness horse races held at Dover Downs Raceway and isintended to provide increased vitality for Delaware’s horse racing industry.

 

Wehave an agreement with the Delaware Standardbred Owner’s Association, Inc.(“DSOA”) effective May 1, 2007 and continuing through July 31,2010.  DSOA’s membership consists ofowners, trainers and drivers of harness horses participating in harness racemeetings at our facilities and elsewhere in the United States and Canada. TheDSOA has been organized and exists for the purpose of promoting the sport ofharness racing; improving the lot of owners, drivers and trainers of harnessracing horses participating in race meetings; establishing health, welfare andinsurance programs for owners, drivers and trainers of harness racing horses;negotiating with harness racing tracks on behalf of owners, trainers, driversand grooms of harness racing horses; and generally rendering assistance to themwhenever and wherever possible. Under the DSOA agreement, we are required todistribute as purses for races conducted at our facilities a percentage of ourretained share of pari-mutuel revenues.

 

We enjoy a good relationship with representatives of DSOA andanticipate that this relationship will continue. We believe that the DSOAagreement is typical of similar agreements in the industry.

 

**Licensingand Regulation by Gaming and Other Authorities**

 

*General*

 

We are subject to extensive federal, state and local regulationsrelated to our operations, particularly our video lottery (slot) operations,live harness racing and pari-mutuel wagering. These operations are contingentupon continued government approval of such operations as forms of legalizedgaming and could be subjected at any time 

 

4

----

 

to additional ormore restrictive regulations.  Thefollowing is a brief outline of some of the more significant regulationsaffecting our gaming operations and not intended as a recitation of allregulations applicable to our business.

 

Delaware law regulates the percentage of commission we are entitled toreceive from our gaming activities, which comprises a significant portion ofour overall revenues.  Our licenses toconduct video lottery (slot) machine operations, harness horse races andpari-mutuel wagering could be modified or repealed at any time and we could berequired to terminate our gaming operations.

 

*Video Lottery (Slot) Operations*

 

*General. *Videolottery (slot) operations are by statute operated and administered by theDirector of the Delaware State Lottery Office (the “Lottery Director”). We are a Licensed Agent authorized to conduct video lottery (slot)operations under the Delaware State Lottery Code.

 

A “video lottery (slot) machine” is defined by law as any machine inwhich bills, coins or tokens are deposited in order to play in a game of chancein which the results, including options available to the player, are randomlyand immediately determined by the machine. A machine may use spinning reels or video displays or both, and may ormay not dispense coins or tokens directly to winning players.  A machine shall be considered a video lottery(slot) machine notwithstanding (i) the use of an electronic credit systemmaking the deposit of bills, coins or tokens unnecessary, or (ii) the factthat the video lottery (slot) machine has employed dual function terminal technology.  Various video lottery (slot) machines are inuse at our casino.

 

The Lottery Director has discretion to adopt such rules andregulations as the Lottery Director deems necessary or desirable for theefficient and economical operation and administration of the system, including (i) typeand number of games permitted, (ii) pricing of games, (iii) numbersand sizes of prizes, (iv) manner of payment, (v) value of bills,coins or tokens needed to play, (vi) requirements for licensing agents andservice providers, (vii) standards for advertising, marketing andpromotional materials used by Licensed Agents, (viii) procedures foraccounting and reporting, (ix) registration, kind, type, number andlocation of video lottery (slot) machines on a Licensed Agent’s premises, (x) securityarrangements for the video lottery system, and (xi) reporting and auditing offinancial information of Licensed Agents.

 

*Licensing Requirements*.  We were granted a license on December 13,1995.  Delaware gaming licenses do nothave an expiration date.

 

There are continuing licensure requirements for all officers,directors, key employees and persons who own directly or indirectly 10% or moreof a Licensed Agent, which licensure requirements shall include thesatisfaction of such security, fitness and background standards as the LotteryDirector may deem necessary relating to competence, honesty and integrity, suchthat a person’s reputation, habits and associations do not pose a threat to thepublic interest of the State or to the reputation of or effective regulationand control of the video lottery; it being specifically understood that anyperson convicted of any felony, a crime involving gambling, or a crime of moralturpitude within 10 years prior to applying for a license or at any timethereafter shall be deemed unfit.

 

There are similar licensure requirements for providers of the videolottery (slot) machines and certain companies that seek to provide services toa Licensed Agent.

 

*Revocation, Suspension or Modification of License*.  The Lottery Director may revoke or suspendthe license of a Licensed Agent, such as ours, for “cause.”  “Cause” is broadly defined and couldpotentially include falsifying any application for license or report requiredby the rules and regulations, the failure to report any informationrequired by the rules and regulations, the material violation of any rules andregulations promulgated by the Lottery Director or any conduct by the licenseewhich undermines the public confidence in the video lottery system or servesthe interest of organized gambling or crime and criminals in any manner.  A license may be revoked for an unintentionalviolation of any federal, state or local law, rule or regulation providedthat the violation is not cured within a reasonable time as determined by theLottery Director.  A hearing officer’sdecision revoking or suspending the license shall be appealable to the DelawareSuperior Court under the provisions of the Administrative Procedures Act.  All existing or new officers, directors, keyemployees and owners of a Licensed Agent are subject to 

 

5

----

 

backgroundinvestigation.  Failure to satisfy thebackground investigation may constitute cause for suspension or revocation ofthe License.

 

*Ownership Changes*.  Under Delaware law, a change of ownership ofa Licensed Agent will automatically terminate its license 90 days after thechange of ownership occurs, unless the Lottery Director determines afterapplication to issue a new license to the new owners.  Change of ownership may occur if any newindividual or entity acquires, directly or indirectly, 10% or more of theLicensed Agent or if more than 20% of the legal or beneficial interest in the LicensedAgent is transferred, whether by direct or indirect means.  The Commission may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks.  Accordingly, we have a restrictive legend onour shares of common stock which require that (a) any holders of commonstock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of our outstanding common stock must first obtain priorwritten approval from the Delaware State Lottery Office.

 

*Harness Racing Events*.  In order to maintain our license for videolottery (slot) machine gaming, we are required to maintain our license forharness horse racing with the Commission and must conduct a minimum of 80 liverace days each racing season, subject to the availability of racing stock.

 

*Control Over Equipment and Technology*.  We do not own or lease the video lottery(slot) machines or computer systems used by the State in connection with ourvideo lottery gaming operations.  TheLottery Director enters into contracts directly with the providers of the videolottery (slot) machines and computer systems (the “Technology Providers”).  Equipment is provided to the State by sale orlease and all Technology Providers must be licensed by the LotteryDirector.  Our operations could bedisrupted in the event that a licensed Technology Provider in any way breachesits agreement with the State or ceases to be properly licensed for anyreason.  Such an event would be outsideof our control.

 

### ***Harness Racing and Pari-MutuelWagering***

### ** **

*Licensing Requirements. *Harness racing in the Stateof Delaware is governed by the Delaware Harness Racing Commission.  We hold a license from the Commission bywhich we are authorized to hold harness race meetings on our premises and tomake, conduct and sell pools by the use of pari-mutuel machines ortotalizators.  The license must berenewed on an annual basis.  TheCommission may reject an application for a license for any cause which it deemssufficient and the action of the Commission is final.  The Commission may also suspend or revoke alicense which it has issued and its action in that respect is final, subject toreview, upon questions of law only, by the Superior Court of the County withinwhich the license was granted.  Theaction of the Commission stands unless and until reversed by the Court.  We have received an annual license from theCommission for the past 39 consecutive years and management believes that ourrelationship with the Commission remains good. However, there can be no assurances that we will continue to be licensedby the Commission in the future.

 

Under the law, the Commission has broad powers of supervision andregulation.  The Commission may prescriberules, regulations and conditions under which all harness racing and bettingpools shall be conducted; may regulate the performance of any service or thesale of any article on the premises of a licensee; may compel the production ofbooks and documents of a licensee and require that books and records be kept insuch manner as the Commission may prescribe; may visit, investigate and placeaccountants or other persons as it deems necessary, at the expense of alicensee, in the office, track or place of business of a licensee; may summonwitnesses and administer oaths; and may require the removal of any employee orofficial employed by a licensee.  All proposedextensions, additions or improvements to the property of a licensee are subjectto the approval of the Commission.

 

The Commission is required to inspect a licensee’s racing plant notless than five days prior to a race meeting and may withdraw the license forthe meeting if the racing plant is found to be unsafe for animals or persons oris not rendered safe prior to the opening of the meeting.  A licensee must deposit with the Commission,ten days before a race meeting, a policy of insurance against personal injuryliability in an amount to be approved by the Commission.

 

6

----

 

*USTA. *Anylicense granted by the Commission is also subject to such reasonable rules andregulations as may be prescribed from time to time by the United StatesTrotting Association (“USTA”).  The USTAsets various rules relating to the conduct of harness racing.  According to its Articles of Incorporation,the purposes of the USTA shall include the improvement of the breed of trottingand pacing horses, the establishment of rules regulating standards and theregistration of such horses thereunder, the advancement and promotion of theinterest of harness racing in the United States, the investigation,ascertainment and registration of the pedigrees of such horses, the regulationand government of the conduct of the sport of harness racing, the establishmentof rules for the conduct thereof, not inconsistent with the laws of thevarious states, and the sanctioning of the holding of exhibitions of suchhorses and meetings for the racing thereof, the issuance of licenses toqualified persons to officiate at harness race meetings and exhibitions, theissuance of licenses to the owners of horses permitting the exhibition andracing of such horses and the qualification thereof, the issuance of licensesto drivers of horses participating in such races or exhibitions, and providingfor the enforcement of the rules promulgated by the USTA, and providingfor the fixing of penalties, fines, and the suspension or expulsion frommembership, or privileges or for any other misconduct detrimental to the sport.

 

*Gaming Taxes and Fees*

 

We believe that the prospect of significant additional tax revenue isone of the primary reasons why jurisdictions have legalized gaming.  As a result, gaming operators are typicallysubject to significant taxes and fees in addition to normal federal and statecorporate income taxes.  These taxes andfees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations andwould likely incur similar burdens in any other jurisdiction in which we mayconduct gaming operations in the future.

 

*Compliance with Other Laws*

 

We are subject to various federal, state and local laws and regulationsin addition to gaming regulations. These laws and regulations include, but arenot limited to, restrictions and conditions concerning alcoholic beverages,environmental matters, employees, currency transactions, taxation, zoning andbuilding codes, and marketing and advertising.

 

The Internal Revenue Service (“IRS”) requires operators of casinoslocated in the United States to file information returns for United Statescitizens, including names and addresses of winners, for all winnings in excessof stipulated amounts. The IRS also requires operators to withhold taxes oncertain winnings.

 

Regulations adopted by the Financial Crimes Enforcement Network of theTreasury Department (“FinCEN”) require us to report currency transactions inexcess of stipulated amounts occurring within a gaming day, includingidentification of the patron by name and social security number. FinCEN hasalso established regulations that require us to file suspicious activityreports on all transactions that we know, suspect, or have reason to suspectfall into specific categories that are deemed to be suspicious. We believe ourprograms meet the requirements of the applicable regulations.

 

Laws and regulations are always subject to change, can be interpreteddifferently in the future, and new laws and regulations may be enacted whichcould adversely affect the tax, regulatory, operational or other aspects of thegaming industry and our company. Furthermore, noncompliance with one or more ofthese laws and regulation could result in the imposition of substantialpenalties against us.

 

**Competition**

 

The gaming industry in the United States is intensely competitive andfeatures many participants, including riverboat casinos, dockside casinos,land-based casinos, video lottery (slot) and poker machines, whether or notlocated in casinos, native American gaming, pari-mutuel wagering on live andsimulcast horse racing, off-track betting, state run lotteries, internetgambling and other forms of gambling. Gaming competition is particularly intensein each of these sectors.

 

We compete in local and regional markets withhorse tracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities.  We cannot be certainthat we will maintain our market share or compete more 

 

7

----

 

effectively with our competitors.  The introduction or expansion of gaming inneighboring jurisdictions, particularly Maryland, Virginia, West Virginia,Washington, D.C., Pennsylvania or New Jersey, or the legalization of additionalgaming venues in Delaware, could have a material adverse effect on our cashflows and results of operations.  From time to time legislation is proposed foradoption in these jurisdictions which if enacted, would further expand stategambling and wagering opportunities, including video lottery (slot) machines atracetracks. Enactment of such legislation could increase our competition andcould adversely affect our business, financial condition and overallprofitability.  For example, afterseveral failed attempts in prior years, the Maryland Legislature passedlegislation in 2008 that will permit up to 15,000 slot machines infive different specific locations throughout Maryland. The legislationrequires a Constitutional amendment and, therefore, will be put to avote by the Maryland electorate in a special referendum to be held inNovember 2008.  Even if the referendum passes, the establishmentof any gaming locations in the State remains subject to local zoningprohibitions and may face further opposition.  As the number of machinesand the specific locations of the gaming establishments will be set by theState’s Constitution, any changes to the number of machines or the locationswould require further amendment to the State Constitution.   Itis difficult for us to predict whether the referendum will pass and if itpasses what types of gaming establishments may ultimately be built inMaryland or when they are likely to become operational.  Management hasestimated that approximately 44% of our total slot win comes from Marylandpatrons.  Approximately 68% of ourCapital Club® member slot win comes from out of statepatrons.  In July 2004, Pennsylvania adopted legislation which authorizes upto 61,000 slot machines at various existing and proposed venues throughout thestate.  It is difficult for us to predictthe effect that such legislation will ultimately have on us, but severalfacilities in Pennsylvania began operations by the end of 2006.  Management has estimated that slot win fromPennsylvania patrons currently represents approximately****4%of our total slot win compared to 5% last year.

 

Pennsylvania, Maryland and New Jersey allhave state-run lotteries. Atlantic City, New Jersey is located approximately100 miles from our entertainment facility and offers a full range of gamingproducts. Maryland, Virginia and Washington, D.C. do not currently permit videolottery (slot) machine operations.

 

Competition in horse racing is varied since racetracks in thesurrounding area differ in many respects. Some tracks only offer thoroughbredor harness horse racing; others have both. Tracks have live racing seasons thatmay or may not overlap with neighboring tracks. Depending on the pursestructure, tracks that are farther apart may compete with each other more forquality horses than for patrons.

 

Live harness racing also competes with simulcasts of thoroughbred andharness racing. All racetracks in the region are involved with simulcasting. Inaddition, a number of off-track betting parlors compete with track simulcastingactivities. With respect to the simulcasting of our live harness races totracks and other locations, our simulcast signals are in direct competitionwith live races at the receiving track and other races being simulcast to thereceiving location.

 

Within the State of Delaware, we face little direct live competitionfrom the State’s other two tracks. Harrington Raceway, a south central Delawarefairgrounds track, conducts harness horse racing periodically between April andOctober. There is no overlap presently with our live race season. DelawarePark, a northern Delaware track, conducts thoroughbred horse racing from April throughmid-November. Its race season only overlaps with ours for approximately sixweeks each year.

 

We compete with harness and thoroughbred racing and simulcastingfacilities in the neighboring states of Pennsylvania, Maryland and NewJersey.  We also receive simulcastharness and thoroughbred races from approximately 80 race tracks.

 

Competition for our hotel varies and consists of local and regionalcompetition. With respect to hotel accommodations only, we compete with avariety of nearby hotels in the Dover area; however, few of these offer theluxury accommodations that we offer.  Ourhotel is the only hotel in the Dover area, and one of only three hotels in theState, to receive the AAA Four Diamond Award. With respect to trade shows, conferences, concerts and hotel roompackages tied to these events or tied to our casino and other gaming offerings,we compete at a regional level with the other gaming operations referred toabove and with convention centers and larger hotels in major cities such asPhiladelphia, Washington, D.C., Baltimore and Wilmington.

 

In addition, our activities compete with other leisure, entertainmentand recreational activities.

 

8

----

 

**GrowthStrategies**

 

We offer a unique gaming and entertainment experience and makeavailable to our patrons a number of different options: slot machine gaming,live harness horse racing, fine dining, national recording and entertainmentacts, live boxing and simulcasting of thoroughbred and harness horse races fromacross North America. Our mission is simple: to provide all of our customers apremier gaming and entertainment experience with a focus on unparalleledcustomer service.  Our growth strategy isto foster customer loyalty by following this mission, focus on our mostvaluable customers, expand and improve the quality of our slot gaming positions,enhance our gaming products with additional entertainment offerings and createan exciting gaming environment while focusing on areas that we believe willincrease our revenue and profitability. Our efforts in this regard include thefollowing:

 

*IncreaseThe Utilization Of Our Casino*

 

We use a sophisticated database marketing program to enable us todevelop long-term relationships with our patrons and to target promotions tospecific customer segments.  Our CapitalClub, a slots players club and tracking system, allows us to identify customersand to reward their level of play through various marketing programs.Membership in this club currently stands at approximately 147,000 activepatrons.  We expect to increase attendanceat both our casino and hotel through effective promotional use of our databaseand by making improvements to our facilities and gaming offerings based on whatwe learn from our Capital Club members. For example, we continue to add themost popular machines with differing denominations. Additionally, we have addedmulti-player electronic table games, such as Blackjack and Poker, which seat upto five players in an interactive setting that features a virtual dealer.

 

In the first quarter of 2006, the State of Delaware passed legislation whichallowed us to expand our operating hours, add additional slot machines andprovide free promotional play through our recently enhanced slots marketingsystem.  Beginning in April 2006, westarted operating 24 hours per day, except on Sunday morning from 6am tonoon.  The legislation increased thenumber of allowable slot machines for each of the three licensed facilities inDelaware from 2,500 to 4,000.  In July of 2006, we converted 4,000square-feet of space within our existing complex to gaming space and we addedmore than 200 new machines. We have determined that there is a demandfor additional machines and amenities and are proceeding with our plans toexpand the casino facility.  On March 30, 2007, we announced ourPhase VI casino expansion plan that will add approximately 70,000 square-feetto the Dover Downs Casino and will feature a new main entrance for the casino,a new gaming floor with room for approximately 500 additional slot machines andthe new Dover Downs Fire and Ice Lounge — an upscale entertainment lounge thatwill seat approximately 200 guests.  Theexpansion will also include retail space and three new restaurants.  Construction began in the first quarter of2007 and is expected to be completed by the fall of 2008.

 

Legislation has been introducedin Delaware to consider the resumption of sports betting.  Recently, three Delaware state agencies (theOffice of Management and Budget, the Department of Finance, and the ControllerGeneral’s office) participated in a report issued January 10, 2008which concludes as follows: “[W]hile all the options for theimplementation of sports betting in the State of Delaware are feasible, themost reasonable option for phased-in legalization is a racino based operation.”  By Federal law, Delaware is the only stateeast of Montana, and one of only four states in the United States, where sportsbetting is legally permitted.

