**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

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**Form 10-K**

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**Annual Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

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**For the fiscal year endedDecember 31, 2006**

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**Commission filenumber      1-16791**

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**Dover Downs Gaming & Entertainment, Inc.**

(Exact name of registrant as specified in its charter)

 

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

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**1131 North DuPontHighway, Dover, Delaware  19901**

(Address of principal executive offices)

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**(302) 674-4600**

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes x   No o

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer o   Accelerated filer x         Non-acceleratedfiler o

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

The aggregate market value of common stock held bynon-affiliates of the registrant was $268,410,178 as of June 30, 2006 (the lastday of our most recently completed second quarter).

As of February 28, 2007, the number of shares ofeach class of the registrant’s common stock outstanding is as follows:

| Common Stock -         |   | 15,642,707 shares |
|------------------------|--------|-------------------|
| Class A Common Stock - |   | 17,003,173 shares |

 

**Documents Incorporated byReference**

Portions of the registrant’s Proxy Statement in connection with theAnnual Meeting of Stockholders held April 25, 2007 are incorporated byreference into Part III, Items 10 through 14 of this report.

 

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**Part I**

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

**Item 1.            Business**

We are adiversified gaming and entertainment company whose operations consist of DoverDowns Slots — a 97,000 square-foot video lottery (slots) casino complex; theDover Downs Hotel — featuring luxury accommodations with conference, banquet,fine dining, ballroom and concert hall facilities; and Dover Downs Raceway — aharness racing track with pari-mutuel wagering on live and simulcast horseraces.  Our entertainment complex islocated in Dover, the capital of the State of Delaware.

Dover Downs Gaming& Entertainment, Inc. is a public holding company that has two wholly ownedsubsidiaries: Dover Downs, Inc. and Dover Downs Management Corp.  Dover Downs, Inc. was incorporated in 1967and began motorsports and harness racing operations in 1969.  In June of 1994, legislation authorizingvideo lottery operations in the State of Delaware (the “State”) was adopted.Our video lottery (slots) casino operations began on December 29, 1995.  As a result of several restructurings, DoverDowns, Inc. became a wholly owned subsidiary of Dover Motorsports, Inc.(formerly known as Dover Downs Entertainment, Inc.) (“DVD”), and became theoperating entity for all of DVD’s gaming operations.

Dover Downs Gaming& Entertainment, Inc. was incorporated in the State in December of 2001 asa wholly owned subsidiary of DVD. Effective March 31, 2002, DVD completed a tax-free spin-off of itsgaming operations by contributing 100% of the issued and outstanding commonstock of Dover Downs, Inc. to  DoverDowns Gaming & Entertainment, Inc., and subsequently distributing 100% ofour issued and outstanding common stock to DVD stockholders.  Immediately following the spin-off, DoverDowns Gaming & Entertainment, Inc. became an independent public company.

Dover Downs, Inc.is authorized to conduct video lottery operations as a “Licensed Agent” underthe Delaware State Lottery Code. Pursuant to Delaware’s Horse RacingRedevelopment Act, enacted in 1994, the Delaware State Lottery Officeadministers and controls the operation of the video lottery.

Our license fromthe Delaware Harness Racing Commission (the “Commission”) to hold harness racemeetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races must be renewed on an annual basis. In order to maintainour license to conduct video lottery operations, we are required to maintainour harness horse racing license.  Wehave received an annual license from the Commission for the past 38 consecutiveyears and management believes that our relationship with the Commission remainsgood.

Due to the natureof our business activities, we are subject to various federal, state and localregulations.

**Dover Downs Slots**

Our video lottery(slot) machine casino opened in December 1995 with approximately 500 videolottery (slot) machines.  Due to itspopularity, the video lottery (slot) machine casino has expanded five timessince its opening and the number of machines has increased steadily to 2,724  at December 31, 2006.  The mostrecent expansion, which was completed in July of 2006, converted 4,000square-feet of space within our existing complex to gaming space and added morethan 200 new machines.

In the firstquarter of 2006, the State of Delaware passed legislation which allowed us toexpand our operating hours, add additional slot machines and provide freepromotional play through our recently enhanced slots marketing system.  We now operate 24 hours per day, except onSunday morning from 6am to noon.  Thelegislation increased the number of allowable slot machines for each of thethree licensed facilities in Delaware from 2,500 to 4,000.  Each slot machine in excess of 2,500 requirespayment of an annual fee of $1,100 per machine for the first 500 machinesadded, $700 per machine for the next 500 machines added, and $300 per machinefor the last 500 machines added.

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Since legislationnow allows us to operate up to 4,000 video lottery (slot) machines, we areproceeding with our plans to expand the casino facility.  We are currentlyfinalizing a bid package for the Phase VI expansion of our casino which isexpected to include additional casino space, as well as restaurant and retailofferings.

Our video lottery(slot) machines range from our popular penny machines to $100 machines in thePremium Slots area and include most popular games found in the country’s majorgaming jurisdictions.  We have recentlyadded multi-player electronic table games, such as Blackjack and Poker, whichaccomodate up to five players in an interactive setting that features a virtualdealer.  Additional amenities include theGarden Cafe, which becomes a lounge with live entertainment several nights aweek.  The Las Vegas style video lotterycasino housing the gaming equipment was designed and built using expertise fromCaesars World Gaming Development Corporation (“Caesars”), a leader in thegaming industry.  Our facilities are openevery day of the year, except Christmas and Easter, and were visited byapproximately 3 million patrons in 2006.

The Delaware StateLottery Office administers and controls our video lottery (slot) machineoperations. We are a Licensed Agentauthorized to conduct video lottery operations under the Delaware State LotteryCode and one of only three locations permitted to do so in the State ofDelaware. We are permitted by law to set the payout to customers between 87%and 95%.

We usesophisticated database marketing to enable us to develop long-termrelationships with our patrons and to target promotions to specific customersegments. Our Capital Club®, a slots players club and tracking system, allows us toidentify customers and to reward their level of play through various marketingprograms. Membership in this club currently stands at approximately 143,000active patrons.  Our state-of-the-artcustomer management and slot data system allows us to market our property moreeffectively and has allowed for the conversion of our entire casino floor toticket-in, ticket-out (cashless) technology.

We haveimplemented extensive procedures for financial and accounting controls,safekeeping and accounting of monies, and security provisions. Security overthe gaming operations involves the integration of surveillance cameras,observation and oversight by employees, security and gaming staff, and varioussecurity features built into the video lottery (slot) machines. The above, whencombined with proper internal control procedures and daily monitoring of eachvideo lottery (slot) machine by the Delaware State Lottery Office, are intendedto maintain the security, integrity and accountability of the video lotteryoperations.

On May 30, 2003, the Advisory Council on Video Lottery Planning, acommittee created by the Delaware House of Representatives (the “Committee”),issued a favorable assessment as to the merits of conducting sports wagering inthe State through its video lottery agents. The Committee concluded that sports gaming is feasible in the State,outlined proposed structures for its implementation and provided variousfinancial projections.  The report hasbeen provided to the Delaware General Assembly for consideration.  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.  Enablinglegislation needed to establish sports gaming operations at our property isbeing discussed by the Delaware legislature.

**Dover Downs Hotel**

Our luxury hotelfacility, the Dover Downs Hotel, connects to our casino.  Thefacility was completed in April 2002 and includes 232 rooms, amulti-purpose ballroom/concert hall, a fine dining restaurant, swimming pooland health spa.  When we built the hotelwe also 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, trade shows and conferences, we are able toattract new patrons and lengthen the stay of current patrons.  Since opening the Dover Downs Hotel, we havemanaged its operations ourselves.  In2006, hotel occupancy averaged almost 97% and the hotel was awarded the AAAFour Diamond Award for the fourth consecutive year.

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On March 16, 2006, we announced an expansion plan that will morethan double the number of hotel rooms from 232 to 500, including eleven luxuryspa suites, and add a luxurious 6,000 square-foot spa to the Dover DownsHotel.  Construction began in the secondquarter of 2006 and is expected to be completed in the fall of 2007.  The estimated cost of the expansion is$53,600,000, of which approximately $16,400,000 was paid through 2006.

**Dover Downs Raceway**

Dover DownsRaceway has presented pari-mutuel harness racing events for 38 consecutiveyears. Live harness races are conducted at Dover Downs Raceway between Novemberand April and are simulcast to more than 400 tracks and other off-track bettinglocations across North America on each of our more than 130 live racedates.  The harness horse racing track isa 5/8-mile track and is lighted for nighttime operations.  The track is adjacent to our casino and hotelon land owned by DVD on the inside of DVD’s auto racing superspeedway.  Use of the track is pursuant to an easementgranted by DVD which does not require the payment of any rent.

Within our maingrandstand is the simulcast parlor where our patrons can wager on harness andthoroughbred races received by satellite into Dover Downs Raceway year roundfrom numerous tracks across North America. Television monitors throughout the parlor area provide views of allraces simultaneously and the parlor’s betting windows are connected to acentral computer allowing bets to be received on all races from alltracks.  Additional amenities include theWinners Circle® Restaurant.

Harness racing inthe State of Delaware is governed by the Delaware Harness Racing Commission. Wehold a license from the Commission authorizing us to hold harness race meetingson our premises and to offer pari-mutuel wagering on live and simulcast horseraces.

In harness racingcompeting horses are harnessed to a two-wheeled sulky, which carries thedriver.  Pari-mutuel wagering is pooledbetting by which the wagering public, not the track, determines the odds andthe payoff. The track retains a commission, which is a percentage of the totalamount wagered, or the “handle.” Simulcasting is the transmission of live horse racing by television,cable or satellite signal from one race track to another with pari-mutuelwagering being conducted at the sending and receiving track and a portion ofthe handle being shared by the sending and receiving tracks.

The legislationauthorizing video lottery operations in the State of Delaware was adopted inJune 1994, and is referred to as the “Horse Racing Redevelopment Act.” TheDelaware General Assembly’s stated purpose in approving the legislation was to(i) provide non-state supported assistance in the form of increased economicactivity and vitality for Delaware’s harness and thoroughbred horse racingindustries, which activity and vitality will enable the industry to improve itsfacilities and breeding stock, and cause increased employment; and (ii)restrict the location of such lottery to locations where wagering is alreadypermitted and controls exist. A portion of the proceeds from the wagering onthe video lottery (slot) machines is allocated to increase the purses forharness horse races held at Dover Downs Raceway and is intended to provideincreased vitality for Delaware’s horse racing industry.

We have anagreement with the Delaware Standardbred Owner’s Association, Inc. (“DSOA”)effective August 1, 2003 and continuing through July 31, 2007. We believe thatthe agreement will be renegotiated in 2007 at terms similar to those in thecurrent agreement.  DSOA’s membershipconsists of owners, trainers and drivers of harness horses participating inharness race meetings at our facilities and elsewhere in the United States andCanada. The DSOA has been organized and exists for the purpose of promoting thesport of harness racing; improving the lot of owners, drivers and trainers ofharness racing horses participating in race meetings; establishing health,welfare and insurance programs for owners, drivers and trainers of harnessracing horses; negotiating with harness racing tracks on behalf of owners,trainers, drivers and grooms of harness racing horses; and generally renderingassistance to them whenever and wherever possible. Under the DSOA agreement, weare required to distribute as purses for races conducted at our facilities apercentage of our retained share of pari-mutuel revenues.

We enjoy a goodrelationship with representatives of DSOA and anticipate that this relationshipwill continue. We believe that the DSOA agreement is typical of similaragreements in the industry.

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**Licensing and Regulation byGaming and Other Authorities**

## *General*

We are subject toextensive federal, state and local regulations related to our operations,particularly our video lottery (slot) operations, live harness racing andpari-mutuel wagering. These operations are contingent upon continued governmentapproval of such operations as forms of legalized gaming and could be subjectedat any time to additional or more restrictive regulations.  The following is a brief outline of some ofthe more significant regulations affecting our gaming operations and notintended as a recitation of all regulations applicable to our business.

Delaware lawregulates the percentage of commission we are entitled to receive from ourgaming activities, which comprises a significant portion of our overallrevenues.  Our licenses to conduct videolottery (slot) machine operations, harness horse races and pari-mutuel wageringcould be modified or repealed at any time and we could be required to terminateour gaming operations.

## *Video Lottery (Slot) Operations*

*General. *Video lottery (slot)operations are by statute operated and administered by the Director of theDelaware State Lottery Office (the “LotteryDirector”).  We are a LicensedAgent authorized to conduct video lottery (slot) operations under the DelawareState Lottery Code.

A “video lottery(slot) machine” is defined by law as any machine in which bills, coins ortokens are deposited in order to play in a game of chance in which the results,including options available to the player, are randomly and immediatelydetermined by the machine.  A machine mayuse spinning reels or video displays or both, and may or may not dispense coinsor tokens directly to winning players.  Amachine shall be considered a video lottery (slot) machine notwithstanding (i)the use of an electronic credit system making the deposit of bills, coins ortokens unnecessary, or (ii) the fact that the video lottery (slot) machine hasemployed dual function terminal technology. Various video lottery (slot) machines are in use at our casino.

The LotteryDirector has discretion to adopt such rules and regulations as the LotteryDirector deems necessary or desirable for the efficient and economicaloperation and administration of the system, including (i) type and number ofgames permitted, (ii) pricing of games, (iii) numbers and sizes of prizes, (iv)manner of payment, (v) value of bills, coins or tokens needed to play, (vi)requirements for licensing agents and service providers, (vii) standards foradvertising, marketing and promotional materials used by Licensed Agents,(viii) procedures for accounting and reporting, (ix) registration, kind, type,number and location of video lottery (slot) machines on a Licensed Agent’spremises, (x) security arrangements for the video lottery system, and (xi)reporting and auditing of financial information of Licensed Agents.

*LicensingRequirements*.  We weregranted a license on December 13, 1995. Delaware gaming licenses do not have an expiration date.

There arecontinuing licensure requirements for all officers, directors, key employeesand persons who own directly or indirectly 10% or more of a Licensed Agent,which licensure requirements shall include the satisfaction of such security,fitness and background standards as the Lottery Director may deem necessaryrelating to competence, honesty and integrity, such that a person’s reputation,habits and associations do not pose a threat to the public interest of theState or to the reputation of or effective regulation and control of the videolottery; it being specifically understood that any person convicted of anyfelony, a crime involving gambling, or a crime of moral turpitude within 10years prior to applying for a license or at any time thereafter shall be deemedunfit.

There are similarlicensure requirements for providers of the video lottery (slot) machines andcertain companies that seek to provide services to a 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 information required 

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by the rules andregulations, the material violation of any rules and regulations promulgated bythe Lottery Director or any conduct by the licensee which undermines the publicconfidence in the video lottery system or serves the interest of organizedgambling or crime and criminals in any manner. A license may be revoked for an unintentional violation of any federal,state or local law, rule or regulation provided that the violation is not curedwithin a reasonable time as determined by the Lottery Director.  A hearing officer’s decision revoking orsuspending the license shall be appealable to the Delaware Superior Court underthe provisions of the Administrative Procedures Act.  All existing or new officers, directors, keyemployees and owners of a Licensed Agent are subject to backgroundinvestigation.  Failure to satisfy thebackground investigation may constitute cause for suspension or revocation ofthe License.

*OwnershipChanges*.  UnderDelaware law, a change of ownership of a Licensed Agent will automaticallyterminate its license 90 days after the change of ownership occurs, unless theLottery Director 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 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 common stockfound to be disqualified or unsuitable or not possessing the qualificationsrequired by any appropriate gaming authority could be required to dispose ofsuch stock and (b) any holder of common stock intending to acquire 10% or moreof our outstanding common stock must first obtain prior written approval fromthe Delaware State Lottery Office.

*HarnessRacing Events*.  Inorder to maintain our license for video lottery (slot) machine gaming, we arerequired to maintain our license for harness horse racing with the Commissionand must conduct a minimum of 80 live race days each racing season, subject tothe availability of racing stock.

*ControlOver 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.

### *HarnessRacing and Pari-Mutuel Wagering*

*LicensingRequirements. *Harnessracing in the State of Delaware is governed by the Delaware Harness RacingCommission.  We hold a license from theCommission by which we are authorized to hold harness race meetings on ourpremises and to make, conduct and sell pools by the use of pari-mutuel machinesor totalizators.  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 38 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, theCommission has broad powers of supervision and regulation.  The Commission may prescribe rules,regulations and conditions under which all harness racing and betting poolsshall be conducted; may regulate the performance of any service or the sale ofany article on the premises of a licensee; may compel the production of booksand documents of a licensee and require that books and records be kept in suchmanner 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.  Allproposed extensions, additions or improvements to the property of a licenseeare subject to the approval of the Commission.

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The Commission isrequired to inspect a licensee’s racing plant not less than five days prior toa race meeting and may withdraw the license for the meeting if the racing plantis found to be unsafe for animals or persons or is not rendered safe prior tothe opening of the meeting.  A licenseemust deposit with the Commission, ten days before a race meeting, a policy ofinsurance against personal injury liability in an amount to be approved by theCommission.

*USTA. *Any license granted by theCommission is also subject to such reasonable rules and regulations as may beprescribed from time to time by the United States Trotting Association (“USTA”).  The USTA sets various rules relating to theconduct of harness racing.  According toits Articles of Incorporation, the purposes of the USTA shall include the improvementof the breed of trotting and pacing horses, the establishment of rulesregulating standards and the registration of such horses thereunder, theadvancement and promotion of the interest of harness racing in the UnitedStates, the investigation, ascertainment and registration of the pedigrees ofsuch horses, the regulation and government of the conduct of the sport ofharness racing, the establishment of rules for the conduct thereof, notinconsistent with the laws of the various states, and the sanctioning of theholding of exhibitions of such horses and meetings for the racing thereof, theissuance of licenses to qualified persons to officiate at harness race meetingsand exhibitions, the issuance of licenses to the owners of horses permittingthe exhibition and racing of such horses and the qualification thereof, theissuance of licenses to drivers of horses participating in such races orexhibitions, and providing for the enforcement of the rules promulgated by theUSTA, and providing for the fixing of penalties, fines, and the suspension orexpulsion from membership, or privileges or for any other misconductdetrimental to the sport.

