Dover Downs Gaming & Entertainment 10-K/A 2004 FY Annual report (amended)

United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1)

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

Commission file number   1-16791

Dover Downs Gaming & Entertainment, Inc.

(Exact name of registrant as specified in its charter)

Delaware	51-0414140
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

1131 North DuPont Highway, Dover, Delaware 19901

(Address of principal executive offices)

(302) 674-4600

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark 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  ý         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.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ý          No  o

The aggregate market value of common stock held by non-affiliates of the registrant was $108,642,263 as of June 30, 2004 (the last day of our most recently completed second quarter).

As of February 28, 2005, the number of shares of each class of the registrant’s common stock outstanding is as follows:

Common Stock -	9,564,163 shares
Class A Common Stock -	14,339,687 shares

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement in connection with the Annual Meeting of Stockholders held April 27, 2005 are incorporated by reference into Part III, Items 10 through 14 of this report.

Explanatory Note

Dover Downs Gaming & Entertainment, Inc. (the “Company”) is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 10, 2005 (the “Annual Report”) to amend and restate Items 7 and 8 to the Annual Report to reflect the following changes:

•Expand our discussion of the Company’s results from its other operating activities. This discussion is in the “Results of Operations” section of Part I, Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operation,

•Expand our discussion of and clarify the impact on the Company’s future operations as a result of our decision not to renew our management agreement with Caesars World Gaming Development Corporation. This discussion is in the “Liquidity and Capital Resources” section of Part I, Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operation,

•Expand our disclosure of the Company’s critical accounting policies to include the quantitative effects on accrued pension expense that would result from a change in our discount rate assumption. This discussion is in the “Critical Accounting Policies” section of Part I, Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operation,

•Expand our disclosure of the Company’s other operating activities. This discussion is in NOTE 3-Summary of Significant Accounting Policies to the consolidated financial statements in Part I, Item 8. Financial Statements and Supplementary Data,

•Expand our disclosure of the Company’s policy for evaluating property and equipment for impairment. This discussion is in NOTE 3-Summary of Significant Accounting Policies to the consolidated financial statements in Part I, Item 8. Financial Statements and Supplementary Data,

•Expand our disclosure of the Company’s deferred income tax assets and liabilities to include a tabular presentation of the tax effect of each type of temporary difference that gives rise to a significant portion of deferred tax assets and liabilities. This discussion is in NOTE 7-Income Taxes to the consolidated financial statements in Part I, Item 8. Financial Statements and Supplementary Data,

•Expand our disclosure of the Company’s pension plans to include our matching contributions to our 401(k) plan. This discussion is in NOTE 8-Pension Plans to the consolidated financial statements in Part I, Item 8. Financial Statements and Supplementary Data,

•Expand our disclosure of a control relationship with respect to the Company’s outstanding common stock and other relationships with related parties. This discussion is in NOTE 10-Related Party Transactions to the consolidated financial statements in Part I, Item 8. Financial Statements and Supplementary Data.

The complete text of Items 7 and 8 are included in this Amendment pursuant to Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).

In addition, Item 15 includes the certifications required pursuant to Rules 13a-14(a)/15d-14(a) and Rules 13a-14(b)/15d-14(b) of the Exchange Act, which have been re-executed and re-filed as of the date of this Amendment.

With the exception of the changes discussed above, this Amendment continues to speak as of the date of the Annual Report and we have not updated the disclosure contained herein to reflect events that have occurred since the filing of the Annual Report.

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Part I

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

Item 7.    Management’s Discussion And Analysis Of Financial Condition And Results Of Operation

The following discussion is based upon and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots — a 91,000 square foot video lottery (slots) casino complex; the Dover Downs Hotel and Conference Center — featuring luxury accommodations with conference, banquet, fine dining, ballroom and concert hall facilities; and Dover Downs Raceway — a harness racing track with pari-mutuel wagering on live and simulcast horse races.