 

*CapitalizeOn Our Luxury Hotel*

 

Our luxury hotel facility, the Dover Downs Hotel, connects to ourcasino.  It is the only hotel in theDover area, and one of only three hotels in the State, to receive the AAA FourDiamond Award.  The recently expanded facility includes 500 rooms, includingeleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and a luxurious 6,000 square-foot spa.  When we built the original hotel we alsobuilt a 425-seat buffet restaurant and renovated our enclosed harness racinggrandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers,live boxing, gourmet dining, trade shows and conferences, we believe we areable to attract new patrons and lengthen the stay of current patrons.

 

9

----

 

*IncreaseWagering On Live Harness Horse Racing Through Increased Purse Levels*

 

With a percentage of video lottery (slot) machine revenuessupplementing the purses for the horsemen, we have experienced dramaticincreases in the amount of our purses. By the end of our 2006-2007 season, our average daily purse distributionincreased to approximately $212,000 from $8,000 in 1995.  The result is that we continue to attracthigher quality horses.  We haveprestigious events such as our annual “Progress Pace” with an estimated$400,000 purse, an event which attracts the country’s top three-year-oldhorses.  Bettors are attracted to raceswith larger purses and typically wager more on the higher quality and morepredictable horses. We have also completed various upgrades to enhance theharness horse racing facilities, including renovations to the track andgrounds, receiving barn and paddock areas and, more recently, our simulcastparlor which has state-of-the-art facilities that allow year round wagering. Wecontinue to focus on improvements that we believe allow us to increaseattendance and wagering, including wagering on our events from other tracks andoff-track wagering facilities that receive our racing signal.

 

**Seasonality**

 

Our quarterly operating results are affected by weather and the generaleconomic conditions in the United States. Our quarterly operating results are generally distributed evenlythroughout the year. However, the results for any quarter are not necessarilyindicative of results to be expected in any future period.

 

**Employees**

 

As of December 31, 2007, we had 817 full-time employees and 89part-time employees. We engage temporary personnel to assist during our liveharness racing season. None of our employees are party to a collectivebargaining agreement and we believe that our relationship with our employees isgood.

 

#### **Available Information**

#### ** **

We file annual, quarterly and current reports, information statementsand other information with the United States Securities and Exchange Commission(the “SEC”). The public may read and copy any materials we file with the SEC atthe SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.20549. The public may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330. The SEC also maintains anInternet site that contains reports, proxy and information statements, andother information regarding issuers that file electronically with the SEC.  The address of that site is http://www.sec.gov.

 

#### **Internet Address**

#### ** **

We maintain a website where additional information concerning ourbusiness and various upcoming events can be found.  The address of our Internet website is http://www.doverdowns.com.We provide a link on our website, under Investor Relations, to our filings withthe SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and all amendments to those reports.

 

**Item 1A.         Risk Factors**

 

Disclosure regarding the most significant factors that may adverselyaffect our business, operations, industry or financial position or our futurefinancial performance is set forth under the section entitled, “Factors That May AffectOperating Results; Forward-Looking Statements,” beginning on page 21.

 

**Item 1B.         Unresolved Staff Comments**

 

We have not received any written comments that were issued more than180 days before December 31, 2007, the end of the fiscal year covered bythis report, from the SEC staff regarding our periodic or current reports underthe Securities Exchange Act of 1934 that remain unresolved.

 

10

----

 

**Item 2.            Properties**

 

We own our principal executive office located in Dover, Delaware; DoverDowns Casino — our 97,000 square-foot casino featuring the latest in slotmachine offerings such as multi-player electronic table games with virtualdealers; the Dover Downs Hotel and Conference Center — a 500 room AAA FourDiamond hotel with conference, banquet, fine dining, ballroom, concert hall andspa facilities; and the Dover Downs Raceway — indoor grandstands, betting andsimulcasting parlors, all of which are located at our entertainment complexsituated on approximately 69 acres of land owned by us.

 

Our use of DVD’s 5/8-mile harness racingtrack is pursuant to an easement granted to us by DVD which does not requirethe payment of any rent. Under the terms of the easement, we have exclusive useof the harness track during the period beginning November 1 of each yearand ending April 30 of the following year, together with set up and teardown rights for the two weeks before and after such period.  The harness track is located on propertyowned by DVD and is on the inside of DVD’s motorsports superspeedway.  Our indoor grandstands are used by DVD at nocharge in connection with its major motorsports events. DVD also leases itsprincipal office space from us.  Variouseasements and agreements relative to access, utilities and parking have alsobeen entered into between DVD and us relative to our respective Dover, Delawarefacilities.

 

**IntellectualProperty**

 

We have various registeredand common law trademark rights, including, but not limited to, “DoverDowns Gaming & Entertainment,” “Dover Downs,” “Dover Downs Raceway,”“Dover Downs Slots,” “Capital Club,” “Capital Gold,” “Capital Platinum,” “DoverDowns Hotel & Casino,” “Dover Downs is Cooking,” “Sweet Perks,”“Gazebo Bar,” “Winners Circle,” “Michele’s at Dover Downs,” “Rollins Center,”“$1 Million Jackpot Slot,” “Come Play!.” We also have limited rights to use the names and logos of otherbusinesses in connection with promoting our facilities and special eventsat those facilities.  Due to the value of our intellectual propertyrights for promotional purposes, it is our intention to vigorouslyprotect these rights, through litigation, if necessary.

 

**Item 3.            Legal Proceedings**

 

We are a party to ordinary routine litigation incidental to ourbusiness.  Management does not believethat the resolution of any of these matters is likely to have a seriousnegative effect on our financial condition, cash flows or profitability.

 

**Item 4.            Submission Of Matters To A Vote Of Security Holders**

 

No matters were submitted during the fourth quarter of the fiscal yearcovered by this report to a vote of security holders.

 

**Executive Officers Of The Registrant**

 

See Part III, Item 10 of this Annual Report on Form 10-K forinformation about our executive officers.

 

11

----

 

**Part II**

 

**Item 5.****      Market For Registrant’sCommon Equity, Related Stockholder Matters And Issuer Purchases Of EquitySecurities**

 

Ourcommon stock is listed on the New York Stock Exchange under the ticker symbol“DDE.”  Our Class A common stock isnot publicly traded but is freely convertible on a one-for-one basis intocommon stock at any time at the option of the holder thereof.  As of February 29, 2008, there were14,768,361 shares of common stock and 17,003,173 shares of Class A commonstock outstanding. There were 1,045 holders of record for common stock and 13holders of record for Class A common stock.

 

        Thehigh and low sales prices for our common stock on the New York Stock Exchangeand the dividends declared per share for the years ended December 31, 2007and 2006 are detailed in the following table.

 

| **Quarter Ended:**      | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| December 31, 2007  |       | $        | 12.56      |    | $          | 9.89                    |       | $ | 0.050 |   |
| September 30, 2007 |       | $        | 15.23      |    | $          | 9.77                    |       | $ | 0.050 |   |
| June 30, 2007      |       | $        | 15.32      |    | $          | 12.06                   |       | $ | 0.045 |   |
| March 31, 2007     |       | $        | 15.71      |    | $          | 11.76                   |       | $ | 0.045 |   |
|                    |       |     |       |    |       |                    |       |
| December 31, 2006  |       | $        | 15.50      |    | $          | 11.89                   |       | $ | 0.045 |   |
| September 30, 2006 |       | $        | 20.60      |    | $          | 11.73                   |       | $ | 0.045 |   |
| June 30, 2006      |       | $        | 20.15      |    | $          | 14.53                   |       | $ | 0.045 |   |
| March 31, 2006     |       | $        | 14.70      |    | $          | 9.33                    |       | $ | 0.040 |   |

 

        On October 23,2002, our Board of Directors authorized the repurchase of up to 3,000,000shares of our outstanding common stock. The purchases may be made in the open market or in privately negotiatedtransactions as conditions warrant.  Therepurchase authorization does not obligate us to acquire any specific number ofshares and may be suspended at any time.

 

        Thefollowing table details our purchases of equity securities for the three monthsended December 31, 2007 (the average price paid per share does not includenominal brokerage commissions):
| **Period**                                           | ** ** | **Total Number   of Shares Purchased** | ** ** | **Average   Price   Paid Per   Share** | ** ** | **Total Number of  Shares Purchased as Part of Publicly  Announced Plans or Programs** | ** ** | **Maximum   Number  of Shares that May Yet Be Purchased  Under the Plans   or Programs** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| October 1, 2007 –  October 31, 2007   |       | —                                 |       | $                                      | —     |                                                                                        | —     |                                                                                          | 2,668,733  |   |
| November 1, 2007 –  November 30, 2007 |       | 672,900                                |       | $                                      | 10.68      |                                                                                        | 672,900    |                                                                                          | 1,995,833  |   |
| December 1, 2007 –  December 31, 2007 |       | 244,000                                |       | $                                      | 10.82      |                                                                                        | 244,000    |                                                                                          | 1,751,833  |   |
| Total                                                |       | 916,900                                |       | $                                      | 10.72      |                                                                                        | 916,900    |                                                                                          | 1,751,833  |   |

 

12

----

 

**CommonStock Performance**

 

         The graph below compares the cumulativetotal return of the following:

 

·                  our Common Stock;

 

·                  the Russell 2000 Index; and

 

·                  an index of peer companies.

 

         The peer index we selected consists ofthe following companies engaged in the gaming business:  Dover Downs Gaming & Entertainment, Inc.,MTR Gaming Group, Inc., Ameristar Casinos, Inc., Penn National Gaming, Inc.,Churchill Downs, Inc., Pinnacle Entertainment, Inc., and MagnaEntertainment Corp.  The graph assumesthat the value of the investment in our Common Stock and each index was 100 at December 31,2002 and all dividends were reinvested. The comparisons in this table are required by the Securities andExchange Commission and, therefore, are not intended to forecast or benecessarily indicative of any future return on our Common Stock.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

**AMONGDOVER DOWNS GAMING & ENTERTAINMENT, INC., THE RUSSELL 2000 INDEX**

**AND APEER GROUP**

 

 

----

 

*                    $100 invested on December 31, 2002 in stock orindex—including reinvestment of dividends. Fiscal year ending December 31.

 

13

----

 

**Item 6.****            Selected FinancialData**

 

         The table below summarizes certainselected consolidated financial data and should be read together with *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations* and our consolidated financial statements and notescontained elsewhere in this document.

 

**Five YearSelected Financial Data**

** **
| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated Statement of Earnings Data   (in thousands, except per share data):** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                            |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                               |       | $                                 | 224,760    |   | $ | 220,412 |   | $ | 202,372 |   | $ | 193,922 |   | $ | 175,023 |   |
| Other operating                                                                      |       | 17,606                            |       | 16,039 |   | 14,480 |   | 13,822 |   | 13,809 |   |
|                                                                                 |       | 242,366                           |       | 236,451 |   | 216,852 |   | 207,744 |   | 188,832 |   |
| Less — non-recurring gaming charge (a)                                          |       | —                            |       | — |   | — |   | 448 |   | — |   |
|                                                                                 |       | 242,366                           |       | 236,451 |   | 216,852 |   | 207,296 |   | 188,832 |   |
| Expenses:                                                                            |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                               |       | 166,040                           |       | 163,288 |   | 151,973 |   | 152,725 |   | 138,423 |   |
| Non-recurring gaming charge (a)                                                      |       | —                            |       | — |   | — |   | 1,802 |   | — |   |
| Other operating                                                                      |       | 15,268                            |       | 14,202 |   | 13,167 |   | 13,013 |   | 9,899 |   |
| General and administrative                                                           |       | 6,319                             |       | 5,905 |   | 4,765 |   | 4,603 |   | 4,317 |   |
| Depreciation                                                                         |       | 7,843                             |       | 7,146 |   | 6,998 |   | 6,791 |   | 6,287 |   |
|                                                                                 |       | 195,470                           |       | 190,541 |   | 176,903 |   | 178,934 |   | 158,926 |   |
|                                                                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Gain on sale of  shopping center (b)                                                 |       | —                            |       | — |   | 5,837 |   | — |   | — |   |
| Operating earnings                                                                   |       | 46,896                            |       | 45,910 |   | 45,786 |   | 28,362 |   | 29,906 |   |
| Interest expense                                                                     |       | 2,741                             |       | 2,943 |   | 1,875 |   | 762 |   | 842 |   |
| Earnings before income  taxes                                                        |       | 44,155                            |       | 42,967 |   | 43,911 |   | 27,600 |   | 29,064 |   |
| Income taxes                                                                         |       | 18,070                            |       | 17,639 |   | 17,871 |   | 11,219 |   | 11,827 |   |
| Net earnings                                                                         |       | $                                 | 26,085     |   | $ | 25,328 |   | $ | 26,040 |   | $ | 16,381 |   | $ | 17,237 |   |
| ** **                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per common  share (c):                                                  |       |                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | $                                 | 0.81       |   | $ | 0.78 |   | $ | 0.73 |   | $ | 0.41 |   | $ | 0.43 |   |
| Diluted                                                                              |       | $                                 | 0.80       |   | $ | 0.77 |   | $ | 0.72 |   | $ | 0.41 |   | $ | 0.43 |   |
|                                                                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Dividends declared per  common share                                                 |       | $                                 | 0.19       |   | $ | 0.175 |   | $ | 0.16 |   | $ | 0.15 |   | $ | 0.13 |   |
| ** **                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected Consolidated Operating  Data (unaudited):**                               | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average number of slot  machines                                                     |       | 2,719                             |       | 2,599 |   | 2,500 |   | 2,432 |   | 2,000 |   |
| Casino square-footage                                                                |       | 97,000                            |       | 97,000 |   | 91,000 |   | 91,000 |   | 80,000 |   |

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated Balance Sheet Data  (in thousands):** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                                      |       | $                     | 7,414      |   | $ | 11,979 |   | $ | 9,216 |   | $ | 8,505 |   | $ | 8,917 |   |
| Total assets                                         |       | 225,180               |       | 173,027 |   | 153,461 |   | 160,300 |   | 152,159 |   |
| Long-term debt (b)                                   |       | 92,425                |       | 59,425 |   | 24,075 |   | 51,950 |   | 31,225 |   |
| Total stockholders’  equity (c)                 |       | 89,599                |       | 77,259 |   | 93,270 |   | 72,770 |   | 94,975 |   |
|                                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)          Effective December 2004, we changed our policyrelating to our point loyalty program to allow points earned by customers to beredeemed for cash under certain circumstances. As a result, we recorded anon-recurring charge of $2,250,000 ($1,338,000 after income tax benefit)in the fourth quarter of 2004 to record thenet impact of the program change.  Theestimated amount of points redeemable for cash was recorded as a reduction ofrevenue and the estimated amount of points redeemable for services andmerchandise was recorded as gaming expense.

 

14

----

(b)         On December 28, 2005, weclosed on the sale of a shopping center we owned in Dover, Delaware.  The sales price was $12,450,000 and werecognized a gain on the sale of $5,837,000 ($3,461,000 after incometaxes).  The proceeds from the sale wereused to pay down outstanding amounts on our credit facility.

 

(c)          On November 10, 2004, we commenced a tender offerto purchase up to 1,560,632 shares of our common stock and up to 2,411,259shares of our Class A common stock at a fixed price of $8.00 pershare.  The offer expired on December 10,2004.  We purchased 1,560,632 shares ofour common stock and 2,400,000 shares of our Class A common stock for$32,045,000, including expenses, in connection with the tender offer.

 

                        On December 19, 2005, we commenced atender offer to purchase up to 1,595,906 shares of our common stock and up to1,988,202 shares of our Class A common stock at a fixed price of $9.67 pershare.  The offer expired on January 19,2006. We purchased 1,595,906 shares of our common stock and 1,987,500 shares ofour Class A common stock for $34,996,000, including expenses, inconnection with the tender offer.

 

                        On October 23, 2002, our Board ofDirectors authorized the repurchase of up to 3,000,000 shares of ouroutstanding common stock.  The purchasesmay be made in the open market or in privately negotiated transactions asconditions warrant.  The repurchaseauthorization has no expiration date, does not obligate us to acquire anyspecific number of shares and may be suspended at any time.  During the year ended December 31, 2007,we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. No purchases of our equity securities were made pursuant to thisauthorization during the years ended December 31, 2006 and 2005.  During the years ended December 31, 2004and 2003, we purchased and retired 76,350 and 254,918 shares of our outstandingcommon stock pursuant to this plan at an average purchase price of $6.63 and$5.93 per share, respectively, not including nominal brokerage commissions.

 

**Item 7****.      Management’s DiscussionAnd Analysis Of Financial Condition And Results Of Operations**

 

The following discussion is based upon and should be read together withthe consolidated financial statements and notes thereto included elsewhere inthis document.

 

Dover Downs Gaming & Entertainment, Inc. is a diversifiedgaming and entertainment company whose operations consist of Dover DownsCasino—a 97,000 square-foot video lottery casino complex featuring the latestin slot machine offerings, including multi-player electronic table games withvirtual dealers; the Dover Downs Hotel and Conference Center—a 500 room AAAFour Diamond hotel with conference, banquet, fine dining, ballroom, and concerthall and spa facilities; and Dover Downs Raceway—a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

Approximately 90% of our revenue is derived from video lottery (slot)machine win.  Several factors contributeto the video lottery (slot) machine win for any gaming company, including, butnot limited to:

 

·                  Proximity to major population bases,

·                  Competition in the market,

·                  The quantity and types of slot machines available,

·                  The quality of the physical property,

·                  Other amenities offered on site,

·                  Customer service levels, and

·                  Marketing programs.

 

We believethat we hold a strong position in each of these areas.  Our entertainment complex is located inDover, the capital of the State of Delaware. We draw patrons from several majormetropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all withina two hour drive. According to the 2000 United States Census, approximately32.8 million people live within 150 miles of our complex.  There are significant barriers to entryrelated to the gaming business in Delaware. By law, only three existing horse racing facilities in the State areallowed to have a gaming license.  Ourproperty, originally designed and developed with the assistance of Caesars, 

 

15

----

 

is similar to properties found in the country’s largest gamingmarkets.  Our recently expanded luxuryhotel is the only casino hotel in Delaware, providing a strong marketing tool,especially to higher-end players.  Wealso utilize our slot marketing system to allow for the most efficientmarketing programs and the highest levels of customer service.

 

Because all of our operations are located at one facility, we face therisk of increased competition from the legalization of new or additional gamingvenues.  We have therefore focused oncreating the region’s premier gaming destination and building and rewardingcustomer loyalty through innovative marketing efforts, unparalleled customerservice and a variety of amenities.