## *Gaming Taxes and Fees*

We believe thatthe prospect of significant additional tax revenue is one of the primary reasonswhy jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxesand fees in addition to normal federal and state corporate income taxes.  These taxes and fees are subject to increaseat any time.  We pay substantial taxesand fees with respect to our operations and would likely incur similar burdensin any other jurisdiction in which we may conduct gaming operations in thefuture.

# *Compliance with Other Laws*

We are subject tovarious federal, state and local laws and regulations in addition to gamingregulations. These laws and regulations include, but are not limited to,restrictions and conditions concerning alcoholic beverages, environmentalmatters, employees, currency transactions, taxation, zoning and building codes,and marketing and advertising.

The InternalRevenue Service (“IRS”) requires operators of casinos located in the UnitedStates to file information returns for United States citizens, including namesand addresses of winners, for all winnings in excess of stipulated amounts. TheIRS also requires operators to withhold taxes on certain winnings.

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Department(“FinCEN”) require us to report currency transactions in excess of stipulatedamounts occurring within a gaming day, including identification of the patronby name and social security number. FinCEN has also established regulationsthat require us to file suspicious activity reports on all transactions that weknow, suspect, or have reason to suspect fall into specific categories that aredeemed to be suspicious. We believe our programs meet the requirements of theapplicable regulations.

Laws andregulations are always subject to change, can be interpreted differently in thefuture, and new laws and regulations may be enacted which could adverselyaffect the tax, regulatory, operational or other aspects of the gaming industryand our company. Furthermore, noncompliance with one or more of these laws andregulation could result in the imposition of substantial penalties against us.

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**Competition**

The gamingindustry in the United States is intensely competitive and features manyparticipants, including riverboat casinos, dockside casinos, land-basedcasinos, video lottery (slot) and poker machines, whether or not located incasinos, native American gaming, pari-mutuel wagering on live and simulcasthorse racing, off-track betting, state run lotteries, internet gambling andother forms of gambling. Gaming competition is particularly intense in each ofthese sectors.

We compete in local and regional markets with horse tracks, off-trackbetting parlors, state run lotteries, casinos and other gaming facilities.  We cannot be certain that we will maintainour market share or compete more 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 cash flowsand results of operations.  Approximately70% of our Capital Club member slot win comes from out of state patrons.  In July2004, Pennsylvania adopted legislation which authorizes up to 61,000 slotmachines at various existing and proposed venues throughout the state.  It is difficult for us to predict the effectthat such legislation will have on us, but several of these facilities inPennsylvania began operations in the latter half of 2006.  Pennsylvania has one of the highest effectivetax rates on slot machine gaming in the country and charges an up front$50,000,000 license fee to the horse racing and casino venues that are granteda gaming license.  Management hasestimated that slot win from Pennsylvania patrons represents approximately 5%of our total slot win.

Pennsylvania,Maryland and New Jersey all have state-run lotteries. Atlantic City, New Jerseyis located approximately 100 miles from our entertainment facility and offers afull range of gaming products. Maryland, Virginia and Washington, D.C. do notpermit video lottery (slot) machine operations.

Competition inhorse racing is varied since racetracks in the surrounding area differ in manyrespects. Some tracks only offer thoroughbred or harness horse racing; othershave both. Tracks have live racing seasons that may or may not overlap withneighboring tracks. Depending on the purse structure, tracks that are fartherapart may compete with each other more for quality horses than for patrons.

Live harnessracing also competes with simulcasts of thoroughbred and harness racing. Allracetracks in the region are involved with simulcasting. In addition, a numberof off-track betting parlors compete with track simulcasting activities. Withrespect to the simulcasting of our live harness races to tracks and otherlocations, our simulcast signals are in direct competition with live races atthe receiving track and other races being simulcast to the receiving location.

Within the Stateof Delaware, we face little direct live competition from the State’s other twotracks. Harrington Raceway, a south central Delaware fairgrounds track,conducts harness horse racing periodically between May and November. There isno overlap presently with our live race season. Delaware Park, a northernDelaware track, conducts thoroughbred horse racing from April throughmid-November. Its race season only overlaps with ours for approximately sixweeks each year.

We compete withharness and thoroughbred racing and simulcasting facilities in the neighboringstates of Pennsylvania, Maryland and New Jersey.  We also receive simulcast harness andthoroughbred races from approximately 80 race tracks.

Competition forour hotel varies and consists of local and regional competition. With respectto hotel accommodations only, we compete with a variety of nearby hotels in theDover area; however, few of these offer the luxury accommodations that weoffer.  Our hotel is the only hotel inthe Dover area, and one of only three hotels in the State, to receive the AAAFour Diamond Award.  With respect totrade shows, conferences, concerts and hotel room packages tied to these eventsor tied to our casino and other gaming offerings, we compete at a regionallevel with the other gaming operations referred to above and with conventioncenters and larger hotels in major cities such as Philadelphia, Washington,D.C., Baltimore and Wilmington.

In addition, ouractivities compete with other leisure, entertainment and recreationalactivities.

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**Growth Strategies**

We offer a uniquegaming and entertainment experience and make available to our patrons a numberof different options: slot machine gaming, live harness horse racing, finedining, national recording and entertainment acts, live boxing and simulcastingof thoroughbred and harness horse races from across North America. Our missionis simple: to provide all of our customers a premier gaming and entertainmentexperience with a focus on unparalleled customer service.  Our growth strategy is to foster customer loyaltyby following this mission, focus on our most valuable customers, expand andimprove the quality of our slot gaming positions, enhance our gaming productswith additional entertainment offerings and create an exciting gamingenvironment while focusing on areas that we believe will increase our revenueand profitability. Our efforts in this regard include the following:

*Increase The Utilization Of OurCasino*

We use asophisticated database marketing program to enable us to develop long-termrelationships with our patrons and to target promotions to specific customersegments.  Our Capital Club, a slotsplayers club and tracking system, allows us to identify customers and to rewardtheir level of play through various marketing programs. Membership in this clubcurrently stands at approximately 143,000 active patrons.  This state-of-the-art customer management andslot data system allows us to market our property more effectively and hasallowed for the conversion of a majority of our casino floor to ticket-in,ticket-out (cashless) technology.  As ofDecember 31, 2006, we have converted virtually our entire casino floor toticket-in, ticket-out technology.  Weexpect to increase attendance at both our casino and hotel through effectivepromotional use of our database and by making improvements to our facilitiesand gaming offerings based on what we learn from our Capital Club members. Forexample, we continue to add machines with differing denominations andprogressive slot machines with large jackpot sizes because they offer patrons amore exciting gaming experience. Additionally, we have recently 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 firstquarter of 2006, the State of Delaware passed legislation which allowed us toexpand our operating hours, add additional slot machines and provide freepromotional play through our recently enhanced slots marketing system.  We now operate 24 hours per day, except onSunday morning from 6am to noon.  Thelegislation increased the number of allowable slot machines for each of thethree licensed facilities in Delaware from 2,500 to 4,000.  Each slot machine in excess of 2,500 requirespayment of an annual fee of $1,100 per machine for the first 500 machinesadded, $700 per machine for the next 500 machines added, and $300 per machinefor the last 500 machines added.  In July of 2006, we converted 4,000 square-feet ofspace within our existing complex to gaming space and we added more than 200new machines. We have determined that there is a demand for additionalmachines and amenities and are proceeding with our plans to expand the casinofacility.  We are currently finalizing a bid package for the Phase VI expansion of ourcasino which is expected to include additional casino space, as well asrestaurant and retail offerings.

On May 30, 2003, a committee created by the Delaware House ofRepresentatives issued a favorable assessment as to the merits of conductingsports wagering in the State through its three video lottery agents.  The Committee concluded that sports gaming isfeasible in the State, outlined proposed structures for its implementation andprovided various financial projections. The report has been provided to the Delaware General Assembly forconsideration.  By Federal law, Delawareis the only state east of Montana, and one of only four states in the UnitedStates, where sports betting is legally permitted.  Enabling legislation needed to establishsports gaming operations at our property is being discussed by the Delawarelegislature.

*Capitalize On Our Luxury Hotel*

Our luxury hotelfacility, the Dover Downs Hotel, is located adjacent to our casino.  It is the only hotel in the Dover area, andone of only three hotels in the State, to receive the AAA Four DiamondAward.  Thefacility was completed in April 2002 and includes 232 rooms, amulti-purpose ballroom/concert hall, a fine dining restaurant, swimming pooland health spa.  Construction thatoccurred simultaneously with building the hotel included, among other things,building a new 425-seat buffet restaurant and renovating the enclosed harnessracing grandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including 

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concerts featuringprominent entertainers, live boxing, gourmet dining, trade shows andconferences, we are able to attract new patrons and lengthen the stay of currentpatrons.

On March 16, 2006, we announced an expansion plan that will morethan double the number of hotel rooms from 232 to 500, including eleven luxuryspa suites, and add a luxurious 6,000 square-foot spa to the Dover DownsHotel.  Construction began in the secondquarter of 2006 and is expected to be completed in the fall of 2007.  The estimated cost of the expansion is$53,600,000, of which approximately $16,400,000 was paid through 2006.

*Increase Wagering On Live HarnessHorse Racing Through Increased Purse Levels*

With a percentageof video lottery (slot) machine revenues supplementing the purses for thehorsemen, we have experienced dramatic increases in the amount of ourpurses.  By the end of our 2005-2006season, our average daily purse distribution increased to approximately$200,000 from $8,000 in 1995.  The resultis that we continue to attract higher quality horses.  We have prestigious events such as our annual“Progress Pace” with an estimated $400,000 purse, an event which attracts thecountry’s top three-year-old horses. Bettors are attracted to races with larger purses and typically wagermore on the higher quality and more predictable horses. We have also completedvarious upgrades to enhance the harness horse racing facilities, includingrenovations to the track and grounds, receiving barn and paddock areas and,more recently, our simulcast parlor which has state-of-the-art facilities thatallow year round wagering. We continue to focus on improvements that we believeallow us to increase attendance and wagering, including wagering on our eventsfrom other tracks and off-track wagering facilities that receive our racingsignal.

**Seasonality**

Our quarterlyoperating results are affected by weather and the general economic conditionsin the United States.  Our quarterlyoperating results are generally distributed evenly throughout the year.However, the results for any quarter are not necessarily indicative of resultsto be expected in any future period.

**Employees**

As of December 31,2006, we had 772 full-time employees and 116 part-time employees. We engagetemporary personnel to assist during our live harness racing season. None ofour employees are party to a collective bargaining agreement and we believethat our relationship with our employees is good.

#### **AvailableInformation**

We file annual,quarterly and current reports, information statements and other informationwith the United States Securities and Exchange Commission (the “SEC”). Thepublic may read and copy any materials we file with the SEC at the SEC’s PublicReference Room at 100 F Street, N.E., Washington, D.C. 20549. The public mayobtain information on the operation of the Public Reference Room by calling theSEC at 1-800-SEC-0330. The SEC also maintains an Internet site that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

#### **InternetAddress**

We maintain awebsite where additional information concerning our business and variousupcoming events can be found.  Theaddress of our Internet website is http://www.doverdowns.com. We providea link on our website, under Investor Relations, to our filings with the 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**

Disclosureregarding the most significant factors that may adversely affect our business,operations, industry or financial position or our future financial performanceis set forth under the section entitled, “Factors That May Affect OperatingResults; Forward-Looking Statements,” beginning on page 21.

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**Item 1B.         Unresolved Staff Comments**

We have notreceived any written comments that were issued more than 180 days beforeDecember 31, 2006, the end of the fiscal year covered by this report, from theSEC staff regarding our periodic or current reports under the SecuritiesExchange Act of 1934 that remain unresolved.

**Item 2.            Properties**

We own our principalexecutive office located in Dover, Delaware; Dover Downs Slots—our 97,000square-foot casino; the Dover Downs Hotel—featuring luxury accommodations withconference, banquet, fine dining, ballroom and concert hall facilities; and theDover Downs Raceway—indoor grandstands, betting and simulcasting parlors, allof which are located at our entertainment complex situated on approximately 69acres of land owned by us.

Our use of DVD’s 5/8-mile harness racing track is pursuant to aneasement granted to us by DVD which does not require the payment of any rent.Under the terms of the easement, we have exclusive use of the harness trackduring the period beginning 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.

** Intellectual Property**

We have variousregistered and common law trademark rights, including, but not limitedto, ”Dover Downs Gaming & Entertainment,” “Dover Downs,” “Dover DownsRaceway,” “Dover Downs Slots,” “Capital Club,” “Capital Gold,” “CapitalPlatinum,” “Dover Downs Hotel & Casino,” “Dover Downs is Cooking,” “SweetPerks,” “Gazebo Bar,” “Winners Circle,” “Michele’s at Dover Downs,” “RollinsCenter,” “$1 Million Jackpot Slot,” “Come Play!.”  We also have limited rights to use thenames and logos of other businesses in connection with promoting ourfacilities and special events at those facilities.  Due to the valueof our intellectual property rights for promotional purposes, it is ourintention to vigorously protect these rights, through litigation, ifnecessary.

**Item 3.            Legal Proceedings**

We are a party toordinary routine litigation incidental to our business.  Management does not believe that theresolution of any of these matters is likely to have a serious negative effecton our financial condition, cash flows or profitability.

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

No matters weresubmitted during the fourth quarter of the fiscal year covered by this reportto a vote of security holders.

**Part II**

**Item 5.****                                   MarketFor Registrant’s Common Equity, Related Stockholder Matters And IssuerPurchases Of Equity Securities**

Our common stockis listed on the New York Stock Exchange under the ticker symbol “DDE.”  Our Class A common stock is not publiclytraded but is freely convertible on a one-for-one basis into common stock atany time at the option of the holder thereof. As of February 28, 2007, there were 15,642,707 shares of common stockand 17,003,173 shares of Class A common stock outstanding.  There were 1,059 holders of record for commonstock and 14 holders of record for Class A common stock.

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The high and low sales prices for our common stock on theNew York Stock Exchange and the dividends declared per share for the yearsended December 31, 2006 and 2005 are detailed in the following table.

| Quarter Ended: | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|---------------------|------------|------------|------------|----------|------------|---------|------------|-------------------------|------------|
| 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      |   |
|                |       |       |       |     |       |    |       |
| December 31,  2005  |       | $          | 9.63       |     | $          | 7.97    |       | $                       | 0.040      |   |
| September 30,  2005 |       | $          | 10.09      |     | $          | 8.67    |       | $                       | 0.040      |   |
| June 30, 2005       |       | $          | 9.20       |     | $          | 7.67    |       | $                       | 0.040      |   |
| March 31, 2005      |       | $          | 9.72       |     | $          | 7.73    |       | $                       | 0.040      |   |

 

The amounts for2005 and the quarters ended March 31, 2006 and June 30, 2006 have been adjustedto reflect the three-for-two split of our common stock and Class A common stockwhich was effective June 15, 2006.

###### **Equity Compensation Plan Information**

We have a stock incentive planwhich provides for the grant of up to 2,250,000 shares of common stock to ourofficers and key employees through stock options and/or awards valued in wholeor in part by reference to our common stock, such as restricted stockawards.  Refer to NOTE8-Stockholders’ Equity to our consolidated financial statements includedelsewhere in this document for further discussion.  Securities authorized for issuance underequity compensation plans at December 31, 2006 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     |       | 953,749    |       | $                                                                                                                                                                | 6.86       |                                                                                                                      | 959,909    |                                                                                                                                                                                                                                 |
|                                                        |       |       |       |                                                                                                                                                             |       |                                                                                                                      |       |
| Equity  compensation plans not approved by security holders |       | —     |       | —                                                                                                                                                           |       | —                                                                                                                    |       |
| Total                                                       |       | 953,749    |       | $                                                                                                                                                                | 6.86       |                                                                                                                      | 959,909    |                                                                                                                                                                                                                                 |

 

OnOctober 23, 2002, our Board of Directors authorized the repurchase of up to3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization does notobligate us to acquire any specific number of shares and may be suspended atany time.  At December 31, 2006, we hadremaining repurchase authority of 2,668,733 shares.

On April 26, 2006,our Board of Directors approved a three-for-two split of both classes of our commonstock. 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 A common stockwere distributed to shareholders of record at the close of business on May 10,2006.  No fractional shares wereissued.  Shareholders were paid cash inlieu of any fractional shares.  All shareand per share amounts have been restated to give effect to the stock split.

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**CommonStock Performance**

The graph belowcompares the cumulative total return of the following:

·                  ourCommon Stock;

·                  theRussell 2000 Index; and

·                  anindex of peer companies.

The peer index weselected consists of the following companies engaged in the gamingbusiness:  Dover Downs Gaming &Entertainment, Inc., MTR Gaming Group, Inc., Ameristar Casinos, Inc.,Penn National Gaming, Inc., Churchill Downs, Inc., PinnacleEntertainment, Inc., and Magna Entertainment Corp.  The graph assumes that the value of theinvestment in our Common Stock and each index was 100 at April 1, 2002(the date of our spin-off from Dover Motorsports, Inc.) and all dividendswere reinvested.  The comparisons in thistable are required by the Securities and Exchange Commission and, therefore,are not intended to forecast or be necessarily indicative of any future returnon our Common Stock.

**COMPARISONOF 57 MONTH CUMULATIVE TOTAL RETURN***

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

**AND APEER GROUP**

 

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*                   $100 investedon April 1, 2002 in stock or index—including reinvestment of dividends.  Fiscal year ending December 31.

