**UNITED STATES SECURITIES &EXCHANGECOMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| (Mark One)                                                                                                                                                                                                                                                                            | ** ** | ** **                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                    |
| **For the quarterly period ended September 30,  2006**                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                    |
| **OR**                                                                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                    |
| **o**                                                                                                                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                    |
| **For the transition period from                          to                    ** |

 

**Commission File No. 333-53211**

**HardRock Hotel, Inc.**(Exact name of registrant as specified in its charter)

| **Nevada**                      |   | **88-0306263**                       |
|---------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |   |                                 |

 

**4455 Paradise Road, Las Vegas NV  89109**(Address of principal executive offices — Zip Code)

**(702) 693-5000**(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,if changed since last report)

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. xYes o No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.    (Checkone):

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

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). o Yesx No

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

Common Stock outstanding by class as of November 14, 2006

| Class of Common Stock | ** ** | **Shares** |
|----------------------------|------------|------------|
| Class A Common Stock  |       | 12,000     |
| Class B Common Stock  |       | 64,023     |

 

 

----

 

HARD ROCK HOTEL,INC.INDEX
| Part I  |   | FINANCIAL  INFORMATION                                                                                          |   |   |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|
|         |   |                                                                                                            |   |   |
| Item  1.     |   | Financial  Statements (unaudited)                                                                               |   |   |
|         |   |                                                                                                            |   |   |
|         |   | Condensed Balance Sheets as of September 30, 2006  and December 31, 2005                              |   |   |
|         |   |                                                                                                            |   |   |
|         |   | Condensed Statements of Operations for the three and  nine month periods ended September 30, 2006 and 2005 |   |   |
|         |   |                                                                                                            |   |   |
|         |   | Condensed Statements of Cash Flows for the nine month  periods ended September 30, 2006 and 2005           |   |   |
|         |   |                                                                                                            |   |   |
|         |   | Notes to Condensed Financial Statements                                                                         |   |   |
|         |   |                                                                                                            |   |   |
| Item 2.      |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                     |   |   |
|         |   |                                                                                                            |   |   |
| Item 3.      |   | Quantitative and Qualitative Disclosures about Market  Risk                                                     |   |   |
|         |   |                                                                                                            |   |   |
| Item 4.      |   | Controls and Procedures                                                                                         |   |   |
|         |   |                                                                                                            |   |   |
| PART II |   | OTHER  INFORMATION                                                                                              |   |   |
|         |   |                                                                                                            |   |   |
| Item  1.     |   | Legal  Proceedings                                                                                              |   |   |
|         |   |                                                                                                            |   |   |
| Item 1A.     |   | Risk  Factors                                                                                                   |   |   |
|         |   |                                                                                                            |   |   |
| Item  5.     |   | Other  Information                                                                                              |   |   |
|         |   |                                                                                                            |   |   |
| Item 6.      |   | Exhibits                                                                                                        |   |   |

 

 

2

----

**Part I FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**HARD ROCK HOTEL, INC.****CONDENSED BALANCE SHEETS (unaudited)****(in thousands, except share amounts)**
| ** **                                                                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                    |       |                         |       |                        |       |
|                                                                                                                                                      |       |                         |       |                        |       |
| Current assets:                                                                                                                                           |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                |       | $                            | 14,801     |                        | $          | 8,895 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,249 and $1,002 as of  September 30, 2006 and December 31, 2005, respectively |       | 8,490                        |       | 6,986                       |       |
| Inventories                                                                                                                                               |       | 2,120                        |       | 2,205                       |       |
| Prepaid expenses  and other current assets                                                                                                                |       | 3,943                        |       | 2,590                       |       |
| Deferred income  taxes, net                                                                                                                               |       | 2,287                        |       | 5,832                       |       |
| Related party  receivables                                                                                                                                |       | 638                          |       | 589                         |       |
| Total current  assets                                                                                                                                     |       | 32,279                       |       | 27,097                      |       |
|                                                                                                                                                      |       |                         |       |                        |       |
| Property and equipment,  net of accumulated depreciation and amortization                                                                                 |       | 163,993                      |       | 165,662                     |       |
| Deferred income taxes,  net                                                                                                                               |       | 2,034                        |       | 2,034                       |       |
| Other assets, net                                                                                                                                         |       | 3,226                        |       | 4,164                       |       |
| TOTAL ASSETS                                                                                                                                              |       | $                            | 201,532    |                        | $          | 198,957 |   |
|                                                                                                                                                      |       |                         |       |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ DEFICIENCY                                                                                                            |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                      |       |                         |       |                        |       |
| Accounts payable                                                                                                                                          |       | $                            | 3,755      |                        | $          | 3,968 |   |
| Related party  payable                                                                                                                                    |       | 384                          |       | 784                         |       |
| Accrued expenses  and other liabilities                                                                                                                   |       | 10,206                       |       | 8,021                       |       |
| Advanced  reservations deposits                                                                                                                           |       | 2,535                        |       | 2,447                       |       |
| Gaming chip and  token float                                                                                                                              |       | 2,802                        |       | 2,673                       |       |
| Deferred  compensation, current portion                                                                                                                   |       | 4,405                        |       | —                      |       |
| Interest payable                                                                                                                                          |       | 5,058                        |       | 3,024                       |       |
| Current portion  of long-term debt                                                                                                                        |       | —                       |       | 58                          |       |
| Total current  liabilities                                                                                                                                |       | 29,145                       |       | 20,975                      |       |
|                                                                                                                                                      |       |                         |       |                        |       |
| Deferred compensation,  less current portion                                                                                                              |       | —                       |       | 2,478                       |       |
| Junior subordinated  notes                                                                                                                                |       | 41,929                       |       | 40,857                      |       |
| Long-term debt, less  current portion                                                                                                                     |       | 147,000                      |       | 157,000                     |       |
| Total long-term  liabilities                                                                                                                              |       | 188,929                      |       | 200,335                     |       |
| Total liabilities                                                                                                                                         |       | 218,074                      |       | 221,310                     |       |
|                                                                                                                                                      |       |                         |       |                        |       |
| Commitments and  contingencies (Note 4)                                                                                                                   |       |                         |       |                        |       |
|                                                                                                                                                      |       |                         |       |                        |       |
| Shareholders’  deficiency:                                                                                                                           |       |                         |       |                        |       |
| Common stock,  Class A voting, no par value, 40,000 shares authorized, 12,000 shares issued  and outstanding                                              |       | —                       |       | —                      |       |
| Common stock,  Class B non-voting, no par value, 160,000 shares authorized, 64,023 shares  issued and outstanding                                         |       | —                       |       | —                      |       |
| Paid-in capital                                                                                                                                           |       | 7,508                        |       | 7,508                       |       |
| Accumulated  deficit                                                                                                                                      |       | (24,050                      | )          | (29,861                     | )          |
| Total  shareholders’ deficiency                                                                                                                      |       | (16,542                      | )          | (22,353                     | )          |
|                                                                                                                                                      |       |                         |       |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIENCY                                                                                                       |       | $                            | 201,532    |                        | $          | 198,957 |   |

 

*The accompanying notes are an integral part ofthese unaudited condensed financial statements.*

 

3

----

**HARD ROCK HOTEL, INC.CONDENSED STATEMENTS OF OPERATIONS(in thousands, except share and per share amounts)(unaudited)**
| ** **                                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Casino                                               |       | $                                                    | 15,678     |                                                | $          | 17,890 |   | $ | 46,115 |   | $ | 50,699 |   |
| Lodging                                              |       | 11,549                                               |       | 10,180                                              |       | 32,561 |   | 29,858 |   |
| Food and  beverage                                   |       | 20,162                                               |       | 17,475                                              |       | 55,807 |   | 51,937 |   |
| Retail store                                         |       | 1,915                                                |       | 2,050                                               |       | 5,535 |   | 5,893 |   |
| Other                                                |       | 5,258                                                |       | 3,576                                               |       | 12,838 |   | 12,018 |   |
| Gross revenues                                       |       | 54,562                                               |       | 51,171                                              |       | 152,856 |   | 150,405 |   |
| Less:  promotional allowances                        |       | (3,238                                               | )          | (3,671                                              | )          | (9,620 | ) | (10,754 | ) |
| Net revenues                                         |       | 51,324                                               |       | 47,500                                              |       | 143,236 |   | 139,651 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and expenses:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Casino                                               |       | 9,335                                                |       | 10,183                                              |       | 27,109 |   | 28,203 |   |
| Lodging                                              |       | 2,673                                                |       | 2,581                                               |       | 8,178 |   | 7,600 |   |
| Food and  beverage                                   |       | 10,539                                               |       | 9,149                                               |       | 30,032 |   | 26,670 |   |
| Retail store                                         |       | 1,231                                                |       | 968                                                 |       | 3,215 |   | 2,556 |   |
| Other                                                |       | 5,078                                                |       | 2,994                                               |       | 12,289 |   | 12,174 |   |
| Marketing,  advertising and entertainment            |       | 1,339                                                |       | 1,567                                               |       | 4,465 |   | 4,729 |   |
| General and  administrative                          |       | 7,100                                                |       | 7,399                                               |       | 22,189 |   | 20,393 |   |
| Merger costs                                         |       | 782                                                  |       | —                                              |       | 2,665 |   | — |   |
| Depreciation and  amortization                       |       | 3,277                                                |       | 3,001                                               |       | 9,570 |   | 8,900 |   |
| Loss (gain) on  disposal of assets, net              |       | 80                                                   |       | (37                                                 | )          | 452 |   | 514 |   |
| Pre-opening  expenses                                |       | —                                               |       | 87                                                  |       | — |   | 283 |   |
| Total costs and  expenses                            |       | 41,434                                               |       | 37,892                                              |       | 120,164 |   | 112,022 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Income from operations                               |       | 9,890                                                |       | 9,608                                               |       | 23,072 |   | 27,629 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense):                              |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                      |       | 49                                                   |       | 88                                                  |       | 186 |   | 218 |   |
| Interest expense                                     |       | (4,547                                               | )          | (4,863                                              | )          | (13,902 | ) | (14,611 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Income before provision  for income taxes            |       | 5,392                                                |       | 4,833                                               |       | 9,356 |   | 13,236 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense                                   |       | 2,045                                                |       | —                                              |       | 3,545 |   | — |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                           |       | $                                                    | 3,347      |                                                | $          | 4,833 |   | $ | 5,811 |   | $ | 13,236 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| BASIC AND DILUTED NET  INCOME PER SHARE:             |       |                                                 |       |                                                |       |   |   |   |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                           |       | $                                                    | 44.03      |                                                | $          | 63.57 |   | $ | 76.44 |   | $ | 174.11 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number of common shares outstanding |       | 76,023                                               |       | 76,023                                              |       | 76,023 |   | 76,023 |   |

