UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

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

Commission File No. 333-71094

HERBST GAMING, INC.

(Exact name of Registrant as specified in its charter)

Nevada		88-0446145
(State of incorporation)		(I.R.S. Employer Identification Number)

3440 West Russell Road, Las Vegas, NV		89118
(Address of principal executive offices)		(Zip Code)

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

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

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

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009 was $0.

Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o Not Applicable x

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of December 31, 2009.

Common Stock, no par value, 300 outstanding shares.

Documents Incorporated by Reference

None.

Table of Contents

TABLE OF CONTENTS

PART I

Item 1.	Business
Item 1A.	Risk Factors
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information

PART III

Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services

PART IV

Item 15.	Exhibits and Financial Statement Schedules

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PART I

Item 1. Business.

General

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations. Our slot route operations involve the exclusive installation and operation of slot machines in certain strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. We currently have approximately 6,200 slot machines in our slot route business and are one of the largest slot machine operators in Nevada. As of December 31, 2009, our casino operations in Nevada consisted of 12 casinos. Five of these casinos focus on local gaming patrons in Southern Nevada, and include the ownership and operation of Terrible’s Hotel & Casino in Las Vegas, Nevada and four other small casinos in Southern Nevada operated under the Terrible’s name. We also operate the following four casinos in Northern Nevada, all of which were acquired by the Company in January 2007: Terrible’s Rail City Casino in Sparks, Nevada (“Rail City”); the Sands Regency Casino Hotel in downtown Reno, Nevada (“Sands”); Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada (“Gold Ranch”) and Terrible’s Dayton Depot Casino (“Dayton Casino” and together with Rail City, Sands and Gold Ranch, the “Sands Regent Casinos”) in Dayton, Nevada. In addition, we operate the following three casinos in Primm, Nevada, all of which were acquired by the Company in April 2007: Buffalo Bill’s Hotel and Casino (“Buffalo Bill’s”), Primm Valley Resort and Casino (“Primm Valley”) and Whiskey Pete’s Hotel and Casino (“Whiskey Pete’s”, and together with Buffalo Bill’s and Primm Valley, the “Primm Casinos”). As of December 31, 2009, these casinos in Nevada contained an aggregate of approximately 6,300 slot machines and 119 table games. Our casino operations outside of Nevada consist of Terrible’s St. Jo Frontier Casino in St. Joseph, Missouri (“St. Jo”), Terrible’s Mark Twain Casino in LaGrange, Missouri (“Mark Twain”), and Terrible’s Lakeside Casino Resort in Osceola, Iowa (“Lakeside Iowa”). As of December 31, 2009, these three properties contained an aggregate of approximately 2,200 slot machines and 45 table games.

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

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

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

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

Available Information

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

Chapter 11 Reorganization

On March 22, 2009 (the “Petition Date”), Herbst Gaming, Inc. (“Herbst” or the “Company”) and certain of its subsidiaries (the “Subsidiary Guarantors”, and together with the Company, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”), in the United States Bankruptcy Court for the District of Nevada, Northern Division (the “Bankruptcy Court”) under case numbers 09-50746-gwz through 09-50763-gwz. From the period commencing on the Petition Date up to and including the Effective Date (as defined below), the Debtors operated their businesses and managed their properties as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, the Chapter 11 Cases are being jointly administered.

On July 22, 2009, the Debtors filed with the Bankruptcy Court an amended joint plan of reorganization. On January 22, 2010, the Bankruptcy Court issued an Amended Order Confirming Debtors’ First Amended Joint Plan of Reorganization (the “Order”), confirming the amended joint plan of reorganization, as modified by the Findings of Fact and Conclusions of Law in Support of Order Confirming Debtors’ First Amended Joint Plan of Reorganization (the “Findings of Fact “) entered contemporaneously with the Order (the amended joint plan of reorganization as modified by the Findings of Fact, the “Plan”). The Plan became effective on February 5, 2010 (the “Effective Date”), but will not be fully implemented until the Substantial Consummation Date (as defined below). Since the Effective Date, the Debtors have been operating as reorganized debtors pursuant to the terms and provisions of the Plan and, except as otherwise specifically provided for in the Plan, outside the jurisdiction of the Bankruptcy Court. Upon the Substantial Consummation Date, the Plan provides for the following restructuring (the “Restructuring”) of the Debtors to occur:

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· Conversion of all allowed claims under the Company’s $860.0 million senior credit facility (the “amended Credit Agreement”) into debt and equity of the Debtors, through ownership of a new holding company (“Reorganized Herbst Gaming”).

· Termination of all outstanding obligations under our 8 1/8% senior subordinated notes due 2012 (the “8 1/8% Notes”) and our 7% senior subordinated notes due 2014 (the “7% Notes” and, collectively with the 8 1/8% Notes, the “Subordinated Notes”).

· Cancellation of 100% of the existing equity in the Company.

Following the Substantial Consummation Date, Reorganized Herbst Gaming will hold all of the equity interests in the Reorganized Debtors (as defined below) and the Company will be dissolved.

The Plan generally will be fully implemented on the third business day following the satisfaction or waiver of all conditions to substantial consummation of the Plan (the “Substantial Consummation Date”), which are described in the paragraph below. However, pursuant to the Plan certain payments were made on or shortly after the Effective Date, including payment of allowed priority claims, certain allowed secured claims and allowed general unsecured claims, in some cases with interest from the Petition Date, as described in the Plan and the Second Amended Disclosure Statement to Accompany the Plan filed with the Bankruptcy Court on August 7, 2009.

Additionally, under the Plan, between the Effective Date and the Substantial Consummation Date the Company will make adequate protection payments to the lenders under the amended Credit Agreement (the “Lenders”) in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured initially as of the end of the third full calendar month following the Effective Date, and then as of the end of every third full calendar month thereafter, and paid 30 days thereafter).

The Plan will not be fully implemented until the Substantial Consummation Date. The Substantial Consummation Date will not occur until the Restructuring and the individuals proposed as officers, directors and key employees of Reorganized Herbst Gaming and the Subsidiary Guarantors, as they will be reorganized pursuant to the Plan (collectively, the “Reorganized Debtors”) have received all requisite governmental and regulatory approvals. The Company has been advised by the representatives of the Lenders that the applications of Reorganized Herbst Gaming, as well as the equity holders of Reorganized Herbst Gaming and their principals, have been filed with the gaming authorities in Nevada, Missouri and Iowa, and that the applications of directors, officers and key employees required to submit to licensing are expected to be filed in those jurisdictions in the near future. The Company has been advised by the representatives of the Lenders that the licensing process is expected to take nine to 12 months.

The Substantial Consummation Date is also subject to the satisfaction or waiver of the following conditions: (i) none of the Debtors and Lenders are in material breach of the Plan; and (ii) the Bankruptcy Court has authorized the assumption and rejection of certain contracts of the Debtors. The Company currently expects that the Substantial Consummation Date will occur in the fourth quarter of 2010, although the Company cannot assure you that all conditions to the Substantial Consummation Date will be satisfied by that date or at all, or that the Company will be successful in implementing the Restructuring in the form contemplated by the Plan or at all. The Plan provides that the Substantial Consummation Date must occur no later than February 5, 2011, the first anniversary of the Effective Date, unless extended by mutual agreement of the Debtors and Requisite Lenders (as defined below). In the event that the Substantial Confirmation Date does not occur by that date, or such later date as may be agreed to by the Debtors and the Requisite Lenders, the confirmation of the Plan would be vacated and all claims (except for allowed priority claims, certain allowed secured claims unrelated to the Lenders or the Subordinated Notes, and allowed general unsecured claims) would be restored as though the Effective Date had never occurred.

On January 28, 2010, the Indenture Trustee, as defined in the Findings of Fact, filed a notice of appeal from the Order. On January 29, 2010, the Debtors elected to have the Appeal heard by the U.S. District Court for the District of Nevada (the “District Court”) and not the U.S. Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals. The appellate briefs are due to be filed with the District Court commencing April 3, 2010 with the final reply brief due by May 4, 2010. The Indenture Trustee has not sought a stay of the Order.

On November 16, 2009, the Indenture Trustee filed its First Amended Complaint for Declaratory Judgment (the “Amended Complaint”) against the Debtors and the Administrative Agent under the amended Credit Agreement seeking, among other relief, a judgment of the Bankruptcy Court determining that the Subordinated Notes entitled to pari passu treatment with the obligations due under the amended Credit Agreement. The Debtors and the Administrative Agent filed motions to dismiss the Amended Complaint. On February 23, 2010, the Bankruptcy Court dismissed the Amended Complaint without prejudice to seek leave to re-file the Amended Complaint in the event the Order is set aside in the Appeal.

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The Debtors and Lenders holding, in the aggregate, approximately 61% of all of the outstanding claims under the amended Credit Agreement are parties to an amended and restated lockup agreement (the “Lockup Agreement”). Pursuant to the Lockup Agreement, the parties thereto are contractually obligated to use commercially reasonable efforts to successfully consummate the Restructuring and achieve the expeditious consummation of the Plan. The Lockup Agreement will automatically terminate, pursuant to its terms, if the Substantial Consummation Date does not occur on or before February 5, 2011, the first anniversary of the Effective Date, unless such termination event is waived by Lenders party to the Lockup Agreement holding at least two-thirds in amount of the total claims held by all Lenders party to the Lockup Agreement (the “Requisite Lenders”) within five days of the occurrence of the termination event. In the event that the Substantial Consummation Date does not occur by that date, and the Requisite Lenders do not waive the related termination event and the Lockup Agreement is terminated, the Lenders would no longer be obligated to support the Restructuring.

The Plan provides that, from the Effective Date through the Substantial Consummation Date, the Debtors will continue to be managed by the current officers and directors.

Narrative Description of Business

Our business focuses on attracting and fostering repeat business from local gaming patrons in both our route and casino operations. Local patrons are typically sophisticated gaming customers who seek convenient locations, high payouts and a pleasant atmosphere.

Route Operations

Our route operations involve the exclusive installation and operation of slot machines in chain store and street account locations. At December 31, 2009, we operated approximately 6,200 slot machines throughout the state of Nevada. We define chain stores as grocery stores, drug stores, merchandise stores and convenience stores, each with more than five locations. Our chain store contracts are primarily with large, national retailers such as Albertsons, Vons, Safeway, CVS and Smith’s, as well as Terrible Herbst gas stations and convenience stores. Street accounts include local bars, restaurants and non-chain convenience stores. Nevada law limits slot route operations to certain types of non-casino locations including bars, taverns, convenience stores, grocery stores and drug stores. Most locations are limited to offering no more than 15 slot machines.

We generally enter into two types of route contracts: space lease arrangements and revenue-sharing arrangements. Under space lease arrangements, which we principally enter into with chain stores, we pay a fixed monthly fee for each location in which we place slot machines. Under revenue-sharing arrangements, which we typically enter into with street accounts, we pay the location owner a percentage of the revenues generated by our slot machines located at that particular street account. In order to enter into a revenue-sharing arrangement, the location owner must hold a gaming license. Both space lease and revenue-sharing arrangements typically involve long-term contracts that provide us with the exclusive right to install our slot machines at particular locations. In the case of chain stores, our contracts give us the exclusive right to install slot machines at stores opened in the future.

Casino Operations

Our casino operations consist of 12 casinos in Northern and Southern Nevada. We also own three casinos in Missouri and Iowa. All of our casino properties focus on local customers, with an emphasis on slot play. The following table summarizes our casino assets as of December 31, 2009:

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		Number of
Property	Location	Slot Machines	Table Games	Hotel Rooms	Additional

Herbst Gaming Casino Properties (as of December 31, 2009)

Southern Nevada

Terrible’s Hotel & Casino	Las Vegas, NV	960	9	329	Race and sports book 196 seat bingo facility

Terrible’s Town Casino	Pahrump, NV	334	6	—	Race and sports book; 120 seat bingo facility

Terrible’s Lakeside Casino & RV Park	Pahrump, NV	194	—	159 RV spaces	Race and sports book; 192-seat bingo facility; 7 acre lake

Terrible’s Casino & Bowl	Henderson, NV	134	—	—	16-lane bowling alley

Terrible’s Searchlight Casino	Searchlight, NV	75	—	—	—

Buffalo Bill’s	Primm, NV	1,025	34	1,242	31,280 sq. ft. conference space, including the 6,800 seat “Star of the Desert” arena; rollercoaster

Whiskey Pete’s	Primm, NV	747	16	779	8,000 sq. ft. convention space, including a 700 seat showroom

Primm Valley Resort and Casino	Primm, NV	934	34	625	21,000 sq.ft conference space

Northern Nevada

Terrible’s Rail City	Sparks, NV	875	5	—	Sports book/Keno

Sands Regency	Reno, NV	539	15	833	Sports book; 12,000 sq. ft. conference space/Bingo

Terrible’s Gold Ranch	Verdi, NV	235	—	105 RV spaces	Sports book; California lottery station

Terrible’s Dayton Depot Casino	Dayton, NV	247	—	—	Sports book

Midwest

Terrible’s Lakeside Casino Resort	Osceola, IA	1,010	20	60 Hotel Rooms and 47 RV spaces	10,000 sq. ft. conference space; convenience store and gas station; 121 acres (88 acres un-developed; 15 acre lake)

Terrible’s Mark Twain Casino	LaGrange, MO	650	14	—	—

Terrible’s St. Jo Frontier Casino	St. Joseph, MO	543	11	—	2,400 sq. ft. conference space; 40 acres (32 acres undeveloped)

Total		8,592	171	3,869 rooms	329 RV spaces

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Southern Nevada Casinos

Terrible’s Hotel & Casino

Terrible’s Hotel & Casino in Las Vegas, Nevada (“Terrible’s”) offers a buffet and a 24-hour café. There are currently 329 rooms with standard amenities. Terrible’s is conveniently located approximately one mile east of the Las Vegas Strip, which we believe appeals to locals who wish to avoid the congestion of the Strip. Terrible’s favorable location has made it popular with Strip casino employees. Although we are not a tourist destination, we receive a certain amount of tourist traffic through our casino due to our location near the airport, the Strip and the Las Vegas Convention Center.

Terrible’s Searchlight Casino

Terrible’s Searchlight Casino is located in Searchlight, Nevada and offers 75 slot machines, a full-service truck stop and 24-hour café.

Terrible’s Town Casino

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60 miles from Las Vegas, offers approximately 334 slot machines, six table games, a race and sports book, a 120-seat bingo facility and a restaurant with buffet.

Terrible’s Lakeside Casino & RV Park

Terrible’s Lakeside Casino & RV Park is located in Pahrump, Nevada and offers 194 slot machines, a race and sports book, a 192 seat bingo facility, 159 RV spaces and a restaurant with buffet.

Terrible’s Town Casino & Bowl

Terrible’s Town Casino & Bowl is located in Henderson, Nevada and offers approximately 134 slot machines, a 16-lane bowling alley and 24-hour café.

Primm Casinos

We own the business and lease the real property on which Buffalo Bill’s Hotel and Casino, Whiskey Pete’s Hotel and Casino and Primm Valley Resort and Casino are located in Primm, Nevada. The Primm Casinos are subject to a real property lease that has an initial fifty-year term, which expires in 2043, with one twenty-five-year extension option ending in 2068. Also, the Primm Casinos collectively own and manage three gas station/convenience stores, a Starbucks Coffee outlet and one California Lottery lotto store. The Primm Casinos also manage a 36-hole Tom Fazio golf course with a full-service restaurant.

Buffalo Bill’s Hotel and Casino

Buffalo Bill’s offers 1,025 slot machines and 34 table games. In addition to a 1,242 room hotel, Buffalo Bill’s has a full service restaurant and buffet as well as a “Tony Roma’s” restaurant. The western themed property also has extensive entertainment amenities including the 6,800 seat “Star of the Desert” arena that hosts big name entertainers throughout the year. Buffalo Bill’s has a world class roller coaster as well as water park log rides, a movie theater and a midway style arcade.

Whiskey Pete’s Hotel and Casino

Whiskey Pete’s offers 747 slot machines and 16 table games, a sports book and two full service bars. Additionally Whiskey Pete’s has a 779 room hotel , a full service coffee shop, a weekend buffet, a McDonald’s restaurant, an 8,000 square feet special events and concert venue with 700 seats and a swimming pool.

Primm Valley Resort and Casino

Primm Valley offers 934 slot machines, 34 table games, a sports book and keno. Additionally Primm Valley has a 625 room hotel and 21,000 square feet of convention space. Primm Valley has a full service coffee shop and buffet as well as the GP Steakhouse. The resort has a swimming pool, and a full service spa is currently under construction. The Primm Valley Resort is connected to the “Fashion Outlets of Las Vegas,” a retail complex owned by a third party that houses over 100 designer outlet stores, including a Neiman Marcus “Last Call,” a Williams Sonoma Outlet store, and Coach, Tommy Bahama, Banana Republic and Versace factory outlet stores.

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Northern Nevada / Sands Regent Casinos

Terrible’s Rail City Casino

Terrible’s Rail City Casino in Sparks, Nevada has approximately 30,000 square feet of gaming space housing 875 slots, five table games, including keno, a sports book operated by an independent party, a 24-hour family-style restaurant and an ale house and brew pub. Rail City’s customer base comes primarily from Northern Nevada and a majority of its customers reside in close proximity to the casino.

Sands Regency Casino Hotel

Sands Regency Casino Hotel in Downtown Reno, Nevada has approximately 29,000 square feet of gaming space and a full selection of gaming alternatives, including 539 slot machines and 15 table games, as well as keno, bingo, live poker and a sports book operated by an independent party. Additionally, the Sands resort complex has 833 hotel rooms, including 29 suites, a health spa, and a large outdoor swimming pool. Dining options at the Sands include Cabana Café, a coffee house/deli-style restaurant, The Buffet at the Sands, and Fuzio’s, an Italian restaurant. The property also has a Mel’s, the Original, diner style restaurant, and an Arby’s restaurant, both of which are operated by third parties. The facility also includes an entertainment cabaret, three cocktail lounges, a comedy club operated by a third party and approximately 12,000 square feet of convention and meeting space. Third parties lease space from the Sands and operate a wedding chapel, a bicycle and ski rental shop, and a beauty shop. The Sands facility contains multiple parking areas, including a parking garage, with total combined capacity for approximately 1,100 vehicles. A substantial portion of the Sands’ business, particularly our hotel customer base, is arranged through travel groups, both air and motor coach wholesalers, which offer economy rates, and are primarily from Western Canada, the Pacific Northwest and Northern California.

Terrible’s Gold Ranch Casino and RV Resort

Terrible’s Gold Ranch Casino and RV Resort in Verdi, Nevada offers approximately 235 slot machines in an 8,370 square foot casino, a sports book operated by a third party, a family-style restaurant, a Jack-in-the-Box restaurant leased to and operated by a third-party, a bar, a 105-space RV park, a California lottery station, a gas station and a convenience store. Gold Ranch’s guests include both tourists and local residents, with local residents generating over half of the property’s casino patronage. Gold Ranch attempts to attract local residents through mid-week promotions geared toward enhancing local play mainly through lottery, casino, and restaurant programs. Tourist programs emphasize the RV Park, casino and restaurant cross-promotions. Gold Ranch attempts to attract as much traffic as possible off Interstate 80, the major Nevada/California thoroughfare. We lease the real property on which Gold Ranch is located. The real property lease has a twenty-year term with four five-year extension options ending in 2042. We possess the option to purchase the real property on which the Gold Ranch business assets are located.