 

**Resultsof Operations**

 

*        *Gaming revenues represent (i) the net win fromvideo lottery (slot) machine wins and losses and (ii) commissions frompari-mutuel wagering.  Other operatingrevenues consist of hotel rooms revenue, food and beverage sales and othermiscellaneous income.  Revenues do notinclude the retail amount of hotel rooms, food and beverage and othermiscellaneous goods and services provided without charge to customers aspromotional items. The estimated direct cost of providing these items has beencharged to the casino through interdepartmental allocations and is included in gamingexpenses in the consolidated statement of earnings.

 

         For the video lottery operations, thedifference between the amount wagered by bettors and the amount paid out tobettors is referred to as the win. The win is included in the amount recordedin our consolidated financial statements as gaming revenue. The Delaware StateLottery Office sweeps the win from the video lottery operations, collects theState’s share of the win and the amount due to the vendors under contract withthe State who provide the video lottery (slot) machines and associated computersystems, collects the amount allocable to purses for harness horse racing andremits the remainder to us as our commission for acting as a Licensed Agent.Gaming expenses include the amounts collected by the State (i) for theState’s share of the win, (ii) for remittance to the providers of thevideo lottery (slot) machines and associated computer systems, and (iii) forharness horse racing purses. We recognize revenues from pari-mutuel commissionsearned from live harness horse racing and importing of simulcast signals fromother race tracks when the race occurs. Revenues from hotel rooms, food andbeverage sales and other miscellaneous income are recognized at the time theservice is provided.

 

*Year EndedDecember 31, 2007 vs. Year Ended December 31, 2006*

 

        Gamingrevenues increased by $4,348,000, or 2.0%, to $224,760,000 in 2007, entirelythe result of increased play in our casino. This increase in video lottery (slot) machine win was partially offsetby lower horse racing commissions.  Webelieve that theincrease in casino play can be attributed to the opening of our hotel expansionduring the later part of 2007, the conversion of 4,000 square-feet of space within our existing complex to gaming spacewhich allowed us to add more than 200 new machines in July of 2006, targetedmarketing efforts using our player database, and our efforts to provide ourcustomers with enhanced casino products and other amenities.  Our average number of machines increased from2,599 in 2006 to 2,719 in 2007.

 

        Otheroperating revenues were $17,606,000 in 2007 as compared to $16,039,000 in2006.  Net food and beverage revenuesincreased $1,177,000 to $12,123,000 from $10,946,000 in 2006 primarily due toan increase in banquet sales and sales at our Festival Buffet restaurant.  Additionally, cash rooms revenue increased$585,000 in 2007 mainly due to the hotel expansion.  Partially offsetting these increases was adecrease in concert ticket sales as a result of promoting fewer shows during2007.  Other operating revenues do notinclude the retail amount of promotional allowances which are provided tocustomers on a complimentary basis of $15,770,000 and $15,152,000 in 2007 and2006, respectively.

 

        Gamingexpenses increased by $2,752,000, or 1.7%, reflecting the higher gamingrevenues.  Amountsretained by the State of Delaware and the amount collected by the State forpayment to the vendors under contract with the State who provide the videolottery (slot) machines and associated computer systems increased by $1,025,000and $1,115,000, respectively. Additionally, amounts allocated from the video lottery operation forharness horse racing purses increased from $25,333,000 in 2006 to $25,887,000in 2007.

 

16

----

 

         Other operating expensesincreased by $1,066,000, or 7.5%. Expenses related to our food and beverage operations were $12,552,000 in2007 and $11,815,000 in 2006.  Expensesrelated to our rooms operations increased $262,000 in 2007 primarily due to thehotel expansion.  All other operatingexpenses increased $67,000 in 2007 as compared to 2006.

 

        Generaland administrative expenses increased by $414,000 to $6,319,000 from $5,905,000in 2006, primarily the resultof higher stock based compensationexpenses, higher benefits costs and losses on the disposal of property andequipment.  Partially offsetting theseincreases was a decrease in legal expenses.

 

        Depreciationexpense was $7,843,000 in 2007 as compared to $7,146,000 in 2006.  The increase resulted primarily from theopening of our hotel expansion during 2007.

 

        Interestexpense decreased by $202,000 due to the amount of interest we capitalizedduring 2007 as compared to 2006, despite higher average outstanding borrowings andan increase in our average interest rate on our credit facility.  During 2006, the majority of our creditfacility borrowings were used to fund our $34,986,000 self-tender in January 2006.  During 2007, the majority of our creditfacility borrowings were used for our hotel expansion project and to a lesserextent our casino expansion project.  Theinterest expense associated with the borrowings for our hotel and casinoexpansions is being capitalized as part of the project cost.

 

        Oureffective income tax rate was 40.9% and 41.1% for the years ended December 31,2007 and 2006, respectively.

 

         Net earnings were $26,085,000 in 2007as compared to $25,328,000 in 2006.  The increase of $757,000, or 3.0%, was due tothe improved results for our gaming operations that resulted from an increasein slot win, improved results for our hotel and food and beverage operations,and a reduction in our interest expense, partially offset by lower horse racingcommissions and higher general and administrative and depreciation expenses.

 

*YearEnded December 31, 2006 vs. Year Ended December 31, 2005*

 

        Gamingrevenues increased by $18,040,000, or 8.9%, to $220,412,000 in 2006, primarilythe result of increased play in our casino. We believe that the increase in casino play can beattributed to the conversion of 4,000square-feet of space within our existing complex to gaming space which allowedus to add more than 200 new machines, our marketing efforts using ourplayer database which allows us to target specific customer segments, and ourefforts to provide our customers with enhanced video lottery (slot) productsand other amenities.  Our average numberof machines increased from 2,500 in 2005 to 2,599 in 2006.

 

        Otheroperating revenues were $16,039,000 in 2006 as compared to $14,480,000 in2005.  Net rooms revenue increased$617,000 in 2006 compared to 2005 primarily due to an increase in cash salesand fewer rooms being provided to customers on a complimentary basis.  Net food and beverage revenues increased$1,168,000 to $10,946,000 from $9,778,000 in 2005 primarily due to an increasein sales at our premium buffet restaurant, an increase in banquet sales and theopening of a new coffee shop in our hotel lobby during the second quarter of2006.  The remainder of the other operatingrevenue increase resulted mainly from an increase in concert ticket sales.  Partially offsetting these increases was aloss of $752,000 of rental income from a property we sold in December 2005.  Other operating revenues do not include theretail amount of promotional allowances which are provided to customers on acomplimentary basis of $15,152,000 and $15,103,000 in 2006 and 2005,respectively.

 

        Gamingexpenses increased by $11,315,000, or 7.4%, reflecting the higher gamingrevenues.  Amountsretained by the State of Delaware and the amount collected by the State forpayment to the vendors under contract with the State who provide the videolottery (slot) machines and associated computer systems increased by $6,793,000and $1,629,000, respectively. Additionally, amounts allocated from the video lottery operation forharness horse racing purses increased from $23,292,000 in 2005 to $25,333,000in 2006.

 

         Other operating expensesincreased by $1,035,000, or 7.9%, slightly less than the percentage increase inrevenues.  Expenses related to our roomsoperations increased by $236,000. Expenses related to our food and beverage operations were $11,815,000 in2006 as compared to $10,999,000 in 2005. The increase resulted primarily from higher payroll costs and increasedfood costs and supplies expenses due to the increase in food and beveragesales. Additionally, fewer expenses were allocated to the gaming operationsthrough interdepartmental charges in 2006 since a lower percentage of grossrevenues represent promotional items provided to gaming customers on acomplimentary basis.

 

17

----

 

        Generaland administrative expenses increased by $1,140,000 to $5,905,000 from$4,765,000 in 2005 primarily the result of stock-based compensation expense from theadoption of Financial Accounting Standards Board (“FASB”) Statement No. 123Reffective January 1, 2006, higher wages and benefits costs, increasedlegal fees and the write-off of office expansion costs.

 

        Depreciationexpense increased slightly to $7,146,000 in 2006 from $6,998,000 in 2005.  The increase resulted primarily from theimprovements to our heating, cooling and lighting systems which were placed inservice during the later part of 2006 and the expansion of our gaming spacewithin our existing facility.

 

        Interestexpense increased by $1,068,000 due to an increase in our average interest ratefrom 4.2% during 2005 to 5.9% during 2006 and higher average outstandingborrowings on our credit facility during 2006 as compared to 2005 due primarilyto our self-tender in January 2006.

 

        Oureffective income tax rates were 41.1% and 40.7% for the years ended December 31,2006 and 2005, respectively.  Theincrease in the effective rate was due primarily to the non-deductibility ofstock-based compensation expense recorded as a result of adopting FASBStatement No. 123R.

 

         Net earnings were $25,328,000 in 2006as compared to $26,040,000 in 2005, adecrease of $712,000, or 2.7%.

 

        On December 28, 2005, we closed on the sale of a shopping center weowned in Dover, Delaware.  The salesprice was $12,450,000 and we recognized a gain on the sale of $5,837,000($3,461,000 after income taxes).  Webelieve that excluding the impact of this item will enhance comparativeanalysis of our operating results.  Thefollowing table reconciles and compares results reported in accordance withGenerally Accepted Accounting Principles (“GAAP”) for 2006 and 2005 withresults excluding the impact of the sale of the shopping center in 2005:

 

| ** **                                                          | ** ** | **2006** | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|------------|------------|
| GAAP net earnings                                                   |       | $        | 25,328,000 |       | $          | 26,040,000 |   |
| Gain on sale of  shopping center, net of income taxes of $2,376,000 |       | —   |       | (3,461,000 | )          |
| Adjusted net earnings                                               |       | $        | 25,328,000 |       | $          | 22,579,000 |   |
|                                                                |       |     |       |       |       |
| GAAP net earnings per  common share — diluted                  |       | $        | 0.77       |       | $          | 0.72 |   |
| Gain on sale of  shopping center, net of income taxes of $0.07      |       | —   |       | (0.09      | )          |
| Adjusted net earnings  per common share — diluted              |       | $        | 0.77       |       | $          | 0.63 |   |

 

         Excluding the gain on sale of theshopping center in 2005, adjusted net earnings in 2006 increased $2,749,000, or12.2%, to $25,328,000 compared to 2005 adjusted net earnings of$22,579,000.  The increase was primarilydue to the improved results for our gaming operations that resulted from anincrease in slot win, partially offset by increased general and administrative,depreciation and interest expenses.

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities was $36,420,000 for the yearended December 31, 2007 compared to $26,791,000 for the year ended December 31,2006.  The increase was primarily due tothe timing of income tax payments related to the gain on sale of a shoppingcenter and other working capital changes. We sold the shopping center in December 2005; however, the incometaxes on the gain on sale were paid in 2006.

 

Net cash used in investing activities was $52,134,000 for the yearended December 31, 2007 compared to $22,065,000 for the year ended December 31,2006 and was solely related to capital improvements.  Capital expenditures for 2007 relatedprimarily to the Dover Downs Hotelexpansion and to a lesser extent, our Phase VI casino expansion.  Capital expenditures for 2006 relatedprimarily to the Dover Downs Hotelexpansion and the improvements to the heating, cooling and lighting systems forour entire entertainment complex.

 

         Net cash provided by financingactivities was $18,150,000 for the year ended December 31, 2007 comparedto net cash used in financing activities of $4,692,000 for the year ended December 31,2006.  We borrowed $33,000,000 under ourrevolving line of credit during 2007, primarily to fund capital expendituresand stock repurchases of $9,990,000.  Weborrowed $35,350,000 under our credit facility during 2006, primarily to fundstock 

 

18

----

repurchases of$35,052,000.  We paid $6,036,000 and$5,510,000 in cash dividends during 2007 and 2006, respectively.

 

        On January 23, 2008,our Board of Directors declared a quarterly cash dividend on both classes ofcommon stock of $0.05 per share.  Thedividend is payable on March 10, 2008 to shareholders of record at theclose of business on February 10, 2008.

 

         On October 23, 2002, our Board ofDirectors authorized the repurchase of up to 3,000,000 shares of ouroutstanding common stock.  The purchasesmay be made in the open market or in privately negotiated transactions asconditions warrant.  The repurchaseauthorization has no expiration date, does not obligate us to acquire anyspecific number of shares and may be suspended at any time.  During the year ended December 31, 2007,we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. No purchases of our equity securities were made pursuant to thisauthorization during the year ended December 31, 2006.  At December 31, 2007, we had remainingrepurchase authority of 1,751,833 shares.

 

        On December 19, 2005,we commenced a tender offer to purchase up to 1,595,906 shares of our commonstock and up to 1,988,202 shares of our Class A common stock at a fixedprice of $9.67 per share.  The offerexpired on January 19, 2006. We purchased 1,595,906 shares of our commonstock and 1,987,500 shares of our Class A common stock for $34,996,000,including expenses, in connection with the tender offer. The tender offer wasfunded with borrowings on our unsecured revolving line of credit.

 

        During2007, we more thandoubled the number of hotel rooms in the Dover Downs Hotel from 232 to 500,including eleven luxury spa suites, and added a luxurious 6,000 square-footspa.  Construction began in the secondquarter of 2006 and was completed in October 2007.  The cost of the hotel expansion wasapproximately $48,000,000, of which approximately $44,100,000 was paid as of December 31,2007. The remainder is expected to be paid during the first quarter of2008.  OnMarch 30, 2007, we announced our Phase VI casino expansion planthat will add nearly 70,000 square-feet to the Dover Downs Casino and willfeature a new main entrance for the casino, a new gaming floor with room formore than 500 additional slot machines and the new Dover Downs Fire and IceLounge — an upscale entertainment lounge that will seat approximately 200guests.  The expansion will also includeretail space and three new restaurants. Construction began in the first quarter of 2007 and is expected to becompleted during the summer of 2008.  Theestimated cost of the casino expansion is $56,000,000, of which approximately$17,000,000 was paid as of December 31, 2007. The remainder is expected tobe paid during 2008.  Based on current business conditions, otherthan the hotel and casino expansions we expect to make capital expenditures ofapproximately $5,000,000 during 2008, primarily for renovations to our existingcasino facility, casino equipment, an improved surveillance system andimprovements in our food and beverage departments.  Additionally,we expect to contribute approximately $1,000,000 to our pension plans in 2008.

 

         We have a credit facility withWilmington Trust Company that expires on April 17, 2012.  At December 31, 2007, the maximumborrowing limit under the facility was $125,000,000 which reduces to$100,000,000 on January 1, 2010, to $85,000,000 on January 1, 2011and to $75,000,000 on January 1, 2012. Interest is based, at our option, upon LIBOR plus a margin that variesbetween 75 and 125 basis points depending on the ratio of funded debt toearnings before interest, taxes, depreciation and amortization (the “leverageratio”) or the base rate (the greater of the prime rate or the federal fundsrate plus 0.5%) less a margin that varies between 50 and 100 basis points (100basis points at December 31, 2007) depending on the leverage ratio.  The credit facility has minimum net worth,interest coverage and maximum leverage requirements.  Material adverse changes in our results ofoperations could impact our ability to satisfy these requirements.  The facility is for seasonal funding needs,capital improvements (including our hotel and casino expansions) and othergeneral corporate purposes.  At December 31,2007, we were in compliance with all terms of the facility and there was$92,425,000 outstanding at a weighted average interest rate of 5.7%.  At December 31, 2007, $32,575,000 wasavailable pursuant to the facility.

 

         We expect that our netcash flows from operating activities and funds available from our creditfacility will be sufficient to provide for our working capital needs andcapital spending requirements at least through the next twelve months, as wellas any cash dividends our Board of Directors may declare.  We expect cash flows from operatingactivities and funds available from our credit facility to also provide forlong-term liquidity.

 

19

----

 

         The introduction or expansion of gamingin and around our market area could have a material adverse effect on our cashflows and results of operations.  See Part I,Item 1—Business included elsewhere in this document for further discussion.

 

**Contractual Obligations**

 

         At December 31, 2007, we had thefollowing contractual obligations:

 
| ** **                                               | ** ** | ** ** | ** **  |
|----------------------------------------------------------|------------|------------|-------------|
| ** **                                               | ** ** | ** ** | ** **  | **Payments Due by Period** | ** ** |
| ** **                                               | ** ** | **Total**  | ** **  | **2008** | ** ** | **2009 — 2010** | ** ** | **2011 — 2012** | ** ** | **Thereafter** | ** ** |
| Revolving line of  credit                                |       | $          | 92,425,000  |   | $ | — |   | $ | — |   | $ | 92,425,000 |   | $ | — |   |
| Estimated interest payments on revolving line of  credit |       | 22,609,000 |        | 5,268,000 |   | 10,536,000 |   | 6,805,000 |   | — |   |
| Pension contributions                                    |       | 5,000,000  |        | 1,000,000 |   | 2,000,000 |   | 2,000,000 |   | — |   |
| Purchase obligations                                     |       | 42,900,000 |        | 42,900,000 |   | — |   | — |   | — |   |
|                                                     |       | $          | 162,934,000 |   | $ | 49,168,000 |   | $ | 12,536,000 |   | $ | 101,230,000 |   | $ | — |   |

 

         The future interestpayments on our revolving credit agreement were estimated using the currentoutstanding principal and interest rates as of December 31, 2007.

 

         Although we have norequired minimum contribution related to our pension plans, we expect tocontribute approximately $1,000,000 per year to the plans.

 

         At December 31, 2007, we havepurchase obligations related to the expansionof the Dover Downs Hotel.  On March 16, 2006, we announced an expansionplan that more than doubled the number of hotel rooms from 232 to 500,including eleven luxury spa suites, and add a luxurious 6,000 square-foot spato the Dover Downs Hotel.  Constructionbegan in the second quarter of 2006 and was completed in October 2007.  The cost of the expansion was approximately$48,000,000, of which approximately $44,100,000 was paid through December 31,2007, and the remainder is expected to be paid during the first quarter of2008.

 

         At December 31, 2007, we have purchaseobligations related to the expansion of ourcasino.  On March 30, 2007, we announced our Phase VI casinoexpansion plan that will add nearly 70,000 square-feet to the Dover DownsCasino and will feature a new main entrance for the casino, a new gaming floorwith room for more than 500 additional slot machines and the new Dover DownsFire and Ice Lounge—an upscale entertainment lounge that will seatapproximately 200 guests.  Plans alsoinclude retail space and three new restaurant options.  Construction began in the first quarter of2007 and is expected to be completed by the summer of 2008.  The estimated cost of the casino expansion is$56,000,000, of which approximately $17,000,000 was paid through December 31,2007, and the remainder is expected to be paid during 2008.