 

*The accompanying notes are an integral part ofthese unaudited condensed financial statements.*

 

4

----

**HARD ROCK HOTEL, INC.CONDENSED STATEMENTS OF CASH FLOWS(in thousands, except supplemental schedule)(unaudited)**
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,  2006** | ** ** | **Nine Months Ended  September 30,   2005** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Cash flows from  operating activities:                                             |       |                                                      |       |                                                            |       |
| Net income                                                                         |       | $                                                         | 5,811      |                                                            | $          | 13,236 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                      |       |                                                            |       |
| Depreciation and  amortization                                                     |       | 9,570                                                     |       | 8,900                                                           |       |
| Provision for  losses on accounts receivable                                       |       | 364                                                       |       | 358                                                             |       |
| Amortization of  bond offering fees and costs                                      |       | 384                                                       |       | 384                                                             |       |
| Loss on disposal  of assets                                                        |       | 452                                                       |       | 514                                                             |       |
| Changes in  operating assets and liabilities:                                      |       |                                                      |       |                                                            |       |
| Accounts  receivable                                                               |       | (1,868                                                    | )          | (2,748                                                          | )          |
| Inventories                                                                        |       | 85                                                        |       | 280                                                             |       |
| Prepaid expenses  and other current assets                                         |       | (701                                                      | )          | (372                                                            | )          |
| Related party  receivable                                                          |       | (49                                                       | )          | (747                                                            | )          |
| Accounts payable                                                                   |       | (213                                                      | )          | 172                                                             |       |
| Related party  payable                                                             |       | (400                                                      | )          | 2                                                               |       |
| Deferred  compensation                                                             |       | 1,927                                                     |       | 1,050                                                           |       |
| Accrued expenses                                                                   |       | 2,402                                                     |       | 1,298                                                           |       |
| Deferred income  taxes                                                             |       | 3,545                                                     |       | —                                                          |       |
| Interest payable                                                                   |       | 3,106                                                     |       | 4,569                                                           |       |
| Net cash provided by  operating activities                                         |       | 24,415                                                    |       | 26,896                                                          |       |
|                                                                               |       |                                                      |       |                                                            |       |
| Cash flows used in  investing activities:                                          |       |                                                      |       |                                                            |       |
| Purchases of  property and equipment                                               |       | (8,357                                                    | )          | (6,424                                                          | )          |
| Proceeds from  sale of operating assets                                            |       | 4                                                         |       | 19                                                              |       |
| Other long lived  assets                                                           |       | (98                                                       | )          | (17                                                             | )          |
| Net cash used in  investing activities                                             |       | (8,451                                                    | )          | (6,422                                                          | )          |
|                                                                               |       |                                                      |       |                                                            |       |
| Cash flows used in  financing activities:                                          |       |                                                      |       |                                                            |       |
| Principal  payments on long-term debt                                              |       | (10,058                                                   | )          | (13,630                                                         | )          |
| Net cash used in  financing activities                                             |       | (10,058                                                   | )          | (13,630                                                         | )          |
|                                                                               |       |                                                      |       |                                                            |       |
| Net increase in cash  and cash equivalents                                         |       | 5,906                                                     |       | 6,844                                                           |       |
| Cash and cash  equivalents, beginning of period                                    |       | 8,895                                                     |       | 10,655                                                          |       |
|                                                                               |       |                                                      |       |                                                            |       |
| Cash and cash  equivalents, end of period                                          |       | $                                                         | 14,801     |                                                            | $          | 17,499 |   |
|                                                                               |       |                                                      |       |                                                            |       |
| Supplemental  disclosures of cash flow information:                                |       |                                                      |       |                                                            |       |
| Cash paid during the  period for interest                                          |       | $                                                         | 10,412     |                                                            | $          | 9,658 |   |
| Cash paid during the period for income taxes, net                                  |       | $                                                         | —     |                                                            | $          | 210 |   |

 

SupplementalSchedule of Non-Cash Investing and Financing Activities:

In accordance with the terms of the Junior Notes, theCompany recorded interest in kind of $1.1 million during the nine monthperiod ended September 30, 2006 and increased the principal amount of theJunior Notes.

In accordance with the terms of the Junior Notes, theCompany recorded interest in kind of $2.8 million during the nine monthperiod ended September 30, 2005 and increased the principal amount of theJunior Notes.

*The accompanying notes are an integral part ofthese unaudited condensed financial statements*

 

5

----

**HARD ROCK HOTEL, INC.NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**

1.             BASISOF PRESENTATION

Hard Rock Hotel, Inc. (the “Company”), a Nevadacorporation incorporated on August 30, 1993, operates a hotel-casino inLas Vegas, Nevada (the “Resort”). Lily Pond Investments, Inc. (“LilyPond”), a Nevada corporation controlled and majority owned by Peter Morton,owns all of the voting shares and 93% of the non-voting shares of the Company.Mr. Morton has granted a sublicense to the Company, pursuant to which theCompany holds the exclusive right to use the “Hard Rock Hotel” trademark forthe Company’s operations in Las Vegas.

These condensed financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, certain notes and otherinformation have been condensed or omitted from the interim financialstatements presented in this Quarterly Report on Form 10-Q and they do notinclude all information required by accounting principles generally accepted inthe United States of America for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates.

Certain reclassifications have been made to the prioryear financial statements to conform to the current year presentation. Thereclassifications relate primarily to recording revenue and related expenses oncertain transactions on a gross basis versus net basis. During the three and ninemonth periods ended September 30, 2005, the Company recorded certaintransactions for entertainment ticket sales and catering production on a netbasis and included the net expense in marketing expense. The Company has reclassified$0.9 million of revenue that had previously been netted with marketing expenseto other income, $0.5 million from marketing expense to other expense and $0.2million of revenue that had previously been netted with food and beverageexpense to food and beverage revenue for the three month period ended September30, 2005. The Company has reclassified $4.4 million of revenue that hadpreviously been netted with marketing expense to other income, $3.6 millionfrom marketing expense to other expense and $0.7 million of revenue that hadpreviously been netted with food and beverage expense to food and beveragerevenue for the nine month period ended September 30, 2005.  

The Company reclassed $0.5 million, on the statementof operations, to general and administrative expenses for technical supportservices for the development, ongoing improvement and operation of the Companyfrom related party expense for the three months ended September 30, 2005.  The Company reclassed $1.8 million, on thestatement of operations, to general and administrative expenses for technicalsupport services for the development, ongoing improvement and operation of theCompany from related party expense for the nine months ended September 30,2005.  The Company reclassed $0.9 millionto operating expenses, on the statement of operations, for the Amended andRestated Supervisory Agreement from related party expenses for the three monthsended September 30, 2005.  The Companyreclassed $2.8 million to operating expenses, on the statement of operations,for the Amended and Restated Supervisory Agreement from related party expensesfor the nine months ended September 30, 2005. 

The Company reclassified $4.2 million in deferredincome tax liability to deferred income tax asset long term on the balancesheet as of December 31, 2005. The Company reclassified $2.4 million in accruedexpenses and other liabilities to advanced reservations deposits on the balancesheet as of December 31, 2005. The Company reclassified $2.7 million in accruedexpenses and other liabilities to gaming chip and token float on the balancesheet as of December 31, 2005. These reclassification did not have an effect onnet income in the statements of operations.

Operating results for the nine month period ended September 30,2006 are not necessarily indicative of future financial results or the resultsthat may be expected for the year ending December 31, 2006. The unauditedinterim financial statements contained herein should be read in conjunctionwith the audited financial statements and notes in our Annual Report onForm 10-K for the year ended December 31, 2005.

6

----

Recently Issued Accounting Standards

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 158.*“Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans-anamendment of FASB Statements No. 87, 88, 106 and 132(R)”*. SFAS No.158 requires employers to recognize the over-funded or under-funded status of adefined benefit postretirement plan as an asset or liability and to recognizechanges in that funded status in the year in which the changes occur through othercomprehensive income. This Statement also requires employers to measure thefunded status of a plan as of the date of its year end and is effective forpublicly traded companies as of the end of the fiscal year ending after December31, 2006. We do not expect the adoption of SFAS No. 158 to have a materialeffect on our financial statements as we do not currently have a definedbenefit postretirement plan that meets the criteria specified under SFAS No. 158.