More than 80% of the Company’s gross revenue is derived from video lottery (slot) machine win (as defined below). Several factors contribute to the video lottery (slot) machine win for any gaming company, including, but not limited to:

•              Proximity to major population bases,

•              Competition in the company’s market,

•              The quantity and types of slot machines available,

•              The quality of the physical property,

•              Other amenities offered on site,

•              Customer service levels, and

•              Marketing programs.

The Company believes that it holds a strong position in each of these areas. Our entertainment complex is located in Dover, the capital of the State of Delaware. We draw patrons from several major metropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all within a 2 hour drive. According to the 2000 United States Census, approximately 32.8 million people live within 150 miles of the complex. There are significant barriers to entry related to the gaming business in Delaware, such as the statutory limitation of gaming licenses to the three existing horse racing facilities. The Company’s property, designed and developed with the assistance of Caesars, is similar to properties found in the country’s largest gaming markets. The Company offers the only luxury hotel in the Delaware gaming market, providing a strong marketing tool, especially to higher-end players. The Company also utilizes its recently improved slot marketing system to allow for the most efficient marketing programs and the highest levels of customer service.

Because all of our operations are located at one facility, we face the risk of increased competition from the legalization of new or additional gaming venues. The Company has therefore focused on creating the region’s premier gaming destination and building and rewarding customer loyalty through innovative marketing efforts and unparalleled customer service.

Results of Operations

Gaming revenues represent (i) the net win from video lottery (slot) machine wins and losses and (ii) commissions from pari-mutuel wagering. Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.

For the video lottery operations, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in the Company’s financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the video lottery operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the video

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lottery (slot) machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to the Company as its commission for acting as a Licensed Agent. Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the video lottery (slot) machines and associated computer systems, and (iii) for harness horse racing purses. The Company recognizes revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

The retail value of hotel rooms, food, beverage and other items that are provided to customers without charge has been included in gross revenues and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statement of earnings.

Year Ended December 31, 2004 vs. Year Ended December 31, 2003

Gaming revenues increased by $18,899,000, or 10.8%, to $193,922,000 in 2004, entirely the result of increased play in our casino. During the first quarter of 2004, we added 500 new video lottery (slot) machines which increased our average number of machines from 2,000 in 2003 to 2,432 in 2004. Additionally, we have redirected our marketing efforts to attract more profitable casino customers by providing additional complimentary and discounted rooms in our hotel. We believe that our marketing efforts have been effective at attracting customers to our casino and consequently increasing slot win.

Other operating revenues were $33,795,000 and $32,476,000, respectively, for 2004 and 2003 and included $19,973,000 and $18,667,000, respectively, related to promotional items provided to customers without charge. The increase in promotional allowances is primarily due to the Company’s expanded marketing efforts to attract more casino customers to the hotel by providing additional complimentary and discounted hotel rooms. Other operating revenues, net of promotional allowances and excluding the non-recurring charge noted below, were $13,822,000 in 2004 as compared to $13,809,000 in 2003. Food and beverage revenues, net of promotional allowances, increased by $922,000 to $9,098,000 from $8,176,000 in 2003, primarily due to an increase in cash sales and a reduction in the amount of complimentary beverages being offered to patrons. Additionally, the Company promoted an outdoor concert for the first time in 2004 that generated revenues of $840,000. Partially offsetting these increases was the receipt of $1,300,000 in 2003 related to the settlement of a business interruption insurance claim and a decrease in hotel rooms revenue, net of promotional allowances, due to the change in the Company’s marketing efforts which focused on providing a higher percentage of its hotel rooms to customers on a complimentary basis.

The Company currently has a point loyalty program for its video lottery customers which allows them to earn points based on the volume of their video lottery activity. Prior to December 2004, the points could be redeemed for various services and merchandise throughout the gaming facility; however, they were not redeemable for cash or casino play. Effective December 2004, the Company changed its policy relating to its point loyalty program to allow points earned by customers to be redeemed for cash under certain circumstances. As a result, the Company recorded a non-recurring charge in the fourth quarter of 2004 to record the net impact of the program change. The estimated amount of points redeemable for cash was recorded as a reduction of revenue and the estimated amount of points redeemable for services and merchandise was recorded as gaming expense. The total estimated liability at December 31, 2004 was $2,678,000. All reward points earned by customers are now expensed in the period earned.