Terrible’s Dayton Depot Casino

Terrible’s Dayton Depot Casino is located in Dayton, Nevada. We own the building that houses the Dayton Casino and the 4.5 acres of real property on which the Dayton Casino is located, as well as a building and 0.5 acres of real property directly across the street which housed a small tavern that is not currently operating. Dayton Casino has approximately 16,000 square feet of casino space, a family-style restaurant, 247 slot machines and a sports book operated by a third party.

Casinos Outside Nevada

Terrible’s Lakeside Casino Resort

Lakeside Iowa, a riverboat casino located on West Lake in Osceola, Iowa, offers 1,010 slot machines and 20 table games. Lakeside Iowa offers a 60 room, all-suite hotel, modular conference and meeting facilities that can seat up to 900 people and that are used for meetings, banquets and concerts, a fitness center, an outdoor pool and a gift shop. In addition, Lakeside Iowa offers a 280-seat restaurant/buffet and lounge located in the main lobby, two bars located in the casino, a convenience store and gas station that are located adjacent to the casino and 47 RV spaces with utility hookups. Lakeside Iowa owns 121 acres of land, 88 acres of which are undeveloped.

Terrible’s Mark Twain Casino

Mark Twain, located in a man-made basin adjacent to the Mississippi River in LaGrange, Missouri, offers 650 slot machines and 14 table games. Mark Twain offers a 157-seat restaurant/bar and an additional bar in the casino. The casino has a locally popular theme based on Mark Twain, who grew up in and wrote about nearby Hannibal, Missouri.

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Terrible’s St. Jo Frontier Casino

St. Jo, located in a man-made basin adjacent to the Missouri River in St. Joseph, Missouri, offers 543 slot machines and 11 table games. St. Jo offers a bar, a buffet and over 2,400 total square feet of modular conference and meeting space. The casino and its amenities have a locally popular Pony Express western theme that plays off St. Joseph’s heritage as the founding location and headquarters of the Pony Express. St. Jo owns 40 acres of land, 32 acres of which are undeveloped.

Financial Information

The primary source of our revenue and income is from our route and casino operations, although we view the restaurants, bars and services on our premises to be important adjuncts to our casino operations. The following table sets forth the contribution to total net revenues on a dollar and percentage basis of our major activities for the years ended December 31, 2007, 2008 and 2009.

	Years Ended December 31,
	2007(1)					2008(1)					2009
	Amount			Percent		Amount			Percent		Amount			Percent
	(in thousands, except percentages)
Revenues:
Route operations(2)	$	276,946		35.3	%	$	243,635		31.6	%	$	200,637		30.0	%
Casino operations(2)
Nevada	331,517			42.2		337,006			43.7		312,149			46.7
Other states	141,731			18.0		137,188			17.8		139,280			20.8
Other	98,987			12.6		116,609			15.2		86,285			12.9
Total revenues	$	849,181				$	834,438				$	738,351
Less promotional allowances(2)	(64,241		)	(8.2	)	(63,349		)	(8.2	)	(69,788		)	(10.4	)
Total net revenues	$	784,940		100.0	%	$	771,089		100.0	%	$	668,563		100.0	%

(1) Calendar year 2007 reflects a partial year of, operations of the Sands Regent Casinos, which were acquired in January 2007, and the Primm Casinos, which were acquired in April 2007. As a result, the results of operations for calendar year 2007 may not be comparable to the results of operations in 2008 and 2009.

(2) Route and casino revenues are the net difference between gaming wins and losses. Promotional allowances consist primarily of food and beverages furnished gratuitously to customers. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances. See Note 2, Description of Business and Summary of Significant Accounting Policies” to the accompanying Notes to consolidated financial statements in “Item 8. Financial Statements and Supplementary Data”.

See “Item 8. Financial Statements and Supplementary Data” for additional financial information about us.

Marketing

Nevada Market

Since we believe that a vast majority of our patrons at our casinos in Southern Nevada are locals, our marketing efforts are primarily focused on the local population of Clark County and Nye County, Nevada. These marketing efforts seek to capitalize on the strong recognition and high level of quality and value associated with the Terrible Herbst trade name and its cowboy logo, which are used in 87 gasoline stations and convenience stores in Southern Nevada and 12 gasoline stations and convenience stores in California, Arizona and Utah. The Terrible Herbst brand is prominently displayed in our route and casino operations. We license the Terrible Herbst trade name from Terrible Herbst, Inc., a related party, through 2011. Subject to mutual consent, we may extend the term of the license agreement for five successive five-year periods. The Plan provides that this license agreement will be assigned to Reorganized Herbst Gaming. As the Terrible Herbst brand is important to our operations in Southern Nevada, any loss of this license could adversely affect our business. See “Item 13. Certain Relationships and Related Transactions” for a further discussion of this license agreement.

We have a state of the art player’s club loyalty program, “the one card”, that combines the loyalty programs at all of our Nevada casinos. Under the one card program customers are rewarded with points for playing at all of our casino locations in Nevada, which points may be redeemed for cash as well as free or discounted rooms, food or other goods or services provided at any such location.

The customer base of the Sands Regent Casinos ranges from locals living in Northern Nevada, in the case of Rail City, to customers from Western Canada, the Pacific Northwest and Northern California, in the case of the Sands. The marketing efforts for

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the Sands Regent Casinos are primarily focused on attracting locals and value-minded out-of-market visitors through aggressive promotions and customer loyalty programs.

The customer base of the Primm Casinos consists primarily of value oriented tourists living in the inland empire of Southern California such as San Bernardino, Victorville and Barstow. The marketing efforts of the Primm Casinos prior to our acquisition were primarily focused on attracting value-minded out-of-market visitors through aggressive promotions and special events. While continuing this focus, we have been expanding the marketing of these casinos into the Southern Nevada locals market. The Primm Casinos also manage a 36-hole golf course and a new spa and exercise facility at the Primm Valley Casino that opened in December 2009.

Midwest Market

Each of Lakeside Iowa, Mark Twain and St. Jo has a highly recognizable brand name within its respective community. In addition, each of Lakeside Iowa, Mark Twain and St. Jo operates a slot club that rewards customers with points for every coin-in. Points are redeemable for free play as well as points that may be used for food, valet or retail items. Each of the three casinos also hosts blackjack and slot tournaments as well as other special events on the casino premises that seek to recognize and cultivate regular casino patrons.

Business Strategy

Our business strategy for the route business primarily focuses on attracting and fostering repeat business from local gaming patrons. Local patrons are typically sophisticated gaming customers who seek convenient locations, high payouts and a pleasant atmosphere. Because local gaming consumers represent high potential repeat business, generating customer satisfaction and loyalty is a critical component of our strategy. With respect to the casino businesses, our business strategy focuses on the value oriented, high repeat patron from both local and drive in tourist gaming markets.

Route Operations

We believe that route patrons choose to play slot machines near their homes. We attract and retain these players by installing state-of-the-art slot machines with popular games, offering a high level of customer service and providing an attractive, comfortable atmosphere at our route locations. We actively manage our route locations as if they were casinos. For example, we extend patrons’ slot play by offering free snacks and beverages at some of our route locations. We place our gaming machines in locations where they will receive maximum customer traffic, generally near a store’s entrance. In addition, we utilize a game tracking system and other technology to monitor the play of our patrons. Upon reviewing and analyzing our customer play, we adjust the types of games available.

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

Casino Operations

Our casino operations strategy is to offer high quality gaming, hotel and dining experiences at affordable prices. Our primary target market consists of value oriented local middle market gaming patrons who gamble frequently. We believe that we attract our targeted customers and that they return to our casinos because of our high value orientation, as well as convenient locations, great food, ample parking and high slot machine payout rates. Because locals demand variety and quality in their slot and video poker machine play, our locals casino properties offer the latest in slot and video poker technology. Although perceived value initially attracts a customer to our casino properties, actual value generates customer satisfaction and loyalty. For our drive-in tourist market casinos many of the same strategies apply as this market is heavily focused on repeat business and high value. We experience little, if any, non-drive-in tourist patronage. As part of our commitment to providing a quality entertainment experience for our patrons, we are dedicated to ensuring a high level of customer satisfaction and loyalty by providing attentive customer service in a friendly, casual atmosphere. We recognize that consistent quality and a comfortable atmosphere stem from the collective care and friendliness of each employee.

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Competition

Nevada Market

Our slot route operations are subject to substantial direct competition for our revenue-sharing and fixed space lease locations from one large route operator and numerous small operators, located principally in Las Vegas, Nevada. The principal method of competition for slot route operators includes the economic terms of the revenue-sharing or space lease arrangement, the services provided and the reputation of the route operator. Price competition for revenue-sharing or space lease arrangements is intense and we believe that price competition among slot route operators will continue. We are one of the largest route operators with approximately 6,200 slot machines situated in locations outside of our casinos as of December 31, 2009.

With respect to our casino operations in Las Vegas, Terrible’s Hotel & Casino competes for local gaming customers with other locals-oriented casino-hotels in Las Vegas. We do not believe that we are in direct competition with many of the resort-casino properties on the Las Vegas Strip, which focus primarily on attracting tourist players. Instead, we believe that our principal competitors in our casino operations are the two other local casinos located within a one mile radius. We compete with these properties on the basis of the desirability of location, payout rates, personalized approach, casino promotions, comfort and value of restaurants and hotel rooms and the variety and value of entertainment. The construction of new casinos or the expansion of existing casinos near our casinos could have a negative impact on our casino operations.

Our casino operations in Pahrump, Henderson, and Searchlight, Nevada face competition from other casinos located in the vicinity of these properties.

Competition among casinos in the markets in which the Sands Regent Casinos are located, particularly the Reno/Sparks market, is intense. The expansion and maturation of Native American gaming in Northern California, the Pacific Northwest, and British Columbia has had an adverse impact on total gaming revenues of the greater Reno area. Native American casinos in Northern California offer most of the amenities that casinos in Reno offer, including big name entertainment and hotel rooms. In addition, Thunder Valley, on the Interstate-80 corridor in California, has grown to be one of the country’s busiest and most profitable casinos and is currently expanding its hotel and casino. More Native American casinos and expansions to other existing casinos are planned in Northern California and many are partnering with existing gaming companies that have financial resources to promote their facilities. Many of our direct competitors in the Reno market have greater financial and other resources than we do.

The Primm Casinos face competition from Native American gaming in Southern California, other casinos outside of Las Vegas, such as casinos located in Laughlin and Mesquite, Nevada, as well as value oriented casinos located in the Las Vegas market.

Midwest Market

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

Lakeside Iowa is located along Interstate 35, approximately 40 miles southwest of Des Moines, Iowa. The primary competitors of Lakeside Iowa are the Prairie Meadows racino, the Riverside Casino and Golf Resort and the Meskwaki Bingo Casino Hotel. The Prairie Meadows racino is located approximately 60 miles from Lakeside Iowa east of Des Moines. Riverside Casino and Golf Resort is located in Riverside, Iowa, approximately 175 miles from Osceola. The Meskwaki Bingo Casino Hotel is located in Tama, Iowa and is approximately 110 miles from Lakeside Iowa.

Mark Twain is the only casino in northeast Missouri and is approximately 15 miles from Quincy, Illinois and approximately 25 miles from Hannibal, Missouri. The closest casino to Mark Twain is the Catfish Bend Casino, located in Burlington, Iowa, which is approximately 75 miles from LaGrange.

St. Jo is approximately 50 miles north of Kansas City, Missouri. St. Jo primarily targets residents of St. Joseph, Missouri and is the only casino in St. Joseph. However, St. Jo competes indirectly with four riverboats in Kansas City, Missouri and to a lesser extent with several Native American casinos, the closest of which is approximately 45 miles from St. Joseph.

Certain states have recently legalized, and other states are considering legalizing, casino gaming in certain areas. In addition, states such as Illinois and Kansas have awarded additional gaming licenses or are expanding permitted gaming. In addition, Iowa is considering awarding additional gaming licenses in the State. The award of one or more additional licenses in Iowa or in other locations close to Lakeside Iowa, Mark Twain or St. Jo would be expected to adversely affect our results of operations and financial condition.

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Seasonality

We do not believe that our business as a whole is seasonal to any significant degree. However, our casinos in the Midwest and in Northern Nevada do experience some business interruption during the winter months. For example, in December 2009 as well as in the first two months of 2010, our Midwest casinos experienced a decline in revenue related to severe weather conditions.

Environmental Laws

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

Employees

As of December 31, 2009, we employed 5,654 employees. None of our current employees is covered by a collective bargaining agreement. We believe that our relationship with our employees is good.

Regulation and Licensing

Nevada

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

Our gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board, and the Cities of Las Vegas, Reno, Henderson and other local regulatory authorities (the “Nevada Gaming Authorities”).

The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things:

· the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;

· the establishment and maintenance of responsible accounting practices and procedures;

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

· the prevention of cheating and fraudulent practices; and

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

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

Corporations and other entities that operate casinos or slot routes in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license for such activities requires the periodic payment of fees and taxes and is not transferable. Herbst Gaming is registered by the Nevada Gaming Commission as a publicly traded corporation (a “registered corporation”). As a registered corporation, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information that the Nevada Gaming Commission may require. Herbst Gaming has been found suitable by the Nevada Gaming Commission to own the stock or the membership interests of various licensed corporations and limited liability companies that own and operate casinos or slot machine operating routes licensed by the Nevada Gaming Commission (all of which are collectively referred to as the “Gaming Subsidiaries”). No person may become a stockholder or member of, or receive any percentage of the profits from, any of the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. Herbst Gaming and all of its Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in the various gaming businesses that each respectively operates in Nevada.

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The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Herbst Gaming or any of the Gaming Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of Herbst Gaming or any of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove any change in corporate position.

If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

Herbst Gaming and the Gaming Subsidiaries are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by Herbst Gaming and its Gaming Subsidiaries must be reported, to and/or approved by, the Nevada Gaming Commission.

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

Any beneficial holder of Herbst Gaming’s voting or non-voting securities, regardless of the number of shares owned, may be required to file an application, be investigated and have his or her suitability as a beneficial holder of Herbst Gaming’s voting or non-voting securities determined if the Nevada Gaming Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada. If such beneficial holder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of its beneficial owners. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in connection with conducting such investigation.

The Nevada Act requires any person who acquires more than 5% of a registered corporation’s voting securities to report the acquisition to the Nevada Gaming Commission. The Nevada Act requires beneficial owners of more than 10% of a registered corporation’s voting securities apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring such filing. However, an “institutional investor,” as defined in the Nevada Act, that beneficially owns more than 10%, but not more than 11%, of a registered corporation’s voting securities as a result of a stock repurchase by the registered corporation may not be required to file such an application. Further, an institutional investor that acquires more than 10%, but not more than 25%, of a registered corporation’s voting securities may apply to the Nevada Gaming Commission for a waiver of a finding of suitability if that institutional investor holds the voting securities for investment purposes only. An institutional investor that has obtained a waiver may hold more than 25%, but not more than 29%, of a registered corporation’s voting securities and maintain its waiver if the additional ownership results from a stock repurchase by the registered corporation. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered corporation, any change in the corporate charter, bylaws, management, policies or operations of the registered corporation, or any of its gaming affiliates or any other action which the Nevada Gaming Commission finds to be inconsistent with holding the registered corporation’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:

· voting on all matters voted on by stockholders;

· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and

· other activities as the Nevada Gaming Commission may determine to be consistent with such investment intent.

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Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chairman of the Nevada State Gaming Control Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. Herbst Gaming and the Gaming Subsidiaries may become subject to disciplinary action if, after receipt of notice that a person is unsuitable to be a stockholder or to have any other relationship with Herbst Gaming or the Gaming Subsidiaries, Herbst Gaming:

· pays that person any dividend or interest upon voting securities;

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

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

· fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities for cash at fair market value.

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

Herbst Gaming may be required to disclose to the Nevada State Gaming Control Board and the Nevada Gaming Commission the identities of all holders of its debt securities. The Nevada Gaming Commission may, in its discretion, require the holder of any debt or similar security of a registered corporation to file applications, be investigated and be found suitable to own the debt or other security of a registered corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own the security, then pursuant to Nevada law, the registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming Commission, it:

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

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

· pays the unsuitable person remuneration in any form; or

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

Herbst Gaming is required to maintain a current stock ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial holder to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Gaming Commission has the power to require our securities to bear a legend indicating that the securities are subject to the Nevada Act.

Herbst Gaming may not make a public offering of securities without the prior approval of the Nevada Gaming Commission if the proceeds from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or similar transactions. Furthermore, any such approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Gaming Commission or the Nevada State Gaming Control Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

Changes in the control of Herbst Gaming through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control or ownership of a registered corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Nevada Gaming Commission may also require the stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

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The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defensive tactics affecting Nevada corporate gaming licensees and registered corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established regulations to ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to: (1) assure the financial stability of corporate gaming licensees and their affiliates; (2) preserve the beneficial aspects of conducting business in the corporate form; and (3) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the registered corporation can make exceptional repurchases of voting securities above the current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the registered corporation’s board of directors in response to a tender offer made directly to the registered corporation’s stockholders for the purposes of acquiring control of the registered corporation.

License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee’s respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:

· a percentage of the gross revenues received;

· the number of gaming devices operated; or

· the number of table games operated.

Any person who is licensed, required to be licensed, registered, required to be registered or is under common control with such persons, or Licensees, and who is or who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada State Gaming Control Board of the Licensees’ participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada gaming laws. Licensees are also subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to a foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability.

Missouri

On November 3, 1992, a statewide referendum authorized gaming in the State of Missouri on the Missouri and the Mississippi Rivers. On April 29, 1993, Missouri enacted revised legislation (as amended, the “Missouri Gaming Law”) which amended the existing legislation. In a decision handed down on January 25, 1994, the Missouri Supreme Court held that games of chance were prohibited under the Missouri constitution. In a statewide election held on November 8, 1994, Missouri voters approved the adoption of an amendment to the Missouri Constitution which permits the legislature to allow games of chance to be conducted on excursion boats and floating facilities on the Mississippi River and the Missouri River. As a result of the amendment, games of chance are also permitted, subject to Missouri Gaming Law. Pursuant to the Missouri Gaming Law, there are twelve operating riverboat gaming facility sites in Missouri: one in Caruthersville; one in Boonville; four in the St. Louis area; four in the Kansas City area; one in LaGrange; and one in St. Joseph.

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

Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. Herbst Gaming, HGI—St. Jo, Inc., the subsidiary of Herbst Gaming that owns St. Jo and the current licensee and HGI—Mark Twain, Inc., the subsidiary of Herbst Gaming that owns Mark Twain and the current licensee, any

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subsidiaries, and some of their officers and employees are and will be subject to specific regulations, including ongoing licensing requirements. As part of the application and licensing process for a gaming license, the applicant must submit detailed financial, operating and other reports to the Missouri Gaming Commission. Each applicant has an ongoing duty to update the information provided to the Missouri Gaming Commission in the application, usually within seven days of a material change in the information on file with the Missouri Gaming Commission. Each of St. Jo and Mark Twain has frequently updated its application materials since it was initially licensed. In addition to the information required of the applicant, directors, officers, affiliated business entities and other defined “key persons” (which include individuals and companies designated by the Missouri Gaming Commission) must submit Personal Disclosure Forms, which include detailed financial information, and are subject to thorough investigations. In addition, some officers and directors of Herbst Gaming, as well as Herbst Gaming itself, have submitted Personal Disclosure Forms and applications to the Missouri Gaming Commission. All gaming employees must obtain an occupational license issued by the Missouri Gaming Commission. Suppliers are also subject to licensing requirements of the Missouri Gaming Commission. An institutional investor holding an interest of 20% or less in Herbst Gaming for only passive investment purposes, may be exempted from these licensure requirements by the Missouri Gaming Commission.