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**Item 6.            Selected Financial Data**

The table belowhas selected consolidated financial data from our consolidated financialstatements for the years ended December 31, 2006, 2005, 2004, 2003 and2002.  This information should be readtogether with *Management’s Discussion and Analysis ofFinancial Condition and Results of Operations* and our consolidatedfinancial statements and notes contained elsewhere in this document.

**Five Year Selected Financial Data**
| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Consolidated Statement of  Earnings Data  (in thousands, except per share data):** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Gaming                                                                               |       | $                                           | 220,412    |   | $ | 202,372 |   | $ | 193,922 |   | $ | 175,023 |   | $ | 193,723 |   |
| Other operating                                                                      |       | 16,039                                      |       | 14,480 |   | 13,822 |   | 13,809 |   | 12,752 |   |
|                                                                                 |       | 236,451                                     |       | 216,852 |   | 207,744 |   | 188,832 |   | 206,475 |   |
| Less — non-recurring  gaming charge (a)                                         |       | —                                      |       | — |   | 448 |   | — |   | — |   |
|                                                                                 |       | 236,451                                     |       | 216,852 |   | 207,296 |   | 188,832 |   | 206,475 |   |
| Expenses:                                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Gaming                                                                               |       | 163,288                                     |       | 151,973 |   | 152,725 |   | 138,423 |   | 148,817 |   |
| Non-recurring  gaming charge (a)                                                     |       | —                                      |       | — |   | 1,802 |   | — |   | — |   |
| Other operating                                                                      |       | 14,202                                      |       | 13,167 |   | 13,013 |   | 9,899 |   | 10,351 |   |
| General and  administrative                                                          |       | 5,905                                       |       | 4,765 |   | 4,603 |   | 4,317 |   | 5,061 |   |
| Depreciation                                                                         |       | 7,146                                       |       | 6,998 |   | 6,791 |   | 6,287 |   | 5,176 |   |
|                                                                                 |       | 190,541                                     |       | 176,903 |   | 178,934 |   | 158,926 |   | 169,405 |   |
|                                                                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Gain on sale of  shopping center (b)                                                 |       | —                                      |       | 5,837 |   | — |   | — |   | — |   |
| Operating earnings                                                                   |       | 45,910                                      |       | 45,786 |   | 28,362 |   | 29,906 |   | 37,070 |   |
| Interest expense                                                                     |       | (2,943                                      | )          | (1,875 | ) | (762 | ) | (842 | ) | (903 | ) |
| Earnings before income  taxes                                                        |       | 42,967                                      |       | 43,911 |   | 27,600 |   | 29,064 |   | 36,167 |   |
| Income taxes                                                                         |       | (17,639                                     | )          | (17,871 | ) | (11,219 | ) | (11,827 | ) | (14,725 | ) |
| Net earnings                                                                         |       | $                                           | 25,328     |   | $ | 26,040 |   | $ | 16,381 |   | $ | 17,237 |   | $ | 21,442 |   |
| ** **                                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per common  share (d):                                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | $                                           | 0.78       |   | $ | 0.73 |   | $ | 0.41 |   | $ | 0.43 |   | $ | 0.53 |   |
| Diluted                                                                              |       | $                                           | 0.77       |   | $ | 0.72 |   | $ | 0.41 |   | $ | 0.43 |   | $ | 0.53 |   |
|                                                                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Dividends declared per  common share (d)                                             |       | $                                           | 0.175      |   | $ | 0.16 |   | $ | 0.15 |   | $ | 0.13 |   | $ | 0.08 |   |
| ** **                                                                           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected Consolidated Operating  Data (unaudited):**                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average number of slot  machines                                                     |       | 2,599                                       |       | 2,500 |   | 2,432 |   | 2,000 |   | 2,000 |   |
| Casino square-footage                                                                |       | 97,000                                      |       | 91,000 |   | 91,000 |   | 80,000 |   | 80,000 |   |

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Consolidated  Balance Sheet Data (in thousands):** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                                      |       | $                     | 11,979     |   | $ | 9,216 |   | $ | 8,505 |   | $ | 8,917 |   | $ | 7,117 |   |
| Total assets                                         |       | 173,027               |       | 153,461 |   | 160,300 |   | 152,159 |   | 152,506 |   |
| Long-term debt (b)                                   |       | 59,425                |       | 24,075 |   | 51,950 |   | 31,225 |   | 40,890 |   |
| Total  stockholders’ equity (c)                 |       | 77,259                |       | 93,270 |   | 72,770 |   | 94,975 |   | 84,439 |   |
|                                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)             EffectiveDecember 2004, we changed our policy relating to our point loyalty program toallow points earned by customers to be redeemed for cash under certaincircumstances.  As a result, we recorded a non-recurring charge of $2,250,000($1,338,000 after income tax benefit) inthe fourth quarter of 2004 to record the net impact of the program change.  The estimated amount of points redeemable forcash was recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise was recorded as gaming expense.

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(b)            On December 28, 2005, we closed on the sale of ashopping center we owned in Dover, Delaware. The sales price was $12,450,000 and we recognized a gain on the sale of$5,837,000 ($3,461,000 after income taxes). The proceeds from the sale were used to pay down outstanding amounts on ourcredit facility.

(c)             OnNovember 10, 2004, we commenced a tender offer to purchase up to 1,560,632shares of our common stock and up to 2,411,259 shares of our Class A commonstock at a fixed price of $8.00 per share. The offer expired on December 10, 2004. We purchased 1,560,632 shares of our common stock and 2,400,000 sharesof our Class A common stock for $32,045,000, including expenses, in connectionwith the tender offer.

On December 19, 2005, we commenced a tender offer topurchase up to 1,595,906 shares of our common stock and up to 1,988,202 sharesof our Class A common stock at a fixed price of $9.67 per share.  The offer expired on January 19, 2006. Wepurchased 1,595,906 shares of our common stock and 1,987,500 shares of ourClass A common stock for $34,996,000, including expenses, in connection withthe tender offer.

(d)         OnApril 26, 2006, our Board of Directors approved a three-for-two split of bothclasses of our common stock. The split was effected in the form of a stockdividend by issuing one additional share of stock for every two shares of stockheld. On June 15, 2006, 4,967,650 shares of common stock and 5,837,343 sharesof Class A common stock were distributed to shareholders of record at the closeof business on May 10, 2006.  No fractionalshares were issued.  Shareholders werepaid cash in lieu of any fractional shares. All share and per share amounts have been restated to give effect to thestock split.

### **Item7.****                                   Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

The followingdiscussion is based upon and should be read together with the consolidatedfinancial statements and notes thereto included elsewhere in this document.

Dover Downs Gaming& Entertainment, Inc. is a diversified gaming and entertainment companywhose operations consist of Dover Downs Slots — a 97,000 square-foot videolottery (slots) casino complex; the Dover Downs Hotel — featuring luxuryaccommodations with conference, banquet, fine dining, ballroom and concert hallfacilities; and Dover Downs Raceway — a harness racing track with pari-mutuelwagering on live and simulcast horse races.

Approximately 90%of our revenue is derived from video lottery (slot) machine win.  Several factors contribute to the videolottery (slot) machine win for any gaming company, including, but not limitedto:

·                  Proximityto major population bases,

·                  Competition inour market,

·                  The quantity andtypes of slot machines available,

·                  The quality ofthe physical property,

·                  Other amenitiesoffered on site,

·                  Customer servicelevels, and

·                  Marketingprograms.

We believe that we hold astrong position in each of these areas. Our entertainment complex is located in Dover, the capital of the Stateof Delaware. We draw patrons from several major metropolitan areas.Philadelphia, Baltimore and Washington, D.C. are all within a two hour drive.According to the 2000 United States Census, approximately 32.8 million peoplelive within 150 miles of our complex. There are significant barriers to entry related to the gaming businessin Delaware.  By law, only three existinghorse racing facilities in the State are allowed to have a gaming license.  Our property, designed and developed with theassistance of Caesars, is similar to properties found in the country’s largestgaming markets.  We offer the only luxuryhotel in the Delaware gaming market, providing a strong marketing tool,especially to higher-end players.  Wealso utilize our recently improved slot marketing system to allow for the mostefficient marketing programs and the highest levels of customer service.

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Because all of ouroperations are located at one facility, we face the risk of increasedcompetition from the legalization of new or additional gaming venues.  We have therefore focused on creating the region’spremier gaming destination and building and rewarding customer loyalty throughinnovative marketing efforts and unparalleled customer service.

**Results of Operations**

Gaming revenuesrepresent (i) the net win from video lottery (slot) machine wins and losses and(ii) commissions from pari-mutuel wagering. Other operating revenues consist of hotel rooms revenue, food andbeverage sales and other miscellaneous income. Revenues do not include the retail amount of hotel rooms, food andbeverage and other miscellaneous goods and services provided without charge tocustomers as promotional items. The estimated direct cost of providing theseitems has been charged to the casino through interdepartmental allocations andis included in gaming expenses in the consolidated statement of earnings.

For the videolottery operations, the difference between the amount wagered by bettors andthe amount paid out to bettors is referred to as the win. The win is includedin the amount recorded in our consolidated financial statements as gamingrevenue. The Delaware State Lottery Office sweeps the win from the videolottery operations, collects the State’s share of the win and the amount due tothe vendors under contract with the State who provide the video lottery (slot)machines and associated computer systems, collects the amount allocable topurses for harness horse racing and remits the remainder to us as ourcommission for acting as a Licensed Agent. Gaming expenses include the amountscollected by the State (i) for the State’s share of the win, (ii) forremittance to the providers of the video lottery (slot) machines and associatedcomputer systems, and (iii) for harness horse racing purses. We recognizerevenues from pari-mutuel commissions earned from live harness horse racing andimporting of simulcast signals from other race tracks when the race occurs.Revenues from hotel rooms, food and beverage sales and other miscellaneousincome are recognized at the time the service is provided.

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

Gaming revenues increased by $18,040,000, or 8.9%, to$220,412,000 in 2006, primarily the result of increased play in our casino. Webelieve that the increase in casino play can be attributed to theconversion of 4,000 square-feet of spacewithin our existing complex to gaming space which allowed us to add more than200 new machines, our marketing efforts using our player database whichallows us to target specific customer segments, and our efforts to provide ourcustomers with enhanced video lottery (slot) products and other amenities.  Our average number of machines increased from2,500 in 2005 to 2,599 in 2006.

Other operating revenues were $16,039,000 in 2006 ascompared to $14,480,000 in 2005.  Netrooms revenue increased $617,000 in 2006 compared to 2005 primarily due to anincrease in cash sales and fewer rooms being provided to customers on acomplimentary basis.  Net food andbeverage revenues increased $1,168,000 to $10,946,000 from $9,778,000 in 2005primarily due to an increase in sales at our premium buffet restaurant, anincrease in banquet sales and the opening of a new coffee shop in our hotellobby during the second quarter of 2006. The remainder of the other operating revenue increase resulted mainlyfrom an increase in concert ticket sales. Partially offsetting these increases was a loss of $752,000 of rentalincome 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.  Promotional allowancesrepresented 48.6% and 51.1% of gross other operating revenues in 2006 and 2005,respectively.

Gaming expenses increased by $11,315,000, or 7.4%,reflecting the higher gaming revenues.  Amounts retained by the State ofDelaware and the amount collected by the State for payment to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems increased by $6,793,000 and $1,629,000,respectively.  Additionally, amountsallocated from the video lottery operation for harness horse racing pursesincreased from $23,292,000 in 2005 to $25,333,000 in 2006.

Other operating expenses increased by $1,035,000, or 7.9%, slightlyless than the percentage increase in revenues. Expenses related to our rooms operations increased by $236,000.  Expenses related to our food and beverageoperations were $11,815,000 in 2006 as compared to $10,999,000 in 2005.  The increase resulted primarily from higherpayroll costs and increased food costs and supplies expenses due to theincrease in food and beverage sales. Additionally, fewer 

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expenseswere allocated to the gaming operations through interdepartmental charges in2006 since a lower percentage of gross revenues represent promotional itemsprovided to gaming customers on a complimentary basis.

General and administrative expenses increased by$1,140,000 to $5,905,000 from $4,765,000 in 2005 primarily the result ofstock-based compensation expense from the adoption of Financial AccountingStandards Board (“FASB”) Statement No. 123R effective January 1, 2006, higherwages and benefits costs, increased legal fees and the write-off of officeexpansion costs.

Depreciation expense increased slightly to $7,146,000 in2006 from $6,998,000 in 2005.  Theincrease resulted primarily from the improvements to our heating, cooling andlighting systems which were placed in service during the later part of 2006 andthe expansion of our gaming space within our existing facility.

Interest expense increased by $1,068,000 due to anincrease in our average interest rate from 4.2% during 2005 to 5.9% during 2006and higher average outstanding borrowings on our credit facility during 2006 ascompared to 2005 due primarily to our self-tender in January 2006.

Our effective income tax rates were 41.1% and 40.7% forthe years ended December 31, 2006 and 2005, respectively.  The increase in the effective rate was dueprimarily to the non-deductibility of stock-based compensation expense recordedas a result of adopting FASB Statement No. 123R.

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

On December 28, 2005, we closed on the sale of ashopping center we owned in Dover, Delaware. The sales price was $12,450,000 and we recognized a gain on the sale of$5,837,000 ($3,461,000 after income taxes). We believe that excluding the impact of this item will enhancecomparative analysis of our operating results. The following table reconciles and compares results reported inaccordance with Generally Accepted Accounting Principles (“GAAP”) for 2006 and2005 with results excluding the impact of the sale of the shopping center in2005:

|                                                                     | ** ** | **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 gainon sale of the shopping center in 2005, adjusted net earnings in 2006 increased$2,749,000, or 12.2%, 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.

*Year Ended December 31, 2005 vs.Year Ended December 31, 2004*

Gaming revenues increased by $8,450,000, or 4.4%, to$202,372,000 in 2005, primarily the result of increased play in ourcasino.  During the first quarter of2004, we added 500 new video lottery (slot) machines which increased ouraverage number of machines from 2,432 in 2004 to 2,500 in 2005.

Other operating revenues were $14,480,000 in 2005 ascompared to $13,822,000 in 2004.  Netrooms revenue increased $542,000 in 2005 as compared to 2004 primarily due toan increase in cash sales and fewer rooms being provided to customers on acomplimentary basis.  Net food andbeverage revenues increased $680,000 to $9,778,000 from $9,098,000 in 2004primarily due to higher casino attendance. Partially offsetting these increases was a decrease in concert revenuesas a result of us promoting fewer shows in 2005 as compared to 2004, includinga large outdoor concert promoted in 2004 that generated revenues of $840,000which was not promoted in 2005.  Otheroperating revenues do not include the retail amount of promotional allowanceswhich are provided to customers on a complimentary basis of $15,103,000 and$19,973,000 in 2005 and 2004, respectively. The decrease in promotional allowances was primarily 

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dueto a decrease in retail room rates. Promotional allowances represented 51% and 59% of gross other operatingrevenues in 2005 and 2004, respectively.

Gaming expenses decreased by $752,000 primarilydue to the fact that we no longer incurexpenses associated with a management agreement with Caesars that expired onDecember 28, 2004.  During 2004, we expensed $4,448,000 ingaming expenses pursuant to this agreement. Additionally, we reduced ourmarketing and advertising costs in 2005 as compared to 2004.  Other gaming expenses increased as a resultof our increased slot win.  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 $3,279,000and $979,000, respectively.  Amountsallocated from the video lottery operation for harness horse racing pursesincreased from $22,269,000 in 2004 to $23,292,000 in 2005.

Other operating expenses increased by $154,000, or 1.2%.  Expenses related to our food and beverageoperations were $10,999,000 in 2005 as compared to $9,669,000 in 2004.  The increase resulted primarily from higherpayroll and related employee costs and food costs necessary to support addedamenities at our facility, the increase in food and beverage sales and theaddition of higher quality menu items. Additionally, fewer expenses wereallocated to the gaming operations through interdepartmental charges in 2005since a lower percentage of gross revenues represent promotional items providedto gaming customers on a complimentary basis as compared to 2004.  Partially offsetting these increases was adecrease in concert expenses of $2,599,000 as a result of us promoting fewershows in 2005 as compared to 2004, including a large outdoor concert promotedin 2004 that was not promoted in 2005.

General and administrative expenses increased by $162,000 to $4,765,000from $4,603,000 in 2004 primarily the result of higher wages andbenefits and pension costs.

Depreciation expense increased to $6,998,000 in 2005from $6,791,000 in 2004 primarily due to assets being placed in service relatedto the continued conversion of video lottery (slot) machines to ticket-in,ticket-out (cashless) technology.

Interest expense increased by $1,113,000, primarily dueto the increase in average outstanding borrowings during the year under ourcredit facility resulting from our self tender in the fourth quarter of 2004and an increase in our average interest rate from 2.33% during 2004 to 4.23%during 2005.

Our effective income tax rates were 40.7% and 40.6% for the years endedDecember 31, 2005 and 2004, respectively.

Net earnings were$26,040,000 in 2005as compared to$16,381,000 in 2004, an increase of $9,659,000, or 59.0%.

On December 28, 2005, we closed on the sale of ashopping center we owned in Dover, Delaware. The sales price was $12,450,000 and we recognized a gain on the sale of$5,837,000 ($3,461,000 after income taxes). Additionally, 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.  Webelieve that excluding the impact of these items will enhance comparativeanalysis of our operating results.