Gaming expenses increased by $14,302,000, or 10.3%, reflecting the higher gaming revenues. Amounts retained by the State of Delaware and the amount collected by the State for payment to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems increased by $7,096,000 and $1,475,000, respectively. Amounts allocated from the video lottery operation for harness horse racing purses increased from $20,143,000 in 2003 to $22,269,000 in 2004. Collectively, these statutory costs increased as a percentage of gaming revenues in 2004 as compared to 2003 in part due to a 1.25% surcharge imposed by the State on the Company’s share of the video lottery (slot) proceeds that took effect in June of 2003. The remaining $3,605,000 increase in gaming expenses relates primarily to higher payroll and benefits, primarily as a result of our casino expansion, and increased marketing costs.

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Other operating expenses increased by $3,114,000, or 31.5%. Expenses related to our food and beverage operations were $9,669,000 in 2004 as compared to $7,350,000 in 2003. The increase resulted primarily from higher payroll and related costs and food costs necessary to support added amenities at the Company’s facility and the addition of higher quality menu items. Additionally, less food and beverage expenses were allocated to the gaming operations through interdepartmental charges in 2004 since a lower percentage of food and beverages were provided to gaming customers on a complimentary basis. Concert promotion expenses of $1,212,000, relating to a large outdoor concert promoted by the Company in the third quarter of 2004, represented the remainder of the increase in other operating expenses. Partially offsetting these increases was a decrease in expenses for the Company’s hotel rooms operation as a result of cost savings in the housekeeping department and a larger portion of rooms expense being allocated to the gaming operations through interdepartmental charges since a higher percentage of rooms were provided to gaming customers on a complimentary basis in 2004.

General and administrative expenses increased by $286,000 to $4,603,000 from $4,317,000 in 2003 primarily the result of higher payroll and related costs, legal costs, and audit and consulting expenses related to the Company’s compliance with the Sarbanes-Oxley Act of 2002.

Depreciation expense increased by $504,000, primarily due to the construction of 11,000 additional square feet of gaming space to accommodate the installation of 500 video lottery (slot) machines within our existing casino complex during the first quarter of 2004 and the purchase of a new customer management and slot data system that was placed into service in April 2004.

Interest expense decreased by $80,000, primarily due to the decrease in outstanding borrowings under our credit facility for the first 11 months of 2004, partially offset by an increase in the Company’s average interest rate from 2.07% during 2003 to 2.33% during 2004.

The Company’s effective income tax rates were 40.6% and 40.7% for the years ended December 31, 2004 and 2003, respectively.

Net earnings were $16,381,000 in 2004 as compared to $17,237,000 in 2003, a decrease of $856,000, or 5.0%.

Net earnings for 2004 included a net, non-recurring charge of $2,250,000 ($1,338,000 after income tax benefit) relating to the change in the Company’s point loyalty program. Additionally, net earnings for 2003 included proceeds of $1,300,000 ($771,000 after income taxes) relating to the settlement of a business interruption insurance claim. The Company believes that excluding the impact of these items will enhance comparative analysis of its results. The following table reconciles and compares results reported in accordance with Generally Accepted Accounting Principles (GAAP) for 2004 and 2003 with results excluding the impact of the change in our point loyalty program in 2004 and receipt of insurance proceeds in 2003:

	2004		2003
GAAP net earnings	$	16,381,000	$	17,237,000
Non-recurring charge for points, net of income taxes of $912,000	1,338,000		—
Insurance proceeds, net of income taxes of $529,000	—		(771,000		)
Pro forma net earnings	$	17,719,000	$	16,466,000

                Excluding the net, non-recurring charge for the 2004 change in our point loyalty program and 2003 receipt of insurance proceeds from the settlement of a business interruption claim, pro forma net earnings in 2004 increased $1,253,000, or 7.6%, to $17,719,000 compared to 2003 pro forma net earnings of $16,466,000.