Effective May 30, 2008, certain amendments were made to Missouri’s gaming regulations that provide for the division of Missouri gaming licenses into Class A and Class B Licenses. Herbst Gaming now holds a Class A License which allows Herbst Gaming to operate the HGI-St. Jo and HGI-Mark Twain business entities. HGI-St. Jo and HGI-Mark Twain now hold Class B Licenses allowing them to operate the respective riverboat gaming operations in Missouri. Based on these amended regulations, HGI-St. Jo as operator of Terrible’s Frontier Casino facility and HGI-Mark Twain as operator of the Mark Twain Casino facility became Class B license holders. Herbst Gaming, as the holding and parent company of HGI-St. Jo and HGI-Mark Twain, holds a Class A license.

Both the holding company Class A license and the operating Class B licenses remain issued through application to the Missouri Gaming Commission, which continues to require, among other things:

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

· suitability investigations into each designated key person or affiliated business entity’s character, financial responsibility, experience and qualifications;

· disclosure of required financial (see above) and other personal information on each key person or designated affiliated business entity;

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

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

· an economic development or impact report.

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

The Missouri Gaming Law and implementing regulations impose restrictions on the use of and do not permit the transfer of the gaming licenses as well as limitations on transactions engaged in by licensees. The licenses issued by the Missouri Gaming Commission may not be transferred nor pledged as collateral. The Missouri Gaming Law regulations bar a licensee from taking any of the following actions without prior notice to, and approval by, the Missouri Gaming Commission:

· any transfer or issuance of an ownership interest in a gaming licensee that is not a publicly held company;

· any transfer or issuance of an ownership interest of five percent or more of the issued and outstanding ownership interest of Herbst Gaming which is publicly traded and is a holding company;

· any private incurrence of debt by the licensee or any holding company of $1,000,000 or more;

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

· defined “significant related party transactions.”

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

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

Missouri statutes and administrative rules contain detailed requirements and conditions concerning the operation of a licensed excursion gaming boat facility, including but not limited to the following:

· a charge of two dollars per gaming customer per excursion that licensees must either collect from each customer or pay itself to the Missouri Gaming Commission;

· minimum payouts;

· the payment of a 21% tax on adjusted gross receipts;

· prohibitions against providing credit to gaming customers;

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

· providing security on the excursion gambling boat, including a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff, including Missouri Highway Patrol Officers, necessary to protect the public on the licensee’s riverboat;

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

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

The Missouri Gaming Commission has the power, as well as broad discretion in exercising this power, to revoke or suspend gaming or occupational licenses and impose other penalties for violations of the Missouri Gaming Law and the rules and regulations promulgated thereunder, including without limitation, forfeiture of all gaming equipment used for improper gaming and fines of up to three times a licensee’s highest daily gross receipts during the preceding twelve months.

Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may be used for gaming, the Missouri Gaming Commission is empowered to impose space limitations through the adoption of rules and regulations.

Previously, the Missouri Gaming Law imposed as to each customer a $500 loss limit per two-hour period established by each licensee with the approval of the Missouri Gaming Commission. However, by vote of Missouri registered voters on November 8, 2008, the Missouri Gaming Law was amended to provide that the Missouri Gaming Commission shall not establish any regulations or policies that limit the amount of wagers, losses or buy-in amounts.

In addition, the Missouri Gaming Commission is empowered to determine on a city and county-specific basis where “dockside” or permanently-docked gaming is appropriate and may be permitted. The Missouri Gaming Commission has authorized all twelve licensed sites to operate all or a portion of their facilities on a continuously docked basis.

On February 23, 2000, the Missouri Gaming Commission granted Mark Twain Casino, L.L.C., from which Herbst Gaming purchased the Mark Twain, the authority to permanently dock the excursion gambling riverboat facility known as the “Mark Twain Casino.” On February 15, 1996, the Missouri Gaming Commission granted St. Joseph Riverboat Partners, from which Herbst Gaming purchased St. Jo, the authority to permanently dock the excursion gambling riverboat facility known as the “Biloxi Bell, II.”

Iowa

In 1989, the State of Iowa legalized riverboat gaming on the Mississippi River and other waterways located in Iowa. Under Iowa law, a license to conduct gaming may be issued in a county only if the county electorate has approved gaming. The electorate of

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Clarke County, Iowa, approved gaming on February 28, 1995 by referendum. Gaming conducted by the Lakeside Casino Resort was approved by referendum on November 18, 1997. In addition, a referendum must be held every eight years in each of the counties where gambling games are conducted and the proposition to continue to allow gambling games in such counties must be approved by a majority of the county electorate voting on the proposition. Such a referendum took place on November 5, 2002 with approximately 80% of the electorate voting on the proposition favoring continued gaming on riverboats in Clarke County. The next referendum is scheduled for 2010. If any reauthorization referendum is defeated, Iowa law provides that any previously issued gaming license will remain valid and subject to renewal for a total of nine years from the date of original issuance of the license, subject to earlier non-renewal or revocation under Iowa law and regulations applicable to all licenses.

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

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

Iowa law permits gaming licensees to offer unlimited stakes gaming on games approved by the Iowa Gaming Commission on a 24-hour basis. Dockside casino gaming is authorized by the Iowa Gaming Commission and the Iowa Legislature, subject to certain limitations not applicable to Lakeside Iowa, eliminated the requirement that gaming licensees cruise, effective May 6, 2004. The legal age for gaming is 21.

The Company’s Iowa excursion gambling boat license was approved for renewal at a March 4, 2010 meeting of the Iowa Gaming Commission. This license is not transferable and will need to be renewed annually and prior to the commencement of each subsequent annual renewal period.

The ownership and operation of gaming facilities in Iowa are subject to extensive state laws, regulations of the Iowa Gaming Commission and various county and municipal ordinances (collectively, the “Iowa Gaming Laws”), concerning the responsibility, financial stability and character of gaming operators and persons financially interested or involved in gaming operations. Iowa Gaming Laws seek to: (1) prevent unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees (including the establishment of minimum procedures for internal fiscal affairs, the safeguarding of assets and revenues, the provision of reliable record keeping and the filing of periodic reports with the Iowa Gaming Commission); (4) prevent cheating and fraudulent practices; and (5) provide a source of state and local revenues through taxation and licensing fees. Changes in Iowa Gaming Laws could have a material adverse effect on the Iowa gaming operations.

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

Officers, directors, managers and employees of the Iowa gaming operations are required to be licensed by the Iowa Gaming Commission. Employees associated with gaming must obtain a license and these licenses are subject to immediate suspension under specific circumstances. In addition, anyone having a material relationship or involvement with the Iowa gaming operations may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Gaming Commission in connection with the investigation. The Iowa Gaming Commission may deny an application for a license for any cause deemed reasonable. In addition to its authority to deny an application for license, the Iowa Gaming Commission has jurisdiction to disapprove a change in position by officers or key employees and the power to require the Iowa gaming operations to

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suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Gaming Commission finds unsuitable to act in such capacities.

The Iowa Gaming Commission may revoke a gaming license if the licensee:

· has been suspended from operating a gaming operation in another jurisdiction by a board or commission of that jurisdiction;

· has failed to demonstrate financial responsibility sufficient to meet adequately the requirements of the gaming enterprise;

· is not the true owner of the enterprise;

· has failed to disclose ownership of other persons in the enterprise;

· is a corporation 10% of the stock of which is subject to a contract or option to purchase at any time during the period for which the license was issued, unless the contract or option was disclosed to the Iowa Gaming Commission and the Iowa Gaming Commission approved the sale or transfer during the period of the license;

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

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

· pleads guilty to, or is convicted of, a felony;

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

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

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

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

The Iowa Gaming Commission may also require any individual who has a material relationship with the Iowa gaming operations to be investigated and licensed or found suitable. The Iowa Gaming Commission, prior to the acquisition, must approve any person who acquires 5% or more of a licensee’s equity securities in the event that approval by the Iowa Gaming Commission is not otherwise contemplated by the operative acquisition document. The applicant stockholder is required to pay all costs of this investigation.

Gaming taxes approximating 22% of the adjusted gross receipts above $3,000,000 will be payable by each licensee on its operations to the State of Iowa. In addition, there was a prepaid assessment due on June 1, 2005 and another prepaid assessment paid on June 1, 2006, in an aggregate amount equal to 2.152% of each licensee’s estimated adjusted gross receipts for fiscal year 2004. These assessments will be offset by future state gaming taxes paid by each licensee with a credit for 20% of the assessments paid allowed each year beginning July 1, 2010 for five consecutive years. The state of Iowa is also reimbursed by the licensees for all costs associated with monitoring and enforcement by the Iowa Gaming Commission and the Iowa Department of Criminal Investigation.

Item 1A. Risk Factors.

The following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in this report. If any of the following risks and uncertainties or other risks and uncertainties not currently known to us or not currently considered to be material actually occur, our business, financial condition or

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operating results could be harmed substantially. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a more detailed discussion of the Restructuring and the Chapter 11 Cases.

We are undergoing a restructuring under Chapter 11 of the Bankruptcy Code and are operating as reorganized debtors. Although the Bankruptcy Court has confirmed the Plan, it is uncertain whether we will consummate the Plan or otherwise emerge from bankruptcy or achieve a viable operation.

We are currently operating as reorganized debtors under Chapter 11 of the Bankruptcy Code, and our continuation as a going concern is contingent upon, among other things, our ability to consummate the Plan, gain gaming authority approvals required to effectuate the Plan, comply with terms of future loan agreements, return to profitability, generate sufficient cash flows from operations, and obtain financing sources to meet future obligations. Further, we may lose valuable contracts to our competitors in the process of the Restructuring.

Although the Plan has been confirmed by the Bankruptcy Court and has an Effective Date of February 5, 2010 it will not be implemented until the Substantial Consummation Date. We cannot assure you that the conditions to the Substantial Consummation Date will be met or that the Plan will be consummated.

If the Plan is not consummated, it is unclear whether we will be able to reorganize our business and what, if any, distributions holders of the remaining claims against or equity interests in the Company ultimately would receive with respect to their claims or equity interests. If an alternative plan of reorganization can not be agreed upon, it is possible that we would have to liquidate our assets, in which case it is possible that holders of claims would receive substantially less favorable treatment than they would receive under the Plan. On January 28, 2010, the Indenture Trustee filed the Appeal from the Order confirming the Plan. While the Indenture Trustee has not sought a stay of the Order, we cannot assure you that the Indenture Trustee will not seek such a stay or that a stay, if sought, will not be granted during the pendency of the Appeal and prior to the Substantial Consummation Date. We cannot assure you that the Order will not be overturned and the Plan set aside.

Prolonged continuation of the Chapter 11 Cases may harm our business.

If the Chapter 11 Cases continue for a prolonged amount of time, the proceedings could adversely affect our business and operations. The Plan was confirmed with an Effective Date of February 5, 2010. The Plan will not be fully implemented until the Substantial Consummation Date. So long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort dealing with our reorganization instead of focusing exclusively on business operations. Prolonged continuation of the Chapter 11 Cases will also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers, suppliers and agents will lose confidence in our ability to successfully reorganize our business and seek to establish alternative commercial relationships. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the Chapter 11 Cases. Prolonged continuation of the Chapter 11 Cases may also require us to seek additional financing. It may not be possible for us to obtain additional financing during or after the Chapter 11 Cases on commercially favorable terms or at all. If we were to require additional financing during the Chapter 11 Cases and were unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized.

The volatility and disruption of the capital and credit markets and adverse changes in the global economy may negatively impact our ability to access financing.

Due to the continuing uncertainty in the capital and credit markets and the global recession, our access to capital upon the emergence from the bankruptcy proceedings may not be available on terms feasible to the Company if at all.

Our operations, and the gaming industry as a whole, have been adversely affected by the recession. The gaming operations and casinos owned by the Company may be further adversely impacted if general economic conditions do not improve, which could lead to an adverse impact on the operations of the Company.

The results of operations of our route and casino businesses have been negatively impacted by the global financial recession, subprime mortgage crisis, volatile gasoline and energy prices, and the general economic downturn, including a decrease in consumer confidence levels. The gaming industry is currently experiencing reduced demand. The demand for gaming is highly sensitive to consumers’ disposable incomes, and a general decline in economic conditions, including businesses downsizing their workforces, may lead to our potential customers having less discretionary income with which to wager. Many of our customers have also experienced significant reductions in their savings as a result of recent investment losses. These developments have led, and are likely to continue to lead, to a reduction in our revenues and have materially adversely affected our operating results, as there are fewer customers and

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our customers spend less than they historically have. Gaming industry revenues are sensitive to general economic conditions and are influenced by consumer confidence in the economy and other factors. An extended period of reduced discretionary spending could significantly harm our operations and we may not be able to lower our costs rapidly enough, or at all, to offset a decrease in revenues. The State of Nevada, one of our primary markets, has experienced a significant economic downturn. According to the U.S. Bureau of Labor Statistics, Nevada had the second highest unemployment rate in the country in 2009 at 11.8% compared to the national average of 9.3%. Other studies have shown Nevada ranked at number one in foreclosure rates in the country for the third quarter of 2009.

Our operations may be adversely impacted by increases in energy prices.

Our properties use significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, the substantial increases in the cost of electricity, natural gas and gasoline in the United States in general, and in Southern and Northern California, Southern and Northern Nevada, south central Iowa and northeast and northwest Missouri in particular, may negatively affect our operating results. In addition, further energy price increases in such areas could result in a decline in disposable income of potential customers and a corresponding decrease in visitation and spending at our route and casino operations, which could negatively impact revenues.

Any increase in the price of gasoline may have an adverse impact on the results of our operations.

Most of our customers drive in to our locations. There is very little, if any, non-drive-in patronage for our facilities. As such, an increase in gasoline prices may have an adverse impact on our operations as it would increase the cost incurred by our customers to drive to our locations. Though gasoline prices were somewhat more stable during 2009, there can be no guarantee that prices will not rise again, thereby adversely affecting our customer’s discretionary income and therefore our revenue.

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

We conduct our route operations under contracts with third parties. Both contracts with chain and street customers are renewable at the option of the owner of the respective chain store or street account. As our route contracts expire, we are required to compete for renewals. Although we have historically been able to renew our contracts, if we are unable to renew a material portion of our route contracts because our competitors offer more favorable terms or for any other reason, including the greater financial stability of our competitors, our business, financial condition and results of operations would be adversely affected. We cannot assure you that our current chain or street contracts will be renewed.

We may experience a loss of market share.

The gaming industry is highly competitive. Our slot route operations are subject to substantial direct competition for our revenue-sharing and fixed space lease locations from one large route operator and numerous small operators, located principally in Las Vegas, Nevada. With respect to our casino operations in Nevada, we compete for local gaming customers with other locals-oriented casino-hotels and other casinos located in the vicinity of these properties. Our casino operations in the Midwest face competitors that include land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American reservations and racing and pari-mutuel operations. If our competitors operate more successfully, if existing route operations or properties are enhanced or expanded, or if additional competitors are established in and around the locations in which we conduct business, we may lose market share. In particular, the expansion of route operations or casino gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a material adverse effect on our business, financial condition and results of operations.

Changes to applicable tax laws could have a material adverse effect on our financial condition.

We pay substantial taxes and fees in connection with our operations as a gaming company. From time to time, federal, state and local legislators and other government officials have proposed and adopted changes in tax laws, or in the administration of those laws affecting the gaming industry. It is not possible to determine the likelihood of changes in tax laws or in the administration of those laws. If adopted, changes to applicable tax laws could have a material adverse effect on our business, financial condition and results of operations. Due to the continued pressures on the state legislatures to address shortfalls in their budgets associated with the current recession, there may be more support to look to increased taxation that could affect all our gaming properties. Any increase in taxes would adversely impact the Company’s future profitability.

We face extensive regulation from gaming and other government authorities.

As owners and operators of gaming facilities, we are subject to extensive state and local regulations in Nevada, Iowa and Missouri. State and local government authorities in such jurisdictions, including the Nevada Gaming Commission, the Iowa Racing

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and Gaming Commission and the Missouri Gaming Commission, require us and our subsidiaries to obtain gaming licenses and require our officers, key employees and business entity affiliates to demonstrate suitability to hold gaming licenses, and such state and local government authorities may limit, condition, suspend or revoke a license for any cause deemed reasonable by the respective licensing agency. They may also levy substantial fines against us or our subsidiaries or the individuals involved in violating any gaming laws or regulations. The violation of any such state and local regulations could have a material adverse effect on our business, financial condition and results of operations.

In Nevada, the Nevada Gaming Commission could request that a state court appoint a supervisor to operate any non-restricted gaming establishment operated by us if the licenses held by us are revoked, suspended or otherwise lapse. In such extraordinary circumstances, earnings generated by gaming operations during a supervisor’s appointment (except for reasonable rental value) could be forfeited to the State of Nevada. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

We depend upon our key employees and certain members of our management.

Our success is substantially dependent upon the efforts and skills of Troy D. Herbst, our Chief Executive Officer, Secretary and Treasurer, Ferenc Szony, our President, Mary E. Higgins, our Chief Financial Officer, and David R. Ross, our Chief Operating Officer - Gaming. We have entered into employment agreements with Mr. Herbst, Mr. Szony, and Ms. Higgins through 2010. These agreements automatically renew for successive one-year periods unless sooner terminated or unless either party to the respective agreements notifies the other in writing at least 60 days prior to the date the respective agreement is scheduled to expire. We have also entered into an employment agreement with Mr. Ross with a term through the earlier of the Substantial Consummation Date or December 31, 2010. If we were to lose the services rendered by these employees, our operations could be adversely affected. In addition, we compete with other potential employers for employees, and we may not succeed in hiring and retaining the executives and other employees that we need. An inability to hire quality employees could have a material adverse effect on our business, financial condition and results of operations.

Our executive officers and members of our board of directors own 100% of the company and conflicts of interests could arise.

Edward, Timothy and Troy Herbst own all of the outstanding stock of Herbst Gaming. This concentration of ownership gives them the power to control the outcome of all matters requiring stockholder approval, including the election of all directors, and will give them the power to hinder or delay a change of control of the Company. In addition, Edward, Timothy and Troy Herbst are all officers and directors of Terrible Herbst, Inc., a company owned by parties related to us. We currently engage in transactions with Terrible Herbst, Inc. and plan to continue to do so in the future. These related-party transactions could lead to potential conflicts of interest. See “Item 13. Certain Relationships and Related Transactions.”

The business of the Sands Regent Casinos and the Primm Casinos may be adversely impacted by expanded Native American gaming operations in California and the Pacific Northwest, which could lead to an adverse impact on the operations of the Company.

The largest sources of customers for the Sands Regent Casinos are California and the Pacific Northwest, including a large number who drive to Reno from the San Francisco and Sacramento metropolitan areas, and the largest source of customers for the Primm Casinos are from Southern California, including a large number who drive to Las Vegas from the San Bernardino and Barstow metropolitan areas. The expansion of Native American casinos in California, Oregon and Washington continues to have an impact on casino revenues in Nevada in general, and such impact may be significant on the markets in which the Sands Regent Casinos and the Primm Casinos operate.