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements”,*which defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. We are currently evaluating theimpact that the adoption of SFAS No. 157 will have on our financial statements.

In February 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 155,*“Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140”*. SFAS No. 155 allows financialinstruments that have embedded derivatives to be accounted for as a whole(eliminating the need to bifurcate the derivative from its host) if the holderelects to irrevocably account for the whole instrument on a fair value basis.SFAS No. 155 is effective for all financial instruments acquired or issuedafter December 31, 2006. We do not expect the adoption of SFAS No. 155 to havea material effect on our financial statements, as we do not currently have anyfinancial instruments that meet the criteria specified under SFAS No. 155.

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”),*“Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109”.* FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes.* FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006, and applies to all tax positions accounted for in accordancewith SFAS No. 109. We are currently evaluating the impact that the adoption ofFIN 48 will have on our financial statements.

InSeptember 2006, the Securities and Exchange Commission (“SEC”) issuedStaff Accounting Bulletin No. 108 (“SAB 108”), which documents the SECstaff’s views regarding the process of quantifying financial statementmisstatements. Under SAB 108, we must evaluate the materiality of an identifiedunadjusted error by considering the impact of both the current year error andthe cumulative error, if applicable. This also means that both the impact onthe current period income statement and the period-end balance sheet must beconsidered. 

SAB 108 iseffective for fiscal years ending after November 15, 2006. Any pastadjustments required to be recorded as a result of adopting SAB 108 arerecorded as a cumulative effect adjustment to the opening balance of retainedearnings. We do not believe the adoption of SAB 108 will have a material impacton our financial position or results of operations. 

2.             AGREEMENTSWITH RELATED PARTIES

The Company has a twenty-five year Amended andRestated Supervisory Agreement with Peter Morton, which provides for thesupervision of the development, improvement, operation, and maintenance of theCompany through 2022. Mr. Morton has the option to renew the agreement for twosuccessive fifteen year terms. Pursuant to the terms of the SupervisoryAgreement, Mr. Morton is to provide consulting and supervisory services to theCompany. In the event either the Company or Mr. Morton is in Default (asdefined in the agreement), the non-defaulting party may terminate the agreementafter the other party has received the opportunity to cure such default. Aspart of this agreement, the Company pays to Mr. Morton a supervisory fee equalto two percent of annual gross revenues (as defined), net of complimentariesfor each year. Total supervisory fee expenses for these services for the ninemonths ended September 30, 2006 and 2005 amounted to $2,874,000 and $2,695,000,respectively. These expenses are included in the operating departments in theaccompanying statements of operations. The unpaid amounts at September 30,2006 and December 31, 2005 are $384,000 and $784,000, respectively, and are includedin related party payable in the accompanying balance sheets.

Entities controlled by Mr. Morton have providedadditional technical support services for the development, ongoing improvementand operation of the Company. The Company reimburses these entities for allcosts and expenses incurred in connection with these services, including,without limitation, employee salary and benefits and allocated overhead. OnAugust 15, 2005, the Company entered a Commercial Sublease (“CommercialSublease”) with 510 Development, whereby the Company pays $20,000 a month forthis lease which expires December 31, 2009. The expense associated with thislease is included as part of the allocated overhead which is reimbursed by theCompany. These expenses aggregated approximately $1,941,000 and $1,806,000 forthe nine months ended September 30, 2006 and 2005, respectively, and areincluded in general and administrative in the accompanying statements ofoperations. The unpaid amounts at September 30, 2006 and December 31, 2005are $619,000 and $157,000, respectively, were due from these entities forexpenses paid in advance and are included in related party receivable in theaccompanying balance sheets.  In the ninemonths ended September 30, 2006 the company capitalized $1.8 million to remodelthe Commercial Sublease.

7

----

The Company has provided technical support servicesand paid certain overhead expenses for the development and operation of HRCondominium Investors (Vegas), LLC (“HRCI”), an affiliate of our ChiefExecutive Officer Mr. Morton. HR Condominium Investors (Vegas), LLCreimburses the Company for all of these costs and expenses. The unpaid amountsat September 30, 2006 and December 31, 2005 are $3,000 and $251,000,respectively, and are included in related party receivable in the accompanyingbalance sheets.

During the nine months ended September 30, 2006 and2005, the Company paid compensation to Harry Morton, son of Peter Morton, of $146,000and $128,000, respectively, for his position as Special Projects Director whichhe started in the year ended December 31, 2004. The Company also providedhousing and other services to Harry Morton at the resort with a total estimatedvalue during the nine months ended September 30, 2006 and 2005, of $35,000 and$23,000, respectively. These costs are included in food and beverage expense onthe statements of operations for the nine months ended September 30, 2006 and2005.

The Company provides technical support services andpays certain overhead expenses for the development and operation of Pink TacoScottsdale, LLC, an entity managed by Harry Morton, son of the Company’s ChiefExecutive Officer Mr. Morton. Pink Taco Scottsdale, LLC reimburses the Companyfor all of these costs and expenses. The unpaid amounts at September 30, 2006and December 31, 2005 are $8,000 and $181,000, respectively, and are includedin related party receivable in the accompanying balance sheets.

On December 24, 2004, PM Realty LLC (a developmententity involved in the condominium project and owned by Mr. Morton) and theCompany entered into a lease for a ten year initial term with Mr. Chow of LasVegas, LLC (“Mr. Chow”) for commercial space anticipated to be developed onland contiguous to the resort. The lease provides that if ground-breaking workon such development has not been received, in each case on or before June 1,2006, Mr. Chow may elect to terminate such lease and receive a leasetermination fee of $250,000.  The Companyhas not broken ground on the development. Mr. Chow has informed the Company that they have not elected toterminate the lease and they are reserving their right to terminate the leasepending the result of ongoing conversations among representatives of theCompany, Morgans Hotel Group and Mr. Chow.

3.                                       LONG-TERMDEBT

As of September 30, 2006, the Company had $140.0million outstanding of its 8.875% Second Lien Notes due 2013 (the “2013Notes”). The Company also has a $40 million Senior Secured Credit Facility (the“Facility”) through a group of banks.  The Facility consists of a $20million, five-year senior secured term loan (the “Term Loan”) and a $20 millionsenior secured revolving credit facility (the “Revolving Credit Facility”). Asof September 30, 2006, the Company had $7.0 million outstanding on itsRevolving Credit Facility and had no balance outstanding on the Term Loan. Asof September 30, 2006, the Company also had approximately $41.9 millionoutstanding of junior subordinated notes (the “Junior Notes”), including$1.1 million of interest paid in kind during the nine month period ended September 30,2006.

2013 Notes

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013Notes are secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses which may not be pledged underapplicable law.  The security interest is junior to the security interestin the assets securing our obligation under our Facility and except forpermitted secured purchase money indebtedness.  The 2013 Notes are subjectto redemption at the option of the Company, in whole or in part, at any time onor after June 1, 2008, at a premium to the face amount ($140 million) thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The redemption rates are as follows: after June 1,2008, 104.438%, after June 1, 2009, 102.958%, after June 2010, 101.479% andafter June 1, 2011, 100%. The 2013 Notes contain covenants restricting orlimiting the ability of the Company to, among other things, pay dividends,create liens or other encumbrances, incur additional indebtedness, issuecertain preferred stock, sell or otherwise dispose of a portion of its assets,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates. The Company was in compliance with thesecovenants as of September 30, 2006.

Facility

Interest on the Facility accrues on all individualborrowings at an interest rate determined at the option of the Company, ateither the LIBOR Index plus an applicable LIBOR margin (not to exceed 3.5%(applicable margin was 3.25% at September 30, 2006) and aggregating 8.3%at September 30, 2006), or the Base Rate, defined as the higher of theFederal

8

----

Funds Rate plus 0.5%, or the reference rate, asdefined, plus an applicable margin (not to exceed 2.25%). The Company chose theLIBOR Index for all of its borrowings outstanding at September 30, 2006.These margins are dependent upon the Company’s total debt to EBITDA ratio, asdefined. Interest accrued on the Base Rate borrowings is due monthly, up to thematurity date, while interest on LIBOR borrowings is due six months up to thematurity date. The Facility is secured by substantially all of the Company’sproperty at the Las Vegas site. The Facility contains certain covenantsincluding, among other things, financial covenants, limitations on the Companyfrom disposing of capital stock, entering into mergers and certainacquisitions, incurring liens or indebtedness, issuing dividends on stock, andentering into transactions with affiliates. The Company was in compliance with these covenants as of September 30,2006.

The Company has a $0.3 million irrevocable standbyletter of credit for the benefit of the State of Nevada related to the selfinsured portion of the Company’s workers compensation insurance.

Junior Notes

Interest on the Junior Notes is payable on eachJanuary 15 and July 15, commencing on January 15, 2004, and maybe paid in cash or in kind at the Company’s option, provided that interest willbe paid in kind if a payment of such interest in cash would cause a defaultunder the 2013 Notes or the Facility.  The Junior Notes require that anysemi-annual interest payment in cash be equal to the lesser of (x) 50% of theamount of interest accrued on the Junior Notes since the most recent interestpayment date and (y) the amount of interest that the Company is permitted topay in cash without causing a default under the 2013 Notes or theFacility.  For interest payments payable in cash, interest accrues at arate per annum equal to 9.875%, and for interest payments payable in kind,interest accrues at a rate per annum equal to 10.50%.  The Junior Notesare contractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.  The Junior Notes mature on January 15,2014 but are subject to redemption at the option of the Company, in whole or inpart, at any time on or after January 15, 2009, at a premium to theprincipal amount thereof that decreases on each subsequent anniversary date,plus accrued interest to the date of redemption.  The Junior Notes containcovenants restricting the Company’s ability to, among other things, sell orotherwise dispose of its assets, pay dividends, incur additional indebtedness,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates. In December of 2005, the Company received consentfrom lenders under the Facility and repurchased $15.0 million of theoutstanding Junior Subordinated Notes. This transaction had a purchase premiumof $1.2 million. For the nine months ended September 30, 2006 and 2005 theCompany paid interest in kind of $1.1 million and $2.8 million, respectively.The Company was in compliance with these covenants as of September 30,2006.