Thefollowing table reconciles and compares results reported in accordance withGAAP for 2005 and 2004 with results excluding the impact of the sale of theshopping center in 2005 and the change in our point loyalty program in 2004: 

|                                                                         | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| GAAP net  earnings                                                      |       | $          | 26,040,000 |      | $          | 16,381,000 |   |
| Gain on sale of  shopping center, net of income taxes of $2,376,000     |       | (3,461,000 | )          | —    |       |
| Non-recurring  charge for points, net of income tax benefit of $912,000 |       | —     |       | 1,338,000 |       |
| Adjusted net earnings                                                   |       | $          | 22,579,000 |      | $          | 17,719,000 |   |

 

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|                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| GAAP net  earnings per common share — diluted                   |       | $        | 0.72       |     | $          | 0.41 |   |
| Gain on sale of  shopping center, net of income taxes of $0.07       |       | (0.09    | )          | —   |       |
| Non-recurring  charge for points, net of income tax benefit of $0.02 |       | —   |       | 0.04     |       |
| Adjusted net earnings  per common share — diluted               |       | $        | 0.63       |     | $          | 0.45 |   |

 

Excluding the gainon sale of the shopping center in 2005 and the net, non-recurring charge forthe 2004 change in our point loyalty program, adjusted net earnings in 2005increased $4,860,000, or 27.4%, to $22,579,000 compared to 2004 adjusted netearnings of $17,719,000.  The increasewas primarily due to the improved results for our gaming operations thatresulted from an increase in slot win and the elimination of the Caesars’management fee, partially offset by increased general and administrative,depreciation and interest expenses.

**Liquidity and Capital Resources**

Net cash providedby operating activities was $26,791,000 for the year ended December 31, 2006compared to $29,521,000 for the year ended December 31, 2005.  The decrease was primarily due to the timingof income tax payments related to the gain on sale of a shopping center.  We sold the shopping center in December 2005;however, the income taxes on the gain on sale were paid in 2006.

Net cash used ininvesting activities was $22,065,000 for the year ended December 31, 2006compared to net cash provided by investing activities of $6,406,000 for theyear ended December 31, 2005.  Capitalexpenditures of $22,065,000 for 2006 related primarily to the Dover Downs Hotel expansion and theimprovements to the heating, cooling and lighting systems for our entireentertainment complex.  Capitalexpenditures of $5,512,000 for 2005 related primarily to the conversion of video lottery (slot) machinesto ticket-in, ticket-out (cashless) technology, payments related to ourcustomer management and slot data system and the addition of new harness tracklighting.  Proceeds from the saleof a shopping center, net of transaction costs, were $11,918,000 and includedin cash provided by investing activities for the year ended December 31, 2005.

Net cash used infinancing activities was $4,692,000 for the year ended December 31, 2006compared to $33,629,000 for the year ended December 31, 2005.  We had net borrowings under our creditfacility of $35,350,000 during 2006 primarily to fund stock repurchases of$35,052,000.  We did not repurchase anyof our stock in 2005.  We made netrepayments under our credit facility of $27,875,000 during 2005 which includedthe use of $11,918,000 of proceeds from the sale of a shopping center.  We paid $5,510,000 and $5,737,000 in cashdividends during 2006 and 2005, respectively.

On January 24, 2007, our Board of Directors declared a quarterly cashdividend on both classes of common stock of $0.045 per share.  The dividend is payable on March 10, 2007 toshareholders of record at the close of business on February 10, 2007.

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. No purchases of our equity securities were made pursuant to thisauthorization during the years ended December 31, 2006 and 2005.  At December 31, 2006, we had remainingrepurchase authority of 2,668,733 shares.

On March 16, 2006, we announced an expansion planthat will more than double the number of hotel rooms from 232 to 500, includingeleven luxury spa suites, and add a luxurious 6,000 square-foot spa to theDover Downs Hotel.  Construction began inthe second quarter of 2006 and is expected to be completed in the fall of2007.  The estimated cost of the hotelexpansion is $53,600,000, of which approximately $16,400,000 was paid through2006 with the remainder expected to be paid in 2007.  We arecurrently finalizing a bid package for the Phase VI expansion of our casinowhich is expected to include additional casino space, as well as restaurant andretail offerings.  Although we arecurrently unable to estimate the cost of the casino expansion, approximately$350,000 was paid in 2006 with the remainder of the expenditures expected to bepaid in 2007 and early 2008.  Based oncurrent business conditions, we expect to make additional capital expenditures ofapproximately $5,500,000 during 2007, primarily for casino equipment andimprovements, an improved surveillance system and improvements in our

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foodand beverage departments.  Additionally, we expect to contributeapproximately $1,000,000 to our pension plans in 2007.

OnDecember 19, 2005, we commenced a tender offer to purchase up to 1,595,906shares of our common stock and up to 1,988,202 shares of our Class A commonstock at a fixed price of $9.67 per share. The offer expired on January 19, 2006. We purchased 1,595,906 shares ofour common stock and 1,987,500 shares of our Class A common stock for$34,996,000, including expenses, in connection with the tender offer. Thetender offer was funded with borrowings on our unsecured revolving line ofcredit.

We have a$105,000,000 credit facility with Wilmington Trust Company that expires onApril 17, 2011.  Interest is based, atour option, upon LIBOR plus a margin that varies between 75 and 125 basispoints depending on the ratio of funded debt to earnings before interest,taxes, depreciation and amortization (the “leverage ratio”) or the base rate(the greater of the prime rate or the federal funds rate plus 0.5%) less amargin that varies between 50 and 100 basis points depending on the leverageratio.  The credit facility has minimumnet 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 expansion) and other generalcorporate purposes.  At December 31,2006, we were in compliance with all terms of the facility and there was$59,425,000 outstanding at a weighted average interest rate of 6.2%. AtDecember 31, 2006, $45,575,000 was available pursuant to the facility.

We expect that our net cash flows from operating activities and fundsavailable from our credit facility will be sufficient to provide for ourworking capital needs and capital spending requirements at least through thenext twelve months, as well as any cash dividends our Board of Directors maydeclare.  We expect cash flows fromoperating activities and funds available from our credit facility to alsoprovide for long-term liquidity.

The introductionor expansion of gaming in and around our market area could have a materialadverse effect on our cash flows and results of operations.  See Part I, Item 1 — Business includedelsewhere in this document for further discussion.

#### **ContractualObligations**

At December 31,2006, we had the following contractual obligations:

 
| ** **                                               | ** ** | ** ** | ** **  | **Payments Due by Period** | ** ** |
|----------------------------------------------------------|------------|------------|-------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **Total**  | ** **  | **2007**                                  | ** ** | **2008 — 2009** | ** ** | **2010 — 2011** | ** ** | **Thereafter** | ** ** |
| Revolving line  of credit                                |       | $          | 59,425,000  |                                      | $          | — |   | $ | — |   | $ | 59,425,000 |   | $ | — |   |
| Estimated  interest payments on revolving line of credit |       | 15,900,000 |        | 3,700,000                                 |       | 7,400,000 |   | 4,800,000 |   | — |   |
| Pension  contributions                                   |       | 5,000,000  |        | 1,000,000                                 |       | 2,000,000 |   | 2,000,000 |   | — |   |
| Purchase  obligations                                    |       | 37,200,000 |        | 37,200,000                                |       | — |   | — |   | — |   |
|                                                     |       | $          | 117,525,000 |                                      | $          | 41,900,000 |   | $ | 9,400,000 |   | $ | 66,225,000 |   | $ | — |   |

 

The future interest payments on our revolving credit agreement wereestimated using the current outstanding principal as of December 31, 2006 andrelated interest rates.

Although we have no required minimum contribution related to ourpension plans, we expect to contribute approximately $1,000,000 per year to theplans.

At December 31,2006, we have purchase obligations related to the expansion of the Dover Downs Hotel. On March 16, 2006, we announcedan expansion plan that will more than double the number of hotel rooms from 232to 500, including eleven luxury spa suites, and add a luxurious 6,000square-foot spa to the Dover Downs Hotel. Construction began in the second quarter of 2006 and is expected to becompleted in the fall of 2007.  Theestimated cost of the expansion is $53,600,000, of which approximately$16,400,000 was paid through 2006.

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#### **RelatedParty Transactions**

See NOTE 9 —Related Party Transactions to our consolidated financial statements includedelsewhere in this document for a full description of related partytransactions.

#### **CriticalAccounting Policies**

The accountingpolicies described below are those considered critical by us in preparing ourconsolidated financial statements and/or include significant estimates made bymanagement using information available at the time the estimates are made.  As described below, these estimates couldchange materially if different information or assumptions were used.

*Points Program*

We currently havea point loyalty program for our video lottery customers which allows them toearn points based on the volume of their video lottery activity.  The points may be redeemed for variousservices and merchandise throughout the gaming facility and for cash undercertain circumstances.  All reward pointsearned by customers are expensed in the period they are earned.  The estimated amount of points redeemable forcash is recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise is recorded as gaming expense.  In determining the amount of the liability,which was $2,010,000 and $2,289,000, respectively, at December 31, 2006 and2005, we estimate a redemption rate, a cost of rewards to be offered and themix of cash, goods and services for which reward points will be redeemed.  We use historical data to estimate those amounts.

*Property and Equipment*

Property andequipment are recorded at cost. Depreciation is provided for financialreporting purposes using the straight-line method over estimated useful livesranging from 5 to 10 years for furniture, fixtures and equipment and up to 40years for facilities.  These estimatesrequire assumptions that are believed to be reasonable.  We perform reviews for impairment oflong-lived assets whenever events or changes in circumstances indicate that thecarrying 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.

**Recent Accounting Pronouncements**

See NOTE 2—Summaryof Significant Accounting Policies****to ourconsolidated financial statements included elsewhere in this document for afull description of recent accounting pronouncements including the expecteddates of adoption and effects on results of operations and financial condition.

### **FactorsThat May Affect Operating Results; Forward-Looking Statements**

In addition tohistorical information, this Annual Report on Form 10-K includes forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934, as amended, relating to our financial condition, profitability,liquidity, resources, business outlook, proposed acquisitions, market forces,corporate strategies, consumer preferences, contractual commitments, legalmatters, capital requirements and other matters. The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements. To comply with the terms of the safe harbor, we note that a varietyof factors could cause our actual results and experience to differsubstantially from the anticipated results or other expectations expressed inour forward-looking statements. When words and expressions such as: “believes,”“expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,”“aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,”“might,” “likely,” “enable” or similar words or expressions are used in thisdocument, as well as statements containing phrases such as “in our view,” “therecan be no assurance,” “although no assurance can be given” or “there is no wayto anticipate with certainty,” forward-looking statements are being made.

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Variousrisks and uncertainties may affect the operation, performance, development andresults of our business and could cause future outcomes to differ materiallyfrom those set forth in our forward-looking statements, including the followingfactors:

·                  successof any expansion to or renovation of our existing facilities or changes in ourgrowth strategies;

·                  expansionof gaming in neighboring jurisdications;

·                  anticipatedtrends in the gaming industry;

·                  patrondemographics;

·                  generalmarket and economic conditions, including consumer and corporate spendingsentiment;

·                  ourability to finance future business requirements;

·                  ourability to effectively compete in the marketplace;

·                  theavailability of adequate levels of insurance;

·                  ourdevelopment and potential acquisition of new facilities;

·                  ourability to successfully integrate acquired companies and businesses;

·                  managementretention and development;

·                  changesin Federal, state, and local laws and regulations, including environmental,gaming license and tax legislation;

·                  theeffect of weather conditions or travel on attendance at our facilities;

·                  military orother government actions; and

·                  nationalor local catastrophic events.

We undertake no obligation to publicly update or reviseany forward-looking statements as a result of future developments, events orconditions.  New risk factors emerge fromtime to time and it is not possible for us to predict all such risk factors,nor can we assess the impact of all such risk factors on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ significantly 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.

*Our Gaming Activities CompeteDirectly With Other Gaming Facilities And Other Entertainment Businesses*

We compete in local and regional markets with horse tracks, off-trackbetting parlors, state run lotteries, casinos and other gaming facilities.  We cannot be certain that we will maintainour market share or compete more 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 additional gamingvenues in Delaware, could have a material adverse effect on our cash flows andresults 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, in2005, the Maryland Senate passed a bill providing for various gaming venues forthe third straight year and for the third straight year could not reach anyconsensus with the Maryland House. Accordingly, no legislation was passed.Approximately 70% of our Capital Club member slot win comes from out 

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of state patrons.  In July2004, Pennsylvania adopted legislation which authorizes up to 61,000 slotmachines at various existing and proposed venues throughout the state.  It is difficult for us to predict the effectthat such legislation will have on us, but several facilities in Pennsylvaniabegan operations by the end of 2006. Pennsylvania has one of the highest effective tax rates on slot machinegaming in the country and charges an up front $50,000,000 license fee to thehorse racing and casino venues that are granted a gaming license.  Management has estimated that slot win fromPennsylvania patrons represents approximately****5%of our total slot win.

*All Of Our Facilities Are In OneLocation*

Our facilities arelocated adjacent to one another at a single location in Dover, Delaware. Anyprolonged disruption of operations at these facilities due to damage ordestruction or other reasons could adversely affect our financial condition andresults of operations. We maintain property and business interruption insuranceto protect against such types of disruption, but there can be no assurance thatthe proceeds of such insurance would be adequate to repair or rebuild ourfacilities or to compensate us for lost profits.

*The Revocation, Suspension OrModification Of Our Gaming Licenses Would Adversely Affect Our Gaming Business*

The Delaware StateLottery Office and the Delaware Harness Racing Commission regulate our gamingoperations. Our license from the Commission must be renewed on an annual basis.To keep our license for video lottery (slot) machine gaming, we must remainlicensed for harness horse racing by the Commission and conduct at least 80live race days each racing season, subject to the availability of harness racehorses. The Commission has broad discretion to reject any application for alicense or suspend or revoke a license once it is issued. The Director of theDelaware State Lottery Office (the “Lottery Director”) has broad discretion torevoke, suspend or modify the terms of a video lottery license. Anymodification or termination of existing licensing regulations or anyrevocation, suspension or modification of our licenses could adversely affectour business, financial condition and overall profitability.

*Our Gaming Activities Are SubjectTo Extensive Government Regulation And Any Additional Government Regulation OrTaxation Of Gaming Activities Could Substantially Reduce Our Revenue Or Profit*

Video lottery(slot) machine gaming, harness horse racing and pari-mutuel wagering aresubject to extensive government regulation. Delaware law regulates the win weare entitled to retain and the percentage of commission we are entitled toreceive from our gaming revenues, which comprises a significant portion of ouroverall revenues. The State granted us a license to conduct video lottery(slot) machine operations and a license to conduct harness horse races andpari-mutuel wagering. The laws under which these licenses are granted could bemodified or repealed at any time and we could be required to terminate ourgaming operations. If we are required to terminate our gaming operations or ifthe amount of the commission we receive from the State for conducting ourgaming operations is decreased, our business operations and overallprofitability would be significantly impaired.

We believe thatthe prospect of significant additional tax revenue is one of the primaryreasons why jurisdictions have legalized gaming. As a result, gaming operatorsare typically subject to significant taxes and fees in addition to normalfederal and state corporate income taxes. These taxes and fees are subject toincrease at any time. We pay substantial taxes and fees with respect to ouroperations and will likely incur similar burdens in any other jurisdiction inwhich we may conduct gaming operations in the future. Any material increase intaxes or fees, or the adoption of additional taxes or fees, may have a materialadverse effect on our future financial results.

We are subject tovarious federal, state and local laws and regulations in addition to gamingregulations. These laws and regulations include, but are not limited to,restrictions and conditions concerning alcoholic beverages, environmentalmatters, employees, currency transactions, taxation, zoning and building codes,and marketing and advertising. Such laws and regulations are always subject tochange, can be interpreted differently in the future, and new laws and regulationsmay be enacted which could adversely affect the tax, regulatory, operational orother aspects of our gaming operations. Furthermore, noncompliance with one ormore of these laws and regulations could result in the imposition ofsubstantial penalties against us.

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*We Do Not Own Or Lease Our VideoLottery (Slot) Machines And Related Technology*

We do not own orlease the video lottery (slot) machines or computer systems used by the Statein connection with our video lottery gaming operations.  The Lottery Director enters into contractsdirectly with the providers of the video lottery (slot) machines and computersystems. The State purchases or leases all equipment and the Lottery Directorlicenses all technology providers. Our operations could be disrupted if alicensed technology provider violates its agreement with the State or ceases tobe licensed for any reason. Such an event would be outside of our control andcould adversely affect our gaming revenues.

*****Due to OurConcentrated Stock Ownership, Stockholders May Have No Effective VoiceIn Our Management*****

We have elected tobe treated as a “controlled corporation” as defined by New York Stock ExchangeRule 303A.  We are a controlled corporation because a single person, HenryB. Tippie, the Chairman of our Board of Directors, controls in excess of fiftypercent of our voting power. This means that he has the ability to determinethe outcome of the election of directors at our annual meetings and todetermine the outcome of many significant corporate transactions, many of whichonly require the approval of a majority of our voting power. Such aconcentration of voting power could also have the effect of delaying orpreventing a third party from acquiring us at a premium.  Inaddition, as a controlled corporation, we are not required to comply withcertain New York Stock Exchange rules.

**Item 7A.         Quantitative And QualitativeDisclosure About Market Risk**

We do not utilize financial instruments fortrading purposes and hold no derivative financial instruments which couldexpose us to market risk.  Our exposureto market risks related to fluctuations in interest rates is limited to ourvariable rate borrowings of $59,425,000 at December 31, 2006 under ourrevolving credit facility.  A change ininterest rates of one percent on the balance outstanding at December 31, 2006would cause a change in total annual interest costs of $594,000.  The carrying values of these borrowingsapproximate their fair values at December 31, 2006.

#### **Item8.      FinancialStatements And Supplementary Data**

Our consolidated financial statements and the Report of IndependentRegistered Public Accounting Firm included in this report are shown on theIndex to Consolidated Financial Statements on page 32.