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Some Native American casinos have a lower minimum age requirement for gambling, which may increase their market share at the expense of our market share.

Some Native American casinos in Southern California and Iowa allow customers at least 18 years old to gamble, whereas our gambling establishments require our customers to be at least 21 years old. This could lead to a reduced market for us as those Native American casinos would have an earlier opportunity to create loyal customers. If our competitors are able to retain these customers after they turn 21, thereby causing them to continue gambling at those establishments rather than try our establishments, we may experience reduced market share.

Adverse winter weather conditions in the Midwest, the Sierra Nevada Mountains and Reno-Lake Tahoe area could have a material adverse effect on the results of operations and financial condition of our casinos, which could lead to an adverse impact on the results of operation and financial condition of the Company.

Adverse winter weather conditions, particularly snowfall, can deter customers of our Northern Nevada and Midwest Casinos from traveling or make it difficult for them to frequent its facilities. If these locations were to experience prolonged adverse winter weather conditions, the results of operations and financial condition of these casinos could also be materially adversely affected, thereby adversely affecting the results of operations and financial condition of the Company. Although our facilities experienced mild weather conditions for most of 2009, the Midwest Casinos experienced severe weather conditions in December 2009 and January 2010, which negatively impacted the results of operations at those facilities.

Environmental legislations or regulations, if enacted, could lead to an adverse impact on the results of operation and financial condition of the Company if such legislations or regulations result in a smaller drive-in tourist market.

Global climate change issues have received an increased focus on the federal and state government levels which could potentially lead to additional rules and regulations that impact how our drive-in tourist market is able to come to our facilities. The ultimate impact on our business would be dependent upon the specific rules and regulations adopted and we cannot predict the effects of any such legislation at this time. However, if such legislations or regulations result in increased costs to motor vehicle drivers, then we may as a result see fewer drive-in tourists, and possibly a lower volume of gasoline sales, which could adversely impact our operations and financial condition.

The business of the Primm Casinos may be adversely impacted if their use of water exceeds allowances permitted by federal and local governmental agencies or if such governmental agencies impose additional requirements in connection with such use of water, which in each case could lead to an adverse impact on the operations of the Company.

The Primm Casinos are not served by a municipal water system. As a result, the water supply of such casinos is dependent on rights they have been granted to water in various wells located on federal land in the vicinity of the Primm Casinos and permits that allow the delivery of water to the Primm Casinos. These permits and rights are subject to the jurisdiction and ongoing regulatory authority of the U.S. Bureau of Land Management, the States of Nevada and California and local governmental units. While we believe that adequate water for the Primm Casinos is available, the future water needs of the Primm Casinos may exceed the permitted allowance. In such an event, future requests for additional water may not be approved or may be approved with terms or conditions that are more onerous. Any such denial or any such additional terms and conditions may have a material adverse effect on the results of operations of the Primm Casinos, thereby adversely affecting the results of operations and financial condition of the Company.

We may be unable to obtain slot machines or related technology from our third party supplier on a timely, cost-effective basis.

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

Riverboats and dockside facilities are subject to risks relating to weather or mechanical failure and must comply with applicable regulations.

We own and operate riverboat and dockside casino facilities, which are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, mechanical failure, extended or extraordinary maintenance, flood or other severe weather. Reduced patronage and the loss of a dockside or riverboat casino from service for any period of time could adversely affect our results of operations. The riverboats are subject to inspection every year and were inspected in November 2009 in

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Missouri. The Company’s only cruising vessel is its boat located in Lakeside, Iowa, and this boat had its turbines removed in late 2008, as riverboats in Iowa are no longer required to cruise.

Risks Related to Our Indebtedness

We have had, and expect to have upon emergence from the bankruptcy proceedings, significant indebtedness.

We are in default under the amended Credit Agreement and the indentures pursuant to which the Subordinated Notes were issued, and are operating as reorganized debtors pursuant to the Plan. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a discussion of the Restructuring. We have significant outstanding indebtedness. As of December 31, 2009, our liabilities subject to compromise totaled $1,230,756,000. Also as of that date, we carried a stockholders’ deficit of $388,245,000 and insufficient earnings to cover our fixed charges. For these purposes, earnings are defined as earnings before fixed charges and loss on early retirement of debt (other than capitalized interest), and fixed charges consist of contractual interest expensed and capitalized and the interest component of rent expense.

Our substantial indebtedness has resulted in adverse consequences for our business, including the factors listed below. If the Plan is consummated, Reorganized Herbst Gaming and the other Reorganized Debtors will continue to have significant indebtedness, which could:

· make it more difficult to satisfy obligations with respect to the instruments governing our then outstanding indebtedness;

· increase vulnerability to general adverse economic and industry conditions;

· require the Reorganized Debtors to dedicate a substantial portion of cash flow from operations to debt service, thereby reducing the availability of cash flow to fund working capital, capital expenditures and other general corporate purposes;

· limit flexibility in planning for, or reacting to, competitive pressures and changes in the business and the industry in which the Reorganized Debtors operate;

· place the Reorganized Debtors at a competitive disadvantage compared to our competitors that have less debt; and

· limit, along with the financial and other restrictive covenants in the indebtedness, among other things, the Reorganized Debtors’ ability to borrow additional funds.

Our indebtedness imposes restrictive covenants on us.

The Company anticipates that debt to be issued pursuant to the Plan will have covenants that impose operational and financial restrictions on Reorganized Herbst Gaming and the other Reorganized Debtors. The restrictions imposed and anticipated under these debt instruments include, among other obligations, limitation on the ability to:

· incur additional debt;

· make payments on subordinated obligations;

· make dividends or distribution and repurchase stock;

· make investments;

· grant liens on our property to secure debt;

· enter into certain transactions with affiliates;

· sell assets or enter into mergers or consolidations;

· sell equity interests in subsidiaries;

· create dividend and other payment restrictions affecting subsidiaries;

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· change the nature of our lines of business;

· make capital expenditures; and

· designate restricted and unrestricted subsidiaries.

The amended Credit Agreement imposes, and we anticipate that the loan agreements to be entered into in order to implement the Plan will impose, various customary affirmative covenants on us and our subsidiaries, including among others, reporting covenants, covenants to maintain insurance, comply with laws, maintain properties and other covenants customary in senior credit financings of this type. In addition, the amended Credit Agreement requires us, and we anticipate that the loan agreements to be entered into in order to implement the Plan will require, us to comply with various restrictive financial covenants, including interest coverage and debt to operating cash flow ratios, and capital spending limits. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a discussion of our defaults under the amended Credit Agreement and the indentures under which the Subordinated Notes were issued and the terms of the new loans contemplated by the Restructuring.

Item 2. Properties.

Our principal properties consist of the following:

Nevada

Company Headquarters and Warehouse.

We lease a four-acre site in Las Vegas and, pursuant to that lease, own the 50,000 square foot building where our executive offices and operational headquarters are located. This facility houses our executive and administrative offices and is used for sub-assembly and warehouse space for our slot route operations. The lease between The Herbst Family Limited Partnership II, a Nevada limited partnership, and us ends on June 30, 2017, with options to renew the lease for five additional successive terms of ten years each. Pursuant to the Plan, this lease is expected to be modified effective as of the Substantial Consummation Date and assumed by and assigned to one of the Reorganized Debtors on the Substantial Consummation Date.

Office Space and Convenience Store.

We lease a three-acre site and a 50,000 square foot building where our employment center and purchasing department are located. The lease between Herbst Grandchildren’s Trust, a trust governed under the laws of the State of Nevada and a related party, and us ends on November 27, 2012, with options to renew the lease for five additional successive terms of ten years each. Pursuant to the Plan, this lease is expected to be modified effective as of the Substantial Consummation Date and assumed by and assigned to one of the Reorganized Debtors on the Substantial Consummation Date.

Terrible’s Searchlight Casino.

We lease the space in which Terrible’s Searchlight Casino is located in Searchlight, Nevada. The space is leased from Terrible Herbst, Inc. and the lease ends on June 30, 2022, with options to renew the lease for five additional successive terms of ten years each, contingent on Terrible Herbst, Inc. renewing its lease of the property from an unrelated third party. Pursuant to the Plan, this lease is expected to be modified and assigned to one of the Reorganized Debtors on the Substantial Consummation Date.

Terrible’s Hotel & Casino.

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

Terrible’s Town Casino.

Terrible’s Town Casino in Pahrump, Nevada, which is approximately 60 miles from Las Vegas, comprises an approximately 30,000 square foot building on approximately three acres. We lease the land from The Herbst Family Limited Partnership, a Nevada limited partnership and a related party. The lease expires on June 30, 2011. We also have an option to further extend the lease for three additional successive terms of five years through 2026. Pursuant to the Plan, this lease is expected to be modified and assigned to one of the Reorganized Debtors on the Substantial Consummation Date.

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Terrible’s Lakeside Casino & RV Park.

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

Terrible’s Town Casino & Bowl.

We lease the land and building on which our Terrible’s Town Casino & Bowl is located in Henderson, Nevada from an unrelated third party. The lease ends on February 9, 2014, with options to renew the lease for five additional successive terms of ten years each. We own a 0.8-acre lot adjacent to Terrible’s Town Casino & Bowl that we are holding for possible future development.

Terrible’s Gold Ranch Casino and RV Park.

We lease the land on which Terrible’s Gold Ranch Casino and RV Resort is located in Sparks, Nevada from an unrelated third party. The lease ends on January 1, 2022, with an option to renew the lease for four additional successive terms of five years each.

Sands Regency Casino Hotel.

Sands Regency Casino Hotel in Downtown Reno, Nevada has approximately 853 rooms, 29,000 square feet of gaming space and approximately 12,000 square feet of convention and meeting space. The buildings that house the Sands sit on approximately 10.5 acres in downtown Reno. This land is owned by the Company.

Terrible’s Dayton Depot Casino.

Terrible’s Rail City Casino.

We own the land and building on which Terrible’s Rail City is located in Sparks, Nevada. The Rail City Casino is approximately 30,000 square feet and the property is approximately 7.5 acres.

Buffalo Bill’s, Whiskey Pete’s and Primm Valley Resort Hotels and Casinos.

We lease (from an unrelated party) approximately 170 acres of land on which Buffalo Bill’s, Whiskey Pete’s and Primm Valley are located in Primm, Nevada. The lease ends on June 30, 2043, with an option to renew the lease for one additional twenty-five year term.

Midwest

Lakeside Casino Resort.

We own the land in Osceola, Iowa on which certain facilities of Lakeside Iowa are located, including the all-suite hotel, convention facilities, RV park and convenience store and own an additional 121 acres of land adjacent to or nearby the casino. We lease the use of West Lake and certain real estate surrounding West Lake from the City of Osceola, Iowa. This lease expires on May 19, 2014. We have an option to extend this lease for seven additional successive terms of five years each.

Mark Twain Casino.

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

St. Jo Frontier Casino.

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

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Item 3. Legal Proceedings.

On February 17, 2006, the Clark County Circuit Court entered judgment of a jury verdict delivered on January 14, 2006 against ETT for $4.1 million in compensatory damages and $10.1 million in punitive damages. The jury verdict was delivered in connection with an action brought by the family of an individual that alleged that ETT had negligently retained and negligently supervised a temporary employee who in 2001 stole a truck from ETT and, while drunk, hit and killed the individual. The punitive damage award was subsequently lowered to $4.1 million in a post-trial ruling. The Company believes the award of compensatory and punitive damages against ETT, the liability of ETT, and the amount thereof, is not supportable in either law or in fact and plans to vigorously pursue all appropriate post-trial and other remedies, including exercising its right to appeal. The Company has appealed this decision and oral arguments were heard by the Supreme Court of the State of Nevada on December 9, 2009. Based on a review of the legal opinions and facts available to the Company at this time, the Company believes it is adequately reserved for any potential liability related to this incident.

The Company was party to an arbitration in 2008 in Las Vegas, Nevada involving the termination of an employee. The former employee alleged he was terminated without cause and was therefore due amounts pursuant to his employment agreement. On March 10, 2009, the Company received an interim award from the arbitrator that awarded the former employee $1.3 million as a result of this arbitration. The award is currently under appeal; however, the Company fully recognized the award and approximately $0.2 million for attorneys fees in fiscal year 2008.

The Debtors have filed the Chapter 11 Cases in the Bankruptcy Court under case numbers 09-50746-gwz through 09-50763-gwz. On the Petition Date, the Debtors filed several emergency motions with the Bankruptcy Court, including a motion to have the Chapter 11 Cases jointly administered. On March 29, 2009, the Bankruptcy Court conducted hearings on the motion, including the motion for joint administration. The Bankruptcy Court granted the motions either on a final basis or an interim basis with a continued hearing date regarding the interim orders on April 30, 2009. The joint administration motion was granted with the lead case being “Zante Inc” being case number 09-50746-gwz. From the period commencing on the Petition Date up to and including the Effective Date, the Debtors operated their businesses and managed their properties as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. For convenience, XRoads Court Management Services has established a webpage for access to all pleadings filed in the Chapter 11 Cases. The web address is http://www.xroadscms.net/zante. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a further discussion of the Chapter 11 Cases. On July 22, 2009, the Debtors filed with the Bankruptcy Court an amended joint plan of reorganization. On July 22, 2009, the Debtors filed with the Bankruptcy Court an amended joint plan of reorganization. On January 22, 2010, the Bankruptcy Court confirmed the Plan. The Plan became effective on February 5, 2010 (the “Effective Date”), but will not be fully implemented until the Substantial Consummation Date. The Debtors are currently operating their businesses and managing their properties as reorganized debtors in accordance with the applicable provisions of the Bankruptcy Code and the Plan until the Substantial Consummation Date; and except as otherwise specifically provided for in the Plan, are operating outside the jurisdiction of the Bankruptcy Court. On January 28, 2010, the Indenture Trustee filed the Appeal from the Order. On January 29, 2010, the Debtors elected to have the Appeal heard by the District Court and not the U.S. Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals. The appellate briefs are due to be filed with the District Court commencing April 3, 2010 with the final reply brief due by May 4, 2010. The Indenture Trustee has not sought a stay of the Order.

On November 16, 2009, the Indenture Trustee filed its Amended Complaint against the Debtors and the Administrative Agent under the amended Credit Agreement seeking, among other relief, a judgment of the Bankruptcy Court determining that the Subordinated Notes are entitled to pari passu treatment with the obligations due under the amended Credit Agreement. The Debtors and the Administrative Agent filed motions to dismiss the Amended Complaint. On February 23, 2010, the Bankruptcy Court dismissed the Amended Complaint without prejudice to seek leave to re-file the Amended Complaint in the event the Order is set aside in the Appeal.

The Company is a party to certain claims, legal actions, and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions filed by the Company. Management believes that its defenses are substantial in each of these matters and that the Company’s legal position can be successfully defended without material adverse effect on its consolidated financial statements.

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

Not applicable.

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PART II

(a) Market Information

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

(b) Holders

Edward, Timothy and Troy Herbst beneficially own collectively all of the outstanding shares of our common stock.

No dividends were paid in fiscal years 2008 and 2009.

The amended Credit Agreement and the indentures governing the Subordinated Notes restrict our ability to declare or make distributions on our capital shares. Prior to the filing of the Chapter 11 Cases, the only distributions that we made on our common stock were distributions permitted by the instruments governing our outstanding indebtedness. Since filing the Chapter 11 Cases, we have not made any distributions on our common stock. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.”

Item 6. Selected Financial Data.

In the tables below, we provide selected consolidated historical financial data as of and for the periods indicated. We prepared this information using audited financial statements for the fiscal years ended December 31, 2009, December 31, 2008, December 31, 2007, December 31, 2006, and December 31, 2005. In February 2005, we consummated the acquisition of Lakeside Iowa, Mark Twain and St Jo, and as a result the period beginning on January 1, 2005 may not be comparable to prior years. Similarly, in January 2007 we consummated the acquisition of the Sands Regent Casinos and in April 2007 we consummated the acquisition of the Primm Casinos, and as a result the period beginning January 1, 2007 may not be comparable to prior years. When reading this selected historical consolidated financial data, it is important to read it in conjunction with our consolidated financial statements and related notes contained in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements” included in this Form 10-K.

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

	Year Ended December 31,
	2005			2006			2007			2008			2009
	(in thousands)
Income statement data:
Revenues
Route operations	$	339,401		$	347,041		$	276,946		$	243,635		$	200,637
Casino operations
Nevada	95,400			95,614			331,517			337,006			312,149
Other states	117,774			141,435			141,731			137,188			139,280
Other operations	4,923			10,676			98,987			116,609			86,285
Total revenues	557,498			594,766			849,181			834,438			738,351
Promotional allowances—route	(223		)	(86		)	(64		)	(90		)	(126		)
Promotional allowances—casino	(21,434		)	(32,617		)	(64,177		)	(63,259		)	(69,662		)
Net revenues	535,841			562,063			784,940			771,089			668,563
Costs of revenues:
Route operations	258,114			271,463			244,086			215,653			182,734
Casino operations
Nevada	59,125			64,349			245,507			262,338			242,957
Other states	79,239			87,852			89,745			88,835			85,105
Depreciation and amortization	33,941			38,124			56,405			57,783			55,426
General and administrative	15,217			13,324			22,983			21,485			18,913
Other operations	—			6,491			80,184			94,522			67,333
Restructuring costs	—			—			—			17,717			9,814
Loss on impairment of assets	3,360			—			72,965			106,271			7,192
Total costs and expenses	448,996			481,603			811,875			864,604			669,474
Income (loss) from operations	86,845			80,460			(26,935		)	(93,515		)	(911		)
Interest income	740			734			1,481			921			161
Interest expense	(36,532		)	(39,134		)	(85,631		)	(116,832		)	(29,530		)
Change in value of derivative instruments	—			—			(16,115		)	—			—
Loss on early retirement of debt(1)	(221		)	—			—			—			—
Reorganization items	—			—			—			—			(29,810		)

Net income (loss)	$	50,832		$	42,060		$	(127,200	)	$	(209,426	)	$	(60,090	)

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	Year Ended December 31,
	2005			2006			2007			2008			2009
	(in thousands, except ratios)
Other data:
Route EBITDA(2)	$	79,922		$	75,492		$	32,796		$	27,892		$	17,777
Casino EBITDA(3)
Nevada(3)	$	20,281		$	17,719		$	43,551		$	29,475		$	16,823
Other states(3)	$	29,865		$	34,512		$	30,268		$	30,287		$	36,882
Net cash provided by (used in) operating activities	$	92,204		$	81,493		$	4,273		$	(2,498	)	$	49,993
Net cash used in investing activities	$	(309,172	)	$	(79,758	)	$	(574,128	)	$	(15,746	)	$	(21,113	)
Net cash provided by (used in) financing activities	$	152,645		$	(9,944	)	$	598,495		$	29,952		$	(17,976	)
Capital expenditures	$	43,893		$	66,622		$	32,418		$	15,578		$	15,645

	December 31,
	2005		2006		2007			2008			2009
	(in thousands)
Balance sheet data:
Cash and cash equivalents	$	73,849	$	65,540	$	94,282		$	105,990		$	116,894
Total assets	$	534,930	$	568,450	$	1,080,385		$	934,248		$	884,028
Total debt(4)	$	500,593	$	522,618	$	1,146,070		$	1,176,330		$	1,158,846
Stockholders’ equity (deficiency)	$	7,981	$	18,771	$	(118,729	)	$	(328,155	)	$	(388,245	)

(1)		Consists of a premium of $221,000 paid to call the balance of our 10 ¾% notes in September 2005.