4.             COMMITMENTS ANDCONTINGINCIES

Legal

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business.

Management provides an accrual for estimated lossesthat may occur and does not believe that the outcome of any pending claims orlitigation individually or in the aggregate, will have a material adverseeffect on the Company’s financial position, results of operations or liquiditybeyond the amounts recorded in the accompanying balance sheet as of September 30,2006.

Self-Insurance

The Company is self-insured for workers’ compensationclaims, up to an annual stop loss of $350,000 per claim. Management hasestablished reserves it considers adequate to cover estimated future paymentson claims incurred by the Company through September 30, 2006.

5.             MERGER

On May 11, 2006, the Company entered into an Agreementand Plan of Merger (the “Merger Agreement”) with Morgans Hotel Group Co.(“Morgans”) and MHG HR Acquisition Corp. (“Merger Sub”), a wholly ownedsubsidiary of Morgans. Under the terms of the Merger Agreement, Merger Sub willbe merged with and into the Company, with the Company continuing as thesurviving corporation and becoming a wholly owned subsidiary of Morgans. Eachshare of common stock of the Company issued and outstanding immediately priorto the effective time of the merger will be automatically converted into theright to receive cash based on the total transaction consideration ofapproximately $421.0

9

----

million, which is subject to a number of adjustments,including, among others, outstanding indebtedness and related party payables,working capital, cage cash, retention bonuses, transaction costs and expenses,and certain capital expenditures by the Company. Peter Morton, our ChiefExecutive Officer, will receive $40.0 million of the total transactionconsideration as consideration for the early termination of his SupervisoryAgreement. Of the total transaction consideration, $2.5 million will be held inan escrow to cover post-closing adjustments for working capital and cage cash,and $15.0 million will be held in an escrow to cover post-closingindemnification obligations of the Company’s stockholders.

Concurrently with the execution of the Merger Agreementand pursuant to the terms therein, Morgans has deposited into escrow $30.0million, a portion of which, upon the closing of the merger, will be creditedtowards the total transaction consideration, and a portion of which, upon theclosing of the merger, will be held in escrow as described above.

If the Merger Agreement is terminated under certaincircumstances, the Company may retain the $30 million deposit, with theCompany’s financial advisors receiving 25% of the transaction fee that theywould have received if the Merger was completed.  In the event of a default by the Company orits affiliates under the Merger Agreement, Morgans may seek specificperformance of the Merger Agreement.

The Merger Agreement provides that the closing of themerger must occur on or prior to the earlier of (1) seven business days afterMorgans’ receipt of all necessary gaming approvals to consummate thetransaction and (2) February 10, 2007, unless further extended by the parties.

The completion of the merger is subject to a number ofconditions, including, among other things, Morgans’ or related parties’ receiptof all necessary antitrust, gaming and other approvals, the repayment of alloutstanding indebtedness of the Company, the closing of certain othertransactions, and the satisfaction or waiver of all other conditions precedent.The merger is not subject to a financing condition.

In addition, completion of the Merger is conditionedon the concurrent closing of other transactions contemplated by the MergerAgreement, which transactions are governed by certain agreements betweenMorgans (or an affiliate thereof) and Mr. Morton, the Company’s Chief ExecutiveOfficer, pursuant to the Merger Agreement, as well as the termination ofcertain existing agreements between the Company and Mr. Morton.

The Company has agreed to stay bonuses ofapproximately $2.3 million in total, which will be paid to select employees whoare critical to the continued operations of the Company through the completionof the merger. The stay bonuses will become payable at the completion of themerger provided that the selected employee has remained in our employment tothe applicable date. The stay bonuses were communicated to select employees inApril 2006 and are being accrued over the expected service period. The Companybegan expensing this liability in April 2006 and has expensed $1.3 million inthe nine months ended September 30, 2006.

James D. Bowen, the Company’s acting Chief OperatingOfficer, General Manager, Executive Vice President, Chief Financial Officer andTreasurer has an employment agreement, dated November 8, 2000, and amendedas of September 7, 2001 and December 16, 2004 (the “Bowen EmploymentAgreement”).  Mr. Bowen’s employment agreementprovides that in the event of a Change in Control (as defined in the BowenEmployment Agreement) of the Company and if within thirty (30) days after theChange in Control Mr. Bowen tenders his resignation in accordance with theterms of the Bowen Employment Agreement, Mr. Bowen is entitled to be paid alump sum termination fee in an amount equal to the greater of (i) Six-Hundredand Fifty Thousand Dollars ($650,000.00) or (ii) twenty-four (24) months of Mr.Bowen’s base salary rate immediately prior to such termination, plus, an amountequal to two (2) times the average of the immediately preceding three (3)year’s annual bonuses paid to Mr. Bowen. The estimated amount of this payment is $0.8 million.  In addition, Mr. Bowen is entitled to be paidany amounts deferred or owed under any deferred compensation plan and to bepaid at a minimum a pro-rata share of any amounts that would have otherwisebeen due to Mr. Bowen under any deferred bonus plan.

The Company has expensed $2.7 million in costsassociated with the Merger Agreement in the nine months ended September 30,2006.  The Company has expensed $0.8million in costs associated with the Merger Agreement in the three  months ended September 30, 2006.

**Item 2.****    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The following discussion should be read in conjunctionwith, and is qualified in its entirety by the Company’s financial statements,including the notes thereto, and the other financial information appearingelsewhere herein and the

10

----

Annual Report to Shareholders on Form 10-K forthe year ended December 31, 2005, which may be obtained upon request fromthe Company.

SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS

This document includes various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, asamended, which represent the Company’s expectations or beliefs concerningfuture events. Statements containing expressions such as “believes,”“anticipates” or “expects” used in our press releases and periodic reports onForms 10-K and 10-Q filed with the Securities and Exchange Commission areintended to identify forward-looking statements. All forward-looking statementsinvolve risks and uncertainties. Although we believe our expectations are basedupon reasonable assumptions within the bounds of our knowledge of our businessand operations, there can be no assurances that actual results will notmaterially differ from expected results. We caution that these and similarstatements included in this report and in previously filed periodic reports,including reports filed on Forms 10-K and 10-Q, are further qualified byimportant factors that could cause actual results to differ materially fromthose in the forward-looking statements. Such factors include, withoutlimitation, the following:  increasedcompetition in existing markets or the opening of new gaming jurisdictions; adecline in the public acceptance of gaming; the limitation, conditioning orsuspension of any of our gaming licenses; increases in or new taxes imposed ongaming revenues or gaming devices; a finding of unsuitability by regulatoryauthorities with respect to our officers, directors or key employees; loss orretirement of key executives; significant increases in fuel or transportationprices; adverse economic conditions in our key markets; severe and unusualweather in our key markets; and adverse results of significant litigationmatters. Readers are cautioned not to place undue reliance on forward-lookingstatements, which speak only as of the date thereof. We expressly disclaim anyobligation or undertaking to disseminate any updates or revisions to anyforward-looking statement contained in this report, including to reflect anychange in our expectations with regard to that forward-looking statement or anychange in events, conditions or circumstances on which that forward-lookingstatement is based. For more information regarding risks inherent in aninvestment in the Company, see the section ”Business — Risk Factors” inour Annual Report to Shareholders on Form 10-K for the year endedDecember 31, 2005 filed with the SEC on April 17, 2006, in ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2006 filed withthe SEC on May 15, 2006 and in our Quarterly Report on Form 10-Q for thequarter ended June 30, 2006 filed with the SEC on August 14, 2006.

OVERVIEW

Our sole business is the operation of the Hard RockHotel and Casino in Las Vegas, NV.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPAREDTO THREE MONTHS ENDED SEPTEMBER 30, 2005

NET REVENUES.  Netrevenues increased 8% for the three months ended September 30, 2006 to$51.3 million compared to $47.5 million for the three months endedSeptember 30, 2005. The $3.8 million increase in net revenues wasprimarily attributable to a $2.7 million or 15% increase in food and beveragerevenues, a $1.7 million or 47% increase in other revenues, a $1.4 million or13% increase in lodging revenues and a $0.4 million decrease in promotionalallowances related to items furnished to customers on a complimentary basis.  These increases were offset partially by a$2.2 million or a 12% decrease in casino revenues and a $0.1 million or 7%decrease in retail revenues.