**Item 9.****                                ChangesIn And Disagreements With Accountants On Accounting And Financial Disclosure**

None.

**Item 9A.         Controls and Procedures**

*(a) Evaluation of DisclosureControls and Procedures*

We haveestablished disclosure controls and procedures to ensure that materialinformation relating to us, including our consolidated subsidiaries, is madeknown to the officers who certify our financial reports and to other members ofsenior management and the Board of Directors.

Based on theirevaluation as of December 31, 2006, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) areeffective to ensure that the information we are required to disclose in thereports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms.

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*(b) Changes in Internal ControlOver Financial Reporting*

There have been nochanges in our internal control over financial reporting during the fiscalquarter ended December 31, 2006 that have materially affected, or that arereasonably likely to materially affect, our internal control over financialreporting.

*(c) Management’s Report onInternal Control Over Financial Reporting*

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  We conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation, managementconcluded that our internal control over financial reporting was effective asof December 31, 2006.  Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by KPMG LLP, an independentregistered public accounting firm, as stated in their report which is includedherein.

# *(d) Report of Independent RegisteredPublic Accounting Firm*

The Board of Directorsand StockholdersDover Downs Gaming & Entertainment, Inc.:

We have auditedmanagement’s assessment, included in the accompanying *Management’sReport on Internal Control Over Financial Reporting (Item 9A(c)),*thatDover Downs Gaming & Entertainment, Inc. (the Company) maintained effectiveinternal control over financial reporting as of December 31, 2006, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures 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 reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

25

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In our opinion,management’s assessment that Dover Downs Gaming & Entertainment, Inc.maintained effective internal control over financial reporting as of December31, 2006, is fairly stated, in all material respects, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  Also, in our opinion, DoverDowns Gaming & Entertainment, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31, 2006,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of Dover DownsGaming & Entertainment, Inc. and subsidiaries as of December 31, 2006 and2005, and the related consolidated statements of earnings and cash flows foreach of the years in the three-year period ended December 31, 2006, and ourreport dated March 6, 2007 expressed an unqualified opinion on thoseconsolidated financial statements.

##                                                           KPMGLLP

Philadelphia,PennsylvaniaMarch 6, 2007

**Item 9B.         Other Information**

None.

**Part III**

**Item 10.         Directors, Executive Officers AndCorporate Governance**

Except aspresented below, biographical information relating to our directors andexecutive officers, information regarding our audit committee financial expertsand information on Section 16(a) Beneficial Ownership Reporting Compliancecalled for by this Item 10 are incorporated by reference to our Proxy Statementto be filed pursuant to Regulation 14A for the Annual Meeting of Stockholdersto be held on April 25, 2007.

We have a Code ofBusiness Conduct applicable to all of our employees, including our ChiefExecutive Officer and Chief Financial Officer. We also have a Code of Business Conduct and Ethics for Directors andExecutive Officers and Related Party Transactions Policy applicable to alldirectors and executive officers.  Copiesof these Codes and other corporate governance documents are available on ourwebsite at http://www.doverdowns.com under the heading InvestorRelations. We will post on our website any amendments to, or waivers from,these Codes as required by law.

Executive Officers of theRegistrant.  As ofDecember 31, 2006, our executive officers were:
| **Name**             | ** ** | ** **                                                         | ** ** | **Position** | ** ** | **Age**       | ** ** | **Term of Office** |
|----------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|---------------|------------|--------------------|
| Denis McGlynn        |       | President and Chief  Executive Officer                             |       | 60           |       | 11/79 to date |
|                 |       |                                                               |       |         |       |          |
| Edward J. Sutor      |       | Executive Vice  President and Chief Operating Officer              |       | 57           |       | 3/99 to date  |
|                 |       |                                                               |       |         |       |          |
| Timothy R. Horne     |       | Sr. Vice  President-Finance, Treasurer and Chief Financial Officer |       | 40           |       | 11/96 to date |
|                 |       |                                                               |       |         |       |          |
| Klaus M.  Belohoubek |       | Sr. Vice  President-General Counsel and Secretary                  |       | 47           |       | 7/99 to date  |

 

26

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

Denis McGlynn hasserved as our President and Chief Executive Officer for 27 years.  Mr. McGlynn also serves as President andChief Executive Officer to DVD.

Edward J. Sutorhas been Executive Vice President and Chief Operating Officer since 1999.  Previously, Mr. Sutor served as Senior VicePresident of Finance at Caesars Atlantic City from 1983 until 1999.  Mr. Sutor previously served as Executive VicePresident to DVD, a position he held from 1999 to 2002.

Timothy R. Hornehas been Sr. Vice President-Finance, Treasurer and Chief Financial Officersince November 1996.  Mr. Hornepreviously served as Vice President-Finance and Chief Financial Officer to DVD.

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

**Item 11.         Executive Compensation**

The informationcalled for by this Item 11 is incorporated by reference to our Proxy Statementto be filed pursuant to Regulation 14A for the Annual Meeting of Stockholdersto be held on April 25, 2007.

**Item 12.****                            SecurityOwnership Of Certain Beneficial Owners And Management And Related StockholderMatters**

The informationcalled for by this Item 12 is incorporated by reference to our Proxy Statementto be filed pursuant to Regulation 14A for the Annual Meeting of Stockholdersto be held on April 25, 2007.

**Item 13.         Certain Relationships And RelatedTransactions, 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 25, 2007.

**Item 14.         Principal Accounting Fees AndServices**

The informationcalled for by this Item 14 is incorporated by reference to our Proxy Statementto be filed pursuant to Regulation 14A for the Annual Meeting of Stockholdersto be held on April 25, 2007.

**Part IV**

**Item 15.         Exhibits, Financial Statement Schedules**
| (a) (1) |   | Financial  Statements — See accompanying Index to Consolidated Financial Statements on  page 32.                                                                                                                                                                                                                                                                                                         |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)     |   | Financial Statement Schedules — None.                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| (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). |

 

27

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3.1                         Certificateof Incorporation of Dover Downs Gaming & Entertainment, Inc. (incorporatedherein 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                         Amendedand Restated By-laws of Dover Downs Gaming & Entertainment, Inc. datedMarch 1, 2002 (incorporated herein by reference to Exhibit 3.2 to the Form 10filed on March 7, 2002).

4.1                         Formof Common Stock Certificate of Dover Downs Gaming & Entertainment, Inc.(incorporated herein by reference to Exhibit 4.1 to the Form 10 filed onNovember 21, 2001, which was declared effective on March 7, 2002).

4.2                         RightsAgreement dated as of January 2, 2002 between Dover Downs Gaming &Entertainment, Inc. and Mellon Investor Services, as Rights Agent (incorporatedherein 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                   EmployeeBenefits Agreement, dated as of January 15, 2002, by and between DoverMotorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.) and DoverDowns Gaming & Entertainment, Inc. (incorporated herein by reference toExhibit 10.2 to the Form 10 filed on January 16, 2002, which was declaredeffective on March 7, 2002).

10.2                   TransitionSupport Services Agreement, dated as of January 15, 2002, by and between DoverMotorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.) and DoverDowns Gaming & Entertainment, Inc. (incorporated herein by reference toExhibit 10.3 to the Form 10 filed on January 16, 2002, which was declaredeffective on March 7, 2002).

10.3                   TaxSharing Agreement, dated as of January 15, 2002, by and between DoverMotorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.) and DoverDowns Gaming & Entertainment, Inc. (incorporated herein by reference toExhibit 10.4 to the Form 10 filed on January 16, 2002, which was declaredeffective on March 7, 2002).

10.4                   RealProperty Agreement dated as of January 15, 2002, by and between DoverMotorsports, Inc. (formerly known as Dover Downs Entertainment, Inc.) and DoverDowns Gaming & Entertainment, Inc. (incorporated herein by reference toExhibit 10.5 to the Form 10 filed on January 16, 2002, which was declaredeffective on March 7, 2002).

10.5                   Agreementbetween Dover Downs, Inc. and Delaware Standardbred Owners Association, Inc.dated October 22, 2003 (incorporated herein by reference to Exhibit 10.9 to theForm 10-K filed on March 9, 2004).

10.6                   Credit Agreementamong Dover Downs Gaming & Entertainment, Inc. and Wilmington TrustCompany, dated as of January 15, 2002 (incorporated herein by reference toExhibit 10.10 to the Form 10 filed on January 16, 2002, which was declaredeffective on March 7, 2002).

10.7                   Amended and Restated Credit Agreement among DoverDowns Gaming & Entertainment, Inc. and Wilmington Trust Company, as agent,dated as of March 25, 2002 (incorporated herein by reference to Exhibit 10.6 tothe Form 10-Q filed on May 10, 2002).

10.8                   Amended and Restated Guaranty and SuretyshipAgreement by and between Dover Downs, Inc. and Wilmington Trust Company, asagent, dated as of March 25, 2002 (incorporated herein by reference toExhibit 10.7 to the Form 10-Q filed on May 10, 2002).

10.9                   Amendmentto Amended and Restated Credit Agreement among Dover Downs Gaming &Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of August12, 2002 (incorporated herein by reference to Exhibit 10.1 to the Form 10-Qfiled on November 4, 2002).

28

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10.10             Second Amendment to Amended and RestatedCredit Agreement among Dover Downs Gaming & Entertainment, Inc. andWilmington Trust Company, as agent, dated as of February 19, 2004 (incorporatedherein by reference to Exhibit 10.14 to the Form 10-K filed on March 9, 2004).

10.11             Third Amendment to Amended and Restated CreditAgreement among Dover Downs Gaming & Entertainment, Inc. and WilmingtonTrust Company, as agent, dated as of November 5, 2004 (incorporatedherein by reference to Exhibit 10.14 to the Form 10-K filed on March 10, 2005).

10.12             Fourth Amendment to Amended and Restated CreditAgreement among Dover Downs Gaming & Entertainment, Inc. and WilmingtonTrust Company, as agent, dated as of December 14, 2005 (incorporatedherein by reference to Exhibit 10.1 to the Form 8-K filed on December 16, 2005).

10.13             Fifth Amendment to Amended and Restated CreditAgreement among Dover Downs Gaming & Entertainment, Inc. and WilmingtonTrust Company, as agent, dated as of April 18, 2006 (incorporated hereinby reference to Exhibit 10.1 to the Form 8-K filed on April 21, 2006).

10.14             Amended and Restated Employment and Non-CompeteAgreement between Dover Downs Gaming & Entertainment, Inc. and DenisMcGlynn dated February 13, 2006 (incorporated herein by reference to Exhibit10.1 to the Form 8-K filed on February 17, 2006).

10.15             Amended and Restated Employment and Non-CompeteAgreement between Dover Downs Gaming & Entertainment, Inc. and Edward J.Sutor dated February 13, 2006 (incorporated herein by reference toExhibit 10.2 to the Form 8-K filed on February 17, 2006).

10.16             Amended and Restated Employment and Non-CompeteAgreement between Dover Downs Gaming & Entertainment, Inc. and Timothy R.Horne dated February 13, 2006 (incorporated herein by reference toExhibit 10.3 to the Form 8-K filed on February 17, 2006).

10.17             Amended and Restated Employment and Non-CompeteAgreement between Dover Downs Gaming & Entertainment, Inc. and Klaus M.Belohoubek dated February 13, 2006 (incorporated herein by reference toExhibit 10.4 to the Form 8-K filed on February 17, 2006).

10.18             Amended and Restated Non-Compete Agreement betweenDover Downs Gaming & Entertainment, Inc. and Patrick J. Bagley datedFebruary 13, 2006 (incorporated herein by reference to Exhibit 10.5 tothe Form 8-K filed on February 17, 2006).

10.19             Non-Compete Agreement between Dover Downs Gaming& Entertainment, Inc. and Henry B. Tippie dated June 16, 2004 (incorporatedherein by reference to Exhibit 10.7 to the Form 10-Q filed on August 6, 2004).

10.20             Dover Downs Gaming & Entertainment,Inc. 2002 Stock Incentive Plan, as Amended and Restated (incorporated herein byreference to Exhibit A to our Proxy Statement filed on March 29, 2004).

10.21             Form of Incentive Stock Option AgreementUsed with Dover Downs Gaming & Entertainment, Inc. 2002 Stock IncentivePlan, as Amended and Restated (incorporated herein by reference to Exhibit 10.1to the Form 10-Q filed on November 3, 2004).

10.22             Form of Restricted Stock Grant AgreementUsed with Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated (incorporatedherein by reference to Exhibit 10.2 to the Form 10-Q filed on November 3,2004).

10.23             Description of Annual Salary and CertainDiscretionary Incentives to Executive Officers

21.1                   Listof Subsidiaries of Dover Downs Gaming & Entertainment, Inc.

24.1                   Powers of Attorney for Directors

29

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31.1                   Certificationof Chief Executive Officer pursuant to Rule 13a-14(a)

31.2                   Certificationof Chief Financial Officer pursuant to Rule 13a-14(a)

32.1                   Certificationof Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002

32.2                   Certificationof Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002

99.1                   InformationStatement dated as of March 7, 2002 (incorporated herein by reference toExhibit 99.1 to the Form 10 filed on March 7, 2002).

99.2                   Audit CommitteeCharter of Dover Downs Gaming & Entertainment, Inc. (incorporated herein byreference to Exhibit B to our Proxy Statement filed on March 29, 2004).

30

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**Signatures**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
| DATED: March 6, 2007 |     | Dover Downs Gaming & Entertainment, Inc. |
|----------------------|----------|----------------------------------------------|
|                 |     |                                         |   |                Registrant |
|                 |     |                                         |   |   |
|                 |     |                                         |   |   |
|                 |     | BY:                                          |   | /s/ Denis McGlynn |
|                 |     |                                         |   | Denis McGlynn |
|                 | * * | * *                                     |   | *President and Chief Executive Officer* |
|                 | * * | * *                                     |   | *and Director* |

 

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

 
| /s/ Timothy R. Horne | * * | *Sr. Vice President-Finance,*           |   | March 6, 2007 |
|----------------------|----------|-----------------------------------------|--------|---------------|
| Timothy R. Horne     | * * | *Treasurer and Chief Financial Officer* |   |          |

 

The Directors ofthe registrant (listed below) executed a power of attorney appointing DenisMcGlynn and Timothy R. Horne their attorneys-in-fact, empowering either of themto 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 6, 2007 |
|--------------------|----------|-----------------------|--------|---------------|
| Denis McGlynn      | * * | *and Director*        |   |          |

 

31

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                             | ** ** | **Page** |
|---------------------------------------------------------------------------------------------|------------|----------|
| Statement of Management Responsibility                                                      |       | 33       |
|                                                                                        |       |     |
| Report of Independent Registered Public Accounting  Firm                                    |       | 34       |
|                                                                                        |       |     |
| Consolidated Statements of Earnings for the years  ended December 31, 2006, 2005 and 2004   |       | 35       |
|                                                                                        |       |     |
| Consolidated Balance Sheets at December 31, 2006 and  2005                                  |       | 36       |
|                                                                                        |       |     |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004 |       | 37       |
|                                                                                        |       |     |
| Notes to the Consolidated Financial Statements                                              |       | 38       |

 

32

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**STATEMENTOF 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’s2006 Annual Report on Form 10-K. The consolidated financial statements havebeen prepared in conformity with U.S. generally accepted accounting principlesand reflect the effects of certain estimates and judgments made by management.

The Company’smanagement also is responsible for establishing and maintaining a system ofinternal controls designed to provide reasonable assurance that assets aresafeguarded and transactions are properly recorded and executed in accordancewith management’s authorization. The system is regularly monitored by directmanagement review and by internal auditors who conduct an extensive program ofaudits throughout the Company.  TheDirector of Internal Audit reports directly to the Audit Committee of the Boardof Directors.  We have confidence in ourfinancial reporting, the underlying system of internal controls, and ourpeople, who are objective in their responsibilities and operate under theCompany’s Code of Business Conduct and with the highest level of ethicalstandards.  These standards are a keyelement of the Company’s control system.

The Companyconducted an evaluation of the effectiveness of its internal control overfinancial reporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on the Company’s evaluation, management of the Company concludedthat the Company’s internal control over financial reporting was effective asof December 31, 2006.

The AuditCommittee of the Board of Directors, which is comprised entirely of independentdirectors, has direct and private access to and meets regularly withmanagement, the internal auditors and the independent registered publicaccounting firm to review accounting, reporting, auditing and internal controlmatters.
| /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

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directorsand StockholdersDover Downs Gaming & Entertainment, Inc.:

We have auditedthe accompanying consolidated balance sheets of Dover Downs Gaming &Entertainment, Inc. and**subsidiaries(the Company) as of December 31, 2006 and 2005, and the related consolidatedstatements of earnings and cash flows for each of the years in the three-yearperiod ended December 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Dover Downs Gaming &Entertainment, Inc. and subsidiaries as of December 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2006, in conformity with U.S. generallyaccepted accounting principles.