(2)		Route segment EBITDA consists of net income plus depreciation and amortization, interest expense, net of capitalized interest, restructuring costs and reorganization items and is calculated before allocation of overhead.

(3)		Casino segment EBITDA consists of net income plus depreciation and amortization, interest expense, net of capitalized interest, impairment charges, costs associated with the retirement of assets, restructuring costs and reorganization items. Casino EBITDA for casinos in Nevada and other states are calculated before allocation of overhead.

(4)		Total debt consists of the current and long-term portions for all periods presented.

Route and Casino segment EBITDA are non-GAAP measures but are used by management to measure segment profits and losses in accordance with ASC Topic 280, “Segment Reporting” (“ASC Topic 280”). Route and Casino segment EBITDA have certain limitations in that they do not take into account the impact of certain expenses, including allocation of overhead. The Company endeavors to compensate for the limitations of the non-GAAP measures presented by providing the comparable GAAP measure with equal or greater prominence, financial statements prepared in accordance with generally accepted accounting principles, and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. The following table reconciles Segment EBITDA to net income (loss) (in thousands):

	Year Ended December 31,
	2005			2006			2007			2008			2009
Segment EBITDA(2)
Slot route operations	$	80,262		$	75,492		$	32,796		$	27,892		$	17,777
Casino operations
Nevada	23,747			17,719			43,551			29,475			16,823
Other states	29,330			34,512			30,268			30,287			36,882
Other and corporate(1)	(11,813		)	(8,405		)	(2,700		)	(16,194		)	(9,614		)
Depreciation and amortization	(33,941		)	(38,124		)	(56,405		)	(57,783		)	(55,426		)
Interest expense, net of capitalized interest (capitalized interest of $0, $101, $873, $206 and $0 respectively)	(36,532		)	(39,134		)	(85,631		)	(116,832		)	(29,530		)
Loss on impairment of assets	—			—			(72,965		)	(106,271		)	(7,192		)
Change in value of derivatives	—			—			(16,114		)	—			—
Reorganization items	—			—			—			—			(29,810		)
Loss on early retirement of debt	(221		)	—			—			—			—

Net income (loss)	$	50,832		$	42,060		$	(127,200	)	$	(209,426	)	$	(60,090	)

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(1) Represents non-gaming revenues, general and administrative expenses, interest income and loss on lease.

(2) Segment EBITDA is used by management to measure segment profits and losses and consists of income from segment operations plus depreciation and amortization and is calculated before allocation of overhead.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Overview

We are a diversified gaming company that focuses on two business lines: slot route operations and casino operations. Our route operations involve the exclusive installation and operation of approximately 6,200 slot machines as of December 31, 2009 in strategic, high traffic, non-casino locations, such as grocery stores, drug stores, convenience stores, bars and restaurants. Our casino operations consist of sixteen casinos located in Nevada, Iowa and Missouri. Other than the Sands and the Primm Casinos, our casinos are operated under the “Terrible’s” brand

We generally enter into two types of route contracts. With chain store customers, such as Albertsons, Vons, Safeway, SavOn, Smith’s, and Terrible Herbst , we pay a fixed monthly fee for each location in which we place slot machines. With our street accounts, such as bars, restaurants and non-chain convenience stores, we share in the revenues on a percentage basis with the location owner. Revenues from street accounts are recorded gross of amounts share.

Our revenues are primarily derived from gaming revenues, which include revenues from slot machines and table games. Gaming revenues are generally defined as gaming wins less gaming losses. Our largest component of revenues is from our slot machines. Promotional allowances consist primarily of food and beverages furnished gratuitously to customers. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances. We calculate income from operations as net revenues less total operating costs and expenses. Income from operations represents only those amounts that relate to our operations and excludes interest income, interest expense and other non-operating income and expenses. Segment EBITDA consists of income from segment operations plus depreciation and amortization, and is calculated before an allocation of overhead.

We have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986. Under those provisions, the owners of our Company pay income taxes on our taxable income. Accordingly, a provision for income taxes is not included in our financial statements.

Full implementation of the Plan on the Substantial Consummation Date is subject to various regulatory approvals. We cannot assure you that we will be successful in consummating the Plan. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a more detailed discussion of the Chapter 11 Cases and the Restructuring.

Year 2009 Compared to Year 2008

Route Operations

	Year ended December 31, 2008					Year ended December 31, 2009
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Slot route revenue	$	243,635		100.0	%	$	200,637		100.0	%
Promotional allowances	(90		)	0.0		(126		)	0.1
Direct expenses	(215,653		)	88.5		(182,734		)	91.1
EBITDA	27,892			11.5		17,777			8.8
Impairment of intangibles	—			—		—			—
Depreciation and amortization	(17,806		)	7.3		(15,192		)	7.6
Income from slot route operations	$	10,086		4.2	%	$	2,585		1.2	%

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Route operations accounted for 27% of total revenues during the year ended December 31, 2009. This was a decrease from 29% of total revenues for the year ended December 31, 2008. Total revenues from route operations were $200.6 million for the year ended December 31, 2009, a decrease of $43.0 million, or 18%, from $243.6 million for the year ended December 31, 2008. At December 31, 2009, we were operating approximately 6,200 slot machines, which was 500 less than the approximately 6,700 we were operating as of December 31, 2008. The decrease in machines reflects the closures of some taverns and grocery and drug store chain clients and the elimination of certain underperforming route locations. These factors, coupled with general economic weakness in Nevada, contributed to the decline in route revenue in 2009 compared to 2008.

Route operating costs were $182.7 million, or 91%, of route revenues for the year ended December 31, 2009. This compares to $215.7 million, or 89%, of route revenues for the same period in 2008. The increase in the expenses as a percentage of route revenues is due to the fixed nature of many of the route costs. The decrease in the absolute amount of route operating expenses was primarily associated with the store closures discussed above and their respective space lease payments, as well as lower revenues at our participation locations, which are based on operating contracts that provide for a decrease in revenue share costs in proportion to revenue decline.

As a result of the factors mentioned above, Route EBITDA was $17.8 million for the year ended December 31, 2009, a decrease of $10.1 million, or 36%, from $27.9 million for the year ended December 31, 2008.

Casino Operations

	Year ended December 31, 2008					Year ended December 31, 2009
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	474,194		100.0	%	$	451,429		100.0	%
Promotional allowances	(63,259		)	13.3		(69,662		)	15.4
Direct expenses	(351,173		)	74.1		(328,062		)	72.7
EBITDA	59,762			12.6		53,705			11.9
Impairment of intangibles	(106,271		)	22.4		(7,192		)	1.6
Depreciation and amortization	(39,678		)	8.4		(39,912		)	8.8
Income (loss) from casino operations	$	(86,187	)	(18.2	)	$	6,601		1.5

Casino operations accounted for 61% of total revenues for the year ended December 31, 2009 and 57% of total revenues for the year ended December 31, 2008. Total revenues derived from casino operations were $451.4 million for the year ended December 31, 2009, a decrease of $22.8 million, or 5%, from $474.2 million for the year ended December 31, 2008. Revenues at the Primm Casinos decreased by $12.9 million in 2009, while revenues at the other Nevada Casinos decreased by $11.9 million. These revenue decreases in Nevada were offset by revenue increases of $2.0 million in the Midwest Casinos.

Overall casino expenses were $328.1 million for the year ended December 31, 2009, a decrease of $23.1 million, or 7%, from $351.2 million for the year ended December 31, 2008. Expenses at the Primm Casinos, the other Nevada Casinos and the Midwest Casinos decreased by $13.6 million, $5.8 million and $3.7 million, respectively.

Casino EBITDA was $53.7 million for the year ended December 31, 2009, a decrease of $6.1 million, or 10%, from $59.8 million from the year ended December 31, 2008. EBITDA at the Primm Casinos and the other Nevada Casinos decreased by $6.7 million and $5.9 million, respectively. EBITDA at the Midwest Casinos increased by $6.5 million.

The following paragraphs describe the results from our casino operations geographically between casinos in Nevada and those in other states.

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Casino Operations — Nevada

	Year ended December 31, 2008					Year ended December 31, 2009
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	337,006		100.0	%	$	312,149		100.0	%
Promotional allowances	(45,193		)	13.4		(52,369		)	16.8
Direct expenses	(262,338		)	77.8		(242,957		)	77.8
EBITDA	29,475			8.7		16,823			5.4
Depreciation and amortization	(28,450		)	8.4		(29,361		)	9.4
Impairment of intangibles	(87,071		)	25.8		(7,192		)	2.3
Income from casino operations	$	(86,046	)	(25.5	)	$	(19,730	)	(6.3	)

Nevada casino operations accounted for 42% of total Company revenues for the year ended December 31, 2009 and 40% of total revenues for the year ended December 31, 2008. Revenues derived from Nevada casino operations were $312.1 million for the year ended December 31, 2009 compared with $337.0 million for the year ended December 31, 2008. The Primm Casinos and the other Nevada Casinos experienced significant economic pressures that impacted revenues at these properties.

Nevada casino promotional spending was up $7.2 million. This was primarily attributable to an increase of $7.4 million in promotional spending related to the Primm Casinos, which was offset by a decrease of $0.2 million attributable to the other Nevada properties. The increase from the Primm Casinos was primarily in connection with an increased number of concert events and vacation getaway promotions. These events and promotions accounted for an increase of $1.4 million, $3.0 million and $2.5 million in promotional spending associated with food, rooms and concert tickets, respectively. As a percentage of revenue, promotional allowances were 16.8% for the year ended December 31, 2009 compared to 13.4% for the year ended December 31, 2008.

Nevada casino operating costs for the year ended December 31, 2009 were $243.0 million, down $19.3 million from the year ended December 31, 2008. This was primarily associated with focused cost savings efforts deployed in 2009, including decreases in payroll and related expenses resulting from a reduction in workforce, taxes and licenses expenses and variable costs of sales related to lower revenues. As a percentage of revenue, casino operating costs were 78% for the year ended December 31, 2009 and for the year ended December 31, 2008.

Depreciation and amortization expense was $29.4 million for the year ended December 31, 2009, an increase of $0.9 million, or 3%, from $28.5 million for the year ended December 31, 2008. This increase is attributable primarily to slot machine purchases, office furniture and computer software at the Primm Casinos.

Operating results at the Primm Casinos have continued to decline as economic pressures have increased and competition has increased for Southern California and Southern Nevada customers. Interim impairment testing performed in the second quarter of 2008 determined that the fair value of goodwill associated with the Primm Casinos was less than the book value. Accordingly, as of June 30, 2008, we recorded a non-cash charge of $30.7 million to reduce the balance of this asset to zero. Impairment testing performed in the fourth quarter of 2008 determined that the fair value this asset was zero as of December 31, 2008. Further, annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the year ended December 31, 2009 we recorded a non-cash charge of $3.8 million to reduce the balance of this asset to its fair value. As a result of revenue declines related to our Primm properties, the Company tested these assets for recoverability pursuant to ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”), in 2009. The test resulted in no impairment; however, we will continue to monitor the performance of the Primm properties, and, if necessary, continue to update our asset recoverability test under ASC Topic 360.

Annual impairment testing performed in the fourth quarter of 2008 determined that the fair value of goodwill associated with the Sands Regent Casinos was less than its book value. Accordingly, we recorded a non-cash charge of $48.9 million for the year ended December 31, 2008 to reduce the balance of this asset to zero. Further, annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademarks associated with the Sands Regent Casinos were less than their book value. Accordingly, for the year ended December 31, 2009 we recorded a non-cash charge of $3.4 million to reduce the balance of these assets to their fair value.

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As a result of the factors mentioned above, Nevada casino EBITDA was $16.8 million for the year ended December 31, 2009 compared to $29.5 million for the year ended December 31, 2008. EBITDA decreased at all of our Nevada Casinos in 2009 compared to 2008, decreasing by $6.7 million at the Primm Casinos, by $4.1 million at the Northern Nevada Casinos and by $1.8 million at the Southern Nevada Casinos.

Casino Operations — Other states

	Year ended December 31, 2008					Year ended December 31, 2009
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Other state casino revenue	$	137,188		100.0	%	$	139,280		100.0	%
Promotional allowances	(18,066		)	13.2		(17,293		)	12.4
Direct expenses	(88,835		)	64.8		(85,105		)	61.1
EBITDA	30,287			22.0		36,882			26.5
Impairment of Intangibles	(19,200		)	14.0		—			0.0
Depreciation and amortization	(11,228		)	8.2		(10,551		)	7.6
Income from casino operations	$	(141	)	(0.2	)	$	26,331		18.9

Casino operations in other states accounted for 19% of total company revenues for the year ended December 31, 2009, which was up from 16% in 2008. Total revenues derived from casino operations located in states other than Nevada were $139.3 million, an increase of $2.1 million, compared to $137.2 million for the year ended December 31, 2008. The revenue increase occurred at both of our Missouri properties, primarily due to lower revenues in the second quarter of 2008 due to the impact of floods in the Midwest during that time. In June 2008, Mark Twain was closed for two weeks and St Jo experienced a decrease in business related to the floods. The Company received a payment of $0.3 million under its business recovery insurance policy related to these floods in the third quarter of 2008, which partially offset the lower revenues in the second quarter in 2008. Revenues at our Lakeside Iowa casino declined in 2009 due to continued competitive pressures in the Iowa market as well as general economic weakness in the region.

Promotional allowances for the year ended December 31, 2009 were $17.3 million, compared to $18.1 million for the year ended December 31, 2008, a decrease of $0.8 million, or 4%. This was due primarily to a $0.6 million decrease in slot promotional expense at Lakeside Iowa, related to decreased revenue at that location.

Other states’ casino operating costs were $85.1 million, or 61% of revenues, for the year ended December 31, 2009 compared to $88.8 million, or 65% of revenues, for the year ended December 31, 2008. The decrease was primarily associated with focused cost savings efforts deployed in 2009 that reduced the direct variable costs of revenue, as well as a decrease in payroll and related costs due to a reduction in workforce.

Other states’ casino EBITDA was $36.9 million for the year ended December 31, 2009, an increase of $6.6 million, or 22%, compared to $30.3 million for the year ended December 31, 2008. This was primarily due to the combination of higher revenues and focused cost savings efforts.

Other Operations and G&A

	Year ended December 31, 2008					Year ended December 31, 2009
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Other operations — revenue	$	116,609		14.0	%	$	86,285		11.7	%
Other operations — cost of revenue	(94,522		)	11.3	%	(67,333		)	9.1	%
General and administrative	(21,485		)	2.6	%	(18,913		)	2.6	%
Depreciation and amortization	(57,783		)	6.9	%	(55,426		)	7.5	%
Restructuring costs	(17,717		)	2.1	%	(9,814		)	1.3	%

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include a gas station and convenience store located in Osceola, Iowa; a gas station and convenience store at the Gold Ranch property in Verdi, Nevada; and three gas stations at the Primm Casinos. Revenues from other operations were $86.3 million for the year ended December 31, 2009 compared to $116.6 million for the year ended December 31, 2008, a decrease of $30.3 million. This was primarily due to decreases in gasoline prices and gasoline gallons sold in 2009.

Costs associated with other revenues were $67.3 million, , or 78% of revenues from other operations, for the year ended December 31, 2009, compared to $94.5 million, or 81% or revenues from other operations, for the year ended December 31, 2008, a decrease of $27.2 million. The decreased costs were primarily related to the decrease in gasoline costs.

G&A expenses decreased by $2.6 million, or 12%, from $21.5 million for the year ended December 31, 2008 to $18.9 million for the year ended December 31, 2009. This was primarily due to reduced corporate level payroll and related costs resulting from a reduction in workforce associated with focused cost savings initiatives deployed. G&A expenses as a percentage of total revenue were comparable at 2.6% for the years ended December 31, 2009 and 2008.

Depreciation and amortization expense was $55.4 million for the year ended December 31, 2009, a decrease of $2.4 million, or 4%, from $57.8 million for the year ended December 31, 2008. This decrease was due to lower route operations depreciation related to software related fixed assets.

The Company’s restructuring costs, primarily advisory and legal fees, associated with the Restructuring and the Chapter 11 Cases incurred prior to the filing of the Chapter 11 Cases are included under Restructuring Costs. Costs associated with the Restructuring Process after the filing of the Chapter 11 Cases are included in Reorganization Items. Restructuring costs were $9.8 million for the year ended December 31, 2009, a decrease of $7.9 million, or 45%, from $17.7 million for the year ended December 31, 2008. Restructuring costs ceased to be accrued on March 21, 2009, the date of the filing of the Chapter 11 Cases.

Impairment Charges

In 2008 the Company recorded impairment charges to reduce the value of intangible assets associated with the Primm Casinos, the Sands Regent Casinos and Lakeside Iowa and in 2009 the Company recorded impairment charges to reduce the value of intangible assets associated with the Primm Casinos and the Sands Regent Casinos. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of goodwill associated with the Primm Casinos was at book value, resulting in no impairment charge related to this goodwill for 2009. This compares with an impairment charge of $30.7 million in 2008, to bring balance of goodwill to zero based on interim impairment testing performed in the second quarter of 2008. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the year ended December 31, 2009 we recorded an impairment charge of $3.8 million to reduce the balance of this trademark to its fair value. This compares with an impairment charge of $7.5 million in 2008 to bring the balance of this trademark to its fair value based on impairment testing performed in the fourth quarter of 2008.

Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of goodwill associated with the Sands Regent Casinos was at book value, resulting in no impairment charge related to goodwill for 2009, compared to an impairment charge of $48.9 million in 2008 required to bring the balance of this goodwill to zero based on impairment testing performed in the fourth quarter of 2008. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademarks associated with the Sands Regent Casinos was less than the book value. Accordingly, for the year ended December 31, 2009 we recorded impairment charges of $3.4 million to reduce the balance of these assets to their fair value. This compares with no impairment charges related to these trademarks in 2008, based on impairment testing performed in the fourth quarter of 2008.

Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our Lakeside Iowa license rights was at book value. Accordingly, there were no impairment charges for these assets for the year ended December 31, 2009. The compares to impairment charges of $19.2 million in 2008 to bring the balance of these license rights to fair value based on impairment testing performed in the fourth quarter of 2008.

Promotional Allowances

Promotional allowances were $69.8 million, or 9.5% of total revenues, for the year ended December 31, 2009, an increase of $6.5 million, or 10%, from $63.3 million, or 7.6% of total revenues, for the year ended December 31, 2008. This was primarily attributable to an increase of $7.4 million in promotional spending related to the Primm Casinos, which was offset by a decrease of $0.9 million attributable to our other properties. The increase from the Primm Casinos were primarily in connection with an increased

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number of concert events and vacation getaway promotions. These events and promotions accounted for an increase of $1.4 million, $3.0 million and $2.5 million in promotional spending associated with food, rooms and concert tickets, respectively.

Loss from Operations

As a result of the factors discussed above, loss from operations was $0.9 million for the year ended December 31, 2009, compared to a loss of $93.5 million for the year ended December 31, 2008.