 

**Related Party Transactions**

 

         See NOTE 9—Related Party Transactionsto our consolidated financial statements included elsewhere in this documentfor a full description of related party transactions.

 

**Critical Accounting Policies**

 

         The accounting policies described beloware those considered critical by us in preparing our consolidated financialstatements and/or include significant estimates made by management usinginformation available at the time the estimates are made.  As described below, these estimates couldchange materially if different information or assumptions were used.

 

*Propertyand Equipment*

 

         Property and equipment are recorded atcost. Depreciation is provided for financial reporting purposes using thestraight-line method over estimated useful lives ranging from 5 to 10 years forfurniture, fixtures and equipment and up to 40 years for facilities.  These estimates require assumptions that arebelieved to be reasonable.  We 

 

20

----

 

perform reviewsfor impairment of long-lived assets whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable.  No such events or changes in circumstanceshave occurred to date.  An impairmentloss would be measured as the amount by which the carrying amount of the assetexceeds its fair value.  Generally, fairvalue will be determined using valuation techniques such as the present valueof future cash flows.

 

**RecentAccounting Pronouncements**

 

SeeNOTE 2—Summary of Significant Accounting Policies****toour consolidated financial statements included elsewhere in this document for adescription of recent accounting pronouncements including the expected dates ofadoption and effects on results of operations, financial condition and cashflows.

 

**Factors That May Affect Operating Results;Forward-Looking Statements**

 

In addition to historical information, this Annual Report on Form 10-Kincludes forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, relating to our financialcondition, profitability, liquidity, resources, business outlook, proposedacquisitions, market forces, corporate strategies, consumer preferences,contractual commitments, legal matters, capital requirements and othermatters.  Documents incorporated byreference into this Annual Report may also contain forward-looking statements.The Private Securities Litigation Reform Act of 1995 provides a safe harbor forforward-looking statements. To comply with the terms of the safe harbor, wenote that a variety of factors could cause our actual results and experience todiffer substantially from the anticipated results or other expectationsexpressed in our forward-looking statements. When words and expressions suchas: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,”“objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,”“may,” “could,” “should,” “might,” “likely,” “enable” or similar words or expressionsare used in this document, as well as statements containing phrases such as “inour view,” “there can be no assurance,” “although no assurance can be given” or“there is no way to anticipate with certainty,” forward-looking statements arebeing made.

 

        Various risks anduncertainties may affect the operation, performance, development and results ofour business and could cause future outcomes to differ materially from thoseset forth in our forward-looking statements, including the following factors:

 

·                  success of any expansion to or renovation of ourexisting facilities or changes in our growth strategies;

 

·                  expansion of gaming in neighboring jurisdictions;

 

·                  anticipated trends in the gaming industry;

 

·                  patron demographics;

 

·                  general market and economic conditions, includingconsumer and corporate spending sentiment;

 

·                  our ability to finance future business requirements;

 

·                  our ability to effectively compete in the marketplace;

 

·                  the availability of adequate levels of insurance;

 

·                  our development and potential acquisition of newfacilities;

 

·                  our ability to successfully integrate acquiredcompanies and businesses;

 

·                  management retention and development;

 

21

----

 

·                  changes in Federal, state, and local laws andregulations, including environmental, gaming license and tax legislation;

 

·                  the effect of weather conditions or travel onattendance at our facilities;

 

·                  military or other government actions; and

 

·                  national or local catastrophic events.

 

        The above risks and uncertainties and thecautionary statements below should be considered in connection with any futureforward-looking statements we make. Weundertake no obligation to publicly update or revise any forward-lookingstatements as a result of future developments, events or conditions.  New risk factors emerge from time to time andit is not possible for us to predict all such risk factors, nor can we assessthe impact of all such risk factors on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differsignificantly from those forecast in any forward-looking statements. Giventhese risks and uncertainties, stockholders should not overly rely or attachundue weight to our forward-looking statements as an indication of our actualfuture results.

 

*OurGaming Activities Compete Directly With Other Gaming Facilities And OtherEntertainment Businesses*

 

         We compete in local andregional markets with horse tracks, off-track betting parlors, state runlotteries, casinos and other gaming facilities. We cannot be certain that we will maintain our market share or competemore effectively with our competitors.  Theintroduction or expansion of gaming in neighboring jurisdictions, particularlyMaryland, Virginia, West Virginia, Washington, D.C., Pennsylvania or NewJersey, or the legalization of additional gaming venues in Delaware, could havea material adverse effect on our cash flows and results of operations.  From timeto time legislation is proposed for adoption in these jurisdictions which ifenacted, would further expand state gambling and wagering opportunities,including video lottery (slot) machines at racetracks. Enactment of suchlegislation could increase our competition and could adversely affect ourbusiness, financial condition and overall profitability.  For example, after several failedattempts in prior years, the Maryland Legislature passed legislation in2008 that will permit up to 15,000 slot machines in five differentspecific locations throughout Maryland. The legislation requires aConstitutional amendment and, therefore, will be put to avote by the Maryland electorate in a special referendum to be held inNovember 2008.  Even if the referendum passes, the establishmentof any gaming locations in the State remains subject to local zoningprohibitions and may face further opposition.  As the number of machinesand the specific locations of the gaming establishments will be set by theState’s Constitution, any changes to the number of machines or the locationswould require further amendment to theState Constitution.   It is difficult for us to predictwhether the referendum will pass and if it passes what types of gaming establishmentsmay ultimately be built in Maryland or when they are likely to becomeoperational.  Management has estimated that approximately 44% of our totalslot win comes from Maryland patrons. ** **Approximately 68% of our CapitalClub® member slot win comes from out of state patrons.  In July 2004,Pennsylvania adopted legislation which authorizes up to 61,000 slot machines atvarious existing and proposed venues throughout the state.  It is difficult for us to predict the effectthat such legislation will ultimately have on us, but several facilities inPennsylvania began operations by the end of 2006.  Management has estimated that slot win fromPennsylvania patrons currently represents approximately****4%of our total slot win compared to 5% last year.

 

*All OfOur Facilities Are In One Location*

 

         Our facilities are located adjacent toone another at a single location in Dover, Delaware. Any prolonged disruptionof operations at these facilities due to damage or destruction or other reasonscould adversely affect our financial condition and results of operations. Wemaintain property and business interruption insurance to protect against suchtypes of disruption, but there can be no assurance that the proceeds of suchinsurance would be adequate to repair or rebuild our facilities or to compensateus for lost profits.

 

*TheRevocation, Suspension Or Modification Of Our Gaming Licenses Would AdverselyAffect Our Gaming Business*

 

         The Delaware State Lottery Office andthe Delaware Harness Racing Commission regulate our gaming operations. Our licensefrom the Commission must be renewed on an annual basis. To keep our license forvideo 

 

22

----

 

lottery (slot)machine gaming, we must remain licensed for harness horse racing by theCommission and conduct at least 80 live race days each racing season, subjectto the availability of harness race horses. The Commission has broad discretionto reject any application for a license or suspend or revoke a license once itis issued. The Director of the Delaware State Lottery Office (the “LotteryDirector”) has broad discretion to revoke, suspend or modify the terms of avideo lottery license. Any modification or termination of existing licensingregulations or any revocation, suspension or modification of our licenses couldadversely affect our business, financial condition and overall profitability.

 

*OurGaming Activities Are Subject To Extensive Government Regulation And AnyAdditional Government Regulation Or Taxation Of Gaming Activities CouldSubstantially Reduce Our Revenue Or Profit*

 

         Video lottery (slot) machine gaming,harness horse racing and pari-mutuel wagering are subject to extensivegovernment regulation. Delaware law regulates the win we are entitled to retainand the percentage of commission we are entitled to receive from our gamingrevenues, which comprises a significant portion of our overall revenues. TheState granted us a license to conduct video lottery (slot) machine operationsand a license to conduct harness horse races and pari-mutuel wagering. The lawsunder which these licenses are granted could be modified or repealed at anytime and we could be required to terminate our gaming operations. If we arerequired to terminate our gaming operations or if the amount of the commissionwe receive from the State for conducting our gaming operations is decreased,our business operations and overall profitability would be significantlyimpaired.

 

         We believe that the prospect ofsignificant additional tax revenue is one of the primary reasons whyjurisdictions have legalized gaming. As a result, gaming operators aretypically subject to significant taxes and fees in addition to normal federaland state corporate income taxes. These taxes and fees are subject to increaseat any time. We pay substantial taxes and fees with respect to our operationsand will likely incur similar burdens in any other jurisdiction in which we mayconduct gaming operations in the future. Any material increase in taxes orfees, or the adoption of additional taxes or fees, may have a material adverseeffect on our future financial results.

 

         We are subject to various federal,state and local laws and regulations in addition to gaming regulations. Theselaws and regulations include, but are not limited to, restrictions and conditionsconcerning alcoholic beverages, environmental matters, employees, currencytransactions, taxation, zoning and building codes, and marketing andadvertising. Such laws and regulations are always subject to change, can beinterpreted differently in the future, and new laws and regulations may beenacted which could adversely affect the tax, regulatory, operational or otheraspects of our gaming operations. Furthermore, noncompliance with one or moreof these laws and regulations could result in the imposition of substantialpenalties against us.

 

*We Do NotOwn Or Lease Our Video Lottery (Slot) Machines And Related Technology*

 

         We do not own or lease the videolottery (slot) machines or computer systems used by the State in connectionwith our video lottery gaming operations. The Lottery Director enters into contracts directly with the providersof the video lottery (slot) machines and computer systems. The State purchasesor leases all equipment and the Lottery Director licenses all technology providers.Our operations could be disrupted if a licensed technology provider violatesits agreement with the State or ceases to be licensed for any reason. Such anevent would be outside of our control and could adversely affect our gamingrevenues.

 

*****Due to Our Concentrated Stock Ownership, Stockholders May HaveNo Effective Voice In Our Management*****

 

         We have elected to be treated as a“controlled corporation” as defined by New York Stock Exchange Rule 303A. We are a controlled corporation because a single person, Henry B. Tippie, theChairman of our Board of Directors, controls in excess of fifty percent of ourvoting power. This means that he has the ability to determine the outcome ofthe election of directors at our annual meetings and to determine the outcomeof many significant corporate transactions, many of which only require theapproval of a majority of our voting power. Such a concentration of votingpower could also have the effect of delaying or preventing a third party fromacquiring us at a premium.  In addition, as a controlled corporation,we are not required to comply with certain New York Stock Exchange rules.

 

23

----

 

**Item 7A.****         Quantitative AndQualitative Disclosure About Market Risk**

 

We do not utilize financialinstruments for trading purposes and hold no derivative financial instrumentswhich could expose us to market risk. Our exposure to market risks related to fluctuations in interest ratesis limited to our variable rate borrowings of $92,425,000 at December 31,2007 under our revolving credit facility. A change in interest rates of one percent on the balance outstanding at December 31,2007 would cause a change in total annual interest costs of $924,250.  The carrying values of these borrowingsapproximate their fair values at December 31, 2007.

 

#### **Item8.**            Financial Statements AndSupplementary Data

 

         Ourconsolidated financial statements and the Report of Independent RegisteredPublic Accounting Firm included in this report are shown on the Index toConsolidated Financial Statements on page 32.

 

**Item 9.****                                  ****Changes In AndDisagreements With Accountants On Accounting And Financial Disclosure**

 

         None.

 

**Item 9A.****         Controls andProcedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

         We have established disclosure controlsand procedures to ensure that material information relating to us, includingour consolidated subsidiaries, is made known to the officers who certify ourfinancial reports and to other members of senior management and the Board ofDirectors.

 

         Based on their evaluation as of December 31,2007, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective toensure that the information we are required to disclose in the reports that wefile or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

         There have been no changes in ourinternal control over financial reporting during the fiscal quarter ended December 31,2007 that have materially affected, or that are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

*(c) Management’sReport on Internal Control Over Financial Reporting*

 

**        **Our management is responsible for establishing andmaintaining adequate internal control over financial reporting.  We conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Basedon our evaluation, management concluded that our internal control overfinancial reporting was effective as of December 31, 2007.  KPMG LLP independently assessed theeffectiveness of our internal control over financial reporting as of December 31,2007.  KPMG LLP has issued their reportwhich is included herein.

 

24

----

 

*(d) Report of Independent Registered PublicAccounting Firm*

 

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

         We have audited Dover Downs Gaming &Entertainment, Inc.’s (the Company’s) internal control over financialreporting as of December 31, 2007, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying *Management’s Report onInternal Control Over Financial Reporting (Item 9A(c))*. Ourresponsibility is to express an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

         We conducted our audit in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reportingwas maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

         A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

         Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

         In our opinion, Dover Downs Gaming &Entertainment, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, basedon criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

         We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Dover Downs Gaming &Entertainment, Inc. and subsidiaries as of December 31, 2007 and2006, and the related consolidated statements of earnings and comprehensiveearnings and cash flows for each of the years in the three-year period ended December 31,2007, and our report dated March 7, 2008 expressed an unqualified opinionon those consolidated financial statements.

 

KPMG LLP

 

Philadelphia,Pennsylvania

March 7, 2008

 

25

----

 

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

 

         None.

 

**Part III**

** **

**Item 10.****         Directors, ExecutiveOfficers And Corporate Governance**

 

         Except as presented below, biographicalinformation relating to our directors and executive officers, informationregarding our audit committee financial experts and information on Section 16(a) BeneficialOwnership Reporting Compliance called for by this Item 10 are incorporated byreference to our Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 23, 2008.

 

         We have a Code of Business Conductapplicable to all of our employees, including our Chief Executive Officer andChief Financial Officer.  We also have aCode of Business Conduct and Ethics for Directors and Executive Officers andRelated Party Transactions Policy applicable to all directors and executiveofficers.  Copies of these Codes andother corporate governance documents are available on our website at http://www.doverdowns.comunder the heading Investor Relations. We will post on our website anyamendments to, or waivers from, these Codes as required by law.

 

Executive Officersof the Registrant.  As of December 31, 2007, our executiveofficers were:

 
| **Name**            | ** ** | **Position**                          | ** ** | **Age** | ** ** | **Term of Office** |
|---------------------|------------|---------------------------------------|------------|---------|------------|--------------------|
|                |       |                                  |       |    |       |               |
| Denis McGlynn       |       | President and                         |       |    |       |               |
|                |       | Chief Executive Officer               |       | 61      |       | 11/79 to date      |
|                |       |                                  |       |    |       |               |
| Edward J. Sutor     |       | Executive Vice President              |       |    |       |               |
|                |       | and Chief Operating Officer           |       | 58      |       | 3/99 to date       |
|                |       |                                  |       |    |       |               |
| Timothy R. Horne    |       | Sr. Vice President-Finance, Treasurer |       |    |       |               |
|                |       | and Chief Financial Officer           |       | 41      |       | 11/96 to date      |
|                |       |                                  |       |    |       |               |
| Klaus M. Belohoubek |       | Sr.Vice President-General Counsel     |       |    |       |               |
|                |       | and Secretary                         |       | 48      |       | 7/99 to date       |

 

         Our Chairman of the Board, Henry B.Tippie, is a non-employee director and, therefore, not an executiveofficer.  Mr. Tippie has served asChairman of the Board since our initial public offering in 2002.  Mr. Tippie also serves as Chairman ofthe Board to DVD as a non-employee director.

 

         Denis McGlynn has served as ourPresident and Chief Executive Officer for 28 years.  Mr. McGlynn also serves as President andChief Executive Officer to DVD.

 

         Edward J. Sutor has been Executive VicePresident and Chief Operating Officer since 1999.  Previously, Mr. Sutor served as SeniorVice President of Finance at Caesars Atlantic City from 1983 until 1999.

 

         Timothy R. Horne has been Sr. VicePresident-Finance, Treasurer and Chief Financial Officer since November 1996.  Mr. Horne previously served as VicePresident-Finance and Chief Financial Officer to DVD.

 

         Klaus M. Belohoubek has been Sr. VicePresident-General Counsel and Secretary since 1999 and has provided us legalrepresentation in various capacities since 1990.  Mr. Belohoubek also serves as Sr. VicePresident-General Counsel and Secretary to DVD.

 

26

----

 

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

 

         The information calledfor by this Item 11 is incorporated by reference to our Proxy Statement to befiled pursuant to Regulation 14A for the Annual Meeting of Stockholders to beheld on April 23, 2008.

 

**Item 12.****                           ****Security Ownership OfCertain Beneficial Owners And Management And Related Stockholder Matters**

 

         The information calledfor by this Item 12 is incorporated by reference to our Proxy Statement to befiled pursuant to Regulation 14A for the Annual Meeting of Stockholders to beheld on April 23, 2008.

 

###### **EquityCompensation Plan Information**

###### ** **

        We have a stock incentive plan which provides forthe grant of up to 2,250,000 shares of common stock to our officers and keyemployees through stock options and/or awards valued in whole or in part byreference to our common stock, such as restricted stock awards.  Refer to NOTE 8-Stockholders’ Equityto our consolidated financial statements included elsewhere in this documentfor further discussion.  Securitiesauthorized for issuance under equity compensation plans at December 31,2007 are as follows:

 
| **Plan Category**                                           | ** ** | **Number of   securities to be   issued upon   exercise of   outstanding   options, warrants   and rights** | ** ** | **Weighted-average exercise price of outstanding   options, warrants and rights** | ** ** | **Number of securities remaining available for future issuance under  equity compensation plans (excluding securities reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       | (a)                                                                                                         |       | (b)                                                                               |       | (c)                                                                                                                                              |       |
| Equity compensation plans approved by security  holders     |       | 746,107                                                                                                     |       | $                                                                                 | 6.87       |                                                                                                                                             | 926,697    |   |
|                                                        |       |                                                                                                        |       |                                                                              |       |                                                                                                                                             |       |
| Equity compensation plans not approved by security  holders |       | —                                                                                                      |       | —                                                                            |       | —                                                                                                                                           |       |
| Total                                                       |       | 746,107                                                                                                     |       | $                                                                                 | 6.87       |                                                                                                                                             | 926,697    |   |

 

**Item 13.****         Certain RelationshipsAnd Related Transactions, And Director Independence**

 

         The information calledfor by this Item 13 is incorporated by reference to our Proxy Statement to befiled pursuant to Regulation 14A for the Annual Meeting of Stockholders to beheld on April 23, 2008.

 

**Item 14.****         Principal AccountingFees And Services**

 

         The information calledfor by this Item 14 is incorporated by reference to our Proxy Statement to befiled pursuant to Regulation 14A for the Annual Meeting of Stockholders to beheld on April 23, 2008.

 

**Part IV**

** **

**Item 15.****         Exhibits, FinancialStatement Schedules**

 

(a)(1)       FinancialStatements — See accompanying Index to Consolidated Financial Statements onpage 32.