As discussed inNotes 2, 7 and 8 to the consolidated financial statements, the Company adoptedthe provisions of Statement 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 forDefined Benefit Pension and Other Postretirement Plans,” on December 31, 2006,and Securities and Exchange Commission Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,” effective January 1, 2006.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Dover Downs Gaming &Entertainment, Inc.’s internal control over financial reporting as of December31, 2006, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 6,2007 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

                                                                       KPMGLLP

Philadelphia,PennsylvaniaMarch 6, 2007

 

34

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

**CONSOLIDATEDSTATEMENTS OF EARNINGS**
| ** **                               | ** ** | **Years ended December 31,** | ** **  |
|------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                               | ** ** | **2006**                                    | ** **  | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                |       |                                        |        |   |   |   |   |
| Gaming                                   |       | $                                           | 220,412,000 |   | $ | 202,372,000 |   | $ | 193,922,000 |   |
| Other operating                          |       | 16,039,000                                  |        | 14,480,000 |   | 13,822,000 |   |
|                                     |       | 236,451,000                                 |        | 216,852,000 |   | 207,744,000 |   |
| Less —  non-recurring gaming charge |       | —                                      |        | — |   | 448,000 |   |
|                                     |       | 236,451,000                                 |        | 216,852,000 |   | 207,296,000 |   |
| Expenses:                                |       |                                        |        |   |   |   |   |
| Gaming                                   |       | 163,288,000                                 |        | 151,973,000 |   | 152,725,000 |   |
| Non-recurring  gaming charge             |       | —                                      |        | — |   | 1,802,000 |   |
| Other operating                          |       | 14,202,000                                  |        | 13,167,000 |   | 13,013,000 |   |
| General and  administrative              |       | 5,905,000                                   |        | 4,765,000 |   | 4,603,000 |   |
| Depreciation                             |       | 7,146,000                                   |        | 6,998,000 |   | 6,791,000 |   |
|                                     |       | 190,541,000                                 |        | 176,903,000 |   | 178,934,000 |   |
|                                     |       |                                        |        |   |   |   |   |
| Gain on sale of  shopping center         |       | —                                      |        | 5,837,000 |   | — |   |
|                                     |       |                                        |        |   |   |   |   |
| Operating earnings                       |       | 45,910,000                                  |        | 45,786,000 |   | 28,362,000 |   |
|                                     |       |                                        |        |   |   |   |   |
| Interest expense                         |       | (2,943,000                                  | )           | (1,875,000 | ) | (762,000 | ) |
|                                     |       |                                        |        |   |   |   |   |
| Earnings before income  taxes            |       | 42,967,000                                  |        | 43,911,000 |   | 27,600,000 |   |
|                                     |       |                                        |        |   |   |   |   |
| Income taxes                             |       | (17,639,000                                 | )           | (17,871,000 | ) | (11,219,000 | ) |
|                                     |       |                                        |        |   |   |   |   |
| Net earnings                             |       | $                                           | 25,328,000  |   | $ | 26,040,000 |   | $ | 16,381,000 |   |
|                                     |       |                                        |        |   |   |   |   |
| Net earnings per common  share (Note 2): |       |                                        |        |   |   |   |   |
| Basic                                    |       | $                                           | 0.78        |   | $ | 0.73 |   | $ | 0.41 |   |
| Diluted                                  |       | $                                           | 0.77        |   | $ | 0.72 |   | $ | 0.41 |   |

 

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

35

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

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                                   | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                   | ** ** | **2006**              | ** **  | **2005** | ** ** |
| **ASSETS**                                                                                                                                   | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current assets:                                                                                                                              |       |                  |        |   |   |
| Cash                                                                                                                                         |       | $                     | 20,020,000  |   | $ | 19,986,000 |   |
| Accounts receivable                                                                                                                          |       | 4,325,000             |        | 3,805,000 |   |
| Due from State of Delaware                                                                                                                   |       | 10,972,000            |        | 9,100,000 |   |
| Inventories                                                                                                                                  |       | 1,765,000             |        | 1,955,000 |   |
| Prepaid expenses and other                                                                                                                   |       | 1,838,000             |        | 2,000,000 |   |
| Prepaid income taxes                                                                                                                         |       | 128,000               |        | — |   |
| Receivable from Dover Motorsports, Inc.                                                                                                      |       | —                |        | 15,000 |   |
| Deferred income taxes                                                                                                                        |       | 1,247,000             |        | 2,067,000 |   |
| Total current assets                                                                                                                         |       | 40,295,000            |        | 38,928,000 |   |
|                                                                                                                                         |       |                  |        |   |   |
| Property and  equipment, net                                                                                                                 |       | 132,732,000           |        | 114,533,000 |   |
| Total assets                                                                                                                                 |       | $                     | 173,027,000 |   | $ | 153,461,000 |   |
|                                                                                                                                         |       |                  |        |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current  liabilities:                                                                                                                        |       |                  |        |   |   |
| Accounts payable                                                                                                                             |       | $                     | 8,173,000   |   | $ | 4,814,000 |   |
| Purses due horsemen                                                                                                                          |       | 8,899,000             |        | 8,332,000 |   |
| Accrued liabilities                                                                                                                          |       | 11,198,000            |        | 12,748,000 |   |
| Payable to Dover Motorsports, Inc.                                                                                                           |       | 9,000                 |        | — |   |
| Income taxes payable                                                                                                                         |       | —                |        | 3,706,000 |   |
| Deferred revenue                                                                                                                             |       | 37,000                |        | 112,000 |   |
| Total current liabilities                                                                                                                    |       | 28,316,000            |        | 29,712,000 |   |
|                                                                                                                                         |       |                  |        |   |   |
| Revolving line  of credit                                                                                                                    |       | 59,425,000            |        | 24,075,000 |   |
| Liability for  pension benefits                                                                                                              |       | 2,640,000             |        | — |   |
| Deferred income  taxes                                                                                                                       |       | 5,387,000             |        | 6,404,000 |   |
| Total liabilities                                                                                                                            |       | 95,768,000            |        | 60,191,000 |   |
|                                                                                                                                         |       |                  |        |   |   |
| 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:  15,413,867 and 10,639,874, respectively         |       | 1,542,000             |        | 1,064,000 |   |
| Class A common  stock, $.10 par value; 50,000,000 shares authorized; shares issued and  outstanding: 17,003,173 and 13,254,687, respectively |       | 1,700,000             |        | 1,326,000 |   |
| Additional  paid-in capital                                                                                                                  |       | 769,000               |        | 36,461,000 |   |
| Retained  earnings                                                                                                                           |       | 73,736,000            |        | 55,459,000 |   |
| Accumulated  other comprehensive loss                                                                                                        |       | (488,000              | )           | — |   |
| Deferred  compensation                                                                                                                       |       | —                |        | (1,040,000 | ) |
| Total stockholders’ equity                                                                                                              |       | 77,259,000            |        | 93,270,000 |   |
| Total liabilities  and stockholders’ equity                                                                                             |       | $                     | 173,027,000 |   | $ | 153,461,000 |   |

 

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

36

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  activities:                                                               |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 25,328,000 |   | $ | 26,040,000 |   | $ | 16,381,000 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                         |       | 7,146,000                                   |       | 6,998,000 |   | 6,791,000 |   |
| Amortization of credit facility origination fees                                     |       | 44,000                                      |       | 41,000 |   | 62,000 |   |
| Stock-based compensation                                                             |       | 732,000                                     |       | 214,000 |   | 67,000 |   |
| Deferred income taxes                                                                |       | (218,000                                    | )          | (356,000 | ) | 165,000 |   |
| Cumulative effect of accounting change                                               |       | (1,541,000                                  | )          | — |   | — |   |
| Gain on sale of shopping center                                                      |       | —                                      |       | (5,837,000 | ) | — |   |
| Changes in assets and liabilities:                                                   |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                  |       | (520,000                                    | )          | (886,000 | ) | (1,005,000 | ) |
| Due from State of Delaware                                                           |       | (1,872,000                                  | )          | 980,000 |   | (1,410,000 | ) |
| Inventories                                                                          |       | 190,000                                     |       | 192,000 |   | (346,000 | ) |
| Prepaid expenses and other                                                           |       | 118,000                                     |       | (40,000 | ) | 132,000 |   |
| Prepaid income taxes/income taxes payable                                            |       | (3,480,000                                  | )          | 3,055,000 |   | 943,000 |   |
| Accounts payable                                                                     |       | 79,000                                      |       | (792,000 | ) | (909,000 | ) |
| Purses due horsemen                                                                  |       | 567,000                                     |       | (750,000 | ) | 1,125,000 |   |
| Accrued liabilities                                                                  |       | 269,000                                     |       | 758,000 |   | 5,975,000 |   |
| Payable to/receivable from Dover Motorsports, Inc.                                   |       | 24,000                                      |       | (13,000 | ) | (98,000 | ) |
| Deferred revenue                                                                     |       | (75,000                                     | )          | (83,000 | ) | (66,000 | ) |
| Net cash  provided by operating activities                                           |       | 26,791,000                                  |       | 29,521,000 |   | 27,807,000 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Investing  activities:                                                               |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                 |       | (22,065,000                                 | )          | (5,512,000 | ) | (6,329,000 | ) |
| Proceeds from sale of shopping center, net                                           |       | —                                      |       | 11,918,000 |   | — |   |
| Net cash (used  in) provided by investing activities                                 |       | (22,065,000                                 | )          | 6,406,000 |   | (6,329,000 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Financing  activities:                                                               |       |                                        |       |   |   |   |   |
| Borrowings from revolving line of credit                                             |       | 196,010,000                                 |       | 169,109,000 |   | 226,905,000 |   |
| Repayments of revolving line of credit                                               |       | (160,660,000                                | )          | (196,984,000 | ) | (206,180,000 | ) |
| Dividends paid                                                                       |       | (5,510,000                                  | )          | (5,737,000 | ) | (6,098,000 | ) |
| Repurchase of common stock                                                           |       | (35,052,000                                 | )          | — |   | (32,555,000 | ) |
| Proceeds from stock options exercised                                                |       | 470,000                                     |       | 4,000 |   | — |   |
| Excess tax benefit on stock awards                                                   |       | 50,000                                      |       | — |   | — |   |
| Other                                                                                |       | —                                      |       | (21,000 | ) | — |   |
| Net cash used in  financing activities                                               |       | (4,692,000                                  | )          | (33,629,000 | ) | (17,928,000 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Net increase in  cash                                                                |       | 34,000                                      |       | 2,298,000 |   | 3,550,000 |   |
| Cash, beginning  of year                                                             |       | 19,986,000                                  |       | 17,688,000 |   | 14,138,000 |   |
| Cash, end of  year                                                                   |       | $                                           | 20,020,000 |   | $ | 19,986,000 |   | $ | 17,688,000 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Supplemental  information:                                                           |       |                                        |       |   |   |   |   |
| Interest paid                                                                        |       | $                                           | 3,032,000  |   | $ | 1,894,000 |   | $ | 650,000 |   |
| Income taxes  paid                                                                   |       | $                                           | 20,235,000 |   | $ | 15,172,000 |   | $ | 10,112,000 |   |

 

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

37

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

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1—Business Operations**

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

Weare a diversified gaming and entertainment company whose operations consist ofDover Downs Slots — a 97,000 square-foot video lottery (slots) casino complex;the Dover Downs Hotel — featuring luxury accommodations with conference,banquet, fine dining, ballroom and concert hall facilities; and Dover DownsRaceway — a harness racing track with pari-mutuel wagering on live andsimulcast horse races. Our entertainment complex is located in Dover, thecapital of the State of Delaware.

DoverDowns Gaming & Entertainment, Inc. is a public holding company that has twowholly owned subsidiaries: Dover Downs, Inc. and Dover Downs ManagementCorp.  Dover Downs, Inc. was incorporatedin 1967 and began motorsports and harness racing operations in 1969.  In June of 1994, legislation authorizingvideo lottery operations in the State of Delaware (the “State”) was adopted.Our video lottery (slots) casino operations began on December 29, 1995.  As a result of several restructurings, DoverDowns, Inc. became a wholly owned subsidiary of Dover Motorsports, Inc.(formerly known as Dover Downs Entertainment, Inc.) (“DVD”), and became theoperating entity for all of DVD’s gaming operations.

DoverDowns Gaming & Entertainment, Inc. was incorporated in the State in Decemberof 2001 as a wholly owned subsidiary of DVD. Effective March 31, 2002, DVD completed a tax-free spin-off of itsgaming operations by contributing 100% of the issued and outstanding commonstock of Dover Downs, Inc. to Dover Downs Gaming & Entertainment, Inc., andsubsequently distributing 100% of our issued and outstanding common stock toDVD stockholders.  Immediately followingthe spin-off, Dover Downs Gaming & Entertainment, Inc. became anindependent public company.

Dover Downs, Inc.is authorized to conduct video lottery operations as a “Licensed Agent” underthe Delaware State Lottery Code. Pursuant to Delaware’s Horse RacingRedevelopment Act, enacted in 1994, the Delaware State Lottery Officeadministers and controls the operation of the video lottery.

Our license fromthe Delaware Harness Racing Commission (the “Commission”) to hold harness racemeetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races must be renewed on an annual basis. In order to maintainour license to conduct video lottery operations, we are required to maintainour harness horse racing license.  Wehave received an annual license from the Commission for the past 38 consecutiveyears and management believes that our relationship with the Commission remainsgood.

Due to the natureof our business activities, we are subject to various federal, state and localregulations.

**NOTE 2—Summary of SignificantAccounting Policies**

*Basis of consolidation—*Theconsolidated financial statements include 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 beverage items, are stated at the lower of costor market with cost being determined on the first-in, first-out basis.

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*Propertyand equipment—*Property and equipment is stated at cost.  Depreciation is provided for financialreporting purposes using the straight-line method over the following estimateduseful lives:

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

 

We 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 suchevents or changes in circumstances have occurred to date. An impairment losswould 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.

*Interestcapitalization—*Interest is capitalized in connection with theconstruction of major facilities. The capitalized interest is amortized overthe estimated useful life of the asset to which it relates.  During the year ended December 31, 2006, weincurred $3,255,000 of interest cost, of which $312,000 was capitalized.  During the year ended December 31, 2005, weincurred $1,875,000 of interest cost, none of which was capitalized.  During the year ended December 31, 2004, weincurred $779,000 of interest cost, of which $17,000 was capitalized.

*Incometaxes—*Deferred income taxes are provided in accordance withthe provisions of Financial Accounting Standards Board (“FASB”) Statement No.109, *Accounting for Income Taxes*, on alldifferences between the tax bases of assets and liabilities and their reportedamounts in the consolidated financial statements based upon enacted statutorytax rates in effect at the balance sheet date.

*Pointloyalty program—*We currently have a point loyalty program forour video lottery customers which allows them to earn points based on thevolume of their video lottery activity. Prior to December 2004, the points could be redeemed for variousservices and merchandise throughout the gaming facility; however, they were notredeemable for cash or casino play. Effective December 2004, we changed our policy relating to our pointloyalty program to allow points earned by customers to be redeemed for cashunder certain circumstances.  As aresult, we recorded a non-recurring charge of $2,250,000 in the fourth quarterof 2004 to record the net impact of the program change.  All reward points earned by customers are nowexpensed in the period they are earned. The estimated amount of points redeemable for cash is recorded as areduction of revenue and the estimated amount of points redeemable for servicesand merchandise is recorded as gaming expense. In determining the amount of theliability, which was $2,010,000 and $2,289,000, respectively, at December 31,2006 and 2005, we estimate a redemption rate, a cost of rewards to be offeredand the mix of cash, goods and services for which reward points will beredeemed.  We use historical data to estimatethose amounts.

*Revenueand expense recognition—*Gaming revenues represent (i) the netwin from video 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 as promotionalitems of $15,152,000, $15,103,000 and $19,973,000 for the years ended December31, 2006, 2005 and 2004, respectively. The estimated direct cost of providing these items has been charged tothe casino through interdepartmental allocations and is included in gamingexpenses in the consolidated statement of earnings.

For the videolottery operations, which account for at least 90% of revenues for all periodspresented, the difference between the amount wagered by bettors and the amountpaid out to bettors is referred to as the win. The win is included in theamount recorded in our consolidated financial statements as gaming revenue. TheDelaware State Lottery Office sweeps the win from the video lottery operations,collects the State’s share of the win and the amount due to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems, collects the amount allocable to purses forharness horse racing and remits the remainder to us as our commission foracting as a Licensed Agent. Gaming expenses include the amounts collected bythe State (i) for the State’s share of the win, (ii) for remittance to theproviders of the video lottery (slot) machines and associated computer systems,and (iii) for harness horse racing purses. We recognize revenues frompari-mutuel commissions earned from live harness horse racing and importing ofsimulcast signals from other race tracks when the race occurs. Revenues fromhotel rooms, food and beverage sales and other miscellaneous income arerecognized at the time the service is provided.

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*Advertisingcosts—*The cost of general advertising is charged tooperations as incurred.

*Net earnings per share*—Weighted average shares used in computing basicand diluted net earnings per common share (“EPS”) are as follows:

|                                | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic EPS                      |       | 32,353,000                                  |       | 35,681,000 |   | 39,509,000 |   |
| Effect of  dilutive securities |       | 568,000                                     |       | 249,000 |   | 112,000 |   |
| Diluted EPS                    |       | 32,921,000                                  |       | 35,930,000 |   | 39,621,000 |   |

 

Dilutive securities include stock options and nonvested stock awards.

For the years ended December 31, 2005 and 2004, options to purchase22,500 and 420,270 shares of common stock, respectively, were notincluded in the computation of diluted EPS because the options’ exercise priceswere greater than the average market price of the common stock during theperiod.  There were no anti-dilutivesecurities excluded from the computation of diluted EPS for the year endedDecember 31, 2006.

*Accountingfor stock-based compensation—*Prior to January 1, 2006, weaccounted for our stock-based compensation expense in accordance with Accounting Principles Board (“APB”) OpinionNo. 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 stock optionsas all options granted had an exercise price equal to the market value of theunderlying 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 Statement No. 123, *Accountingfor Stock-Based Compensation,* and superseded APB Opinion No.25 and related interpretations. Statement No. 123R requires recognition of the cost of employee servicesreceived in exchange for an award of equity instruments in the financialstatements over the period the employee is required to perform theservices.  We adopted Statement No. 123Rusing the modified prospective method. Under this method, we are required to record compensation expense forall awards granted after the date of adoption and for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.  We calculate compensation expense forour stock options based upon the fair value at the grant date using theBlack-Scholes option-pricing model.  The modified prospective approach does not allowfor the restatement of prior period amounts.