Other Expenses

	Year ended December 31, 2008			Year ended December 31, 2009
	(dollars in thousands)
Interest expense	$	(116,832	)	$	(29,530	)
Reorganization items	—			(29,810		)
Interest income	921			161
Total other income (expense)	$	(115,911	)	$	(59,179	)

Other expenses were $59.2 million for the year ended December 31, 2009, a decrease of $56.7 million from expenses of $115.9 million for the year ended December 31, 2008. As a result of the filing of the Chapter 11 Cases, the Company ceased accruing contractual interest expenses following March 21, 2009, the Petition Date, and instead makes certain adequate protection payments. As a result, interest expense decreased by $87.3 million in 2009 compared to 2008. Please refer to our discussion under “Liquidity and Capital Resources—Cash Flows; Restructuring” for a more detailed discussion of such payments. Additionally, upon the filing of the Chapter 11 Cases, the Company began incurring reorganization item expenses. For the year ended December 31, 2009, the Company’s reorganization item expenses comprised $12.4 million in legal, advisory and trustee fees incurred in connection with the Restructuring and the Chapter 11 Cases and $17.4 million in adjustments to value the liabilities subject to compromise at the allowed claim amount in conjunction with the oral confirmation of the Plan from the Bankruptcy Court on October 30, 2009, which oral confirmation was subsequently confirmed by the Order of the Bankruptcy Court entered on January 22, 2010.

Net Loss

As a result of the factors discussed above, net loss for the year ended December 31, 2009 was $60.1 million compared to net loss of $209.4 million recorded for year ended December 31, 2008.

Year 2008 Compared to Year 2007

Route Operations

	Year ended December 31, 2007					Year ended December 31, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Slot route revenue	$	276,946		100.0	%	$	243,635		100.0	%
Promotional allowances	(64		)	0.0		(90		)	0.0
Direct expenses	(244,086		)	88.1		(215,653		)	88.5
EBITDA	32,796			11.9		27,892			11.5
Impairment of intangibles	(3,165		)	1.1		—			—
Depreciation and amortization	(21,979		)	7.9		(17,806		)	7.3
Income from slot route operations	$	7,652		2.9	%	$	10,086		4.2	%

Route operations accounted for 29% of total revenues during the year ended December 31, 2008. This was a decrease from 33% of total revenues for the year ended December 31, 2007. Total revenues from route operations were $243.6 million for the year ended December 31, 2008, a decrease of $33.3 million, or 12%, from $276.9 million for the year ended December 31, 2007. At December 31, 2008, we were operating approximately 6,700 slot machines, which was 500 less than the approximately 7,200 we were operating as of December 31, 2007. The decrease in machines reflects these factors, the elimination of certain underperforming route

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locations as well as closures of some grocery and drug store chain clients. These factors, coupled with general economic weakness in Nevada contributed to the decline in route revenue in 2008 compared to 2007.

Route operating costs were $215.7 million, or 89%, of route revenues for the year ended December 31, 2008. This compares to $244.1 million, or 88%, of route revenues for the same period in 2007. This $28.4 million decrease in route operating expenses in 2008 was associated with a decrease of approximately $11.5 million in space lease expenses that were contractually agreed to in the prior year in connection with the enactment of a smoking ban in Nevada, as well as a decrease in expenses associated with lower revenues at our participation locations, which are based on operating contracts that provide for a decrease in revenue share costs in proportion to revenue decline. Additional expense reductions resulted from the elimination of underperforming locations referenced above. Route operating costs include a reserve for a litigation contingency recorded in 2008.

As a result of the factors mentioned above, Route EBITDA was $27.9 million for the year ended December 31, 2008, a decrease of $4.9 million, or 15%, from $32.8 million for the year ended December 31, 2007.

Casino Operations

	Year ended December 31, 2007					Year ended December 31, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	473,248		100.0	%	$	474,194		100.0	%
Promotional allowances	(64,177		)	13.6		(63,259		)	13.3
Direct expenses	(335,252		)	70.8		(351,173		)	74.1
EBITDA	73,819			15.6		59,762			12.6
Impairment of intangibles	(69,800		)	14.7		(106,271		)	22.4
Depreciation and amortization	(34,081		)	7.2		(39,678		)	8.4
Income (loss) from casino operations	$	(30,062	)	(6.4	)	$	(86,187	)	(18.2	)

Casino operations accounted for 57% of total revenues for the year ended December 31, 2008 and 56% of total revenues for the year ended December 31, 2007. Total revenues derived from casino operations were $474.2 million for the year ended December 31, 2008, an increase of $0.9 million, or 0.1%, from $473.2 million for the year ended December 31, 2007. Results for 2008 include the Primm Casinos for the entire year, compared to nine months in 2007. The Primm Casinos contributed an increase of $21.3 million in gross revenues for the full year of operations in 2008 as compared to the partial year of operations in 2007. This increase, however, was offset by a decline of $15.8 million in revenues, or 8.8%, from the other Nevada Casinos and a decline of $4.5 million, or 3%, in revenues from the Midwest casinos, in each case for the year ended December 31, 2008 as compared to the year ended December 31, 2007.

Overall casino expenses for the year ended December 31, 2008, as compared to the 2007 fiscal year, increased primarily due to the inclusion of the Primm Casinos for the full year. Increased costs and expenses of $26.8 million were directly associated with a full quarter of operations in 2008 that was not included in 2007 due to the fact that the Primm Casinos were acquired by the Company in April 2007. This increase was offset in part by a decrease in costs and expenses of $0.9 million, and $9.9 million, respectively, for the Midwest casinos and other Nevada casinos.

As a result of the factors mentioned above, Casino EBITDA was $59.8 million for the year ended December 31, 2008, a decrease of $14.0 million, or 19%, from $73.8 million from the year ended December 31, 2007. The Primm Casinos EBITDA results from the casino segment were mixed for the 2007 and 2008 years. The addition of the Primm Casinos provided much of the year-over-year increase as the results are included in 2007 only for nine months; however, EBITDA from the Primm Casinos in 2008 was significantly below the 2007 Primm Casinos results. The other Nevada casinos produced lower EBITDA results for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The Midwest casinos produced similar EBITDA results for the years ended December 31, 2008 and December 31, 2007.

We address the above mentioned EBITDA results more fully in the segment discussions below.

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

Casino Operations — Nevada

	Year ended December 31, 2007					Year ended December 31, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Casino revenue	$	331,517		100.0	%	$	337,006		100.0	%
Promotional allowances	(42,459		)	12.8		(45,193		)	13.4
Direct expenses	(245,507		)	74.1		(262,338		)	77.8
EBITDA	43,551			13.1		29,475			8.7
Depreciation and amortization	(22,765		)	6.7		(28,450		)	8.4
Impairment of intangibles	(36,500		)	11.0		(87,071		)	25.8
Income from casino operations	$	(15,714	)	(4.7	)	$	(86,046	)	(25.5	)

Nevada casino operations accounted for 40% of total Company revenues for the year ended December 31, 2008 and 39% of total revenues for the year ended December 31, 2007. Revenues derived from Nevada casino operations were $337.0 million for the year ended December 31, 2008 compared with $331.5 million for the year ended December 31, 2007. The net increase is primarily due to the inclusion of revenue from the Primm Casinos for the full year in 2008. Revenues increased by $21.3 million for the Primm Casinos for the year ended December 31, 2008 as compared to the year ended December 31, 2007, when the Primm Casinos’ results are included only for nine months. However, revenues decreased by $15.8 million for the other Nevada casinos as economic pressures impacted revenues across the state.

Nevada casino promotional spending was up $2.7 million. This was primarily due to the Primm Casinos’ full year activities, offset in part by decreases of promotional spending of $1.2 million for the other Nevada Casinos. As a percentage of revenue, promotional allowances were 13.4% for the year ended December 31, 2008 compared to 12.8% for the year ended December 31, 2007.

Nevada casino operating costs for the year ended December 31, 2008 were $262.3 million, up $16.8 million from the year ended December 31, 2007. This was primarily due to the inclusion of the Primm Casinos as of April 10, 2007 resulting in cost increases for the year ended December 31, 2008. The increases were associated with payroll and related expenses, taxes and licenses expenses, utilities and variable costs of sales related revenue increases. The increase in Nevada casino operating costs was offset in part by reductions to variable costs of sales related to revenue decreases, lower staffing levels and reduced gaming taxes for the other Nevada casinos.

Depreciation and amortization expense was $28.5 million for the year ended December 31, 2008, an increase of $5.7 million, or 25%, from $22.8 million for the year ended December 31, 2007. The increase was primarily associated with the acquisition of the Primm Casinos in April 2007 and reflects a final purchase price adjustment in the first quarter of 2008 to the estimated depreciation and amortization expense associated with the Primm Casinos.

Operating results at the Primm Casinos have continued to decline as economic pressures have increased and competition has increased for Southern California and Southern Nevada customers. Annual impairment testing performed in the fourth quarter of 2007 as well as interim testing performed in the second quarter of 2008 determined that the fair value of goodwill associated with the Primm Casinos was less than the book value. Accordingly, for the years ended December 31, 2007 and 2008 we recorded non-cash charges of $36.5 million and $30.7 million, respectively, to reduce the balance of this asset to zero. Further, annual impairment testing performed in the fourth quarter of 2008 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the year ended December 31, 2008 we recorded a non-cash charge of $7.5 million to reduce the balance of this asset to its fair value. As a result of revenue declines related to our Primm properties, the Company tested these assets for recoverability pursuant to SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in 2008. The test resulted in no impairment; however, we will continue to monitor the performance of the Primm properties and, if necessary, continue to update our asset recoverability test under SFAS 144. The total impairment charges associated with the Primm Casinos were $38.2 million for 2008.

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Annual impairment testing performed in the fourth quarter of 2008 determined that the fair value of goodwill associated with the Sands Regent Casinos was less than the book value. Accordingly, we recorded a non-cash charge of $48.9 million for the year ended December 31, 2008 to reduce the balance of this asset to zero.

As a result of the factors mentioned above, Nevada casino EBITDA was $29.5 million for the year ended December 31, 2008 compared to $43.6 million for the year ended December 31, 2007. This was mostly a result of EBITDA decreases at the Primm and Sands Regency Casinos, which were impacted significantly by the economic decline.

Casino Operations — Other states

	Year ended December 31, 2007					Year ended December 31, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Other state casino revenue	$	141,731		100.0	%	$	137,188		100.0	%
Promotional allowances	(21,718		)	15.3		(18,066		)	13.2
Direct expenses	(89,745		)	63.3		(88,835		)	64.8
EBITDA	30,268			21.4		30,287			22.0
Impairment of Intangibles	(33,300		)	23.5		(19,200		)	14.0
Depreciation and amortization	(11,316		)	8.0		(11,228		)	8.2
Income from casino operations	$	(14,348	)	(10.1	)	$	(141	)	(0.2	)

Casino operations in other states accounted for 16% of total company revenues for the year ended December 31, 2008, which is down from 17% in 2007. Total revenues derived from casino operations located in states other than Nevada were $137.2 million, a decrease of $4.5 million, compared to $141.7 million for the year ended December 31, 2007. The decline in revenue was exclusively at our Lakeside Iowa casino, which was affected by continued competitive pressures in the Iowa market as well as general economic weakness in the region. Results at the two Missouri properties were not impacted by these issues: 2008 results at the St. Jo casino were in line with 2007 and the Mark Twain casino had stronger revenue in 2008 than 2007 due primarily to a smoking ban in Illinois that was enacted in 2008 (the Mark Twain casino’s closest customer market is Quincy, Illinois).

Promotional allowances for the year ended December 31, 2008 were $18.1 million compared to $21.7 million for the year ended December 31, 2007, a decrease of $3.6 million or 17%. This was due primarily to a $4.2 million decrease in slot promotional expenses exclusively at the Lakeside Iowa casino due to decreased revenue at that location.

Other state casino operating costs were $88.8 million, or 65% of revenues, for the year ended December 31, 2008 compared to $89.7 million, or 63% of revenues, for the year ended December 31, 2007. The net decrease in operating costs was attributable to the reduction of variable costs of sales associated with lower revenues, partially offset by an increase in health and dental insurance expenses. The increase in health and dental insurance costs resulted from an error in the placement of the stop loss policy that was part of the self-insurance program at the three riverboat casinos in the Midwest. The additional exposure related to the placement of an incorrect stop loss policy resulted in additional expense in 2008 of approximately $2.8 million compared to 2007.

Operating results at Lakeside Iowa have continued to decline as economic pressures have continued and competition has intensified in the Iowa market. Annual impairment testing performed in the fourth quarter of 2007 and 2008, as well as interim testing performed in the second quarter of 2008, determined that the fair value of our Lakeside Iowa license rights was less than the book value. According, for the year ended December 31, 2007 we recorded a non-cash charge of $33.3 million and for the year ended December 31, 2008 we recorded non-cash charges totaling $19.2 million to reduce the balance of this asset to its fair value.

Other state casino EBITDA was $30.3 million for the year ended December 31, 2008, which was consistent with EBITDA results for the year ended December 31, 2007 that totaled $30.3 million.

Other Operations and G&A

	Year ended December 31, 2007					Year ended December 31, 2008
	$			% of revenue		$			% of revenue
	(dollars in thousands)

Other operations — revenue	$	98,987		11.7	%	$	116,609		14.0	%
Other operations — cost of revenue	(80,184		)	9.4	%	(94,522		)	11.3	%
General and administrative	(22,983		)	2.7	%	(21,485		)	2.6	%
Depreciation and amortization	(56,405		)	6.6	%	(57,783		)	6.9	%
Restructuring costs	—					(17,717		)	2.1	%

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Revenue from other operations consists of revenue from sources such as gasoline and convenience store sales, ATM fees, pay phone charges, rental income and other miscellaneous items unrelated to route and casino operations. Our gas station operations include a gas station and convenience store located in Osceola, Iowa; a gas station and convenience store at the Gold Ranch property in Verdi, Nevada; and three gas stations we acquired with the Primm Casinos. Revenues from other operations were $116.6 million for the year ended December 31, 2008 compared to $99.0 million for the year ended December 31, 2007, an increase of $17.6 million. This was primarily due to a $22.3 million increase in gas station and convenience store revenues at the Primm Casinos, reflecting a full year of operations. This was offset in part by decreases of $3.0 million and $2.1 million, respectively, in gas station and convenience store revenues at the Lakeside Iowa and Gold Ranch Nevada properties. The change is a result of volatility in gasoline prices.

Costs associated with other revenues were $94.5 million for the year ended December 31, 2008 and $80.2 million for the year ended December 31, 2007, an increase of $14.3 million. This was associated with a $19.7 million increase in gas station and convenience store costs at the Primm Casinos based on a full year of operations. This was offset in part by decreases of $3.1 million and $2.2 million, respectively, in gas station and convenience store costs at the Lakeside Iowa and Gold Ranch Nevada properties, which experienced decreased costs associated with decreased revenues.

G&A expenses decreased by $1.5 million, or 6.5%, from $23.0 million for the year ended December 31, 2007 to $21.5 million for the year ended December 31, 2008. This was primarily associated with expenses paid in 2007 in connection with the acquisition of the Primm Casinos of approximately $2.5 million. G&A expenses in 2008 decreased due to reduced payroll and related costs. G&A expenses as a percentage of total revenue were 2.6% for the year ended December 31, 2008 as compared to 2.7% for the year ended December 31, 2007.

Depreciation and amortization expense was $57.8 million for the year ended December 31, 2008, an increase of $1.4 million, or 2.5%, from $56.4 million for the year ended December 31, 2007. Depreciation and amortization expense reflects a final purchase price adjustment in the first quarter of 2008 to the estimated depreciation and amortization expense associated with the Primm Casinos and the Sands Regent Casinos.

During the year ended December 31, 2008, the Company also incurred costs associated with the restructuring process described in “Liquidity and Capital Resources.” These costs were $17.7 million for the year ended December 31, 2008 and were primarily related to legal and advisory fees.

Impairment Charges

As discussed above, the Company recorded impairment charges in 2007 and 2008 to reduce the value of intangible assets associated with the Primm Casinos, the Sands Regent Casinos and Lakeside Iowa. Annual impairment testing performed in the fourth quarter of 2007 as well as interim testing performed in the second quarter of 2008 determined that the fair value of goodwill associated with the Primm Casinos was less than the book value. Accordingly, for the years ended December 31, 2007 and 2008 we recorded non-cash charges of $36.5 million and $30.7 million, respectively, to reduce the balance of this asset to zero. Further, annual impairment testing performed in the fourth quarter of 2008 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the year ended December 31, 2008 we recorded a non-cash charge of $7.5 million to reduce the balance of this asset to its fair value.

Annual impairment testing performed in the fourth quarter of 2007 and 2008, as well as interim testing performed in the second quarter of 2008, determined that the fair value of our Lakeside Iowa license rights was less than the book value. According, for the year ended December 31, 2007 we recorded a non-cash charge of $33.3 million and for the year ended December 31, 2008 we recorded non-cash charges totaling $19.2 million to reduce the balance of this asset to its fair value.

Promotional Allowances

Promotional allowances were $63.3 million, or 7.6% of total revenues, for the year ended December 31, 2008, a decrease of $0.9 million, or 1.4%, from $64.2 million, or 7.5% of total revenues, for the year ended December 31, 2007. This was primarily due

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to lower promotional spending of $3.7 million, $0.3 million, and $0.9 million, at the Lakeside Iowa Casino, Northern Nevada casinos and Southern Nevada casinos, respectively. The decreases were offset in part by increased promotional spending at the Primm Casinos of $3.9 million.

Loss from Operations

As a result of the factors discussed above, loss from operations was $93.5 million for the year ended December 31, 2008, an increase of $62.4 million from loss of $26.9 million for the year ended December 31, 2007. The loss for the year ended December 31, 2008 included a $30.7 million impairment charge to goodwill at the Primm Casinos, an $7.5 million impairment charge to the Primm trademark, a $48.9 million impairment charge to the goodwill at the Sands Regent Casinos, a $19.2 million impairment charge to the gaming license at the Lakeside Iowa property and $17.7 million in costs (primarily legal and advisory fees) associated with the Company’s restructuring process.

Other Expenses

	Year ended December 31, 2007			Year ended December 31, 2008
	(dollars in thousands)
Interest Expense	$	(85,631	)	$	(116,832	)
Change in value of derivative	(16,115		)	—
Interest Income	1,481			921
Total Other income (expense)	$	(100,265	)	$	(115,911	)

Other expense was $115.9 million for the year ended December 31, 2008, an increase of $15.6 million from expenses of $100.3 million for the year ended December 31, 2007. This increase was primarily a result of interest costs increasing from $85.6 million for the year ended December 31, 2007 to $116.8 million for the year ended December 31, 2008 due to higher average outstanding debt balances for 2008 as well as a higher average borrowing rate on floating rate debt. The Company’s debt increased from $1.1 billion at December 31, 2007 to $1.2 billion at December 31, 2008.

Net Loss

As a result of the factors discussed above, net loss for the year ended December 31, 2008 was $209.4 million compared to net loss of $127.2 million recorded for year ended December 31, 2007.

Liquidity and Capital Resources

Cash Flows; Restructuring

We are currently operating as reorganized debtors under Chapter 11 of the Bankruptcy Code and pursuant to the Plan, which became effective on Effective Date. The Plan will not be fully implemented until the Substantial Consummation Date. Upon the Substantial Consummation Date, the Plan provides for the following restructuring (the “Restructuring”) of the Debtors to occur:

· Cancellation of 100% of the existing equity in the Company

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The Plan will not be fully implemented until the Substantial Consummation Date. The Substantial Consummation Date will not occur until the Restructuring and the individuals proposed as officers, directors and key employees of the Reorganized Debtors have received all requisite governmental and regulatory approvals. The Company has been advised by the representatives of the Lenders that the applications of Reorganized Herbst Gaming, as well as the equity holders of Reorganized Herbst Gaming and their principals, have been filed with the gaming authorities in Nevada, Missouri and Iowa, and that the applications of directors, officers and key employees required to submit to licensing are expected to be filed in those jurisdictions in the near future. The Company has been advised by the representatives of the Lenders that the licensing process is expected to take nine to 12 months.