 

    (2)       Financial Statement Schedules —None.

 

27

----

(3)                     Exhibits:

 
| 2.1    |   | Amended and Restated Agreement Regarding  Distribution and Plan of Reorganization, dated as of February 15, 2002,  by and between Dover Motorsports, Inc. (formerly known as Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 2.1 to the Form 10  filed on February 26, 2002, which was declared effective on  March 7, 2002). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1    |   | Certificate of Incorporation of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 3.1 to the Form 10 filed on November 21, 2001,  which was declared effective on March 7, 2002).                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2    |   | Amended and Restated By-laws of Dover Downs  Gaming & Entertainment, Inc. dated March 1, 2002  (incorporated herein by reference to Exhibit 3.2 to the Form 10  filed on March 7, 2002).                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1    |   | Form of Common Stock Certificate of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 4.1 to the Form 10 filed on November 21, 2001,  which was declared effective on March 7, 2002).                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2    |   | Rights Agreement dated as of January 2, 2002  between Dover Downs Gaming & Entertainment, Inc. and Mellon  Investor Services, as Rights Agent (incorporated herein by reference to  Exhibit 4.2 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1   |   | Employee Benefits Agreement, dated as of  January 15, 2002, by and between Dover Motorsports, Inc. (formerly  known as Dover Downs Entertainment, Inc.) and Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 10.2 to the Form 10 filed on January 16, 2002,  which was declared effective on March 7, 2002).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2   |   | Transition Support Services Agreement, dated as of  January 15, 2002, by and between Dover Motorsports, Inc. (formerly  known as Dover Downs Entertainment, Inc.) and Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit 10.3 to the Form 10 filed on January 16, 2002,  which was declared effective on March 7, 2002).                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3   |   | Tax Sharing Agreement, dated as of January 15,  2002, by and between Dover Motorsports, Inc. (formerly known as Dover  Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.4 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4   |   | Real Property Agreement dated as of January 15,  2002, by and between Dover Motorsports, Inc. (formerly known as Dover  Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to  Exhibit 10.5 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5   |   | Agreement between Dover Downs, Inc. and  Delaware Standardbred Owners Association, Inc. dated May 1, 2007.                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6   |   | Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, dated as of  January 15, 2002 (incorporated herein by reference to Exhibit 10.10  to the Form 10 filed on January 16, 2002, which was declared  effective on March 7, 2002).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7   |   | Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and  Wilmington Trust Company, as agent, dated as of March 25, 2002  (incorporated herein by reference to Exhibit 10.6 to the Form 10-Q  filed on May 10, 2002).                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8   |   | Amended and Restated Guaranty  and Suretyship Agreement by and between Dover Downs, Inc. and Wilmington  Trust Company, as agent, dated as of March 25, 2002 (incorporated herein by reference to  Exhibit 10.7 to the Form 10-Q filed on May 10, 2002).                                                                                                                                                                           |

 

28

----

 
| 10.9   |   | Amendment to Amended and Restated Credit Agreement  among Dover Downs Gaming & Entertainment, Inc. and Wilmington  Trust Company, as agent, dated as of August 12, 2002 (incorporated  herein by reference to Exhibit 10.1 to the Form 10-Q filed on  November 4, 2002).         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | Second Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and  Wilmington Trust Company, as agent, dated as of February 19, 2004  (incorporated herein by reference to Exhibit 10.14 to the Form 10-K  filed on March 9, 2004).  |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.11  |   | Third Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  November 5, 2004 (incorporated  herein by reference to Exhibit 10.14 to the Form 10-K filed on  March 10, 2005).  |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | Fourth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc.  and Wilmington Trust Company, as agent, dated as of December 14, 2005 (incorporated herein by reference to  Exhibit 10.1 to the Form 8-K filed on December 16, 2005). |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.13  |   | Fifth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  April 18, 2006 (incorporated  herein by reference to Exhibit 10.1 to the Form 8-K filed on  April 21, 2006).      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Sixth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  March 30, 2007 (incorporated  herein by reference to Exhibit 10.2 to the Form 8-K filed on  March 30, 2007).      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.15  |   | Amended and Restated Employment  and Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Denis McGlynn dated February 13, 2006 (incorporated herein by reference to  Exhibit 10.1 to the Form 8-K filed on February 17, 2006).                           |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.16  |   | Amended and Restated Employment  and Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Edward J. Sutor dated February 13, 2006 (incorporated herein by reference to  Exhibit 10.2 to the Form 8-K filed on February 17, 2006).                         |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.17  |   | Amended and Restated Employment  and Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Timothy R. Horne dated February 13, 2006 (incorporated herein by reference to  Exhibit 10.3 to the Form 8-K filed on February 17, 2006).                        |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.18  |   | Amended and Restated Employment  and Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Klaus M. Belohoubek dated February 13, 2006  (incorporated  herein by reference to Exhibit 10.4 to the Form 8-K filed on  February 17, 2006).                   |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.18  |   | Amended and Restated  Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Patrick J. Bagley dated February 13, 2006 (incorporated herein by reference to  Exhibit 10.5 to the Form 8-K filed on February 17, 2006).                                      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.20  |   | Non-Compete Agreement between  Dover Downs Gaming & Entertainment, Inc. and Henry B. Tippie  dated June 16, 2004 (incorporated herein by reference to Exhibit 10.7 to the  Form 10-Q filed on August 6, 2004).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.21  |   | Dover Downs Gaming &  Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated  (incorporated herein by reference to Exhibit A to our Proxy Statement  filed on March 29, 2004).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.22  |   | Form of Incentive Stock Option Agreement Used  with Dover Downs Gaming & Entertainment, Inc. 2002 Stock  Incentive Plan, as Amended and Restated (incorporated herein by reference to  Exhibit 10.1 to the Form 10-Q filed on November 3, 2004).                                 |

 

29

----

 
| 10.23  |   | Form of Restricted Stock Grant Agreement Used  with Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and  Restated (incorporated herein by reference to Exhibit 10.2 to the  Form 10-Q filed on November 3, 2004). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| 10.24  |   | Description of Annual Salary  and Certain Discretionary Incentives to Executive Officers (incorporated  herein by reference to the Current Report on Form 8-K dated  January 4, 2008).                                                                                   |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.25  |   | Construction Management Agreement dated March 30, 2007 between Dover Downs, Inc. and  T.N. Ward Company (incorporated herein by reference to Exhibit 10.2  to the Form 8-K filed on March 30, 2007).                                                      |
|   |   |                                                                                                                                                                                                                                                                               |
| 21.1   |   | List of Subsidiaries of Dover Downs  Gaming & Entertainment, Inc.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
| 24.1   |   | Powers of Attorney for  Directors                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
| 99.1   |   | Information Statement dated as of March 7, 2002  (incorporated herein by reference to Exhibit 99.1 to the Form 10  filed on March 7, 2002).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
| 99.2   |   | Audit Committee Charter of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference  to Exhibit B to our Proxy Statement filed on March 29, 2004).                                                                                      |

 

30

----

 

**Signatures**

 

         Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| DATED: March 7, 2008 |     |     | Dover Downs Gaming &  Entertainment, Inc. |              |   |
|---------------------------|----------|----------|---------------------------------------------------------|-------------------|--------|
|                      |     |     | Registrant                                              |              |   |
|                      |     |     |                                                    |              |   |   |   |   |   |
|                      |     |     | BY:                                                     | /s/ Denis McGlynn |   |   |
|                      |     |     | Denis McGlynn                                           |              |   |
| * *                  | * * | * * | *President and Chief Executive  Officer*                |              |   |
| * *                  | * * | * * | *and Director*                                          |              |   |
|                           |          |          |                                                         |                   |        |  |  |  |  |  |  |  |

 

         Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated:

 
| /s/ Timothy R. Horne | *Sr. Vice President-Finance,*            | March 7, 2008 |
|----------------------|------------------------------------------|--------------------|
| Timothy R. Horne     | *Treasurer and Chief Financial  Officer* |               |

 

         The Directors of the registrant (listedbelow) executed a power of attorney appointing Denis McGlynn and Timothy R.Horne their attorneys-in-fact, empowering either of them to sign this report,or any amendments, on their behalf.

 

Henry B. Tippie, *Chairman of the Board*

 

Kenneth K. Chalmers, *Director and Chairman of the Audit Committee*

 

R. Randall Rollins, *Director*

 

Patrick J. Bagley,*Director*

 

John W. Rollins, Jr.,*Director*

 

Jeffrey W. Rollins,*Director*

 
| /s/ Denis McGlynn | *As Attorney-in-Fact* | March 7, 2008 |
|-------------------|-----------------------|--------------------|
| Denis McGlynn     | *and Director*        |               |

 

31

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

** **
| ** **                                                                                                                | **Page** |
|---------------------------------------------------------------------------------------------------------------------------|----------|
| Statement of Management Responsibility                                                                                    | 33       |
|                                                                                                                      |     |
| Report of Independent Registered Public Accounting  Firm                                                                  | 34       |
|                                                                                                                      |     |
| Consolidated Statements of Earnings and Comprehensive  Earnings for the years ended December 31, 2007, 2006 and 2005 | 35       |
|                                                                                                                      |     |
| Consolidated  Balance Sheets at December 31, 2007 and 2006                                                           | 36       |
|                                                                                                                      |     |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2007, 2006 and 2005                          | 37       |
|                                                                                                                      |     |
| Notes to the Consolidated Financial Statements                                                                            | 38       |

** **

32

----

** **

**STATEMENT OF MANAGEMENT RESPONSIBILITY**

** **

         Dover Downs Gaming &Entertainment, Inc. and subsidiaries’ (the “Company”) management isresponsible for the preparation, integrity and objectivity of the consolidatedfinancial statements and other financial information included in the Company’s2007 Annual Report on Form 10-K. The consolidated financial statementshave been prepared in conformity with U.S. generally accepted accountingprinciples and reflect the effects of certain estimates and judgments made by management.

 

         The Company’s management also isresponsible for establishing and maintaining a system of internal controlsdesigned to provide reasonable assurance that assets are safeguarded andtransactions are properly recorded and executed in accordance with management’sauthorization. The system is regularly monitored by direct management reviewand by internal auditors who conduct an extensive program of audits throughoutthe Company.  The Director of InternalAudit reports directly to the Audit Committee of the Board of Directors.  We have confidence in our financialreporting, the underlying system of internal controls, and our people, who areobjective in their responsibilities and operate under the Company’s Code ofBusiness Conduct and with the highest level of ethical standards.  These standards are a key element of theCompany’s control system.

 

The Company conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on the Company’s evaluation, managementof the Company concluded that the Company’s internal control over financialreporting was effective as of December 31, 2007.

 

         The Audit Committee of the Board ofDirectors, which is comprised entirely of independent directors, has direct andprivate access to and meets regularly with management, the internal auditorsand the independent registered public accounting firm to review accounting,reporting, auditing and internal control matters.

 
| /s/ Denis McGlynn             |   | /s/ Timothy R. Horne             |
|-------------------------------|--------|----------------------------------|
| Denis McGlynn                 |   | Timothy R. Horne                 |
| President and Chief Executive |   | Sr. Vice President—Finance, |
| Officer and Director          |   | Treasurer and                    |
|                          |   | Chief Financial Officer          |

 

33

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

         We have audited the accompanying consolidatedbalance sheets of Dover Downs Gaming & Entertainment, Inc. and**subsidiaries (the Company) as of December 31, 2007 and2006, and the related consolidated statements of earnings and comprehensiveearnings and cash flows for each of the years in the three-year period ended December 31,2007. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

         We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

         In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Dover Downs Gaming & Entertainment, Inc.and subsidiaries as of December 31, 2007 and 2006, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles.

 

         As discussed in Notes 2, 7 and 8 to theconsolidated financial statements, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123R, “Share-BasedPayment,” effective January 1, 2006 using the modified prospective method;Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans,” on December 31,2006; and Securities and Exchange Commission Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements,” effective January 1,2006.

 

         We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), Dover Downs Gaming & Entertainment, Inc.’s internalcontrol over financial reporting as of December 31, 2007, based oncriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 7,2008 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

                                                                                                                KPMGLLP

 

Philadelphia,Pennsylvania

March 7, 2008

 

34

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

### **CONSOLIDATEDSTATEMENTS OF EARNINGS**

**  AND COMPREHENSIVE EARNINGS**

** **
| ** **                                                                                                                                       | ** ** | **Years ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                                                                       | ** ** | **2007**                          | ** **  | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                                                                        |       |                              |        |   |   |   |   |
| Gaming                                                                                                                                           |       | $                                 | 224,760,000 |   | $ | 220,412,000 |   | $ | 202,372,000 |   |
| Other operating                                                                                                                                  |       | 17,606,000                        |        | 16,039,000 |   | 14,480,000 |   |
|                                                                                                                                             |       | 242,366,000                       |        | 236,451,000 |   | 216,852,000 |   |
| Expenses:                                                                                                                                        |       |                              |        |   |   |   |   |
| Gaming                                                                                                                                           |       | 166,040,000                       |        | 163,288,000 |   | 151,973,000 |   |
| Other operating                                                                                                                                  |       | 15,268,000                        |        | 14,202,000 |   | 13,167,000 |   |
| General and administrative                                                                                                                       |       | 6,319,000                         |        | 5,905,000 |   | 4,765,000 |   |
| Depreciation                                                                                                                                     |       | 7,843,000                         |        | 7,146,000 |   | 6,998,000 |   |
|                                                                                                                                             |       | 195,470,000                       |        | 190,541,000 |   | 176,903,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Gain on sale of  shopping center                                                                                                                 |       | —                            |        | — |   | 5,837,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Operating earnings                                                                                                                               |       | 46,896,000                        |        | 45,910,000 |   | 45,786,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Interest expense                                                                                                                                 |       | 2,741,000                         |        | 2,943,000 |   | 1,875,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Earnings before income  taxes                                                                                                                    |       | 44,155,000                        |        | 42,967,000 |   | 43,911,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Income taxes                                                                                                                                     |       | 18,070,000                        |        | 17,639,000 |   | 17,871,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Net earnings                                                                                                                                     |       | 26,085,000                        |        | 25,328,000 |   | 26,040,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Amortization of net actuarial loss and prior service  cost included in net periodic pension benefit cost, net of income tax expense  of $143,000 |       | 210,000                           |        | — |   | — |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Comprehensive earnings                                                                                                                           |       | $                                 | 26,295,000  |   | $ | 25,328,000 |   | $ | 26,040,000 |   |
|                                                                                                                                             |       |                              |        |   |   |   |   |
| Net earnings per common  share (Note 2):                                                                                                         |       |                              |        |   |   |   |   |
| Basic                                                                                                                                            |       | $                                 | 0.81        |   | $ | 0.78 |   | $ | 0.73 |   |
| Diluted                                                                                                                                          |       | $                                 | 0.80        |   | $ | 0.77 |   | $ | 0.72 |   |

 

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

35

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                        | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                        | ** ** | **2007**              | ** **  | **2006** | ** ** |
| **ASSETS**                                                                                                                                        | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current assets:                                                                                                                                   |       |                  |        |   |   |
| Cash                                                                                                                                              |       | $                     | 22,456,000  |   | $ | 20,020,000 |   |
| Accounts receivable                                                                                                                               |       | 4,560,000             |        | 4,325,000 |   |
| Due from State of Delaware                                                                                                                        |       | 10,530,000            |        | 10,972,000 |   |
| Inventories                                                                                                                                       |       | 1,858,000             |        | 1,765,000 |   |
| Prepaid expenses and other                                                                                                                        |       | 2,251,000             |        | 1,838,000 |   |
| Prepaid income taxes                                                                                                                              |       | —                |        | 128,000 |   |
| Deferred income taxes                                                                                                                             |       | 1,227,000             |        | 1,247,000 |   |
| Total current assets                                                                                                                              |       | 42,882,000            |        | 40,295,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| Property and equipment,  net                                                                                                                      |       | 182,298,000           |        | 132,732,000 |   |
| Total assets                                                                                                                                      |       | $                     | 225,180,000 |   | $ | 173,027,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                    | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current liabilities:                                                                                                                              |       |                  |        |   |   |
| Accounts payable                                                                                                                                  |       | $                     | 13,382,000  |   | $ | 8,173,000 |   |
| Purses due horsemen                                                                                                                               |       | 9,689,000             |        | 8,899,000 |   |
| Accrued liabilities                                                                                                                               |       | 11,940,000            |        | 11,198,000 |   |
| Payable to Dover Motorsports, Inc.                                                                                                           |       | 18,000                |        | 9,000 |   |
| Income taxes payable                                                                                                                              |       | 341,000               |        | — |   |
| Deferred revenue                                                                                                                                  |       | 98,000                |        | 37,000 |   |
| Total current liabilities                                                                                                                         |       | 35,468,000            |        | 28,316,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| Revolving line of  credit                                                                                                                         |       | 92,425,000            |        | 59,425,000 |   |
| Liability for pension  benefits                                                                                                                   |       | 2,510,000             |        | 2,640,000 |   |
| Deferred income taxes                                                                                                                             |       | 5,178,000             |        | 5,387,000 |   |
| Total liabilities                                                                                                                                 |       | 135,581,000           |        | 95,768,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| Commitments and  contingencies (see Notes to the Consolidated Financial Statements)                                                               |       |                  |        |   |   |
|                                                                                                                                              |       |                  |        |   |   |
| Stockholders’ equity:                                                                                                                        |       |                  |        |   |   |
| Preferred stock, $.10 par value; 1,000,000 shares  authorized; shares issued and outstanding: none                                                |       | —                |        | — |   |
| Common stock, $.10 par value; 74,000,000 shares  authorized; shares issued and outstanding: 14,737,821 and 15,413,867,  respectively              |       | 1,474,000             |        | 1,542,000 |   |
| Class A common stock, $.10 par value;  50,000,000 shares authorized; shares issued and outstanding: 17,003,173 and  17,003,173, respectively |       | 1,700,000             |        | 1,700,000 |   |
| Additional paid–in capital                                                                                                                   |       | 63,000                |        | 769,000 |   |
| Retained earnings                                                                                                                                 |       | 86,640,000            |        | 73,736,000 |   |
| Accumulated other  comprehensive loss                                                                                                             |       | (278,000              | )           | (488,000 | ) |
| Total stockholders’ equity                                                                                                                   |       | 89,599,000            |        | 77,259,000 |   |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                     | 225,180,000 |   | $ | 173,027,000 |   |

 

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

36

----

 