CASINO REVENUES.  The$2.2 million decrease in casino revenues was primarily due to a $2.0 millionor 16% decrease in table games revenues and a $0.3 million or 64% decrease inrace and sports book revenues. These decreases in revenue were partially offsetby a $0.1 million or 1% increase in slot machine revenues. The decrease intable games revenues was due to a decrease in hold percentage and a decrease intable games drop. Table games hold percentage decreased 1.1 percentage pointsto 15.3 from 16.4.  Table games drop decreased$8.9 million or 11% to $70.1 million from $79.0 million. The averagenumber of table games in operation decreased by 2 to 92 from 94. The net resultof these changes in drop, hold percentage and change in number of tables inoperation was a decrease in win per table game per day to $1,295 from $1,504, adecrease of $209 or 14%. We have historically reported table games holdpercentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison toproperties on the Strip, our net hold percentage for the three months ended September30, 2006 was 17.7% compared to 19.3% for the three months ended September 30,2005. The increase in slot machine revenues was due to an increase in slotmachine hold percentage and a decrease in slot machine handle. Slot machinehandle decreased $12.7 million or 13% to $87.7 million from $100.4 million.Slot machine

11

----

hold percentage increased 0.9 percentage points to6.0% from 5.1%. The average number of slot machines in operation increased to558 from 552, an increase of 6 machines or 1%. The net result of these changesin handle, hold percentage and average number of slot machines in operationkept win per slot machine per day constant at $89. The decrease in race andsports revenues was due to a decrease in race and sports hold percentage andoffset by an increase in race and sports handle. Race and sports holdpercentage decreased 7.2 percentage points to 4.5% from 11.7%. Race and sportshandle increased to $3.7 million from $3.4 million.

LODGINGREVENUES.  The $1.4 million increase in lodging revenues to$11.5 million was primarily due to an increase in average daily rate (“ADR”)to $193 from $177. Hotel occupancy increased to 97.7% from 95.6% betweenperiods.

FOOD AND BEVERAGE REVENUES.  The $2.7 millionincrease in food and beverage revenues was due to food revenues increasing byapproximately $1.1 million and beverage revenues increasing by approximately$1.6 million. Food revenues increased due primarily to a $0.5 millionincrease in the Banquet, a $0.3 million increase in the Beach Club, a $0.2 millionincrease in Pink Taco, a $0.2 million increase in Room Service and a $0.1 millionincrease in Mr. Lucky’s.  These increaseswere partially offset by a $0.2 million decrease in Simon Kitchen andBar.  Beverage revenues increased dueprimarily to a $1.0 million increase in the Beach Club Bar, a $0.5 millionincrease in Body English, a $0.3 million increase Joint bar, a $0.1 millionincrease in Banquet bar and a $0.1 million increase in Pink Taco bar.  These increases were partially offset by adecrease of $0.2 million in the casino bars and a $0.1 million decrease inSimon Kitchen and Bar.

RETAILREVENUES.  Retail revenue decreased $0.1 million to $1.9.  The Retail Store revenues decreased due tochanging the product mix which has decreased sales in the short term forpotentially greater sales in the future.

OTHERREVENUE.  Other revenue increased $1.7 million primarily due toa $1.5 million increase in concert ticket sales and a $0.2 million increasein Beach Club cabana sales.   We held 22concerts in the three months ended September 30, 2006 and only 10 in the threemonths ended September 30, 2005.

PROMOTIONALALLOWANCES.  Promotional allowances remained constant as a percentageof casino revenues at 21%.

CASINO EXPENSES.  Casinoexpenses decreased $0.8 million or 8% to $9.3 million. The decreasewas primarily due to a $0.2 million decrease in supervisory fees paid to Mr.Morton, a $0.2 million decrease in payroll and related expenses, a $0.2 milliondecrease in the cost of complementaries and a $0.1 million decrease in concerttickets. The Company’s provision and allowance for doubtful accounts are basedon estimates by management of the collectability of the receivable balances ateach period end. Management’s estimates consider, among other factors, the ageof the receivables, the type or source of the receivables and the results ofcollection efforts to date, especially with regard to significant accounts.Casino expenses as a percentage of casino revenues increased to 60% from 57%, anincrease of 3 percentage points between comparative periods.

LODGINGEXPENSES.  Lodging expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, decreased to 27% from 31%, adecrease of 4 percentage point between comparative periods.  This decrease is due to a $0.2 milliondecrease in repairs and maintanence expense and a $0.1 million decrease inprofessional fees.

FOOD AND BEVERAGE COSTS ANDEXPENSES.  Food and beverage costs and expenses in relation to foodand beverage revenues, prior to reclassifying the cost of complimentaries tocasino expense or department complimentaries to promotional allowances decreasedto 58% from 60% in the prior year period. This decrease is due to cost of goodssold in the food outlets decreasing.

RETAIL COSTS ANDEXPENSES.  Retail costs and expenses in relation to retail revenues,prior to reclassifying the cost of complimentaries to casino expense ordepartment complimentaries to promotional allowances, increased to 72% from 54%.This decrease in efficiency is due to changing our product mix in the retailstore. We have decreased the retail prices of certain products to make room forthe new product line.

OTHER COSTS AND EXPENSES.  Othercosts and expenses increased $2.1 million. We held 22 concerts in the three months ended September 30, 2006 andonly 10 in the three months ended September 30, 2005.

12

----

MERGER COSTS.  The Company has expensed $0.8 millionin costs associated with the Merger Agreement in the three  months ended September 30, 2006.

MARKETING, GENERAL ANDADMINISTRATIVE. Marketing, general and administrative expenses in relation togross revenues decreased to 15% from 18% in the prior year period. This decreaseis due to a $0.3 million decrease in payroll and related costs, a $0.3 million decreasein donations and a $0.1 million decrease in taxes and licences.

DEPRECIATION AND AMORTIZATION.  Depreciationand amortization expense increased $0.3 million to $3.3 million.

INTEREST EXPENSE.  Interest expensedecreased to $4.6 million from $4.9 million, a decrease of$0.3 million or 7%. In December of 2005, the Company received consent fromlenders under the facility and repurchased $15.0 million of the outstandingJunior Subordinated Notes.

LOSS ON DISPOSAL OF ASSETS. During 2006, the Companyhad less than $0.1 million of loss on the disposal of assets.

PRE-OPENING. During 2005, the Company recorded a $0.1million in pre-opening expense for a possible casino in California. During2006, the Company did not have pre-opening expenses.

INCOME TAXES. During the three months ended September30, 2006 the Company recognized income tax expense of $2.0 million. The Companydid not have income tax expense during the three months ended September 30,2005 due to being able to offset 100% of its taxable income with Net OperatingLoss (“NOL”) is from previous periods against which a valuation allowance hadbeen recorded.

NET INCOME. Net income was $3.3 million compared to$4.8 million during the prior period. The decrease in net results forcommon shareholders was due to the factors described above.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TONINE MONTHS ENDED SEPTEMBER 30, 2005

NET REVENUES.  Netrevenues increased $3.6 million for the nine months ended September 30, 2006 to$143.2 million.  The $3.6 millionincrease in net revenues was primarily attributable to a $2.7 million or 9%increase in lodging revenue, a $3.9 million or a 7% increase in food andbeverage revenue, a $0.8 million increase in other revenues and a $1.1 millionor 11% decrease in promotional allowances related to items furnished tocustomers on a complimentary basis. These increases were offset partially by a $4.6 million or 9% decreasein casino revenues and a $0.4 million decrease in retail revenues.

CASINOREVENUES.  The $4.6 million decrease in casino revenues wasprimarily due to a $3.6 million or 10% decrease in table games revenues, a$0.6 million or 4% decrease in slot machine revenues and a $0.4 million or 33%decrease in race and sports book revenues. The decrease in table games revenueswas due to a decrease in table games drop. Table games drop decreased $29.7 millionor 12% to $213.6 million from $243.3 million. The decrease in table gamesdrop was partially offset by an increase in table games hold percentage.  Table games hold percentage increased 0.4 percentagepoints to 14.8% from 14.4%. The average number of table games in operationremained constant at 92. The net result of these changes in drop and holdpercentage was a decrease in win per table game per day to $1,258 from $1,400,a decrease of $142 or 10%. We have historically reported table games holdpercentage using the gross method, while casinos on the Strip report holdpercentage using the net method (which reduces the table game drop by markerrepayments made in the gaming pit area). For the purpose of comparison toproperties on the Strip, our net hold percentage for the nine months ended September30, 2006 was 16.8% compared to 16.7% for the nine months ended September 30,2005. The decrease in slot machine revenues was due to a decrease in slotmachine handle partially offset by an increase in slot machine hold percentage.Slot machine handle decreased $35.5 million or 13% to $242.1 millionfrom $277.6 million. Slot machine hold percentage increased 0.5 percentagepoints to 5.6% from 5.1%. The average number of slot machines in operationincreased to 557 from 552, an increase of 5 machines or 1%. The net result ofthese changes in handle, hold percentage and average number of slot machines inoperation was a decrease in win per slot machine per day to $90 from $94, adecrease of $4 or 4%. The decrease in race and sports revenues was due to adecrease in race and sports hold percentage and handle. Race and sports holdpercentage decreased 3.1 percentage points to 7.9% from 11.0%. Race and sportshandle decreased to $12.4 million from $13.2 million.

 

13

----

LODGINGREVENUES.  The $2.7 million increase in lodging revenues to$32.6 million was primarily due to an increase in average daily rate (“ADR”)to $189 from $172. Hotel occupancy increased to 95.9% from 95.4% betweenperiods.

FOOD AND BEVERAGE REVENUES.  The $3.9 millionincrease in food and beverage revenues was due to food revenues increasing byapproximately $1.3 million and beverage revenues increasing by approximately$2.6 million. Food revenues increased due primarily to a $1.1 millionincrease in the Banquet, a $0.2 million increase in the Beach Club, a $0.2 millionincrease in Pink Taco, a $0.1 million increase in Room Service and a $0.1 millionincrease in AJ’s Steakhouse.  Theseincreases were partially offset by a $0.4 million decrease in Simon Kitchenand Bar and a $0.1 million decrease in Mr. Lucky’s.  Beverage revenues increased due primarily toa $1.6 million increase in the Beach Club Bar, a $1.2 million increase inBody English, a $0.5 million increase in Banquet bar, a $0.2 millionincrease Pink Taco bar and a $0.1 million increase in the Joint bar.  These increases were partially offset by adecrease of $0.7 million in the casino bars and a $0.3 million decrease inSimon Kitchen and Bar.