The Substantial Consummation Date is also subject to the satisfaction or waiver of the following conditions: (i) none of the Debtors and Lenders are in material breach of the Plan; and (ii) the Bankruptcy Court has authorized the assumption and rejection of certain contracts of the Debtors. The Company currently expects that the Substantial Consummation Date will occur in the fourth quarter of 2010, although the Company cannot assure you that all conditions to the Substantial Consummation Date will be satisfied by that date or at all, or that the Company will be successful in implementing the Restructuring in the form contemplated by the Plan or at all. The Plan provides that the Substantial Consummation Date must occur no later than February 5, 2011, the first anniversary of the Effective Date, unless extended by mutual agreement of the Debtors and Requisite Lenders. In the event that the Substantial Confirmation Date does not occur by that date, or such later date as may be agreed to by the Debtors and the Requisite Lenders, the confirmation of the Plan would be vacated and all claims (except for allowed priority claims, certain allowed secured claims unrelated to the Lenders or the Subordinated Notes, and allowed general unsecured claims) would be restored as though the Effective Date had never occurred.

The Plan provides that, from the Effective Date through the Substantial Consummation Date, the Debtors will continue to be managed by the current officers and directors.

Due to the occurrence and continuation of events of default, the amounts outstanding under the amended Credit Agreement and the indentures pursuant to which the Subordinated Notes were issued are immediately due and payable, subject to an automatic stay of any action to collect, assert or recover a claim against the Company under applicable bankruptcy law. Based on the filing of the Chapter 11 Cases, the entire balance outstanding under the amended Credit Agreement and all of the amounts outstanding under the indentures pursuant to which the Subordinated Notes were issued are included in liabilities subject to compromise at December 31, 2009. The Company classifies liabilities subject to compromise as a long-term liability.

The current outstanding balance under the amended Credit Agreement is $858 million. The Plan provides, in part, that the Lenders will receive 100% of the equity of Reorganized Herbst Gaming, and that Reorganized Herbst Gaming and the Reorganized Debtors will borrow $350 million pursuant to a new senior secured bank loan.

Prior to the filing of the Chapter 11 Cases, interest accrued on borrowings under the amended Credit Agreement was based on a floating rate. This floating rate was based upon a variable interest rate (a base rate or LIBOR, at our option) plus a leverage grid-based spread. Our average floating rate on debt incurred under the amended Credit Agreement was 12.5% as of December 31, 2009. However, based on the filing of the Chapter 11 Cases, after the Petition Date the Company did not make payments under the amended Credit Agreement, other than certain adequate protection payments, as provided in the Final Order Approving the Amended and Restated Stipulation Authorizing Use of Cash Collateral by Debtors and Granting Adequate Protection, which was entered by the Bankruptcy Court on May 21, 2009 and remained in effect until the Effective Date (the “Cash Collateral Order”).

The Cash Collateral Order provided for adequate protection payments to be made to the Lenders during the period commencing on the Petition Date and ending on the Effective Date in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured as of the last day of each fiscal quarter and to be paid on the 30th day thereafter) reduced by certain unpaid restructuring costs, as well as costs and expenses of the professionals retained by the administrative agent. Based on the Company’s cash and cash equivalents as of December 31, 2009 and taking into account the required Effective Date payments described in Note 1 of Notes to Consolidated Financial Statements, the Company made an adequate protection payment of $1.1 million on February 5, 2010. Additionally, under the Plan, between the Effective Date and the Substantial Consummation Date the Company will make adequate protection payments to the Lenders in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured initially as of the end of the third full calendar month following the Effective Date, and then as of the end of every third full calendar month thereafter, and paid 30 days thereafter). For 2009, the Company made adequate protection payments of $18.0 million.

We expect to fund our existing operations and capital needs during the Restructuring from operating cash flow and cash on hand, although that may be insufficient. In 2009, we monitored carefully our capital expenditures, and delayed incurring capital expenditures where possible in order to conserve cash. We cannot assure you that our cash flow will be adequate to meet our anticipated working capital requirements and capital expenditures for existing operations.

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Operating Activities

During the year ended December 31, 2009, operating activities provided $50.0 million in cash flows on a net loss of $60.1 million. Based on the filing of the Chapter 11 Cases, the Company does not make payments under the amended Credit Agreement. Instead, the Company made certain adequate protection payments of $18.0 million in 2009 pursuant to the Cash Collateral Order, which remained in effect until the Effective Date.

Investing Activities and Capital Expenditures

For the year ended December 31, 2009, net cash used for investing activities was $21.1 million, primarily related to capital expenditures. These capital expenditures included approximately $5.3 million in slot machine and slot related equipment purchases, approximately $2.7 million spent on the construction of a full service spa at Primm Valley, approximately $0.9 million in costs associated with repairs at Buffalo Bills for construction issues cited by Clark County building inspectors and approximately $5.0 million spent on other items related to standard maintenance of our properties. In 2009, the Company decreased capital expenditures from historical levels in order to preserve short-term liquidity in light of the bankruptcy proceedings and the global recession.

Capital expenditures for 2010 are anticipated to be approximately $28.3 million. This amount reflects a return to a more normalized level compared to the reduction in capital projects for 2009. However, to the extent that our results of operations do not improve, we may elect to delay some of the capital expenditures in order to preserve short-term liquidity.

Financing Activities

Cash flows used by financing activities were $18.0 million during the year ended December 31, 2009. From the Petition Date to the Effective Date the Company was subject to the Cash Collateral Order that called for periodic sweeps of its cash in excess of $100 million to be paid to the Lenders. In 2009, $18.0 million was paid as adequate protection payments pursuant to the Cash Collateral Order.

At December 31, 2009, our liabilities subject to compromise included approximately $160.0 million of outstanding principal amount of our 8 1/8% Notes and $170.0 million of outstanding principal amount of our 7% Notes. After giving effect to indebtedness under our Subordinated Notes and borrowings under our amended Credit Agreement, our total liabilities subject to compromise were approximately $1.2 billion at December 31, 2009.

Please refer to “Liquidity and Capital Resources—Cash Flows; Restructuring” for a discussion of the Plan and treatment of our liabilities subject to compromise.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009.

	Payments Due by Period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Contractual obligations:
Long term debt included in liabilities subject to compromise (1)	$	1,158,846	$	1,158,846	$	—	$	—	$	—
Estimated interest payments (2)	128,505		128,505		—		—		—
Operating leases	389,092		63,630		87,920		47,352		190,190
Total contractual cash obligations	$	1,676,443	$	1,350,981	$	87,920	$	47,352	$	190,190

(1) Please refer to “Liquidity and Capital Resources — Cash Flows; Restructuring” for a description of the treatment in the Plan of liabilities subject to compromise.

(2) Estimated interest for variable rate debt is based on rates at December 31, 2009 and assumes contractual interest for a one year period on long-term debt that, as of December 31, 2009, was classified as liabilities subject to compromise for which interest is no longer accrued or paid. This table does not give effect to the adequate protection payments pursuant to the Cash Collateral Order or the Plan.

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Critical Accounting Policies

The preparation of our financial statements requires our management to adopt accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Our business and industry is highly regulated. The majority of our revenue is counted in the form of cash, chips and tokens and therefore is not subject to any significant or complex estimation procedures.

We have determined that the following accounting policies and related estimates are critical to the preparation of our consolidated financial statements:

Long-Lived Assets

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

We assess the recoverability of long-lived assets when circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is determined based on undiscounted expected future cash flows. An adverse change to the estimate of these undiscounted future cash flows could necessitate an impairment charge that could adversely affect operating results.

Goodwill and Intangible Assets

We have a significant investment in goodwill and other intangible assets on our consolidated balance sheet as of December 31, 2009. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The estimated fair values of the assets acquired pursuant to the acquisitions of Lakeside Iowa, the Sands Regent Casinos and the Primm Casinos, a substantial portion of which consisted of intangible assets comprised of license rights, were determined by management after considering various information including an independent appraisal. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill.

We review the investment in goodwill and license rights for impairment annually, and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value below the amount reflected in the balance sheet. These evaluations of goodwill and license rights require the use of estimates about future operating results of each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates. Once impairment of goodwill or other intangible assets has been recorded, it cannot be reversed. An adverse change to the estimate of these future cash flows could necessitate an impairment charge that could adversely affect operating results.

Based on impairment testing in the fourth quarter of 2009, the Company recorded non-cash charges totaling $7.2 million related to impairment of certain indefinite lived intangible assets. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of goodwill associated with the Primm Casinos was at book value, resulting in no impairment charge related to this goodwill for 2009. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the year ended December 31, 2009 we recorded an impairment charge of $3.8 million to reduce the balance of this trademark to its fair value.

Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of goodwill associated with the Sands Regent Casinos was at book value, resulting in no impairment charge related to goodwill for 2009. Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademarks associated with the Sands Regent Casinos was less than the book value. Accordingly, for the year ended December 31, 2009 we recorded impairment charges of $3.4 million to reduce the balance of these trademarks to their fair value.

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Recently Issued Accounting Standards

On July 1, 2009, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162, (the “Codification”) (previously “SFAS 168”) became effective. Accordingly, the Financial Accounting Standards Board Accounting Standards Codification (the “ASC”) became the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The implementation of the Codification did not initially have an impact on our consolidated financial statements, as it did not modify any existing authoritative GAAP.

Subsequent to the adoption of the Codification, any change to the source of authoritative GAAP will be communicated through an Accounting Standards Update (“ASU”). ASUs will be published by the FASB for all authoritative GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the Codification. Prior to inclusion in an ASU, the standard-setting organizations and regulatory agencies continue to issue proposed changes to the accounting standards in previous form (e.g., FASB Statements of Financial Accounting Standards, Emerging Issues Task Force (“EITF”) Abstracts, FASB Staff Positions, SEC Staff Accounting Bulletins, etc.).

Variable Interest Entities. In September 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 is a revision to FASB Interpretation No. 46, Consolidation of Variable Interest Entities (which is currently promulgated in a subsection of ASC Topic 810, “Consolidation”). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. We do not believe that the adoption of SFAS 167 will have a material impact on our consolidated financial statements.

Statement on Forward-Looking Information

We make statements in this report that relate to matters that are not historical facts that we refer to as “forward-looking statements” regarding, among other things, our business strategy, our prospects and our financial position. These statements may be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties. Forward-looking statements in this report include, among other things, statements concerning:

· projections of future results of operations or financial condition;

· expectations for our route operations and our casino properties;

· expectations of the continued availability of capital resources; and

· expectations regarding our restructuring efforts.

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

· Although the Plan has been confirmed, it will not be fully implemented until the Substantial Consummation Date. Implementation of the Plan is subject to a number of conditions, including no stay being entered in the Appeal, the Appeal not being successful, as well as obtaining certain regulatory approvals. It is uncertain whether we will emerge from bankruptcy. Even if successful, the consummation of the Plan may adversely affect our business, including our relationships with our customers and suppliers. We may lose valuable contracts in the process of carrying out the Plan.

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· The recession, and in particular the economic downturn in Southern Nevada and Southern California (two of our primary markets), has adversely affected our business and is expected to continue to do so.

· Our business relies heavily on certain markets that have been impacted by significant economic downturns. Prolonged economic downturns in these markets could have further material adverse effects on our results.

· If the economic downturn does not improve, there will continue to be an adverse impact on the Company’s operations and therefore the Company’s liquidity.

· Our substantial indebtedness contemplated by the Plan could adversely affect our financial health and prevent us from fulfilling our obligations under the debt instruments to be used upon the Substantial Consummation Date.

· We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.

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

· Our indebtedness imposes restrictive covenants on us.

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

· We face extensive regulation from gaming and other government authorities.

· Changes to applicable tax laws could have a material adverse effect on our financial condition.

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

· Until the Substantial Consummation Date, certain of our executive officers and members of our board of directors own 100% of the Company, which could lead to conflicts of interest.

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

Industry and Market Data

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk, primarily related to interest rate exposure of our debt obligations that bear interest based on floating rates. We do not have any cash or cash equivalents as of December 31, 2009 that are subject to market risk based on changes in interest rates. We are exposed to market risk due to floating or variable interest rates on our indebtedness under our amended Credit Agreement. However, as of the Petition Date, we ceased to accrue contractual interest under the amended Credit Agreement. The interest on the secured credit facility to be entered into on the Substantial Consummation Date is expected to be based on a floating rate (a base rate or LIBOR), plus a leverage grid-based variable amount. It is expected that interest on the new loans contemplated by the Plan will also be based on a floating rate (a base rate or LIBOR) plus a stated amount.

The carrying value of our cash, trade, notes and loans receivable and trade payables approximates fair value primarily because of the short maturities of these instruments. The fair value of our liabilities subject to compromise is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similar terms and average maturities, the estimated fair value of current debt outstanding is approximately $431 million as of December 31, 2009.

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Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm	47

Consolidated Financial Statements

Consolidated Balance Sheets As of December 31, 2008 and 2009	48

Consolidated Statements of Operations For the years ended December 31, 2007, 2008 and 2009	49

Consolidated Statements of Stockholders’ Equity (Deficiency) For the years ended December 31, 2007, 2008 and 2009	50

Consolidated Statements of Cash Flows For the years ended December 31, 2007, 2008 and 2009	51

Notes to Consolidated Financial Statements	52

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Herbst Gaming, Inc. and Subsidiaries

Las Vegas, Nevada

We have audited the accompanying consolidated balance sheets of Herbst Gaming, Inc. and subsidiaries (Debtor-in-Possession) (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Herbst Gaming, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on March 22, 2009. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (3) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations, stockholders’ capital deficiency, and voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code filed on March 22, 2009, raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

Las Vegas, Nevada
March 31, 2010

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Herbst Gaming, Inc.

(Debtor and Debtor-in-Possession as of March 22, 2009)

Consolidated Balance Sheets

(in thousands)

	December 31
	2008			2009
Assets
Current assets
Cash and cash equivalents	$	105,990		$	116,894
Accounts receivable, net	4,470			2,599
Notes and loans receivable	436			955
Prepaid expenses	16,566			14,405
Inventory	4,219			4,396
Total current assets	131,681			139,249
Property and equipment, net	547,002			517,063
Lease acquisition costs, net	15,068			14,746
Due from related parties	1,450			868
Other assets, net	24,124			6,373
Intangibles, net	211,668			202,474
Goodwill	3,255			3,255

Total assets	$	934,248		$	884,028

Liabilities and stockholders’ deficit
Current liabilities
Current portion of long-term debt	$	1,176,330		$	—
Accounts payable	14,179			18,474
Accrued interest	41,672			—
Accrued expenses	28,086			20,415
Total current liabilities	1,260,267			38,889
Long-term debt, less current portion	—			—
Other liabilities	2,136			2,628
Liabilities subject to compromise	—			1,230,756
Commitments and contingencies (Note 13)
Stockholders’ deficit
Common stock (no par value; 2,500 shares authorized; 300 shares issued and outstanding)	2,368			2,368
Additional paid-in-capital	1,631			1,631
Accumulated deficit	(332,154		)	(392,244		)
Total stockholders’ deficit	(328,155		)	(388,245		)

Total liabilities and stockholders’ deficit	$	934,248		$	884,028

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

(Debtor and Debtor-in-Possession as of March 22, 2009)

Consolidated Statements of Operations

(in thousands)

	Year Ended December 31,
	2007			2008			2009
Revenues
Route operations	$	276,946		$	243,635		$	200,637
Casino operations	473,248			474,194			451,429
Other — non gaming	98,987			116,609			86,285

Total revenues	849,181			834,438			738,351
Less promotional allowances	(64,241		)	(63,349		)	(69,788		)

Net revenues	784,940			771,089			668,563
Costs and expenses
Route operations	244,086			215,653			182,734
Casino operations	335,252			351,173			328,062
Depreciation and amortization	56,405			57,783			55,426
General and administrative	22,983			21,485			18,913
Other — non-gaming	80,184			94,522			67,333
Restructuring costs				17,717			9,814
Loss on impairment of assets	72,965			106,271			7,192

Total costs and expenses	811,875			864,604			669,474

Loss from operations	(26,935		)	(93,515		)	(911		)
Other income (expense)
Interest income	1,481			921			161
Interest expense, (net of capitalized interest of $206, $0, and $0, respectively) (contractual interest in 2009 would have been $133,555 if incurred for the entire year)	(85,631		)	(116,832		)	(29,530		)
Reorganization items	—			—			(29,810		)
Change in value of derivative instruments	(16,115		)	—			—
Total other expense, net	(100,265		)	(115,911		)	(59,179		)

Net loss	$	(127,200	)	$	(209,426	)	$	(60,090	)

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

(Debtor and Debtor-in-Possession as of March 22, 2009)

Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands)

					Retained
			Additional		Earnings
	Common		Paid-In		(accumulated
Balance	Stock		Capital		deficit)			Total
Balance, January 1, 2007	$	2,368	$	1,631	$	14,772		$	18,771
Net loss					(127,200		)	(127,200		)
Stockholders’ distributions					(10,300		)	(10,300		)
Balance December 31, 2007	$	2,368	$	1,631	$	(122,728	)	$	(118,729	)
Net loss					(209,426		)	(209,426		)
Balance December 31, 2008	$	2,368	$	1,631	$	(332,154	)	$	(328,155	)
Net loss					(60,090		)	(60,090		)
Balance December 31, 2009	$	2,368	$	1,631	$	(392,244	)	$	(388,245	)

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

(Debtor and Debtor-in-Possession as of March 22, 2009)

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2007			2008			2009
Cash flows from operating activities
Net loss	$	(127,200	)	$	(209,426	)	$	(60,090	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	56,405			57,783			55,426
Amortization of debt issuance costs	3,188			4,116			900
Debt discount amortization	144			143			32
Gain (loss) on sale of property and equipment	105			(44		)	39
Loss on impairment of assets	72,965			106,271			7,192
Decrease (increase) in operating assets:
Accounts receivable	3,790			2,661			1,764
Prepaid expenses	(4,169		)	568			2,161
Inventory	(239		)	776			(177		)
Due from related parties	(606		)	223			(152		)
Other assets	(538		)	10			(1,161		)
Increase (decrease) in operating liabilities:
Accounts payable	(1,074		)	(2,823		)	1,946
Accrued interest	927			37,110			20,493
Accrued expenses	1,067			(298		)	(2,491		)
Other liabilities	(492		)	432			454
Non-cash reorganization items	—			—			23,657
Net cash provided (used) by operating activities	$	4,273		$	(2,498	)	$	49,993

Cash flows from investing activities
Net cash paid for Sands Regent Casinos, net of cash acquired	$	(147,878	)	$	—		$	—
Net cash paid for Primm Casinos, net of cash acquired	(393,682		)	—			—
Additions to notes and loans receivable	(1,153		)	(911		)	(1,522		)
Collection on notes and loans receivable	1,937			927			1,093
Proceeds from sale of property and equipment	248			622			213
Purchases of property and equipment	(32,418		)	(15,578		)	(15,645		)
Lease acquisition costs	(1,180		)	(806		)	(5,252		)
Net cash used in investing activities	$	(574,128	)	$	(15,746	)	$	(21,113	)

Cash flows from financing activities
Proceeds from long term debt	$	853,000		$	35,859		$	—
Payments on long term debt	(229,692		)	(5,742		)	—
Loan origination fees	(14,513		)	(165		)	—
Reorganization items	—			—			(17,976		)
Stockholders’ distributions	(10,300		)	—			—
Net cash provided (used in) by financing activities	598,495			29,952			(17,976		)
Net increase in cash and cash equivalents	28,642			11,708			10,904
Cash and cash equivalents
Beginning of year	65,640			94,282			105,990
End of year	$	94,282		$	105,990		$	116,894
Supplemental cash flow information:
Cash paid during the period for interest	$	81,579		$	75,463		$	8,102
Supplemental schedule of non cash investing and financing activities:
Purchase of property and equipment financed through accounts payable	$	1,028		$	338		$	1,003

See notes to consolidated financial statements.