**DOVER DOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating activities:                                                                |       |                              |       |   |   |   |   |
| Net earnings                                                                         |       | $                                 | 26,085,000 |   | $ | 25,328,000 |   | $ | 26,040,000 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation                                                                         |       | 7,843,000                         |       | 7,146,000 |   | 6,998,000 |   |
| Amortization of credit facility origination fees                                     |       | 40,000                            |       | 44,000 |   | 41,000 |   |
| Stock-based compensation                                                             |       | 895,000                           |       | 732,000 |   | 214,000 |   |
| Deferred income taxes                                                                |       | (333,000                          | )          | (218,000 | ) | (356,000 | ) |
| Cumulative effect of accounting change                                               |       | —                            |       | (1,541,000 | ) | — |   |
| Gain on sale of shopping center.                                                     |       | —                            |       | — |   | (5,837,000 | ) |
| Changes in assets and liabilities:                                                   |       |                              |       |   |   |   |   |
| Accounts receivable                                                                  |       | (235,000                          | )          | (520,000 | ) | (886,000 | ) |
| Due from State of Delaware                                                           |       | 442,000                           |       | (1,872,000 | ) | 980,000 |   |
| Inventories                                                                          |       | (93,000                           | )          | 190,000 |   | 192,000 |   |
| Prepaid expenses and other                                                           |       | (453,000                          | )          | 118,000 |   | (40,000 | ) |
| Accounts payable                                                                     |       | (65,000                           | )          | 79,000 |   | (792,000 | ) |
| Purses due horsemen                                                                  |       | 790,000                           |       | 567,000 |   | (750,000 | ) |
| Accrued liabilities                                                                  |       | 742,000                           |       | 269,000 |   | 758,000 |   |
| Payable to/receivable from Dover  Motorsports, Inc.                             |       | 9,000                             |       | 24,000 |   | (13,000 | ) |
| Income taxes payable/prepaid income taxes                                            |       | 469,000                           |       | (3,480,000 | ) | 3,055,000 |   |
| Deferred revenue                                                                     |       | 61,000                            |       | (75,000 | ) | (83,000 | ) |
| Other liabilities                                                                    |       | 223,000                           |       | — |   | — |   |
| Net cash provided by  operating activities                                           |       | 36,420,000                        |       | 26,791,000 |   | 29,521,000 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Investing activities:                                                                |       |                              |       |   |   |   |   |
| Capital expenditures                                                                 |       | (52,134,000                       | )          | (22,065,000 | ) | (5,512,000 | ) |
| Proceeds from sale of shopping center, net                                           |       | —                            |       | — |   | 11,918,000 |   |
| Net cash (used in)  provided by investing activities                                 |       | (52,134,000                       | )          | (22,065,000 | ) | 6,406,000 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Financing activities:                                                                |       |                              |       |   |   |   |   |
| Borrowings from revolving line of credit                                             |       | 177,255,000                       |       | 196,010,000 |   | 169,109,000 |   |
| Repayments of revolving line of credit                                               |       | (144,255,000                      | )          | (160,660,000 | ) | (196,984,000 | ) |
| Dividends paid                                                                       |       | (6,036,000                        | )          | (5,510,000 | ) | (5,737,000 | ) |
| Repurchase of common stock                                                           |       | (9,990,000                        | )          | (35,052,000 | ) | — |   |
| Proceeds from stock options exercised                                                |       | 1,114,000                         |       | 470,000 |   | 4,000 |   |
| Excess tax benefit on stock awards                                                   |       | 62,000                            |       | 50,000 |   | — |   |
| Other                                                                                |       | —                            |       | — |   | (21,000 | ) |
| Net cash provided by  (used in) financing activities                                 |       | 18,150,000                        |       | (4,692,000 | ) | (33,629,000 | ) |
|                                                                                 |       |                              |       |   |   |   |   |
| Net increase in cash                                                                 |       | 2,436,000                         |       | 34,000 |   | 2,298,000 |   |
| Cash, beginning of year                                                              |       | 20,020,000                        |       | 19,986,000 |   | 17,688,000 |   |
| Cash, end of year                                                                    |       | $                                 | 22,456,000 |   | $ | 20,020,000 |   | $ | 19,986,000 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Supplemental  information:                                                           |       |                              |       |   |   |   |   |
| Interest paid                                                                        |       | $                                 | 2,564,000  |   | $ | 2,720,000 |   | $ | 1,894,000 |   |
| Income taxes paid                                                                    |       | $                                 | 17,870,000 |   | $ | 20,235,000 |   | $ | 15,172,000 |   |

 

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

37

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1—Business Operations**

 

         References in this document to “we,”“us” and “our” mean Dover Downs Gaming & Entertainment, Inc.and/or its wholly owned subsidiaries,as appropriate.

 

We are a diversified gaming and entertainment company whose operationsconsist of Dover Downs Casino—a 97,000 square-foot video lottery casino complexfeaturing the latest in slot machine offerings, including multi-playerelectronic table games with virtual dealers; the Dover Downs Hotel andConference Center—a 500 room AAA Four Diamond hotel with conference, banquet,fine dining, ballroom, concert hall and spa facilities; and Dover DownsRaceway—a harness racing track with pari-mutuel wagering on live and simulcasthorse races. Our entertainment complex is located in Dover, the capital of theState of Delaware.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Management Corp.  DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969.  In June of1994, legislation authorizing video lottery operations in the State of Delaware(the “State”) was adopted. Our video lottery (slots) casino operations began onDecember 29, 1995.  As a result ofseveral restructurings, Dover Downs, Inc. became a wholly owned subsidiaryof Dover Motorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.)(“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

Dover Downs Gaming & Entertainment, Inc. was incorporatedin the State in December of 2001 as a wholly owned subsidiary of DVD.  Effective March 31, 2002, DVD completeda tax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming &Entertainment, Inc., and subsequently distributing 100% of our issued andoutstanding common stock to DVD stockholders. Immediately following the spin-off, Dover Downs Gaming &Entertainment, Inc. became an independent public company.

 

         Dover Downs, Inc. is authorized toconduct video lottery operations as one of three “Licensed Agents” under theDelaware State Lottery Code. Pursuant to Delaware’s Horse Racing RedevelopmentAct, enacted in 1994, the Delaware State Lottery Office administers andcontrols the operation of the video lottery.

 

         Our license from the Delaware HarnessRacing Commission (the “Commission”) to hold harness race meetings on ourpremises and to offer pari-mutuel wagering on live and simulcast horse racesmust be renewed on an annual basis. In order to maintain our license to conductvideo lottery operations, we are required to maintain our harness horse racinglicense.  We have received an annuallicense from the Commission for the past 39 consecutive years and managementbelieves that our relationship with the Commission remains good.

 

         Due to the nature of our businessactivities, we are subject to various federal, state and local regulations.

 

**NOTE2—Summary of Significant Accounting Policies**

 

*Basis of consolidation—*The consolidated financial statementsinclude the accounts of Dover Downs Gaming & Entertainment, Inc.and its wholly owned subsidiaries. Intercompany transactions and balances havebeen eliminated.

 

*Inventories—*Inventories, consisting primarily of food and beverageitems, are stated at the lower of cost or market with cost being determined onthe first-in, first-out basis.

 

38

----

 

*Property and equipment—*Property and equipment is stated atcost.  Depreciation is provided forfinancial reporting purposes using the straight-line method over the followingestimated useful lives:

 

| Facilities                        |   | 10-40 years |
|-----------------------------------|--------|-------------|
| Furniture, fixtures and equipment |   | 5-10 years  |

 

Weperform reviews for impairment of long-lived assets whenever events or changesin circumstances indicate that the carrying value of an asset may not berecoverable. No such events or changes in circumstances have occurred to date.An impairment loss would be measured as the amount by which the carrying amountof the asset exceeds its fair value. Generally, fair value will be determined using valuation techniques suchas the present value of future cash flows.

 

*Interest capitalization—*Interest is capitalized in connectionwith the construction of major facilities. The capitalized interest isamortized over the estimated useful life of the asset to which it relates.  During the years ended December 31, 2007and 2006, respectively, we incurred $4,280,000 and $3,255,000 of interest cost,of which $1,539,000 and $312,000 was capitalized.  During the year ended December 31, 2005,we incurred $1,875,000 of interest cost, none of which was capitalized.

 

*         Income taxes—*Deferred income taxes are provided on alldifferences between the tax bases of assets and liabilities and their reportedamounts in the consolidated financial statements based upon enacted statutory taxrates in effect at the balance sheet date. Tax years 2004-2006 remain open toexamination by the major taxing jurisdictions to which we are subject.

 

*         Point loyalty program—*We currently have a point loyalty programfor our video lottery customers which allows them to earn points based on thevolume of their video lottery activity. All reward points earned by customers are expensed in the period theyare earned.  The estimated amount ofpoints redeemable for cash is recorded as a reduction of revenue and theestimated amount of points redeemable for services and merchandise is recordedas gaming expense. In determining the amount of the liability, which was$1,932,000 and $2,010,000, respectively, at December 31, 2007 and 2006, weestimate a redemption rate, a cost of rewards to be offered and the mix ofcash, goods and services for which reward points will be redeemed.  We use historical data to estimate thoseamounts.

 

*         Revenue and expense recognition—*Gaming revenues represent (i) thenet win from video lottery (slot) machine wins and losses and (ii) commissionsfrom pari-mutuel wagering.  Otheroperating revenues consist of hotel rooms revenue, food and beverage sales andother miscellaneous income.  Revenues donot include the retail amount of hotel rooms, food and beverage and othermiscellaneous goods and services provided without charge to customers aspromotional items of $15,770,000, $15,152,000 and $15,103,000 for the yearsended December 31, 2007, 2006 and 2005, respectively.  The estimated direct cost of providing theseitems has been charged to the casino through interdepartmental allocations andis included in gaming expenses in the consolidated statements of earnings.

 

         For the video lottery operations, whichaccount for approximately 90% of revenues for all periods presented, thedifference between the amount wagered by bettors and the amount paid out tobettors is referred to as the win. The win is included in the amount recordedin our consolidated financial statements as gaming revenue. The Delaware StateLottery Office sweeps the win from the video lottery operations, collects theState’s share of the win and the amount due to the vendors under contract withthe State who provide the video lottery (slot) machines and associated computersystems, collects the amount allocable to purses for harness horse racing andremits the remainder to us as our commission for acting as a Licensed Agent.Gaming expenses include the amounts collected by the State (i) for theState’s share of the win, (ii) for remittance to the providers of thevideo lottery (slot) machines and associated computer systems, and (iii) forharness horse racing purses. We recognize revenues from pari-mutuel commissionsearned from live harness horse racing and importing of simulcast signals fromother race tracks when the race occurs. Revenues from hotel rooms, food andbeverage sales and other miscellaneous income are recognized at the time theservice is provided.

 

*Advertising costs—*The cost of general advertising is charged to operationsas incurred.

 

39

----

 

*        Netearnings per common share**—*Weighted average shares used in computing basic anddiluted net earnings per common share (“EPS”) are as follows:

 

| ** **                     | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic EPS                      |       | 32,239,000                        |       | 32,353,000 |   | 35,681,000 |   |
| Effect of dilutive  securities |       | 372,000                           |       | 568,000 |   | 249,000 |   |
| Diluted EPS                    |       | 32,611,000                        |       | 32,921,000 |   | 35,930,000 |   |

 

         Dilutive securitiesinclude stock options and nonvested stock awards.

 

         There were no anti-dilutive securitiesexcluded from the calculation of diluted EPS for the years ended December 31,2007 and 2006.  For the year ended December 31, 2005, options to purchase 22,500shares of common stock were not included in the calculation of diluted EPSbecause the options’ exercise prices were greater than the average market priceof the common stock during the period.

 

*        *Accounting*for stock-basedcompensation—*Prior to January 1, 2006, we accounted for ourstock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued toEmployees*, and relatedinterpretations, pursuant to which we recognized compensation expensefor our nonvested stock awards over the vesting period equal to the fair marketvalue of the stock on the grant date.  Wewere not required to recognize compensation expense related to our stockoptions as all options granted had an exercise price equal to the market valueof the underlying common stock on the grant date.

 

Effective January 1,2006, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 123R, *Share-Based Payment.* Statement No. 123R revised FASB StatementNo. 123, *Accounting for Stock-Based Compensation,*and superseded APB Opinion No. 25 and related interpretations.  Statement No. 123R requires recognitionof the cost of employee services received in exchange for an award of equityinstruments in the financial statements over the period the employee isrequired to perform the services.  We adoptedStatement No. 123R using the modified prospective method.  Under this method, we are required to recordcompensation expense for all awards granted after the date of adoption and forthe unvested portion of previously granted awards that remain outstanding atthe date of adoption.  Wecalculate compensation expense for our stock options based upon the fair valueat the grant date using the Black-Scholes option-pricing model.  Themodified prospective approach does not allow for the restatement of priorperiod amounts.

 

         Statement No. 123R requires the cashflows resulting from the tax benefits from tax deductions in excess of thecompensation cost recognized for nonvested stock awards and options (“ExcessTax Benefits”) to be classified as a financing activity in our consolidatedstatements of cash flows.

 

         We recorded totalstock-based compensation expense of $895,000, $732,000 and $214,000 as generaland administrative expenses for the years ended December 31, 2007, 2006and 2005, respectively.  Total stock-basedcompensation expense of $680,000 would have been recorded as general andadministrative expenses for the year ended December 31, 2005, had we beensubject to reporting under Statement No. 123R during that period.  Our earnings before income taxes and net earnings for theyear ended December 31, 2006 were $372,000 lower than they would have beenpursuant to our previous accounting method for stock-based compensation.  Werecorded income tax benefits of $231,000, $147,000 and $87,000 for the yearsended December 31, 2007, 2006 and 2005, respectively, related to ournonvested restricted stock awards. The adoption of Statement No. 123R reduced basic and dilutedearnings per share by approximately $0.01 for the year ended December 31,2006.

 

40

----

 

         The following table illustrates theeffect on net earnings and net earnings per common share if we had applied thefair-value recognition provisions of Statement No. 123R to stock-basedemployee compensation related to our stock options and awards:

 

| ** **                                                                                                                                         | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**                               | ** ** |
| Net earnings, as  reported                                                                                                                         |       | $26,040,000                            |       |
| Add: Stock-based employee compensation expense  included in reported net earnings, net of related tax effects                                      |       | 127,000                                |       |
| Deduct: Total stock-based employee compensation  expense determined under fair–value based method for all awards, net of  related tax effects |       | (593,000                               | )          |
| Pro forma net earnings                                                                                                                             |       | $25,574,000                            |       |
|                                                                                                                                               |       |                                   |       |
| Net earnings per common  share:                                                                                                                    |       |                                   |       |
| Basic—as reported                                                                                                                             |       | $0.73                                  |       |
| Basic—pro forma                                                                                                                               |       | $0.72                                  |       |
|                                                                                                                                               |       |                                   |       |
| Diluted—as reported                                                                                                                           |       | $0.72                                  |       |
| Diluted—pro forma                                                                                                                             |       | $0.71                                  |       |

 

*Use of estimates—*The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

*Fair value of financial instruments—*The carrying amounts of financialinstruments reported in the balance sheet for current assets and currentliabilities approximates their fair values because of the short maturity ofthese instruments.  The carrying value ofour revolving line of credit at December 31, 2007 and 2006 approximatesits fair value based on the interest rates available on similar borrowings.

 

*Segment information*—We account for ouroperating segment in accordance with FASB Statement No. 131, *Disclosures About Segments of an Enterprise and Related Information*.  Statement No. 131 establishes guidelinesfor public companies in determining operating segments based on those used forinternal reporting to management.  Basedon these guidelines, we report information under a single gaming andentertainment segment.

 

*Recent accounting pronouncements—*In June 2006, the FASB issuedInterpretation No. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes*. FIN 48 prescribes detailed guidance for thefinancial statement recognition, measurement and disclosure of uncertain taxpositions recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109. Tax positions must meet a more-likely-than-notrecognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. FIN 48 is effective for fiscalyears beginning after December 15, 2006 and the provisions of FIN 48are applied to all tax positions under Statement No. 109 upon initialadoption.  We adopted FIN 48 as of January 1,2007.  The adoption of FIN 48 did nothave an impact on our consolidated financial statements since we have notidentified any uncertain tax positions as defined by FIN 48.

 

In September 2006, the FASB issued Statement No. 157,*Fair Value Measurements*, whichestablishes a framework for measuring fair value and expands disclosures aboutfair value measurements. Statement No. 157 applies under other accountingpronouncements that require or permit fair value measurements and, accordingly,Statement No. 157 does not require any new fair value measurements.Statement No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years, for financial assets and liabilities that are measured at fairvalue on a recurring basis.  The FASB hasagreed to a one-year deferral of Statement No. 157’s fair valuemeasurement requirements for non-financial assets and liabilities that are notrequired or permitted to be measured at fair value on a recurring basis. We donot expect the adoption of Statement No. 157 to have a significant impacton our consolidated financial statements.

 

41

----

 

In February 2007, the FASB issued Statement No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities*. Statement No. 159 permits companiesto choose to measure many financial instruments and certain other items at fairvalue.  Statement No. 159 iseffective for fiscal years beginning after November 15, 2007. Companiesare not allowed to adopt SFAS No. 159 on a retrospective basis unless theychoose early adoption.  We do not expectthe adoption of Statement No. 159 to have a significant impact on ourconsolidated financial statements.

 

**NOTE3—Property and Equipment**

 

Propertyand equipment consists of the following as of December 31:

 

| ** **                         | ** ** | **2007**    | ** **  | **2006**    | ** ** |
|------------------------------------|------------|-------------|-------------|-------------|------------|
| Land                               |       | $           | 785,000     |        | $          | 780,000 |   |
| Casino facility                    |       | 32,881,000  |        | 32,474,000  |       |
| Hotel facility                     |       | 109,402,000 |        | 65,795,000  |       |
| Harness racing  facilities         |       | 9,975,000   |        | 9,447,000   |       |
| General facilities                 |       | 15,277,000  |        | 12,858,000  |       |
| Furniture, fixtures and  equipment |       | 43,692,000  |        | 37,597,000  |       |
| Construction in  progress          |       | 24,477,000  |        | 20,817,000  |       |
|                               |       | 236,489,000 |        | 179,768,000 |       |
| Less accumulated depreciation      |       | (54,191,000 | )           | (47,036,000 | )          |
|                               |       | $           | 182,298,000 |        | $          | 132,732,000 |   |

 

         On December 28, 2005,we closed on the sale of a shopping center we owned in Dover, Delaware.  The sales price was $12,450,000 and werecognized a gain on the sale of $5,837,000.