Statement No. 123Rrequires the cash flows resulting from the tax benefits from tax deductions inexcess of the compensation cost recognized for nonvested stock awards andoptions (“Excess Tax Benefits”) to be classified as a financing activity in ourconsolidated statement of cash flows.

We recorded total stock-based compensation expense of $732,000,$214,000, and $67,000 as general and administrative expenses for the yearsended December 31, 2006, 2005 and 2004, respectively.  Total stock-based compensation expense of$680,000 and $641,000 would have been recorded as general and administrativeexpenses for the years ended December 31, 2005 and 2004, had we been subject toreporting under Statement No. 123R during that period.  Our earnings before income taxes andnet earnings for the year ended December 31, 2006 were $372,000 lower than theywould have been pursuant to our previous accounting method for stock-basedcompensation.  We recorded income tax benefits of $147,000, $87,000 and $27,000 for theyears ended December 31, 2006, 2005 and 2004, respectively, related to ournonvested stock awards.  Theadoption of Statement No. 123R reduced basic and diluted earnings per share byapproximately $0.01 for the year ended December 31, 2006.

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The followingtable illustrates the effect on net earnings and net earnings per common shareif we had applied the fair-value recognition provisions of Statement No. 123Rto stock-based employee compensation related to our stock options and awards:

|                                                                                                                                               | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net earnings, as  reported                                                                                                                    |       | $                                           | 26,040,000 |   | $ | 16,381,000 |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       | 127,000                                     |       | 40,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair-value based  method for all awards, net of related tax effects |       | (593,000                                    | )          | (614,000 | ) |
| Pro forma net  earnings                                                                                                                       |       | $                                           | 25,574,000 |   | $ | 15,807,000 |   |
|                                                                                                                                          |       |                                        |       |   |   |
| Net earnings per  common share:                                                                                                               |       |                                        |       |   |   |
|  Basic — as  reported                                                                                                               |       | $                                           | 0.73       |   | $ | 0.41 |   |
|  Basic — pro  forma                                                                                                                 |       | $                                           | 0.72       |   | $ | 0.40 |   |
|                                                                                                                                          |       |                                        |       |   |   |
|  Diluted — as  reported                                                                                                             |       | $                                           | 0.72       |   | $ | 0.41 |   |
|  Diluted — pro forma                                                                                                                |       | $                                           | 0.71       |   | $ | 0.40 |   |

 

*Use ofestimates—*The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

*Fairvalue of financial instruments—*The carrying amounts offinancial instruments reported in the balance sheet for current assets andcurrent liabilities approximates their fair values because of the shortmaturity of these instruments.  Thecarrying value of long-term debt at December 31, 2006 and 2005 approximates itsfair value based on the interest rates available on similar borrowings.

*Segmentinformation*—We account forour operating segment in accordance with FASB Statement No. 131, *Disclosures About Segments of an Enterprise and Related Information*.  Statement No. 131 establishes guidelines forpublic 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.

*Reclassifications—*Certain reclassifications have been made to theprior year consolidated financial statements to conform to the current yearpresentation.  These reclassificationshad no effect on net earnings.

*RecentAccounting 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 initial adoption.The cumulative effect of applying the provisions of FIN 48 will be reported asan adjustment to the opening balance of retained earnings for that fiscal year.We are currently evaluating the potential impact of FIN 48 on ourconsolidated financial statements.

In June 2006,the Emerging Issues Task Force (“EITF”) issued EITF 06-3, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*, to clarify diversity in practice onthe presentation of different types of taxes in the financial statements. TheTask Force concluded that, for taxes within the scope of EITF 06-3, a companymay adopt a policy of presenting taxes either gross within revenue or net. Thatis, it may include charges to customers for taxes within revenues and thecharge for the taxes from the taxing authority within cost of sales, or,alternatively, it may net the charge to the customer and the charge from thetaxing authority. If taxes subject to EITF 06-3 are significant, 

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a company is required todisclose its accounting policy for presenting taxes and the amounts of suchtaxes that are recognized on a gross basis. The guidance in EITF 06-3 iseffective for the first interim reporting period beginning afterDecember 15, 2006.  We adopted EITF06-3 as of January 1, 2007.  Theadoption of EITF 06-3 did not have an impact on our consolidated financialstatements.

InSeptember 2006 the FASB issued Statement No. 157, *Fair Value Measurements*, which establishes a framework formeasuring fair value and expands disclosures about fair value measurements.Statement No. 157 applies under other accounting pronouncements that require orpermit fair value measurements and, accordingly, Statement No. 157 doesnot require any new fair value measurements. Statement No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We willadopt Statement No. 157 as of January 1, 2008. The adoption of Statement No. 157 is not expected to have a significantimpact on our consolidated financial statements.

In September 2006,the FASB issued Statement No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans*, whichrequires an employer to (a) recognize inits statement of financial position an asset for a plan’s overfunded status ora liability for a plan’s underfunded status, (b) measure a plan’s assets andits obligations that determine its funded status as of the end of the employer’sfiscal year, and (c) recognize changes in the funded status of a defined postretirementplan in the year in which the changes occur (reported in comprehensiveincome).  The requirement to recognize the funded status of our benefitplans and the disclosure requirements are effective for our year endedDecember 31, 2006.  The requirement to measure the plan assets andbenefit obligations as of the date of the employer’s fiscal year-end statementof financial position is effective for fiscal years ending after December 15,2008.  As a result of adopting Statement No. 158, we increased our pensionliability and recorded accumulated other comprehensive loss in the amount of$821,000 ($488,000 after income tax benefit) in our December 31, 2006consolidated balance sheet. Additionally, we reclassified our pension liability from accruedliabilities (current) to liability for pension benefits (non-current).  The adoption of Statement No. 158 did nothave an impact on our 2006 consolidated statement of earnings or cashflows.  Refer to NOTE 7 — Pension Plansfor further discussion.

In September 2006,the United States Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin (“SAB”) No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*, which provides interpretive guidance on howthe effects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. The SEC staff believesthat registrants should quantify errors using both a balance sheet and anincome statement approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material and therefore must be recorded.  We adopted SAB No. 108 during the quarterended December 31, 2006.  Refer to NOTE 8— Stockholders’ Equity for further discussion.

**NOTE 3—Property and Equipment**

Property and equipmentconsists of the following as of December 31:

|                                    | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|------------------------------------|------------|-------------|-------------|-------------|------------|
| Land                               |       | $           | 780,000     |        | $          | 780,000 |   |
| Casino facility                    |       | 32,474,000  |        | 32,153,000  |       |
| Hotel facility                     |       | 65,795,000  |        | 65,648,000  |       |
| Harness racing  facilities         |       | 9,447,000   |        | 9,284,000   |       |
| General  facilities                |       | 12,858,000  |        | 9,783,000   |       |
| Furniture,  fixtures and equipment |       | 37,597,000  |        | 36,355,000  |       |
| Construction in  progress          |       | 20,817,000  |        | 529,000     |       |
|                               |       | 179,768,000 |        | 154,532,000 |       |
| Less accumulated depreciation      |       | (47,036,000 | )           | (39,999,000 | )          |
|                               |       | $           | 132,732,000 |        | $          | 114,533,000 |   |

 

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

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**NOTE 4—Accrued Liabilities**

Accruedliabilities consist of the following as of December 31:

|                                           | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty  program                    |       | $         | 2,010,000  |      | $          | 2,289,000 |   |
| Payroll and  related items                |       | 2,263,000 |       | 2,569,000 |       |
| Win due to  Delaware State Lottery Office |       | 5,441,000 |       | 5,009,000 |       |
| Pension                                   |       | —    |       | 1,706,000 |       |
| Other                                     |       | 1,484,000 |       | 1,175,000 |       |
|                                      |       | $         | 11,198,000 |      | $          | 12,748,000 |   |

 

#### **NOTE5—Credit Facility**

We have a$105,000,000 credit facility with Wilmington Trust Company that expires onApril 17, 2011.  Interest is based, atour option, upon LIBOR plus a margin that varies between 75 and 125 basispoints depending on the ratio of funded debt to earnings before interest,taxes, depreciation and amortization (the “leverage ratio”) or the base rate(the greater of the prime rate or the federal funds rate plus 0.5%) less amargin that varies between 50 and 100 basis points depending on the leverageratio.  The credit facility has minimumnet 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 expansion) and other generalcorporate purposes.  At December 31,2006, we were in compliance with all terms of the facility and there was$59,425,000 outstanding at a weighted average interest rate of 6.2%. AtDecember 31, 2006, $45,575,000 was available pursuant to the facility.

**NOTE6—Income Taxes**

The current anddeferred income tax provisions are as follows:

|                    | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:           |       |                                        |       |   |   |   |   |
| Federal            |       | $                                           | 14,112,000 |   | $ | 14,326,000 |   | $ | 8,691,000 |   |
| State              |       | 3,745,000                                   |       | 3,901,000 |   | 2,363,000 |   |
|               |       | 17,857,000                                  |       | 18,227,000 |   | 11,054,000 |   |
| Deferred:          |       |                                        |       |   |   |   |   |
| Federal            |       | (247,000                                    | )          | (280,000 | ) | 127,000 |   |
| State              |       | 29,000                                      |       | (76,000 | ) | 38,000 |   |
|               |       | (218,000                                    | )          | (356,000 | ) | 165,000 |   |
| Total income taxes |       | $                                           | 17,639,000 |   | $ | 17,871,000 |   | $ | 11,219,000 |   |

 

A reconciliationof the effective income tax rate with the applicable statutory federal incometax rate is as follows: 

|                                      | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal tax at  statutory rate       |       | 35.0                                        | %          | 35.0 | % | 35.0 |  % |
| State taxes, net  of federal benefit |       | 5.7                                         | %          | 5.7 | % | 5.7 |  % |
| Other                                |       | 0.4                                         | %          | — | % | (0.1 | )% |
| Effective income tax  rate           |       | 41.1                                        | %          | 40.7 | % | 40.6 |  % |

 

43

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The components ofdeferred income tax assets and liabilities are as follows as of December 31:

|                                                        | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income  tax assets:                           |       |       |       |       |       |
| Point loyalty program                                  |       | $          | 817,000    |       | $          | 931,000 |   |
| Accrued expenses                                       |       | 939,000    |       | 1,067,000  |       |
| Other                                                  |       | 243,000    |       | 89,000     |       |
| Total deferred income tax assets                       |       | 1,999,000  |       | 2,087,000  |       |
|                                                   |       |       |       |       |       |
| Deferred income tax  liabilities:                      |       |       |       |       |       |
| Depreciation — property and equipment             |       | (6,139,000 | )          | (6,424,000 | )          |
| Total deferred income tax liabilities                  |       | (6,139,000 | )          | (6,424,000 | )          |
| Net deferred income tax liabilities                    |       | $          | (4,140,000 | )          | $          | (4,337,000 | ) |
|                                                   |       |       |       |       |       |
| Amounts  recognized in the consolidated balance sheet: |       |       |       |       |       |
| Current deferred income tax assets                     |       | $          | 1,247,000  |       | $          | 2,067,000 |   |
| Noncurrent deferred income tax liabilities             |       | (5,387,000 | )          | (6,404,000 | )          |
|                                                   |       | $          | (4,140,000 | )          | $          | (4,337,000 | ) |

 

**NOTE 7—Pension Plans**

We maintain anon-contributory, tax qualified definedbenefit pension plan. All of our full time employees are eligible toparticipate in this qualified pension plan. Benefits provided by our qualified pension plan are based on years ofservice and employees’ remuneration over their term of employment.  Pension costs are funded in accordance withthe provisions of the Internal Revenue Code. We also maintain a non-qualified,non-contributory defined benefitpension plan for certain employees.  Thisexcess plan provides benefits that would otherwise be provided under thequalified pension plan but for maximum benefit and compensation limitsapplicable under federal tax law.  Thecost associated with the excess plan is determined using the same actuarialmethods and assumptions as those used for our qualified pension plan.

Thefollowing table sets forth the plans’ funded status and amounts recognized inour consolidated balance sheet as of December 31:

|                                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| Change in  benefit obligation:                  |       |       |       |       |       |
| Benefit obligation  at beginning of year        |       | $          | 7,055,000  |       | $          | 5,307,000 |   |
| Service cost                                    |       | 1,233,000  |       | 1,014,000  |       |
| Interest cost                                   |       | 415,000    |       | 315,000    |       |
| Actuarial (gain)  loss                          |       | (389,000   | )          | 609,000    |       |
| Benefits paid                                   |       | (267,000   | )          | (38,000    | )          |
| Other                                           |       | —     |       | (152,000   | )          |
| Benefit  obligation at end of year              |       | 8,047,000  |       | 7,055,000  |       |
|                                            |       |       |       |       |       |
| Change in plan  assets:                         |       |       |       |       |       |
| Fair value of  plan assets at beginning of year |       | 3,795,000  |       | 2,747,000  |       |
| Actual gain on  plan assets                     |       | 654,000    |       | 239,000    |       |
| Employer  contribution                          |       | 1,225,000  |       | 999,000    |       |
| Benefits paid                                   |       | (267,000   | )          | (38,000    | )          |
| Other                                           |       | —     |       | (152,000   | )          |
| Fair value of  plan assets at end of year       |       | 5,407,000  |       | 3,795,000  |       |
|                                            |       |       |       |       |       |
| Unfunded status                                 |       | (2,640,000 | )          | (3,260,000 | )          |
| Unrecognized net  loss                          |       | —     |       | 1,495,000  |       |
| Unrecognized  prior service cost                |       | —     |       | 59,000     |       |
| Net amount recognized                           |       | $          | (2,640,000 | )          | $          | (1,706,000 | ) |

 

44

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Amounts recognized in accumulated other comprehensiveloss that have not yet been recognized as components of net periodic benefitcost at December 31, 2006 are as follows:

| Net actuarial loss |   | $      | 771,000 |   |
|--------------------|--------|--------|---------|--------|
| Prior service cost |   | 50,000 |    |
|               |   | $      | 821,000 |   |

 

For the yearending December 31, 2007, we expect to recognize the following amounts ascomponents of net periodic benefit cost which are included in accumulatedcomprehensive loss as of December 31, 2006:

| Actuarial loss     |   | $     | 4,000  |   |
|--------------------|--------|-------|--------|--------|
| Prior service cost |   | 9,000 |   |
|               |   | $     | 13,000 |   |

 

We plan tocontribute approximately $1,000,000 to our pension plans in 2007.

The accumulatedbenefit obligation was $6,226,000 and $5,483,000, respectively, as of December31, 2006 and 2005.

Benefit payments,which reflect expected future service, as appropriate, are expected to be paidas follows:

| 2007      |   | $ | 117,000   |   |
|-----------|--------|---|-----------|--------|
| 2008      |   | $ | 140,000   |   |
| 2009      |   | $ | 170,000   |   |
| 2010      |   | $ | 208,000   |   |
| 2011      |   | $ | 285,000   |   |
| 2012-2016 |   | $ | 2,801,000 |   |

 

The components of net periodic pension cost for the yearsended December 31, 2006, 2005 and 2004 are as follows:

|                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                    |       | $        | 1,233,000  |     | $          | 1,014,000 |       | $ | 895,000 |   |
| Interest cost                   |       | 415,000  |       | 315,000  |       | 258,000   |       |
| Expected return on plan  assets |       | (391,000 | )          | (260,000 | )          | (225,000  | )          |
| Recognized net  actuarial loss  |       | 72,000   |       | 25,000   |       | 35,000    |       |
| Recognized prior  service cost  |       | 9,000    |       | 9,000    |       | 9,000     |       |
|                            |       | $        | 1,338,000  |     | $          | 1,103,000 |       | $ | 972,000 |   |

 

The principalassumptions used to determine the net periodic pension cost for the years endedDecember 31, 2006, 2005 and 2004, and the actuarial value of the projectedbenefit obligation at December 31, 2006 and 2005 (the measurement dates) forour pension plans are as follows:
| ** **                                       | ** ** | **Net Periodic Pension Cost** | ** ** | **Projected Benefit   Obligation** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                     | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted-average  discount rate                  |       | 5.85                                         | %          | 6.25                                         | %          | 6.25 | % | 6.15 | % | 5.85 | % |
| 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 |       | 9.00                                         | %          | 9.00                                         | %          | 9.00 | % | n/a |   | n/a |   |

 

For 2006, weassumed a long-term rate of return on plan assets of 9.0%.  In developing the 9.0% 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.

45

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Our pension planasset allocation at December 31, 2006 and 2005, and target allocation for 2007are as follows:

|                                    | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** | **Target  Allocation** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------|------------|
| **Asset Category**            | ** ** | ** **                                                              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2007** | ** ** |
| Equity securities                  |       | 65                                                                      | %          | 63                     | %          | 70 | % |
| Debt securities                    |       | 30                                                                      | %          | 22                     | %          | 20 | % |
| Other (money market  mutual funds) |       | 5                                                                       | %          | 15                     | %          | 10 | % |
| Total                              |       | 100                                                                     | %          | 100                    | %          | 100 | % |
|                                    |            |                                                                         |            |                        |            |  |  |  |  |

 

Our investmentgoals are to maximize returns subject to specific risk managementpolicies.  Our risk management policiespermit investments in mutual funds, and prohibit direct investments in debt andequity 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.

We maintain adefined contribution 401(k) plan which permits participation by substantiallyall employees. Our matching contributions to the 401(k) plan were $64,000,$64,000 and $50,000 for the years ended December 31, 2006, 2005 and 2004,respectively.