RETAILREVENUES.  Retail revenue decreased $0.4 million to $5.5 million from$5.9 million.  The Retail Store revenuesdecreased due to changing the product mix which has decreased sales in theshort term for potentially greater sales in the future.

OTHERREVENUE.  Other revenue increased $0.8 million primarily due toa $0.6 million increase in ticket revenue, a $0.3 million increase in RockSpa and a $0.2 million increase in Beach Club cabana sales.  These increases were partially offset by a$0.1 decrease in each of Sundries, Cuba Libre and Box Office fees. 

PROMOTIONALALLOWANCES.  Promotional allowances remained constant as a percentageof casino revenues at 21%.

CASINOEXPENSES.  Casino expenses decreased $1.1 million or 4% to $27.1 million.The decrease was primarily due to a $0.6 million decrease in the cost ofcomplementaries, a $0.4 million decrease in supervisory fees paid to Mr.Morton, a $0.3 million decrease in concert tickets and a $0.2 million decreasein apparel.  These decreases werepartially offset by a $0.2 million increase in bad debt and a $0.2 millionincrease in customer activities.  TheCompany’s provision and allowance for doubtful accounts are based on estimatesby management of the collectability of the receivable balances at each periodend. Management’s estimates consider, among other factors, the age of thereceivables, the type or source of the receivables and the results ofcollection efforts to date, especially with regard to significant accounts.Casino expenses as a percentage of casino revenues increased to 59% from 57%,an increase of 2 percentage points between comparative periods.

LODGINGEXPENSES.  Lodging expenses in relation to hotel revenues, prior toreclassifying the cost of complimentaries to casino expense or departmentcomplimentaries to promotional allowances, decreased to 29% from 31%, a decreaseof 2 percentage point between comparative periods.  This increase in efficiency is due to the $17increase in ADR which does not increase the cost of running a hotel.

FOOD AND BEVERAGE COSTS ANDEXPENSES.  Food and beverage costs and expenses in relation to foodand beverage revenues, prior to reclassifying the cost of complimentaries tocasino expense or department complimentaries to promotional allowancesincreased to 60% from 59% in the prior year period. This increase is due tosalary and wage increases that have affected the Las Vegas market.

RETAIL COSTS ANDEXPENSES.  Retail costs and expenses in relation to retail revenues,prior to reclassifying the cost of complimentaries to casino expense ordepartment complimentaries to promotional allowances, increased to 65% from 52%.This decrease in efficiency is due to changing our product mix in the retailstore. We have decreased the retail prices of certain products to make room forthe new product line.

OTHER COSTS AND EXPENSES.  Othercosts and expenses increased $0.1 million.

MERGER COSTS.  The Company has expensed $2.7 millionin costs associated with the Merger Agreement in the nine months ended September30, 2006. 

MARKETING, GENERAL ANDADMINISTRATIVE. Marketing, general and administrative expenses in relation togross revenues remained constant at 17%.

14

----

DEPRECIATION AND AMORTIZATION.  Depreciationand amortization expense increased $0.7 million to $9.6 million.

INTEREST EXPENSE.  Interest expensedecreased to $13.9 million from $14.6 million, a decrease of $0.7 millionor 5%. In December of 2005, the Company received consent from lenders under thefacility and repurchased $15.0 million of the outstanding Junior SubordinatedNotes.

LOSS ON DISPOSAL OF ASSETS. During the first quarterof 2006, the Company recorded a $0.5 million loss on the disposal of assets,which was related to our pool remodel. During 2005, the Company recorded a $0.5million loss on the disposal of assets, which was related to our hotel remodel.

PRE-OPENING. During 2005, the Company recorded $0.3million in pre-opening expense for a possible casino in California. During2006, the Company did not have pre-opening expense.

INCOME TAXES. During the nine months ended September30, 2006 the Company recognized income tax expense of $3.5 million. The Companydid not have income tax expense during the nine months ended September 30,2005 due to being able to offset 100% of its taxable income with NOL fromprevious periods against which a valuation allowance had been recorded.

NET INCOME. Net income was $5.8 million compared to$13.2 million during the prior period. The decrease in net results forcommon shareholders was due to the factors described above.

LIQUIDITYAND CAPITAL RESOURCES

For the nine month periodended September 30, 2006 our principal sources of funds were cash on-handat December 31, 2005, and cash provided by operating activities of $24.4million. The amount of cash provided by operating activities primarily includednet income of $5.8 million, depreciation and amortization of $9.6 million,provision for losses on accounts receivable of $0.4 million, amortization ofloan fees of $0.4 million and a loss on disposal of assets of $0.5 million.  Other uses of funds were capital expendituresof $8.4 million, payments on debt of $10.1 million and an increase in otherlong lived assets of $0.1 million.  As aresult, as of September 30, 2006, we had cash and cash equivalents of $14.8million.

On May 11, 2006, the Company entered into an Agreementand Plan of Merger (the “Merger Agreement”) with Morgans Hotel Group Co.(“Morgans”) and MHG HR Acquisition Corp. (“Merger Sub”), a wholly ownedsubsidiary of Morgans. Under the terms of the Merger Agreement, Merger Sub willbe merged with and into the Company, with the Company continuing as thesurviving corporation and becoming a wholly owned subsidiary of Morgans. Eachshare of common stock of the Company issued and outstanding immediately priorto the effective time of the merger will be automatically converted into theright to receive cash based on the total transaction consideration ofapproximately $421.0 million, which is subject to a number of adjustments,including, among others, outstanding indebtedness and related party payables,working capital, cage cash, retention bonuses, transaction costs and expenses,and certain capital expenditures by the Company. Peter Morton, our ChiefExecutive Officer, will receive $40.0 million of the total transactionconsideration as consideration for the early termination of his SupervisoryAgreement. Of the total transaction consideration, $2.5 million will be held inan escrow to cover post-closing adjustments for working capital and cage cash,and $15.0 million will be held in an escrow to cover post-closing indemnificationobligations of the Company’s stockholders.

Concurrently with the execution of the MergerAgreement and pursuant to the terms therein, Morgans has deposited into escrow$30.0 million, a portion of which, upon the closing of the merger, will becredited towards the total transaction consideration, and a portion of which,upon the closing of the merger, will be held in escrow as described above.

If the Merger Agreement is terminated under certaincircumstances, the Company may retain the $30 million deposit, with theCompany’s financial advisors receiving 25% of the transaction fee that theywould have received if the Merger was completed.  In the event of a default by the Company orits affiliates under the Merger Agreement, Morgans may seek specific performanceof the Merger Agreement.

The Merger Agreement provides that the closing of themerger must occur on or prior to the earlier of (1) seven business days afterMorgans’ receipt of all necessary gaming approvals to consummate thetransaction and (2) February 10, 2007, unless further extended by the parties.

15

----

The completion of the merger is subject to a number ofconditions, including, among other things, Morgans’ or related parties’ receiptof all necessary antitrust, gaming and other approvals, the repayment of alloutstanding indebtedness of the Company, the closing of certain othertransactions, and the satisfaction or waiver of all other conditions precedent.The merger is not subject to a financing condition.

In addition, completion of the Merger is conditionedon the concurrent closing of other transactions contemplated by the MergerAgreement, which transactions are governed by certain agreements betweenMorgans (or an affiliate thereof) and Mr. Morton, the Company’s Chief ExecutiveOfficer, pursuant to the Merger Agreement, as well as the termination ofcertain existing agreements between the Company and Mr. Morton.

The Company has agreed to stay bonuses ofapproximately $2.3 million in total, which will be paid to select employees whoare critical to the continued operations of the Company through the completionof the merger. The stay bonuses will become payable at the completion of themerger provided that the selected employee has remained in our employment tothe applicable date. The stay bonuses were communicated to select employees inApril 2006 and are being accrued over the expected service period. The Companybegan expensing this liability in April 2006 and has expensed $1.3 million inthe nine months ended September 30, 2006.

James D. Bowen, the Company’s acting Chief OperatingOfficer, General Manager, Executive Vice President, Chief Financial Officer andTreasurer has an employment agreement, dated November 8, 2000, and amendedas of September 7, 2001 and December 16, 2004 (the “Bowen EmploymentAgreement”).  Mr. Bowen’s employmentagreement provides that in the event of a Change in Control (as defined in theBowen Employment Agreement) of the Company and if within thirty (30) days afterthe Change in Control Mr. Bowen tenders his resignation in accordance with theterms of the Bowen Employment Agreement, Mr. Bowen is entitled to be paid alump sum termination fee in an amount equal to the greater of (i) Six-Hundredand Fifty Thousand Dollars ($650,000.00) or (ii) twenty-four (24) months of Mr.Bowen’s base salary rate immediately prior to such termination, plus, an amountequal to two (2) times the average of the immediately preceding three (3)year’s annual bonuses paid to Mr. Bowen. The estimated amount of this payment is $0.8 million.  In addition, Mr. Bowen is entitled to be paidany amounts deferred or owed under any deferred compensation plan and to bepaid at a minimum a pro-rata share of any amounts that would have otherwisebeen due to Mr. Bowen under any deferred bonus plan.

The Company has expensed $2.7 million in costsassociated with the Merger Agreement in the nine months ended September 30,2006.