 

**NOTE4—Accrued Liabilities**

 

         Accrued liabilities consist of thefollowing as of December 31:

 

| ** **                                | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                     |       | $         | 1,932,000  |      | $          | 2,010,000 |   |
| Payroll and related  items                |       | 2,524,000 |       | 2,263,000 |       |
| Win due to Delaware  State Lottery Office |       | 6,273,000 |       | 5,441,000 |       |
| Other                                     |       | 1,211,000 |       | 1,484,000 |       |
|                                      |       | $         | 11,940,000 |      | $          | 11,198,000 |   |

#### ** **

#### **NOTE 5—Credit Facility**

#### ** **

         We have a credit facility withWilmington Trust Company that expires on April 17, 2012.  At December 31, 2007, the maximumborrowing limit under the facility was $125,000,000 which reduces to$100,000,000 on January 1, 2010, to $85,000,000 on January 1, 2011and to $75,000,000 on January 1, 2012. Interest is based, at our option, upon LIBOR plus a margin that variesbetween 75 and 125 basis points depending on the ratio of funded debt toearnings before interest, taxes, depreciation and amortization (the “leverageratio”) or the base rate (the greater of the prime rate or the federal fundsrate plus 0.5%) less a margin that varies between 50 and 100 basis points (100basis points at December 31, 2007) depending on the leverage ratio.  The credit facility has minimum net worth,interest coverage and maximum leverage requirements.  Material adverse changes in our results ofoperations could impact our ability to satisfy these requirements.  The facility is for seasonal funding needs,capital improvements (including our hotel and casino expansions) and othergeneral corporate purposes.  At December 31,2007, we were in compliance with all terms of the facility and there was$92,425,000 outstanding at a weighted average interest rate of 5.7%.  At December 31, 2007, $32,575,000 wasavailable pursuant to the facility.

 

42

----

** **

**NOTE 6—Income Taxes**

** **

The current and deferred income tax provisions are as follows:

 

| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current:           |       |                              |       |   |   |   |   |
| Federal            |       | $                                 | 14,556,000 |   | $ | 14,112,000 |   | $ | 14,326,000 |   |
| State              |       | 3,938,000                         |       | 3,745,000 |   | 3,901,000 |   |
|               |       | 18,494,000                        |       | 17,857,000 |   | 18,227,000 |   |
| Deferred:          |       |                              |       |   |   |   |   |
| Federal            |       | (364,000                          | )          | (247,000 | ) | (280,000 | ) |
| State              |       | (60,000                           | )          | 29,000 |   | (76,000 | ) |
|               |       | (424,000                          | )          | (218,000 | ) | (356,000 | ) |
| Total income taxes |       | $                                 | 18,070,000 |   | $ | 17,639,000 |   | $ | 17,871,000 |   |

 

A reconciliation of the effective income tax rate with the applicablestatutory federal income tax rate is as follows:

 

| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal tax at  statutory rate       |       | 35.0                              | %          | 35.0 | % | 35.0 | % |
| State taxes, net of  federal benefit |       | 5.7                               | %          | 5.7 | % | 5.7 | % |
| Other                                |       | 0.2                               | %          | 0.4 | % | — | % |
| Effective income tax  rate           |       | 40.9                              | %          | 41.1 | % | 40.7 | % |

 

The components of deferred income tax assets and liabilities are asfollows as of December 31:

 

| ** **                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income tax  assets:                           |       |       |       |       |       |
| Point loyalty program                                  |       | $          | 785,000    |       | $          | 817,000 |   |
| Accrued expenses                                       |       | 1,015,000  |       | 939,000    |       |
| Other                                                  |       | 374,000    |       | 243,000    |       |
| Total deferred income tax assets                       |       | 2,174,000  |       | 1,999,000  |       |
|                                                   |       |       |       |       |       |
| Deferred income tax  liabilities:                      |       |       |       |       |       |
| Depreciation — property and equipment             |       | (6,125,000 | )          | (6,139,000 | )          |
| Total deferred income tax liabilities                  |       | (6,125,000 | )          | (6,139,000 | )          |
| Net deferred income tax liabilities                    |       | $          | (3,951,000 | )          | $          | (4,140,000 | ) |
|                                                   |       |       |       |       |       |
| Amounts recognized in  the consolidated balance sheet: |       |       |       |       |       |
| Current deferred income tax assets                     |       | $          | 1,227,000  |       | $          | 1,247,000 |   |
| Noncurrent deferred income tax liabilities             |       | (5,178,000 | )          | (5,387,000 | )          |
|                                                   |       | $          | (3,951,000 | )          | $          | (4,140,000 | ) |

 

**NOTE7—Pension Plans**

 

We maintain a non-contributory, tax qualified defined benefit pension plan. All of our full time employees areeligible to participate in this qualified pension plan.  Benefits provided by our qualified pensionplan are based on years of service and employees’ remuneration over their termof employment. Pension costs are funded in accordance with the provisions ofthe Internal Revenue Code. We also maintain a non-qualified, non-contributory defined benefit pension plan for certainemployees.  This excess plan providesbenefits that would otherwise be provided under the qualified pension plan butfor maximum benefit and compensation limits applicable under federal taxlaw.  The cost associated with the excessplan is determined using the same actuarial methods and assumptions as thoseused for our qualified pension plan.

 

 

43

----

 

        The following table setsforth the plans’ funded status and amounts recognized in our consolidatedbalance sheet as of December 31:

 

| ** **                                      | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
| Change in benefit  obligation:                  |       |      |       |      |       |
| Benefit obligation at  beginning of year        |       | $         | 8,047,000  |      | $          | 7,055,000 |   |
| Service cost                                    |       | 1,218,000 |       | 1,233,000 |       |
| Interest cost                                   |       | 497,000   |       | 415,000   |       |
| Actuarial gain                                  |       | (500,000  | )          | (389,000  | )          |
| Benefits paid                                   |       | (199,000  | )          | (267,000  | )          |
| Other                                           |       | (11,000   | )          | —    |       |
| Benefit obligation at  end of year              |       | 9,052,000 |       | 8,047,000 |       |
|                                            |       |      |       |      |       |
| Change in plan assets:                          |       |      |       |      |       |
| Fair value of plan  assets at beginning of year |       | 5,407,000 |       | 3,795,000 |       |
| Actual gain on plan  assets                     |       | 334,000   |       | 654,000   |       |
| Employer contribution                           |       | 1,000,000 |       | 1,225,000 |       |
| Benefits paid                                   |       | (199,000  | )          | (267,000  | )          |
| Fair value of plan  assets at end of year       |       | 6,542,000 |       | 5,407,000 |       |
|                                            |       |      |       |      |       |
| Unfunded status                                 |       | $         | (2,510,000 | )         | $          | (2,640,000 | ) |

 

        Amountsrecognized in accumulated other comprehensive loss that have not yet beenrecognized as components of net periodic benefit cost at December 31 areas follows:

 

| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Net actuarial loss |       | $        | 426,000    |     | $          | 771,000 |   |
| Prior service cost |       | 42,000   |       | 50,000   |       |
|               |       | $        | 468,000    |     | $          | 821,000 |   |

 

Forthe year ending December 31, 2008, we expect to recognize the followingamounts as components of net periodic benefit cost which are included inaccumulated comprehensive loss as of December 31, 2007:

 

| Actuarial loss     |   | $     | 9,000  |   |   |
|--------------------|--------|-------|--------|--------|--------|
| Prior service cost |   | 9,000 |   |   |
|               |   | $     | 18,000 |   |   |

 

Weplan to contribute approximately $1,000,000 to our pension plans in 2008.

 

 The accumulated benefit obligation was$7,122,000 and $6,226,000, respectively, as of December 31, 2007 and 2006.

 

Benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid as follows:

 

| 2008      |   | $ | 140,000   |   |
|-----------|--------|---|-----------|--------|
| 2009      |   | $ | 164,000   |   |
| 2010      |   | $ | 202,000   |   |
| 2011      |   | $ | 287,000   |   |
| 2012      |   | $ | 395,000   |   |
| 2013-2017 |   | $ | 3,113,000 |   |

 

 

44

----

 

        Thecomponents of net periodic pension cost for the years ended December 31,2007, 2006 and 2005 are as follows:

 

| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005**  | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                    |       | $        | 1,218,000  |     | $          | 1,233,000 |       | $ | 1,014,000 |   |
| Interest cost                   |       | 497,000  |       | 415,000  |       | 315,000   |       |
| Expected return on plan  assets |       | (502,000 | )          | (391,000 | )          | (260,000  | )          |
| Recognized net  actuarial loss  |       | 11,000   |       | 72,000   |       | 25,000    |       |
| Recognized prior  service cost  |       | 9,000    |       | 9,000    |       | 9,000     |       |
|                            |       | $        | 1,233,000  |     | $          | 1,338,000 |       | $ | 1,103,000 |   |

 

Theprincipal assumptions used to determine the net periodic pension cost for theyears ended December 31, 2007, 2006 and 2005, and the actuarial value ofthe projected benefit obligation at December 31, 2007 and 2006 (themeasurement dates) for our pension plans are as follows:

 
| ** **                                        | ** ** | **Net Periodic Pension Cost** | ** ** | **Projected Benefit Obligation** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2007**                      | ** ** | **2006**                         | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  discount rate                   |       | 6.15                          | %          | 5.85                             | %          | 6.25 | % | 6.50 | % | 6.15 | % |
| Weighted-average rate  of compensation increase   |       | 5.00                          | %          | 5.00                             | %          | 5.00 | % | 5.00 | % | 5.00 | % |
| Expected long-term rate  of return on plan assets |       | 8.50                          | %          | 9.00                             | %          | 9.00 | % | n/a |   | n/a |   |

 

For2007, we assumed a long-term rate of return on plan assets of 8.5%.  In developing the 8.5% expected long-termrate of return assumption, we reviewed asset class return expectations andlong-term inflation assumptions and considered our historical compoundedreturn, which was consistent with our long-term rate of return assumption.

 

Ourpension plan asset allocation at December 31, 2007 and 2006, and targetallocation for 2008 are as follows:

 

| ** **                         | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** | **Target  Allocation** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|
| **Asset  Category**                | ** ** | **2007**                                            | ** ** | **2006**               | ** ** | **2008** | ** ** |
| Equity mutual funds                |       | 68                                                  | %          | 65                     | %          | 70 | % |
| Fixed income mutual  funds         |       | 30                                                  | %          | 30                     | %          | 20 | % |
| Other (money market  mutual funds) |       | 2                                                   | %          | 5                      | %          | 10 | % |
| Total                              |       | 100                                                 | %          | 100                    | %          | 100 | % |

 

Our investment goals are to maximize returns subject to specific riskmanagement policies.  Our risk managementpolicies permit investments in mutual funds, and prohibit direct investments indebt and equity securities and derivative financial instruments.  We address diversification by the use ofmutual fund investments whose underlying investments are in domestic andinternational equity and fixed income securities.  These mutual funds are readily marketable andcan be sold to fund benefit payment obligations as they become payable.

 

Wemaintain a defined contribution 401(k) plan which permits participation bysubstantially all employees. Our matching contributions to the 401(k) planwere $80,000, $64,000 and $64,000 for the years ended December 31, 2007,2006 and 2005, respectively.

 

 

45

----

 

**NOTE8—Stockholders’ Equity**

 

Changes in the components of stockholders’ equity are as follows (inthousands, except per share data):

 
| ** **                                                                                                     | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Deferred  Compensation** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| **Balance at December 31,  2004**                                                                         |       | $                 | 936        |                                 | $          | 1,448                                 |       | $                      | 35,764     |                                        | $          | 35,156                     |       | $ | — |   | $ | (534 | ) |
| Net earnings                                                                                                   |       | —            |       | —                               |       | —                                |       | 26,040                 |       | —                                      |       | —                     |       |
| Dividends paid, $.16  per share                                                                                |       | —            |       | —                               |       | —                                |       | (5,737                 | )          | —                                      |       | —                     |       |
| Issuance of restricted stock awards, net of  forfeitures                                                       |       | 6                 |       | —                               |       | 714                                   |       | —                 |       | —                                      |       | (720                       | )          |
| Proceeds from stock  options exercised                                                                         |       | —            |       | —                               |       | 4                                     |       | —                 |       | —                                      |       | —                     |       |
| Amortization of deferred compensation, net of  forfeitures                                                     |       | —            |       | —                               |       | —                                |       | —                 |       | —                                      |       | 214                        |       |
| Conversion of Class A common stock to common  stock                                                       |       | 122               |       | (122                                 | )          | —                                |       | —                 |       | —                                      |       | —                     |       |
| Other                                                                                                          |       | —            |       | —                               |       | (21                                   | )          | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31,  2005**                                                                         |       | 1,064             |       | 1,326                                |       | 36,461                                |       | 55,459                 |       | —                                      |       | (1,040                     | )          |
| Reclassification of deferred compensation upon  adoption of FASB Statement No. 123R                       |       | —            |       | —                               |       | (1,040                                | )          | —                 |       | —                                      |       | 1,040                      |       |
| Cumulative effect of accounting change for adoption  of SAB No. 108                                       |       | —            |       | —                               |       | —                                |       | (1,541                 | )          | —                                      |       | —                     |       |
| Net earnings                                                                                                   |       | —            |       | —                               |       | —                                |       | 25,328                 |       | —                                      |       | —                     |       |
| Dividends paid, $.17  per share                                                                                |       | —            |       | —                               |       | —                                |       | (5,510                 | )          | —                                      |       | —                     |       |
| Repurchase and retirement of common stock                                                                      |       | (106              | )          | (133                                 | )          | (34,813                               | )          | —                 |       | —                                      |       | —                     |       |
| Proceeds from stock  options exercised                                                                         |       | 5                 |       | —                               |       | 465                                   |       | —                 |       | —                                      |       | —                     |       |
| Issuance of nonvested stock awards, net of  forfeitures                                                        |       | 6                 |       | —                               |       | (6                                    | )          | —                 |       | —                                      |       | —                     |       |
| Stock-based  compensation                                                                                      |       | —            |       | —                               |       | 732                                   |       | —                 |       | —                                      |       | —                     |       |
| Excess tax benefit on  stock awards                                                                            |       | —            |       | —                               |       | 50                                    |       | —                 |       | —                                      |       | —                     |       |
| Conversion of Class A common stock to common  stock                                                       |       | 77                |       | (77                                  | )          | —                                |       | —                 |       | —                                      |       | —                     |       |
| Three-for-two stock  split                                                                                     |       | 496               |       | 584                                  |       | (1,080                                | )          | —                 |       | —                                      |       | —                     |       |
| Adoption of FASB Statement No.158, net of income tax  benefit of $333                                          |       | —            |       | —                               |       | —                                |       | —                 |       | (488                                        | )          | —                     |       |
| **Balance at December 31,  2006**                                                                         |       | 1,542             |       | 1,700                                |       | 769                                   |       | 73,736                 |       | (488                                        | )          | —                     |       |
| Net earnings                                                                                                   |       | —            |       | —                               |       | —                                |       | 26,085                 |       | —                                      |       | —                     |       |
| Dividends paid, $.185  per share                                                                               |       | —            |       | —                               |       | —                                |       | (6,036                 | )          | —                                      |       | —                     |       |
| Repurchase and retirement of common stock                                                                      |       | (92               | )          | —                               |       | (2,753                                | )          | (7,145                 | )          | —                                      |       | —                     |       |
| Proceeds from stock  options exercised                                                                         |       | 16                |       | —                               |       | 1,098                                 |       | —                 |       | —                                      |       | —                     |       |
| Issuance of nonvested stock awards, net of  forfeitures                                                        |       | 8                 |       | —                               |       | (8                                    | )          | —                 |       | —                                      |       | —                     |       |
| Stock-based  compensation                                                                                      |       | —            |       | —                               |       | 895                                   |       | —                 |       | —                                      |       | —                     |       |
| Excess tax benefit on  stock awards                                                                            |       | —            |       | —                               |       | 62                                    |       | —                 |       | —                                      |       | —                     |       |
| Amortization of prior service costs and unrealized  losses on pension plans, net of income tax expense of $143 |       | —            |       | —                               |       | —                                |       | —                 |       | 210                                         |       | —                     |       |
| **Balance at December 31,  2007**                                                                         |       | $                 | 1,474      |                                 | $          | 1,700                                 |       | $                      | 63         |                                        | $          | 86,640                     |       | $ | (278 | ) | $ | — |   |

 

 

46

----

 

         We have 125,000,000 shares ofauthorized capital stock which consists of 74,000,000 shares of common stock,par value $.10 per share; 50,000,000 shares of Class A common stock, parvalue $.10 per share; and 1,000,000 shares of preferred stock, par value $.10per share.

 

         On April 26, 2006, our Board ofDirectors approved a three-for-two split of both classes of our common stock.The split was effected in the form of a stock dividend by issuing oneadditional share of stock for every two shares of stock held. On June 15,2006, 4,967,650 shares of common stock and 5,837,343 shares of Class Acommon stock were distributed to shareholders of record at the close ofbusiness on May 10, 2006.  Nofractional shares were issued. Shareholders were paid cash in lieu of any fractional shares.  All share and per share amounts have beenrestated to give effect to the stock split. The statement of stockholders’ equity reflects the stock split byreclassifying from additional paid-in capital to common stock and Class Acommon stock an amount equal to the par value of the additional shares issuedto effect the stock split.

 

         The holders of common stock areentitled to one vote per share and the holders of our Class A common stockare entitled to 10 votes per share. There is no cumulative voting. Shares of Class A common stock are convertible at any time into ourshares of common stock on a one-for-one basis at the option of the stockholder.Subject to rights of any preferred stockholder, holders of our common stock andClass A common stock are entitled to receive on a pro rata basis suchdividends, if any, as may be declared from time to time by the Board ofDirectors out of funds legally available for that purpose. At the discretion ofour Board of Directors, we may pay to the holders of common stock a cashdividend greater than the dividend, if any, paid to the holders of Class Acommon stock.

 

*        *Under Delaware law, a change of ownership of aLicensed Agent will automatically terminate its license 90 days after thechange of ownership occurs, unless the Director of the Delaware State LotteryOffice determines after application to issue a new license to the newowners.  Change of ownership may occur ifany new individual or entity acquires, directly or indirectly, 10% or more ofthe Licensed Agent or if more than 20% of the legal or beneficial interest inthe Licensed Agent is transferred, whether by direct or indirect means.  The Commission may require extensive backgroundinvestigations of any new owner acquiring a 10% or greater interest in aLicensed Agent, including criminal background checks.  Accordingly, we have a restrictive legend onour shares of common stock which require that (a) any holders of commonstock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of our outstanding common stock must first obtain priorwritten approval from the Delaware State Lottery Office.