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**NOTE 8—Stockholders’ Equity**

Changes in thecomponents of stockholders’ equity are as follows (in thousands, except pershare data):
| ** **                                                                          | ** ** | **Common  Stock** | ** ** | **Class A  Common   Stock** | ** ** | **Additional  Paid-in   Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Deferred  Compensation** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------------|------------|----------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| **Balance at December 31, 2003**                                                    |       | $                 | 1,033      |                                  | $          | 1,615                                  |       | $                      | 67,454     |                                        | $          | 24,873                     |       | $ | — |   | $ | — |   |
| Net earnings                                                                        |       | —            |       | —                                |       | —                                 |       | 16,381                 |       | —                                      |       | —                     |       |
| Dividends paid, $.15 per  share (1)                                                 |       | —            |       | —                                |       | —                                 |       | (6,098                 | )          | —                                      |       | —                     |       |
| Issuance of restricted  stock awards                                                |       | 5                 |       | —                                |       | 596                                    |       | —                 |       | —                                      |       | (601                       | )          |
| Amortization of deferred  compensation                                              |       | —            |       | —                                |       | —                                 |       | —                 |       | —                                      |       | 67                         |       |
| Conversion of Class A  common stock to common stock                                 |       | 7                 |       | (7                                    | )          | —                                 |       | —                 |       | —                                      |       | —                     |       |
| Repurchase and  retirement of common stock                                          |       | (109              | )          | (160                                  | )          | (32,286                                | )          | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31, 2004**                                                    |       | 936               |       | 1,448                                 |       | 35,764                                 |       | 35,156                 |       | —                                      |       | (534                       | )          |
| Net earnings                                                                        |       | —            |       | —                                |       | —                                 |       | 26,040                 |       | —                                      |       | —                     |       |
| Dividends paid, $.16 per  share (1)                                                 |       | —            |       | —                                |       | —                                 |       | (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 (1)                                                 |       | —            |       | —                                |       | —                                 |       | (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 | ) | $ | — |   |

----

(1)                 Restatedfor stock split (see below).

We have125,000,000 shares of authorized capital stock which consists of 74,000,000shares of common stock, par value $.10 per share; 50,000,000 shares of Class Acommon stock, par value $.10 per share; and 1,000,000 shares of preferredstock, par value $.10 per share.

47

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On April 26, 2006,our Board of Directors approved a three-for-two split of both classes of ourcommon stock. The split was effected in the form of a stock dividend by issuingone additional 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 A commonstock were distributed to shareholders of record at the close of business onMay 10, 2006.  No fractional shares wereissued.  Shareholders were paid cash inlieu of any fractional shares.  All shareand per share amounts have been restated to give effect to the stock split,except for the number of shares shown as outstanding at December 31, 2005 onour consolidated balance sheet.  Thestatement of stockholders’ equity reflects the stock split by reclassifyingfrom additional paid-in capital to common stock and Class A common stock anamount equal to the par value of the additional shares issued to effect thestock split.

The holders ofcommon stock are entitled to one vote per share and the holders of our Class Acommon stock are entitled to 10 votes per share.  There is no cumulative voting.  Shares of Class A common stock areconvertible at any time into our shares of common stock on a one-for-one basisat the option of the stockholder. Subject to rights of any preferredstockholder, holders of our common stock and Class A common stock are entitledto receive on a pro rata basis such dividends, if any, as may be declared fromtime to time by the Board of Directors out of funds legally available for thatpurpose. At the discretion of our Board of Directors, we may pay to the holdersof common stock a cash dividend greater than the dividend, if any, paid to theholders of Class A common stock.

Under Delawarelaw, a change of ownership of a Licensed Agent will automatically terminate itslicense 90 days after the change of ownership occurs, unless the Director ofthe Delaware State Lottery Office determines after application to issue a newlicense to the new owners.  Change ofownership may occur if any new individual or entity acquires, directly orindirectly, 10% or more of the Licensed Agent or if more than 20% of the legalor beneficial interest in the Licensed Agent is transferred, whether by director indirect means.  The Commission mayrequire extensive background investigations of any new owner acquiring a 10% orgreater interest in a Licensed Agent, including criminal backgroundchecks.  Accordingly, we have arestrictive legend on our shares of common stock which require that (a) anyholders of common stock found to be disqualified or unsuitable or notpossessing the qualifications required by any appropriate gaming authoritycould be required to dispose of such stock and (b) any holder of common stockintending to acquire 10% or more of our outstanding common stock must firstobtain prior written approval from the Delaware State Lottery Office.

We adopted astockholder rights plan in 2002. The rights are attached to and trade in tandemwith our common stock and Class A common stock. Each right entitles theregistered holder to purchase from us one share of common stock at a purchaseprice of $200 per share. The rights, unless earlier redeemed by our Board ofDirectors, will detach and trade separately from our common stock upon theoccurrence of certain events such as the unsolicited acquisition by a thirdparty of beneficial ownership of 10% or more of our outstanding combined commonstock and Class A common stock or the announcement by a third party of the intentto commence a tender or exchange offer for 10% or more of our outstandingcombined common stock and Class A common stock. After the rights have detached,the holders of such rights would generally have the ability to purchase suchnumber of either shares of our common stock or stock of an acquirer of ourshaving a market value equal to twice the exercise price of the right beingexercised, thereby causing substantial dilution to a person or group of personsattempting to acquire control of us. The rights may serve as a significantdeterrent to unsolicited attempts to acquire control of us, includingtransactions involving a premium to the market price of our stock.  The rights expire on January 1, 2012, unlessearlier redeemed.

We adopted SAB No.108 during the quarter ended December 31, 2006. Prior to adopting SAB No. 108, our approach to quantifying misstatementsonly considered the amount of the error originating in the current yearstatement of earnings.  Thus the effectsof correcting the portion of the balance sheet misstatement that originated inprior years were not considered.  Uponadopting SAB No. 108, we changed our approach to quantifying the effects ofmisstatements to include an analysis of the impact on the current yearstatement of earnings for the cumulative balance of any known errors,regardless of when they originated.  Whenwe applied the new approach to quantifying the effects of misstatements to our2006 consolidated financial statements, we identified an error that was notmaterial to our consolidated statement of earnings in any prior quarter orannual period; however, the cumulative error would have been material tocorrect in the current period.  The errorresulted from a difference in the amount of slot win we recorded from our metersas compared to the amount of cash slot win that was taken out of the slotmachines 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 

48

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corrected with anadjustment of $1,541,000, net of income tax effect of $1,055,000, to thebeginning balance of retained earnings at January 1, 2006.

On January 24, 2007, our Board of Directors declared aquarterly cash dividend on both classes of common stock of $.045 pershare.  The dividend is payable on March10, 2007 to stockholders of record at the close of business on February 10,2007.

OnOctober 23, 2002, our Board of Directors authorized the repurchase of up to3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization does notobligate us to acquire any specific number of shares and may be suspended atany time.  No purchases of our equitysecurities were made pursuant to this authorization during the years endedDecember 31, 2006 and 2005.  During theyear ended December 31, 2004, we purchased and retired 76,350 shares of ouroutstanding common stock pursuant to this plan at an average purchase price of$6.63 per share, not including nominal brokerage commissions.  At December 31, 2006, we had remainingrepurchase authority of 2,668,733 shares.

During 2006, wepurchased and retired 3,431 shares of our outstanding common stock for$56,000.  These purchases were made fromemployees in connection with the vesting of restricted stock awards under ourstock incentive plan and were not pursuant to the aforementioned repurchaseauthorization. Since the vesting of a restricted stock award is a taxable eventto our employees for which income tax withholding is required, the plan allowsemployees to surrender to us some of the shares that would otherwise havevested in satisfaction of their tax liability. The surrender of these shares is treated by us as a purchase of theshares.

On November 10,2004, we commenced a tender offer to purchase up to 1,560,632 shares of ourcommon stock and up to 2,411,259 shares of our Class A common stock at a fixedprice of $8.00 per share.  The offerexpired on December 10, 2004.  Wepurchased 1,560,632 shares of our common stock and 2,400,000 shares of ourClass A common stock for $32,045,000, including expenses, in connection withthe tender offer.

OnDecember 19, 2005, our Board of Directors authorized us to commence a tenderoffer 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, in connectionwith the tender offer.

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 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 planrequires that 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 the grant.  As of December 31, 2006, there were 959,909shares available for granting options or stock awards.

Stock optionactivity for the year ended December 31, 2006 was as follows:

|                                   | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in yrs)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|----------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December  31, 2005 |       | 1,026,384                  |       | $                                                | 6.88       |                                                                   |       |                            |       |   |
| Forfeited                         |       | (7,500                     | )          | $                                                | 6.34       |                                                                   |       |                            |       |   |
| Exercised                         |       | (65,135                    | )          | $                                                | 7.18       |                                                                   |       |                            |       |   |
| Outstanding at December  31, 2006 |       | 953,749                    |       | $                                                | 6.86       |                                                                   | 2.9        |                            | $          | 6,208,293 |   |
| Exercisable at December 31, 2006  |       | 602,924                    |       | $                                                | 6.89       |                                                                   | 2.5        |                            | $          | 3,906,357 |   |

 

49

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No stock optionswere granted during the three year period ending December 31, 2006.  The total intrinsic value of stock optionsexercised during the years ended December 31, 2006 and 2005 was $560,000 and$3,000, respectively.  No stock optionswere exercised during the year ended December 31, 2004.

Nonvested stock option activity for the year endedDecember 31, 2006 was as follows:

|                                 | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Grant Date  Fair Value** | ** ** |
|---------------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| Nonvested at December  31, 2005 |       | 505,929                    |       | $                                                             | 2.99       |   |
| Forfeited                       |       | (3,750                     | )          | $                                                             | 2.68       |   |
| Vested                          |       | (151,354                   | )          | $                                                             | 3.02       |   |
| Nonvested at December 31, 2006  |       | 350,825                    |       | $                                                             | 2.99       |   |

 

The total fairvalue of stock options vested during the year ended December 31, 2006 was$457,000.  We recorded, within generaland administrative expenses, compensation expense of $372,000 related to stockoptions for the year ended December 31, 2006. As of December 31, 2006, there was $553,000 of total unrecognizedcompensation cost related to nonvested stock options granted to employees underour stock incentive plan.  That cost isexpected to be recognized over a weighted-average period of 2 years.

Nonvestedrestricted stock activity for the year ended December 31, 2006 was as follows:

|                                 | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Grant Date  Fair Value** | ** ** |
|---------------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| Nonvested at December  31, 2005 |       | 160,500                    |       | $                                                             | 8.23       |   |
| Granted                         |       | 112,500                    |       | $                                                             | 9.58       |   |
| Vested                          |       | (14,100                    | )          | $                                                             | 7.75       |   |
| Forfeited                       |       | (15,600                    | )          | $                                                             | 8.78       |   |
| Nonvested at December 31, 2006  |       | 243,300                    |       | $                                                             | 8.85       |   |

 

The aggregate market value of the nonvested stockat the date of issuance is being amortized on a straight-line basis over thesix-year service period.  Thetotal fair value of shares vested during the year ended December 31, 2006 was$109,000.  No shares vested during theyears ended December 31, 2005 and 2004. The weighted-average grant-date fair value of nonvested stock awardsgranted during the years ended December 31, 2006, 2005 and 2004 was $9.58,$8.61 and $7.75, respectively.  Werecorded, within general and administrative expenses, compensation expense of$360,000, $214,000 and $67,000 related to nonvested stock awards for the yearsended December 31, 2006, 2005 and 2004, respectively.  As of December 31, 2006, there was $1,620,000of total deferred compensation cost related to nonvested stock awards grantedto employees under our stock incentive plan. That cost is expected to be recognized over a weighted-average period of4.6****years.

**NOTE 9—Related Party Transactions**

During the years ended December 31, 2006, 2005 and2004, we allocated costs of $1,614,000, $1,613,000 and $1,241,000,respectively, to DVD for certain administrative and operating services.  Additionally, DVD allocated costs of$121,000, $113,000 and $116,000 to us for the years ended December 31, 2006,2005 and 2004, respectively.  Theallocations were based on an analysis of each company’s share of thecosts.  In connection with DVD’s 2006,2005 and 2004 NASCAR event weekends at Dover International Speedway, we providedcertain catering services for which DVD was invoiced $965,000, $938,000 and$933,000, respectively.  Additionally,DVD invoiced us $149,000, $113,000 and $238,000, respectively, for tickets andother services related to the 2006, 2005 and 2004 Dover events.  As of December 31, 2006 and 2005, ourconsolidated balance sheet includes a $9,000 payable and $15,000 receivablefrom DVD, respectively, for the aforementioned items.  We have since settled the payable in thefirst quarter of 2007.  The net costsincurred by each company for these services are not necessarily indicative ofthe costs that would have been incurred if the companies had been unrelatedentities and/or had otherwise independently managed these functions; however,management believes that these costs are reasonable.

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Our use of DVD’s 5/8-mile harness racing track is pursuant to aneasement granted to us by DVD which does not require the payment of any rent.Under the terms of the easement, we have exclusive use of the harness track duringthe period beginning 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.

In conjunction with the spin-off from DVD, we and DVDentered into various agreements that addressed the allocation of assets andliabilities between the two companies and that define the companies’relationship after the separation.  Amongthese are the Real Property Agreement, the Transition Support ServicesAgreement and the Tax Sharing Agreement.

The Real Property Agreement governs certain real propertytransfers, leases and easements affecting our Dover, Delaware facility.

The Transition Support Services Agreement provides foreach of us and DVD to provide each other with certain administrative andoperational services.  The partyreceiving the services is required to pay for them within 30 business daysafter receipt of an invoice at rates agreed upon by us and DVD.  The agreement may be terminated in whole orin part 90 days after the request of the party receiving the services or 180days after the request of the party providing the services.

The Tax SharingAgreement provides for, among other things, the treatment of income tax mattersfor periods beginning before and including the date of the spin-off and anytaxes resulting from transactions effected in connection with the spin-off.With respect to any period ending on or before the spin-off or any tax periodin which the spin-off occurs, DVD:

·                  continuesto be the sole and exclusive agent for us in all matters relating to ourincome, franchise, property, sales and use tax liabilities;

·                  subjectto our obligation to pay for items relating to our gaming business, bears anycosts relating to tax audits, including tax assessments and any relatedinterest and penalties and any legal, litigation, accounting or consultingexpenses;

·                  continuesto have the sole and exclusive responsibility for the preparation and filing ofconsolidated federal and consolidated state income tax returns; and

·                  subjectto the right and authority of us to direct DVD in the defense or prosecution ofthe portion of a tax contest directly and exclusively related to any DoverDowns Gaming & Entertainment, Inc. tax adjustment, generally has thepowers, in DVD’s sole discretion, to contest or compromise any claim or refundon our behalf.

HenryB. Tippie, the Chairman of our Board of Directors, controls in excess of fiftypercent of our voting power.  Mr. Tippie’svoting control with respect to us emanates from his direct and indirectholdings of common stock and Class A common stock, from his status as executorof the estate of John W. Rollins, our largest stockholder, and from certainshares as to which he has voting rights pursuant to a voting agreement with R.Randall Rollins, one of our directors. This means that Mr. Tippie has the ability to determine the outcome ofour election of directors and to determine the outcome of many significantcorporate transactions, many of which only require the approval of a majorityof our voting power.

PatrickJ. Bagley, Kenneth K. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W.Rollins, Jr., R. Randall Rollins and Henry B. Tippie are all Directors of oursand DVD. Denis McGlynn is the President and Chief Executive Officer of bothcompanies, Klaus M. Belohoubek is the Senior Vice President — General Counseland Secretary of both companies and Patrick J. Bagley is the Senior VicePresident — Finance and Chief Financial Officer of DVD.  Mr. Tippie controls in excess of fiftypercent of the voting power of DVD.

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**NOTE 10—Commitments and Contingencies**

We are a party toordinary routine litigation incidental to our business.  Management does not believe that theresolution of any of these matters is likely to have a material adverse effecton our results of operations, financial condition or cash flows.

As of December 31,2006, we have purchase obligations related to the expansion of the Dover Downs Hotel.  Construction began in the second quarter of2006 and is expected to be completed in the fall of 2007.  The estimated cost of the hotel expansion is$53,600,000, of which approximately $16,400,000 was paid through 2006 with theremainder expected to be paid in 2007.

We have employment, severance and noncompete agreements with certain ofour officers and directors under which certain change of control, severance andnoncompete payments and benefits might become payable in the event of a changein our control, defined to include a tender offer or the closing of a merger orsimilar corporate transactions.  In theevent of such a change in our control and the subsequent termination ofemployment of all employees covered under these agreements, the maximumcontingent liability would be approximately $9,600,000.

**NOTE 11—Quarterly Results(unaudited)**
| ** **                       | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31 (a)** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|-------------------------------|------------|
| **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 |   |
| ** **                       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                    | ** ** |
| **Year Ended December 31, 2005** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                    | ** ** |
| Revenues                         |       | $                 | 52,091,000 |             | $          | 54,674,000            |       | $                             | 56,072,000 |   | $ | 54,015,000 |   |
| Operating earnings               |       | $                 | 8,824,000  |             | $          | 9,999,000             |       | $                             | 10,941,000 |   | $ | 16,022,000 |   |
| Net earnings                     |       | $                 | 4,979,000  |             | $          | 5,644,000             |       | $                             | 6,195,000  |   | $ | 9,222,000 |   |
| Net earnings per  share-basic    |       | $                 | 0.14       |             | $          | 0.16                  |       | $                             | 0.17       |   | $ | 0.26 |   |
| Net earnings per  share-diluted  |       | $                 | 0.14       |             | $          | 0.16                  |       | $                             | 0.17       |   | $ | 0.26 |   |

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(a)             Includedin our 2005 fourth quarter results is a gain on the sale of a shopping centerof $5,837,000 ($3,461,000 after income taxes).

Per share dataamounts for the quarters have each been calculated separately.  Accordingly, quarterly amounts may not add tothe annual amounts because of differences in the average common sharesoutstanding during each period.

 

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