We believe that our current cash balances and cashflow from operations and other sources of cash including the availableborrowings under our $20.0 million Revolving Credit Facility($2.7 million as of June 30, 2006) will be sufficient to provide operatingand investing liquidity during the next 12 months. We may, however, needto raise additional funds prior to July 1, 2007.

The Company has a $0.3 million irrevocable standbyletter of credit for the benefit of the State of Nevada related to the selfinsured portion of the Company’s workers compensation insurance.

Interest on the 2013 Notes is payable on eachJune 1 and December 1 beginning December 1, 2003.  The 2013Notes are secured by a security interest in substantially all of the Company’sexisting and future assets, other than licenses which may not be pledged underapplicable law.  The security interest is junior to the security interestin the assets securing our obligation under our Facility and except forpermitted secured purchase money indebtedness.  The 2013 Notes are subjectto redemption at the option of the Company, in whole or in part, at any time onor after June 1, 2008, at a premium to the face amount ($140 million) thatdecreases on each subsequent anniversary date, plus accrued interest to thedate of redemption.  The redemption rates are as follows: after June 1,2008, 104.438%, after June 1, 2009, 102.958%, after June 2010, 101.479% andafter June 1, 2011, 100%. The 2013 Notes contain covenants restricting orlimiting the ability of the Company to, among other things, pay dividends,create liens or other encumbrances, incur additional indebtedness, issuecertain preferred stock, sell or otherwise dispose of a portion of its assets,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates.  TheCompany was in compliance with these covenants as of June 30, 2006.

Interest on the Facility accrues on all individualborrowings at an interest rate determined at the option of the Company, ateither the LIBOR Index plus an applicable LIBOR margin (not to exceed 3.5%(applicable margin was 3.25% at September 30, 2006) and aggregating 8.3%at September 30, 2006), or the Base Rate, defined as the higher of theFederal Funds Rate plus 0.5%, or the reference rate, as defined, plus anapplicable margin (not to exceed 2.25%). The Company chose the LIBOR Index forall of its borrowings outstanding at September 30, 2006. These margins aredependent upon the

16

----

Company’s total debt to EBITDA ratio, as defined.Interest accrued on the Base Rate borrowings is due monthly, up to the maturitydate, while interest on LIBOR borrowings is due six months up to the maturitydate. The Facility is secured by substantially all of the Company’s property atthe Las Vegas site. The Facility contains certain covenants including, amongother things, financial covenants, limitations on the Company from disposing ofcapital stock, entering into mergers and certain acquisitions, incurring liensor indebtedness, issuing dividends on stock, and entering into transactionswith affiliates.  The Company was incompliance with these covenants as of September 30, 2006.

Interest on the Junior Notes is payable on eachJanuary 15 and July 15, commencing on January 15, 2004, and maybe paid in cash or in kind at the Company’s option, provided that interest willbe paid in kind if a payment of such interest in cash would cause a defaultunder the 2013 Notes or the Facility.  The Junior Notes require that anysemi-annual interest payment in cash be equal to the lesser of (x) 50% of theamount of interest accrued on the Junior Notes since the most recent interestpayment date and (y) the amount of interest that the Company is permitted topay in cash without causing a default under the 2013 Notes or theFacility.  For interest payments payable in cash, interest accrues at arate per annum equal to 9.875%, and for interest payments payable in kind,interest accrues at a rate per annum equal to 10.50%.  The Junior Notesare contractually subordinated to the 2013 Notes and the Facility and any othersenior debt of the Company.  The Junior Notes mature on January 15,2014 but are subject to redemption at the option of the Company, in whole or inpart, at any time on or after January 15, 2009, at a premium to theprincipal amount thereof that decreases on each subsequent anniversary date,plus accrued interest to the date of redemption.  The Junior Notes containcovenants restricting the Company’s ability to, among other things, sell orotherwise dispose of its assets, pay dividends, incur additional indebtedness,make acquisitions or merge or consolidate with another entity and enter intotransactions with affiliates. In December of 2005, the Company received consentfrom lenders under the Facility and repurchased $15.0 million of theoutstanding Junior Subordinated Notes. This transaction had a purchase premiumof $1.2 million. For the nine months ended September 30, 2006 and 2005 theCompany paid interest in kind of $1.1 million and $2.8 million, respectively.The Company was in compliance with these covenants as of September 30,2006.

**Off-BalanceSheet Arrangements**

We do not have any off-balance sheet arrangements thathave, or are reasonably likely to have, a current or future effect on ourfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material. Currently, we have no guarantees, such as performanceguarantees, keep-well agreements or indemnity. We are not engaged in derivatives activities.

**ContractualObligations and Commitments**

We have various contractual obligations that we recordas liabilities in our financial statements. We also enter into other purchasecommitments and other executory contracts that are not recognized asliabilities until services are performed or goods are received. Additionally,we enter into contracts for goods and services such as food, inventory andentertainment. Such liabilities are recorded as liabilities when so incurredand we expect that such contracts will generate revenue in excess of suchliabilities. As of September 30, 2006, there have been no material changesto the table of contractual obligations and commitments in our most recentlyfiled Form 10-K.

We made cash interest payments on long-term debt of $10.4million and $9.7 million in the nine month periods ended September 30,2006 and 2005, respectively.  Weanticipate our cash interest payments for the remainder of 2006 to be less thanthe payments made in the first nine months of the year.  We have not made significant cash taxpayments during the nine month periods ended September 30, 2006 and 2005and, due to available net operating loss and AMT tax credit carryforwards, wedo not anticipate making significant cash tax payments in the remainder of2006. Total supervisory fee expense for the nine month periods ended September 30,2006 and 2005 amounted to $2.9 million and $2.7 million, respectively, underthe Company’s Amended and Restated Supervisory Agreement with Peter Morton. Thesupervisory fee is equal to two percent of annual gross revenues (as defined inthe Supervisory Agreement), net of complimentaries for each year.

Our ability to service our contractual obligations andcommitments will be dependent on our future performance, which will be affectedby, among other things, prevailing economic conditions and financial, businessand other factors, certain of which are beyond our control.

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business. Management provides anaccrual for estimated losses that may occur and does not believe that the outcomeof any pending claims or

17

----

litigation, in the aggregate, will have a materialadverse effect on the Company’s financial position, results of operations orliquidity.

CRITICALACCOUNTING POLICIES

There have been no changes in the Company’s criticalaccounting policies from those described in the Company’s most recently filedForm 10-K.

**Item 3.****    Quantitativeand Qualitative Disclosures About Market Risk**

Market risks relating to our operations resultprimarily from changes in short-term LIBOR interest rates. We do not have anyforeign exchange or other significant market risk. We did not have anyderivative financial instruments at September 30, 2006.

Our exposure to market risk for changes in interestrates relates primarily to our current Revolving Credit Facility. In accordancewith the Revolving Credit Facility, we enter into variable rate debtobligations to support general corporate purposes, including capitalexpenditures and working capital needs. We continuously evaluate our level ofvariable rate debt with respect to total debt and other factors, includingassessment of the current and future economic environment.

We had $7.0 million in variable rate debt outstandingat September 30, 2006. Based upon these variable rate debt levels, ahypothetical 10% adverse change in the effective interest rate (approximately an83 basis point increase) would increase interest expense less than $0.1 millionon an annual basis, and likewise decrease our earnings and cash flows. Wecannot predict market fluctuations in interest rates and their impact on ourvariable rate debt, nor can there be any assurance that fixed rate long-termdebt will be available to us at favorable rates, if at all. Consequently,future results may differ materially from the estimated adverse changesdiscussed above.

The fair value of the Company’s $140 million of 8.875%Second Lien Notes, which are due in 2013 and are publicly traded, approximated$150.9 million at September 30, 2006 based on published bid prices. Thefair value of the Company’s $41.9 million of Junior Notes cannot be estimatedas there was no established market nor published bid prices.

**Item 4.****    Controlsand Procedures**

(a)  Disclosure Controls and Procedures. TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report. Based on such evaluation, the Company’s Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of such period,the Company’s disclosure controls and procedures are effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act.

(b)  Internal Control Over Financial Reporting.There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered this reportthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

**PART II OTHER INFORMATION**

**Item 1.****    LegalProceedings**

The Company is a defendant in various lawsuitsrelating to routine matters incidental to its business.

Management provides an accrual for estimated lossesthat may occur and does not believe that the outcome of any pending claims orlitigation, in the aggregate, will have a material adverse effect on theCompany’s financial position, results of operations or liquidity beyond theamounts recorded in the accompanying balance sheet as of September 30,2006.

**Item 1A. Risk Factors**

18

----

A completedescription of certain factors that may affect our future results and riskfactors is set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2005. There have been no material changes to those factors inthe nine months ended September 30, 2006. 

**Item 5.****    OtherInformation**

**ProposedMerger**

On May 11, 2006, the Company entered into an Agreementand Plan of Merger (the “Merger Agreement”) with Morgans Hotel Group Co.(“Morgans”) and MHG HR Acquisition Corp. (“Merger Sub”), a wholly ownedsubsidiary of Morgans. Under the terms of the Merger Agreement, Merger Sub willbe merged with and into the Company, with the Company continuing as thesurviving corporation and becoming a wholly owned subsidiary of Morgans. Eachshare of common stock of the Company issued and outstanding immediately priorto the effective time of the merger will be automatically converted into theright to receive cash based on the total transaction consideration ofapproximately $421.0 million, which is subject to a number of adjustments,including, among others, outstanding indebtedness and related party payables,working capital, cage cash, retention bonuses, transaction costs and expenses,and certain capital expenditures by the Company. Peter Morton, our ChiefExecutive Officer, will receive $40.0 million of the total transactionconsideration as consideration for the early termination of his SupervisoryAgreement. Of the total transaction consideration, $2.5 million will be held inan escrow to cover post-closing adjustments for working capital and cage cash,and $15.0 million will be held in an escrow to cover post-closingindemnification obligations of the Company’s stockholders.