 

         We adopted a stockholder rights plan in2002. The rights are attached to and trade in tandem with our common stock and Class Acommon stock. Each right entitles the registered holder to purchase from us oneshare of common stock at a purchase price of $200 per share. The rights, unlessearlier redeemed by our Board of Directors, will detach and trade separatelyfrom our common stock upon the occurrence of certain events such as theunsolicited acquisition by a third party of beneficial ownership of 10% or moreof our outstanding combined common stock and Class A common stock or theannouncement by a third party of the intent to commence a tender or exchangeoffer for 10% or more of our outstanding combined common stock and Class Acommon stock. After the rights have detached, the holders of such rights wouldgenerally have the ability to purchase such number of either shares of ourcommon stock or stock of an acquirer of ours having a market value equal totwice the exercise price of the right being exercised, thereby causingsubstantial dilution to a person or group of persons attempting to acquirecontrol of us. The rights may serve as a significant deterrent to unsolicitedattempts to acquire control of us, including transactions involving a premiumto the market price of our stock.  Therights expire on January 1, 2012, unless earlier redeemed.

 

         We adopted SAB No. 108 during thequarter ended December 31, 2006. Prior to adopting SAB No. 108, our approach to quantifyingmisstatements only considered the amount of the error originating in thecurrent year statement of earnings.  Thusthe effects of correcting the portion of the balance sheet misstatement thatoriginated in prior years were not considered. Upon adopting SAB No. 108, we changed our approach to quantifyingthe effects of misstatements to include an analysis of the impact on thecurrent year statement of earnings for the cumulative balance of any knownerrors, regardless of when they originated. When we applied the new approach to quantifying the effects ofmisstatements to our 2006 consolidated financial statements, we identified anerror that was not material to our consolidated statement of earnings in anyprior quarter or annual period; however, the cumulative error would have beenmaterial to correct in the current period. The error resulted from a difference in the amount 

 

 

47

----

 

of slot win werecorded from our meters as compared to the amount of cash slot win that wastaken out of the slot machines and had accumulated over several years.  Since the error was not material to any priorstatement of earnings, we were not required to restate prior year financialstatements.  The consolidated financialstatements were corrected with an adjustment of $1,541,000, net of income taxeffect of $1,055,000, to the beginning balance of retained earnings at January 1,2006.

 

        On January 23, 2008,our Board of Directors declared a quarterly cash dividend on both classes ofcommon stock of $.05 per share.  Thedividend is payable on March 10, 2008 to stockholders of record at theclose of business on February 10, 2008.

 

                  On October 23, 2002, ourBoard of Directors authorized the repurchase of up to 3,000,000 shares of ouroutstanding common stock.  The purchasesmay be made in the open market or in privately negotiated transactions asconditions warrant.  The repurchaseauthorization has no expiration date, does not obligate us to acquire anyspecific number of shares and may be suspended at any time.  During the year ended December 31, 2007,we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. No purchases of our equity securities were made pursuant to thisauthorization during the years ended December 31, 2006 and 2005.  At December 31, 2007, we had remainingrepurchase authority of 1,751,833 shares.

 

         During 2007 and 2006, we purchased andretired 8,288 and 3,431 shares of our outstanding common stock for $112,000 and$56,000, respectively.  These purchaseswere made from employees in connection with the vesting of restricted stock awardsunder our stock incentive plan and were not pursuant to the aforementionedrepurchase authorization. Since the vesting of a restricted stock award is ataxable event to our employees for which income tax withholding is required,the plan allows employees to surrender to us some of the shares that wouldotherwise have vested in satisfaction of their tax liability.  The surrender of these shares is treated byus as a purchase of the shares.

 

        On December 19, 2005,our Board of Directors authorized us to commence a tender offer to purchase up to1,595,906 shares of our common stock and up to 1,988,202 shares of our Class Acommon stock at a fixed price of $9.67 per share.  The offer expired on January 19, 2006.We purchased 1,595,906 shares of our common stock and 1,987,500 shares of our Class Acommon stock for $34,996,000, including expenses, in connection with the tenderoffer.

 

         We have a stock incentive plan which provides for the grantof up to 2,250,000 shares of common stock to our officers and key employeesthrough stock options and/or awards valued in whole or in part by reference toour common stock, such as nonvested stock awards.  Under the plan, option grants must have anexercise price of not less than 100% of the fair market value of the underlyingshares of common stock at the date of the grant.  The stock options have eight-year terms andgenerally vest equally over a period of six years from the date of grant.  Once the options are exercised, our plan requiresthat the common stock be held for a minimum of one year.  The nonvested stock vests an aggregate oftwenty percent each year beginning on the second anniversary date of thegrant.  As of December 31, 2007,there were 926,697 shares available for granting options or stock awards.

 

Stock option activity for the year ended December 31, 2007 was asfollows:

 

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in yrs)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 953,749               |       | $                                          | 6.86       |                                                         |       |                            |       |   |
| Forfeited                              |       | (43,500               | )          | $                                          | 7.01       |                                                         |       |                            |       |   |
| Exercised                              |       | (164,142              | )          | $                                          | 6.78       |                                                         |       |                            |       |   |
| Outstanding at  December 31, 2007 |       | 746,107               |       | $                                          | 6.87       |                                                         | 2.3        |                            | $          | 3,269,000 |   |
| Exercisable at  December 31, 2007 |       | 544,657               |       | $                                          | 6.93       |                                                         | 2.2        |                            | $          | 2,356,000 |   |

 

No stock options were granted during the three year period ending December 31,2007.  The total intrinsic value of stockoptions exercised during the years ended December 31, 2007, 2006 and 2005was $1,089,000, $560,000 and $3,000, respectively.

 

48

----

 

Nonvested stock option activity for the year ended December 31,2007 was as follows:

 

| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| Nonvested at  December 31, 2006 |       | 350,825               |       | $                                                  | 2.99       |   |
| Forfeited                            |       | (17,500               | )          | $                                                  | 3.03       |   |
| Vested                               |       | (131,875              | )          | $                                                  | 3.08       |   |
| Nonvested at  December 31, 2007 |       | 201,450               |       | $                                                  | 2.92       |   |

 

         The total fair value of stock optionsvested during the years ended December 31, 2007 and 2006 was $407,000 and$457,000, respectively.  We recorded,within general and administrative expenses, compensation expense of $326,000and $372,000 related to stock options for the years ended December 31,2007 and 2006, respectively.  As of December 31,2007, there was $217,000 of total unrecognized compensation cost related tononvested stock options granted to employees under our stock incentiveplan.  That cost is expected to berecognized over a weighted-average period of 0.9 years.

 

Nonvestedrestricted stock activity for the year ended December 31, 2007 was asfollows:

 

| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| Nonvested at  December 31, 2006 |       | 243,300               |       | $                                                  | 8.85       |   |
| Granted                              |       | 85,000                |       | $                                                  | 13.54      |   |
| Vested                               |       | (30,000               | )          | $                                                  | 8.23       |   |
| Nonvested at  December 31, 2007 |       | 298,300               |       | $                                                  | 10.25      |   |

 

         The aggregate market value of the nonvested restrictedstock at the date of issuance is being amortized on a straight-line basis overthe six-year service period.  Thetotal fair value of shares vested during the years ended December 31, 2007and 2006 was $247,000 and $109,000, respectively.  No shares vested during the year ended December 31,2005.  The weighted-average grant-datefair value of nonvested restricted stock awards granted during the years ended December 31,2007, 2006 and 2005 was $13.54, $9.58 and $8.61, respectively.  We recorded, within general and administrativeexpenses, compensation expense of $569,000, $360,000 and $214,000 related tononvested restricted stock awards for the years ended December 31, 2007,2006 and 2005, respectively.  As of December 31,2007, there was $2,202,000 of total deferred compensation cost related tononvested restricted stock awards granted to employees under our stockincentive plan.  That cost is expected tobe recognized over a weighted-average period of 4.1****years.

 

*        *As of December 31, 2007 and 2006, accumulatedother comprehensive loss, net of income taxes of $190,000 and $333,000,respectively, consists of the following:

 

| ** **                                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net actuarial loss and prior service cost not yet  recognized in net periodic benefit cost |       | $        | (278,000   | )        | $          | (488,000 | ) |
| Accumulated other  comprehensive loss                                                      |       | $        | (278,000   | )        | $          | (488,000 | ) |

 

**NOTE9—Related Party Transactions**

 

                  During the yearsended December 31, 2007, 2006 and 2005, we allocated costs of $1,873,000,$1,614,000 and $1,613,000, respectively, to DVD for certain administrative andoperating services.  Additionally, DVDallocated costs of $229,000, $121,000 and $113,000 to us for the years ended December 31,2007, 2006 and 2005, respectively.  Theallocations were based on an analysis of each company’s share of thecosts.  In connection with DVD’s 2007,2006 and 2005 NASCAR event weekends at Dover International Speedway, weprovided certain services for which DVD was invoiced $1,207,000, $965,000 and$938,000, respectively.  Additionally,DVD invoiced us $429,000, $149,000 and $113,000, respectively, for our rentalof a skybox suite, tickets and other services to DVD’s 2007, 2006 and 2005NASCAR event weekends at Dover International Speedway.  As of December 31, 2007 and 2006, ourconsolidated balance sheet includes an $18,000 and $9,000 payable to DVD,respectively, for the aforementioned items. We have 

 

 

49

----

 

since settled the payable in the first quarter of 2008.  The net costs incurred by each company forthese services are not necessarily indicative of the costs that would have beenincurred if the companies had been unrelated entities and/or had otherwiseindependently managed these functions; however, management believes that thesecosts are reasonable.

 

         Ouruse of DVD’s 5/8-mile harness racing track is pursuant to an easement grantedto us by DVD which does not require the payment of any rent. Under the terms ofthe easement, we have exclusive use of the harness track during the periodbeginning November 1 of each year and ending April 30 of thefollowing year, together with set up and tear down rights for the two weeksbefore and after such period.  Theharness track is located on property owned by DVD and is on the inside of DVD’smotorsports superspeedway.  Our indoorgrandstands are used by DVD at no charge in connection with its majormotorsports events. DVD also leases its principal office space from us.  Various easements and agreements relative toaccess, utilities and parking have also been entered into between DVD and usrelative to our respective Dover, Delaware facilities.

 

         Inconjunction with the spin-off from DVD, we and DVD entered into variousagreements that addressed the allocation of assets and liabilities between thetwo companies and that define the companies’ relationship after theseparation.  Among these are the RealProperty Agreement, the Transition Support Services Agreement and the TaxSharing Agreement.

 

        TheReal Property Agreement governs certain real property transfers, leases andeasements affecting our Dover, Delaware facility.

 

        TheTransition Support Services Agreement provides for each of us and DVD toprovide each other with certain administrative and operational services.  The party receiving the services is requiredto pay for them within 30 business days after receipt of an invoice at ratesagreed upon by us and DVD.  The agreementmay be terminated in whole or in part 90 days after the request of the partyreceiving the services or 180 days after the request of the party providing theservices.

 

         The Tax Sharing Agreement provides for,among other things, the treatment of income tax matters for periods beginningbefore and including the date of the spin-off and any taxes resulting fromtransactions effected in connection with the spin-off. With respect to anyperiod ending on or before the spin-off or any tax period in which the spin-offoccurs, DVD:

 

·                  continues to be the sole and exclusiveagent for us in all matters relating to our income, franchise, property, salesand use tax liabilities;

 

·                  subject to our obligation to pay for items relating toour gaming business, bears any costs relating to tax audits, including taxassessments and any related interest and penalties and any legal, litigation,accounting or consulting expenses;

 

·                  continues to have the sole and exclusiveresponsibility for the preparation and filing of consolidated federal andconsolidated state income tax returns; and

 

·                  subject to the right and authority of us to direct DVDin the defense or prosecution of the portion of a tax contest directly andexclusively related to any Dover Downs Gaming & Entertainment, Inc.tax adjustment, generally has the powers, in DVD’s sole discretion, to contestor compromise any claim or refund on our behalf.

 

        Henry B. Tippie, Chairmanof our Board of Directors, controls in excess of fifty percent of our votingpower.  Mr. Tippie’s voting controlemanates from his direct and indirect holdings of common stock and Class Acommon stock, from his status as executor of the estate of John W. Rollins, ourlargest stockholder, and from certain shares as to which he has voting rightspursuant to a voting agreement with R. Randall Rollins, one of ourdirectors.  This means that Mr. Tippiehas the ability to determine the outcome of our election of directors and todetermine the outcome of many significant corporate transactions, many of whichonly require the approval of a majority of our voting power.********On January 31, 2008, the estate of John W. Rollins transferred allof its holdings in our stock to the RMT Trust, a trust established under theterms of the last will and testament of John W. Rollins.  As trustee ofthe RMT Trust, Mr. Tippie has sole voting and dispositive power over thesestockholdings and he continues to control in excess of fifty percent of ourvoting power******.**

 

 

50

----

 

        Patrick J. Bagley, KennethK. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W. Rollins, Jr., R.Randall Rollins and Henry B. Tippie are all Directors of ours and DVD. DenisMcGlynn is the President and Chief Executive Officer of both companies, KlausM. Belohoubek is the Senior Vice President — General Counsel and Secretary ofboth companies and Patrick J. Bagley is the Senior Vice President — Finance andChief Financial Officer of DVD.  Mr. Tippiecontrols in excess of fifty percent of the voting power of DVD.

 

**NOTE10—Commitments and Contingencies**

 

         We are a party to ordinary routinelitigation incidental to our business. Management does not believe that the resolution of any of these mattersis likely to have a material adverse effect on our results of operations,financial condition or cash flows.

 

         As of December 31, 2007, we have purchaseobligations related to the expansion of theDover Downs Hotel.  Constructionbegan in the second quarter of 2006 and was completed in the fourth quarter of2007.  The cost of the hotel expansionwas approximately $48,000,000, of which approximately $44,100,000 was paidthrough December 31, 2007.

 

         As of December 31, 2007, we have purchase obligationsrelated to the expansion of our casino.  Construction began in the first quarter of2007 and is expected to be completed by the fall of 2008.  The estimated cost of the casino expansion is$56,000,000, of which approximately $17,000,000 was paid through December 31,2007, and approximately $6,300,000 is included in accounts payable in theconsolidated balance sheet.

 

         Effective May 10,2007, the State enacted legislation that establishes a one-time minimumincrease in the amount remitted to the State by its three video lotteryagents.  This legislation requires thethree agents to fund a total increase of $5,000,000 in the State’s share of theindustry’s slot win for the year ending June 2, 2008 (the “Review Period”)as compared to the year ended June 4, 2007.  ****The guarantee is not a joint one, but is several.**** In the event that the industry as a wholemeets the required minimum increase, there is no additional liability to theState.  In the event the industry as awhole does not meet the minimum increase, but we meet our portion of theminimum increase, which is approximately $1,692,000, we will have no additionalliability.  In the event the industry asa whole does not meet the minimum increase and we do not meet our portion ofthe minimum increase, we would be liable for our shortfall up to a maximum of$1,692,000.  ****In addition, in the event that the industry as awhole falls below the minimum increase by $10,000,000 and we do not meet ourportion of the minimum increase, we could also be liable for an additionalamount, not to exceed $338,000.**** Based on our operating results for June throughDecember of 2007, we expect to meet our required minimum increase for theReview Period.  As a result, we do notexpect to make any additional payments pursuant to the guarantee, and thereforehave not recorded a liability on our consolidated balance sheet as of December 31,2007.

 

         We have employment,severance and noncompete agreements with certain of our officers and directorsunder which certain change of control, severance and noncompete payments andbenefits might become payable in the event of a change in our control, definedto include a tender offer or the closing of a merger or similar corporatetransactions.  In the event of such achange in our control and the subsequent termination of employment of allemployees covered under these agreements, we estimate that the maximumcontingent liability would range from $9,100,000 to $13,200,000 depending onthe tax treatment of the payments.

 

To the extent that any of the potential payments orbenefits due under the agreements constitute an excess “parachute payment”under the Internal Revenue Code and result in the imposition of an excise tax,each agreement requires that we pay the amount of such excise tax plus anyadditional amounts necessary to place the officer or director in the sameafter-tax position as he would have been had no excise tax been imposed. Weestimate that the tax gross ups that could be paid under the agreements in theevent the agreements were triggered due to a change of control could be ashigh as $4,100,000 and this amount has been included in the maximum contingentliability disclosed above. This maximum tax gross up assumes that none ofthe payments made after the hypothetical change in control would becharacterized as reasonable compensation for services rendered. Each agreementwith an executive officer provides that fifty percent of the monthly amountpaid during the term is paid in consideration of the executive officer’s non-competecovenants. The exclusion of these amounts would reduce the calculated amount ofexcess parachute payments subject to tax. However, as we are unable to concludewhether the Internal Revenue 

 

 

51

----

 

Service would characterize all or some of these non-compete payments asreasonable compensation for services rendered, we have included the full amountof these payments in our calculation.

 

**NOTE11—Quarterly Results (unaudited)**

 
| ** **                             | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| **Year Ended December 31,  2007** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Revenues                               |       | $                 | 60,631,000 |             | $          | 57,868,000            |       | $                    | 64,566,000 |   | $ | 59,301,000 |   |
| Operating earnings                     |       | $                 | 12,188,000 |             | $          | 11,306,000            |       | $                    | 13,308,000 |   | $ | 10,094,000 |   |
| Net earnings                           |       | $                 | 6,881,000  |             | $          | 6,404,000             |       | $                    | 7,435,000  |   | $ | 5,365,000 |   |
| Net earnings per share-basic           |       | $                 | 0.21       |             | $          | 0.20                  |       | $                    | 0.23       |   | $ | 0.17 |   |
| Net earnings per share-diluted         |       | $                 | 0.21       |             | $          | 0.20                  |       | $                    | 0.23       |   | $ | 0.17 |   |
| ** **                             | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| **Year Ended December 31,  2006** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Revenues                               |       | $                 | 59,272,000 |             | $          | 56,831,000            |       | $                    | 61,681,000 |   | $ | 58,667,000 |   |
| Operating earnings                     |       | $                 | 11,104,000 |             | $          | 11,136,000            |       | $                    | 12,655,000 |   | $ | 11,015,000 |   |
| Net earnings                           |       | $                 | 6,163,000  |             | $          | 6,090,000             |       | $                    | 6,994,000  |   | $ | 6,081,000 |   |
| Net earnings per share-basic           |       | $                 | 0.19       |             | $          | 0.19                  |       | $                    | 0.22       |   | $ | 0.19 |   |
| Net earnings per share-diluted         |       | $                 | 0.18       |             | $          | 0.19                  |       | $                    | 0.21       |   | $ | 0.19 |   |

 

Per share data amounts for the quarters have each beencalculated separately.  Accordingly,quarterly amounts may not add to the annual amounts because of differences inthe average common shares outstanding during each period.

 

 

52

----