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Herbst Gaming, Inc.

(Debtor and Debtor-in-Possession as of March 22, 2009)

Notes to consolidated financial statements

1. Chapter 11 Reorganization and Going Concern

On July 22, 2009, the Debtors filed with the Bankruptcy Court an amended joint plan of reorganization. On January 22, 2010, the Bankruptcy Court issued an Amended Order Confirming Debtors’ First Amended Joint Plan of Reorganization (the “Order”), confirming the amended joint plan of reorganization, as modified by the Findings of Fact and Conclusions of Law in Support of Order Confirming Debtors’ First Amended Joint Plan of Reorganization (the “Findings of Fact “) entered contemporaneously with the Order (the amended joint plan of reorganization as modified by the Findings of Fact, the “Plan”). The Plan became effective on February 5, 2010 (the “Effective Date”), but will not be fully implemented until the Substantial Consummation Date (as defined below). Since the Effective Date, the Debtors have been operating as reorganized entities pursuant to the terms and provisions of the Plan and, except as otherwise specifically provided for in the Plan, outside the jurisdiction of the Bankruptcy Court. Upon the Substantial Consummation Date, the Plan provides for the following restructuring (the “Restructuring”) of the Debtors to occur:

· Cancellation of 100% of the existing equity in the Company.

Following the Substantial Consummation Date, Reorganized Herbst Gaming will hold all of the equity interests in the Reorganized Debtors (as defined below) and the Company will be dissolved.

The Plan will not be fully implemented until the Substantial Consummation Date. The Substantial Consummation Date will not occur until the Restructuring and the individuals proposed as officers, directors and key employees of Reorganized Herbst Gaming and the Subsidiary Guarantors, as they will be reorganized (the “Reorganized Debtors”) have received all requisite governmental and regulatory approvals. The Company has been advised by the representatives of the Lenders that the applications of Reorganized Herbst Gaming, as well as the equity holders of Reorganized Herbst Gaming and their principals, have been filed with the gaming authorities in Nevada, Missouri and Iowa, and that the applications of directors, officers and key employees required to submit to licensing are expected to be filed in those jurisdictions in the near future. The Company has been advised by the representatives of the Lenders that the licensing process is expected to take nine to 12 months.

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While the Indenture Trustee has not sought a stay of the Order, we cannot assure you that the Indenture Trustee will not seek such a stay or that a stay, of sought, will not be granted during the pendency of the Appeal and prior to the Substantial Consummation Date. We cannot assure you that the Order will not be overturned and the Plan set aside.

The Plan provides that, from the Effective Date through the Substantial Consummation Date, the Debtors will continue to be managed by the current officers and directors.

The continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) obtain substantial consummation of the Plan or another plan of reorganization under the Bankruptcy Code; (ii) return to profitability; (iii) generate sufficient cash flow from operations; and (iv) obtain financing sources to meet our future obligations. These matters create uncertainty relating to our ability to continue as a going concern. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of assets or liabilities that might result from the outcome of these uncertainties. In addition, the Restructuring could materially change amounts reported in our consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets and liabilities that may be necessary as a consequence of reorganization under Chapter 11 of the Bankruptcy Code.

Additionally, the Restructuring is subject to various regulatory approvals. We cannot assure you that we will be successful in consummating the Plan.

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the indentures pursuant to which the Subordinated Notes were issued are included in liabilities subject to compromise at December 31, 2009. The Company classifies liabilities subject to compromise as a long-term liability.

The Cash Collateral Order provided for adequate protection payments to be made to the Lenders during the period commencing on the Petition Date and ending on the Effective Date in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured as of the last day of each fiscal quarter and to be paid on the 30th day thereafter) reduced by certain unpaid restructuring costs, as well as costs and expenses of the professionals retained by the administrative agent. Based on the Company’s cash and cash equivalents as of December 31, 2009 and taking into account the required Effective Date payments described in Note 1 of Notes to Consolidated Financial Statements, the Company made an adequate protection payment of $1.1 million on February 5, 2010. Additionally, under the Plan, between the Effective Date and the Substantial Consummation Date the Company will make adequate protection payments to Lenders in the amount of the Debtors’ cash and cash equivalents in excess of $100 million (measured initially as of the end of the third full calendar month following the Effective Date, and then as of the end of every third full calendar month thereafter, and paid 30 days thereafter). For 2009, the Company made adequate protection payments of $18.0 million.

2. Description of Business and Summary of Significant Accounting Policies

Description of Business and Principles of Consolidation—The accompanying condensed consolidated financial statements of Herbst Gaming, Inc. include the accounts of Herbst and its subsidiaries: E-T-T, Inc. and subsidiaries (“ETT”), Market Gaming, Inc. (“MGI”), E-T-T Enterprises L.L.C. (“E-T-T Enterprises”), Flamingo Paradise Gaming, LLC (“FPG”), HGI-Lakeside (“HGI-L”), HGI-St. Jo (“HGI-SJ”), HGI-Mark Twain (“HGI-MT”), The Sands Regent and subsidiaries (“The Sands Regent”) and The Primadonna Company LLC (“Primadonna”). The financial statements of ETT are consolidated and include the following wholly-owned subsidiaries: Cardivan Company, Corral Coin, Inc. and Corral Country Coin, Inc. The financial statements of The Sands Regent are consolidated and include the following direct and indirect wholly-owned subsidiaries: Zante, Inc., Last Chance, Inc., California Prospectors, Ltd. (which is a wholly owned subsidiary of Last Chance, Inc.), Plantation Investments, Inc. and Dayton Gaming, Inc.

All significant intercompany balances and transactions between and among Herbst Gaming, ETT, MGI, E-T-T Enterprises, FPG, HGI-L, HGI-SJ, HGI-MT, The Sands Regent and Primadonna have been eliminated in the condensed consolidated financial statements. ETT and MGI conduct business in the gaming industry and generate revenue principally from gaming machine route operations and casino operations. Gaming machine route operations involve the installation, operation and service of gaming machines owned by the Company that are located in licensed, leased or subleased space in retail stores (supermarkets, convenience stores, etc.), bars and restaurants throughout the State of Nevada. The Company owns and operates Terrible’s Town Casino & Bowl in Henderson, Nevada, Terrible’s Searchlight Casino in Searchlight, Nevada and Terrible’s Town Casino and Terrible’s Lakeside Casino & RV Park, both of which are located in Pahrump, Nevada. The operations of the subsidiaries of the Company are as follows:

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

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

· HGI-L owns and operates Lakeside Iowa, as well as a hotel, gas station and convenience store, all located in Osceola, Iowa, which were acquired in February 2005.

· HGI-SJ owns and operates St. Jo in St. Joseph, Missouri, which was acquired in February 2005.

· HGI-MT owns and operates Mark Twain in La Grange, Missouri, which was acquired in February 2005.

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· The Sands Regent and its direct and indirect wholly-owned subsidiaries, which were acquired on January 3, 2007, own and operate the Sands Regent Casinos.

· Primadonna, which was acquired on April 10, 2007, owns and operates the Primm Casinos, a California lottery station located on the Nevada/California border, three gasoline stations and the Primm Travel Center (such properties, together with the Primm Casinos, the “Primm Properties”), all of which are located in Primm, Nevada.

We have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986. Under those provisions, the owners of the Company pay income taxes on its taxable income. Accordingly, a provision for income taxes is not included in our financial statements.

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

Subsequent Events—The Company has evaluated subsequent events through March 31, 2010, the filing date of this Form 10-K.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates incorporated into the Company’s consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable and the estimated cash flows in assessing the recoverability of long-lived assets as well as estimated fair values of certain assets related to write downs and impairments, contingencies and litigation, and claims and assessments. Actual results could differ from those estimates.

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

Fair Value of Financial Instruments—On January 1, 2008, we adopted ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 does not determine or affect the circumstances under which fair value measurements are used, but defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

· Level 1: Quoted prices for identical instruments in active markets.

· Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

· Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For some products or in certain market conditions, observable inputs may not be available.

We adopted previously issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which has been subsequently classified in ASC Topic 820, Section 65, Transition Related to FASB Staff Position No. 157-4, and provides additional guidance for estimating fair value in accordance with ASC Topic 820, when the volume and level of activity for the asset or liability have significantly decreased. This standard also includes guidance on how to identify circumstances that indicate that a transaction is not orderly and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. FSP FAS 157-4 was effective for the period ended December 31, 2009 and, as applied prospectively, did not have a material impact on our consolidated financial statements.

The fair values of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities, approximate their recorded carrying amount because of their short term nature. See Note 8, Long-Term

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Debt, for further discussions of the valuations of certain of our financial instruments. In addition, see below for a discussion of FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.

Restructuring Costs—Restructuring costs are comprised of expenses related to the evaluation of financial and strategic alternatives and include special legal and other advisor fees associated with the Company’s reorganization efforts prior to the Petition Date, including preparation for the bankruptcy filing.

Reorganization Costs—Reorganization costs are comprised of expenses incurred after the Petition Date. Reorganization costs include legal, advisory and trustee fees incurred in connection with the Restructuring and the Chapter 11 Cases. Included in these expenses are adjustments to value the liabilities subject to compromise at the allowed claim amount in conjunction with the oral confirmation of the Plan from the Bankruptcy Court on October 30, 2009.

Accounts Receivable—Receivables consist primarily of amounts due from customers as a result of normal business operations. The Company periodically performs credit evaluations of its customers. The Company reviews accounts receivable balances in order to determine an allowance for potential credit losses based on our collections experience and the age of the receivables. At December 31, 2008 and 2009, the allowance for potential credit losses was $840,000 and $808,000, respectively.

Notes and Loans Receivable—In order to secure various route locations, the Company has provided certain incentives to the location operators in the form of loans. The loans, made for build-outs, tenant improvements, and initial operating expenses, are generally secured by the personal guarantees of the operators and the locations’ assets. The majority of the loans are non-interest bearing and are expected to be repaid within one year from the locations’ share of net gaming win.

The Company regularly evaluates the collectability of the loans by individually evaluating each location’s operating results and cash flows. Management provides for the carrying value of loans that are determined to be uncollectible. At December 31, 2008 and 2009, no allowance for potential credit losses was deemed necessary.

Inventory—Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventories include parts, food, liquor, retail items and gasoline.

Property and Equipment—Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Useful lives are as follows:

Building		40 years
Gaming equipment		5 years
Furniture, fixtures, and equipment		5 — 10 years
Leasehold improvements		1 — 20 years

Lease Acquisition Costs— Significant incremental costs associated with the acquisition of location leases are capitalized and amortized using the straight-line method over the term of the related leases. Lease acquisition costs are stated at cost less accumulated amortization of $41,284,000 and $41,359,000 at December 31, 2008 and 2009, respectively.

Debt Issuance Costs— Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements. On October 30, 2009, the Bankruptcy Court orally confirmed the Plan and as such, debt issuance costs, net of accumulated amortization of loan fees, were fully expensed to reorganization items in the consolidated statement of operations in the fourth quarter of 2009.

Self-Insurance Reserves—We are self-insured up to certain stop loss amounts for employee health care coverage and workers’ compensation costs. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of estimates for claims incurred but not yet reported. In estimating these accruals, we consider historical loss experience and make judgments about the expected levels of costs per claim. We believe our estimates of future liability are reasonable based upon our methodology; however, changes in health care costs, accident frequency and severity and other factors could materially affect the estimate for these liabilities. Self-insurance reserves are included in accrued expenses on our consolidated balance sheets.

Long-Lived Assets— In accordance with the provisions of ASC Topic 360, the Company evaluates the potential impairment of long-lived assets when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If it is determined that the carrying value of long-lived assets may not be recoverable based upon the relevant facts and circumstances, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual

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disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, the Company will recognize an impairment loss for the difference between the carrying value of the asset and its fair value. As a result of revenue declines related to our Primm properties, the Company tested these assets for recoverability pursuant to ASC Topic 360 in 2009. The test resulted in no impairment; however, we will continue to monitor the performance of the Primm properties and, if necessary, continue to update our asset recoverability test under ASC Topic 360. The Company believes that no impairment of long-lived assets occurred for the years ended December 31, 2007, 2008 and 2009.

Goodwill and Intangible Assets— We evaluate our goodwill and indefinite-lived intangible assets in accordance with the applications of ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC Topic 350”). Goodwill and indefinite-lived intangible assets are not subject to amortization, but they are subject to an annual impairment test in the fourth quarter of each year and between annual test dates in certain circumstances. See Note 5, Goodwill and Other Intangible Assets for a discussion of impairment charges related to our goodwill and other intangible assets.

Revenue and Promotional Allowances—In accordance with industry practice, the Company recognizes as gaming revenues the net win from route operations, which is the difference between gaming wins and losses. The Company recognizes total net win from gaming devices as revenues from gaming routes that operate under revenue-sharing arrangements. Revenue-sharing payments to route locations are recorded as costs of route operations. Revenues from casino operations are gaming wins less losses. Revenues from retail sales are presented net of sales tax. Revenues from casino operations include the retail value of food and beverage and goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is as follows:

	Year Ended December 31,
	2007		2008		2009
	(dollars in thousands)
Room	$	8,094	$	8,958	$	11,779
Food and Beverage	21,507		22,827		14,781
Other	20,150		14,198		22,160
Total	$	49,751	$	45,983	$	48,720

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

Liabilities in respect of the Company’s player’s club program are recognized as points are earned and are included in the “Other liabilities” line of the Company’s balance sheet. Expenses in respect of the Company’s player’s club program are included in the “Promotional allowances” line of the Company’s statement of operations.

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

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

Concentrations of Credit Risk—The Company maintains cash balances at certain financial institutions located in Southern Nevada. The balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, cash balances may be in excess of FDIC limits. As of December 31, 2009, the Company does not consider itself to have any significant concentrations of credit risk.

Recently Issued and Adopted Accounting Standards— On July 1, 2009, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162, (the “Codification”) (previously “SFAS 168”) became effective. Accordingly, the Financial Accounting Standards Board Accounting Standards Codification (the “ASC”) became the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The implementation of the Codification did not initially have an impact on our consolidated financial statements, as it did not modify any existing authoritative GAAP.

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in previous form (e.g., FASB Statements of Financial Accounting Standards, Emerging Issues Task Force (“EITF”) Abstracts, FASB Staff Positions, SEC Staff Accounting Bulletins, etc.).

3. Property and Equipment

Property and equipment consist of the following (in thousands):

	December 31,
	2008			2009
Building	$	449,435		$	451,363
Gaming equipment	145,797			148,740
Furniture, fixtures, and equipment	88,733			93,930
Leasehold improvements	2,071			2,043
Land	36,930			36,930
Barge	17,171			16,935
Construction-in-progress	2,711			6,425
	742,848			756,366
Less accumulated depreciation	(195,846		)	(239,303		)
	$	547,002		$	517,063

4. Lease Acquisition Costs

December 31, 2008

December 31, 2009

Gross

Carrying

Accumulated

Carrying

Accumulated

Amount

Amortization

Amount

Amortization

(dollars in thousands)

Lease Acquisition Costs

56,352

41,284

62,659

47,913

The aggregate amortization expense for the years ended December 31, 2007, 2008 and 2009 was $9,577,731, $7,170,354, and $6,808,930 respectively.

Expected annual amortization for the years ending December 31 is:

2010	$	6,657,000
2011	2,480,000
2012	1,994,000
2013	1,826,000
2014	1,679,000

5. Goodwill and Other Intangible Assets

ASC Topic 350 requires the Company to test goodwill and other indefinite-lived intangible assets on an annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value below the amount reflected in the balance sheet. The annual test, which is performed by the Company in the fourth quarter of each year, requires that the Company compare the carrying amount of the indefinitely-lived intangible assets reflected on the balance sheet to the fair value of the intangible assets.

The Company determines the fair value of the indefinite-lived intangible assets other than goodwill utilizing the direct value method. Fair value measurements of these intangible assets include significant assumptions relating to variables that are based on past

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experiences and judgments about future performance. These variables include, but are not limited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusted discount rate and (3) expected growth rates in perpetuity to estimated terminal values.

Annual impairment testing performed in the fourth quarter of 2008 as well as interim testing performed in the second quarter of 2008 determined that the fair value of our Lakeside Iowa license rights was less than the book value. Accordingly, for the year ended December 31, 2008 we recorded non-cash charges totaling $19.2 million to reduce the balance of these assets to the fair value. The Company considered the continued and unexpected deterioration of earnings following the 2007 annual impairment test to constitute a triggering event that required an additional fair value measurement in the second quarter of 2008.

Annual impairment testing performed in the fourth quarters of 2008 and 2009 determined that the fair value of our trademark associated with the Primm Casinos was less than its book value. Accordingly, for the years ended December 31, 2008 and 2009, we recorded non-cash charges of $7.5 million and $3.8 million, respectively, to reduce the balance of this asset to its fair value.

Annual impairment testing performed in the fourth quarter of 2009 determined that the fair value of our trademarks associated with the Sands Regent Casinos was less than their book value. Accordingly, for the year ended December 31, 2009, we recorded a non-cash charge of $3.4 million to reduce the balance of this asset to its fair value.

ASC Topic 350 also requires the Company to test goodwill at its reporting units within its market segment on a annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of goodwill below the amount reflected in the balance sheet. The Company performs its annual impairment test in the fourth quarter of each year by comparing the fair value with the amount reflected in the balance sheet.

The Company determines the fair value of the goodwill utilizing the residual value method. Fair value measurements of these assets include significant assumptions relating to variables that are based on past experiences and judgments about future performance. These variables include, but are not limited to: (1) the forecasted earnings growth rate of each market, (2) risk-adjusted discount rate and (3) expected growth rates in perpetuity to estimated terminal values.

Interim impairment testing performed in the second quarter of 2008 determined that the fair value of goodwill associated with the Primm Casinos was less than the book value. Accordingly, as of June 30, 2008 we recorded a non-cash charge of $30.7 million to reduce the balance of this asset to zero.

The aforementioned impairment charges are included in the table below.

Intangible assets consist of the following (dollars in thousands):

	December 31, 2008				December 31, 2009
	Gross			Gross
	Carrying			Accumulated	Carrying			Accumulated
	Amount			Amortization	Amount			Amortization
	(dollars in thousands)
Amortized intangible assets
Customer Loyalty Programs	$	24,350		5,669	$	24,350		$	7,235
Non-Competition Agreement	2,180			1,383	2,180			1,820
Total	26,530			7,052	26,530			9,055

Unamortized intangible assets
Gaming License Rights	196,800				196,800
Beginning accumulated impairment-Gaming Rights	(33,300		)		(52,500		)
Impairment charges-Gaming Rights	(19,200		)		—
Patent applications	240

HERBST GAMING INC 10-K