Concurrently with the execution of the MergerAgreement and pursuant to the terms therein, Morgans has deposited into escrow$30.0 million, a portion of which, upon the closing of the merger, will becredited towards the total transaction consideration, and a portion of which,upon the closing of the merger, will be held in escrow as described above.

If the Merger Agreement is terminated under certaincircumstances, the Company may retain the $30 million deposit, with theCompany’s financial advisors receiving 25% of the transaction fee that theywould have received if the Merger was completed.  In the event of a default by the Company orits affiliates under the Merger Agreement, Morgans may seek specificperformance of the Merger Agreement.

The Merger Agreement provides that the closing of themerger must occur on or prior to the earlier of (1) seven business days afterMorgans’ receipt of all necessary gaming approvals to consummate thetransaction and (2) February 10, 2007, unless further extended by the parties.

The completion of the merger is subject to a number ofconditions, including, among other things, Morgans’ or related parties’ receiptof all necessary antitrust, gaming and other approvals, the repayment of alloutstanding indebtedness of the Company, the closing of certain othertransactions, and the satisfaction or waiver of all other conditions precedent.The merger is not subject to a financing condition.

In addition, completion of the Merger is conditionedon the concurrent closing of other transactions contemplated by the MergerAgreement, which transactions are governed by certain agreements betweenMorgans (or an affiliate thereof) and Mr. Morton, the Company’s Chief ExecutiveOfficer, pursuant to the Merger Agreement, as well as the termination ofcertain existing agreements between the Company and Mr. Morton.

The Company has agreed to stay bonuses ofapproximately $2.3 million in total, which will be paid to select employees whoare critical to the continued operations of the Company through the completionof the merger. The stay bonuses will become payable at the completion of themerger provided that the selected employee has remained in our employment tothe applicable date. The stay bonuses were communicated to select employees inApril 2006 and are being accrued over the expected service period. The Companybegan expensing this liability in April 2006 and has expensed $1.3 million inthe nine months ended September 30, 2006.

James D. Bowen, the Company’s acting Chief OperatingOfficer, General Manager, Executive Vice President, Chief Financial Officer andTreasurer has an employment agreement, dated November 8, 2000, and amendedas of September 7, 2001 and December 16, 2004 (the “Bowen EmploymentAgreement”).  Mr. Bowen’s employmentagreement provides that in the event of a Change in Control (as defined in theBowen Employment Agreement) of the Company and if within thirty (30) days afterthe Change in Control Mr. Bowen tenders his resignation in accordance with theterms of the Bowen Employment

19

----

Agreement, Mr. Bowen is entitled to be paid a lump sumtermination fee in an amount equal to the greater of (i) Six-Hundred and FiftyThousand Dollars ($650,000.00) or (ii) twenty-four (24) months of Mr. Bowen’sbase salary rate immediately prior to such termination, plus, an amount equalto two (2) times the average of the immediately preceding three (3) year’sannual bonuses paid to Mr. Bowen.  Theestimated amount of this payment is $0.8 million.  In addition, Mr. Bowen is entitled to be paidany amounts deferred or owed under any deferred compensation plan and to bepaid at a minimum a pro-rata share of any amounts that would have otherwisebeen due to Mr. Bowen under any deferred bonus plan.

The Company has expensed $2.7 million in costsassociated with the Merger Agreement in the nine months ended September 30,2006.

**Item 6.    Exhibits**
| EXHIBIT NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                 |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                            |
| (6) 2.1        |       | Agreement and Plan of Merger, dated as of May 11,  2006, by and among Hard Rock Hotel, Inc., Morgans Hotel Group Co. and MHG HR  Acquisition Corp.*                                                             |
|           |       |                                                                                                                                                                                                            |
| 3.             |       | CERTIFICATE OF INCORPORATION AND BY-LAWS                                                                                                                                                                        |
|           |       |                                                                                                                                                                                                            |
| (1) 3.1        |       | Second Amended and Restated Certificate of  Incorporation of the Company.                                                                                                                                       |
|           |       |                                                                                                                                                                                                            |
| (2) 3.2        |       | Certificate of Amendment of Second Amended and  Restated Articles of Incorporation.                                                                                                                             |
|           |       |                                                                                                                                                                                                            |
| (1) 3.3        |       | Second Amended and Restated By-Laws of the Company                                                                                                                                                              |
|           |       |                                                                                                                                                                                                            |
| 4.             |       | INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS,  INCLUDING INDENTURES.                                                                                                                                      |
|           |       |                                                                                                                                                                                                            |
| (3) 4.1        |       | Indenture dated as of May 30, 2003, by and  between the Company and U.S. Bank National Association, as trustee, relating  to the 8 7/8% Second Lien Notes due 2013.                                        |
|           |       |                                                                                                                                                                                                            |
| (3) 4.2        |       | Form of Global 8 7/8% Second Lien Notes due  2013 (included in Exhibit 4.1)                                                                                                                           |
|           |       |                                                                                                                                                                                                            |
| (3) 4.3        |       | Registration Rights Agreement, dated as of  May 30, 2003, by and between the Company and Banc of America Securities  LLC, as representative of the Initial Purchasers.                                     |
|           |       |                                                                                                                                                                                                            |
| (3) 4.4        |       | Intercreditor Agreement, dated as of May 30,  2003, among the Company, U.S. Bank, N.A. and Bank of America, N.A.                                                                                           |
|           |       |                                                                                                                                                                                                            |
| (3) 4.5        |       | Form of Junior Subordinated Notes.                                                                                                                                                                         |
|           |       |                                                                                                                                                                                                            |
| (4) 4.6        |       | First Supplemental Indenture to Indenture, dated as  of November 20, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 8 7/8% Second Lien Notes due 2013.  |
|           |       |                                                                                                                                                                                                            |
| (4) 4.7        |       | Second Supplemental Indenture to Indenture, dated as  of November 24, 2003, by and between the Company and U.S. Bank National  Association, as trustee, relating to the 8 7/8% Second Lien Notes due 2013. |
|           |       |                                                                                                                                                                                                            |
| 10.            |       | MATERIAL CONTRACTS.                                                                                                                                                                                             |
|           |       |                                                                                                                                                                                                            |
| (5) 10.1       |       | Lease by and between the Company, PM Realty, LLC and  Mr. Chow of Las Vegas, LLC dated December 24, 2004.                                                                                             |
|           |       |                                                                                                                                                                                                            |
| (6) 10.2       |       | Performance Awards Plan/Award Agreement between the  Company and Kevin Kelley dated March 20, 2003.                                                                                                        |
|           |       |                                                                                                                                                                                                            |
| (7) 10.3       |       | Second Amendment to Employment Agreement, dated  December 16, 2004, between the Company and James D. Bowen.                                                                                                     |
|           |       |                                                                                                                                                                                                            |
| 31.            |       | CERTIFICATIONS.                                                                                                                                                                                                 |

20

----

 
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                  |
|   |   |                                                                                                                                                                                      |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                                                      |

----

*                    HardRock Hotel agrees to furnish copies of the Schedules and Exhibits referenced inthis agreement to the Securities and Exchange Commission upon request.
| (1)    |   | Incorporated by reference to designated exhibit to  our Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on May 21, 1998 (File No. 333-53211).                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                               |
| (2)    |   | Incorporated by reference to designated exhibit to  our Report on Form 10-Q, filed with the Securities and Exchange Commission  for the quarter ended August 31, 1999 (File No. 333-53211).                         |
|   |   |                                                                                                                                                                                                                               |
| (3)    |   | Incorporated by reference to designated exhibit to  our Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on July 8, 2003 (File No. 333-106863).                               |
|   |   |                                                                                                                                                                                                                               |
| (4)    |   | Incorporated by reference to designated exhibit to  our Registration Statement on Amendment No. 1 to Form S-4, filed  with the Securities and Exchange Commission on November 26, 2003 (File  No. 333-106863). |
|   |   |                                                                                                                                                                                                                               |
| (5)    |   | Incorporated by reference to designated exhibit to  our Report on Form 10-Q, filed with the Securities and Exchange  Commission for the quarter ended March 31, 2005 (File  No. 333-53211).                         |
|   |   |                                                                                                                                                                                                                               |
| (6)    |   | Incorporated by reference to designated exhibit to  our Report on Form 10-Q, filed with the Securities and Exchange Commission  for the quarter ended March 31, 2006 (File No. 333-53211).

                                  |
| (7)    |   | Incorporated by reference to designated exhibit to  our Report on Form 10-Q, filed with the Securities and Exchange Commission  for the quarter ended June 30, 2006 (File No. 333-53211).

                                   |

 

21

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
|                               | HARD ROCK HOTEL, INC.                                      |
|-------------------------------|------------------------------------------------------------|
|                          |                                                       |
| Date: November 14,  2006 | By: /s/ JAMES D. BOWEN                                     |
|                          | Name: James D. Bowen                                       |
|                          | Title: CHIEF FINANCIAL OFFICER                             |
|                          | (PRINCIPAL FINANCIAL OFFICER AND DULY AUTHORIZED  OFFICER) |

 

22

----