Year Ended December 31, 2003 vs. Year Ended December 31, 2002

                Gaming revenue decreased by $18,700,000, or 9.7%, to $175,023,000, primarily the result of the enactment in November 2002 of the Delaware Clean Indoor Air Act (the “Act”) and to a lesser extent from severe weather in February 2003 and Hurricane Isabel in September 2003. From January 2002 through November 2002, slot win grew each month at an average rate of 12.7%. On November 27, 2002, the Delaware Clean Indoor Air Act became effective. The Act prohibits smoking inside the Company’s casino, hotel and conference center, restaurants, harness track indoor grandstands and simulcasting facilities, provided that smoking is permitted in up to 25% of the rooms in the hotel. Prior to the effective date of the Act, we derived significant revenues from designated smoking areas.

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During the first year of the smoking ban, the Company’s slot win declined approximately 11.3% compared to the previous year. In December 2003, slot win increased for the first time in 2003 versus the same month in 2002; by approximately 7%.

                In an effort to increase the revenues from its three video lottery agents, the State passed legislation in June 2003 which extended the operating hours for video lottery agents and permitted the Lottery Director to authorize 500 additional video lottery (slot) machines at each licensed facility. During the first quarter of 2004, the Company constructed 11,000 additional square feet of gaming space and installed 500 machines within its existing casino complex. This brings the Company’s total number of video lottery (slot) machines to 2,500 (the maximum number allowed by the Lottery Director) at December 31, 2004.

                Other operating revenues were $32,476,000 and $26,083,000, respectively, for 2003 and 2002 and included $18,667,000 and $13,331,000, respectively, related to promotional items provided to customers without charge. The increase in promotional allowances is primarily due to the Company’s expanded marketing efforts to attract more casino customers to the hotel by providing additional complimentary and discounted hotel rooms and the result of the Dover Downs Hotel and Conference Center being open for all of 2003 compared with only a portion of 2002. Other operating revenues, net of promotional allowances, were $13,809,000 in 2003 as compared to $12,752,000 in 2002. Food and beverage revenues, net of promotional allowances, increased by $196,000 to $8,176,000 from $7,980,000 in 2002 due to higher occupancy levels at the Dover Downs Hotel and Conference Center and the result of the hotel being open for all of 2003 compared with only a portion of 2002. Additionally, the Company received $1,300,000 in the fourth quarter of 2003 from its insurance carrier to settle a business interruption insurance claim related to the opening of the Dover Downs Hotel and Conference Center. Partially offsetting these increases was the receipt of $250,000 in the fourth quarter of 2002 related to the aforementioned insurance claim and a decrease in hotel rooms revenue, net of promotional allowances, due to the Company providing more complimentary hotel rooms to its customers.

                Gaming expenses decreased by $10,394,000, or 7.0%, reflecting the lower gaming revenues. Amounts retained by the State of Delaware and the amount collected by the State of Delaware for payment to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems decreased by $7,291,000, or 10.9%, and $184,000, or 2.0%, respectively. Amounts allocated from the video lottery operation for harness horse racing purses decreased from $22,307,000 in 2002 to $20,143,000 in 2003. These decreases were offset by a $2,326,000 increase in the cost of advertising and promotions in 2003. All other gaming expenses decreased $3,081,000 compared with 2002.

                Other operating expenses decreased by $452,000, or 4.4%. Expenses related to our food and beverage operations were $7,350,000 in 2003 as compared to $8,464,000 in 2002. The decrease resulted primarily from a larger interdepartmental allocation to the casino operations for the estimated cost of providing the increased promotional allowances. Partially offsetting this decrease was an increase in expenses for the Company’s hotel rooms operation as a result of the Dover Downs Hotel and Conference Center being open for all of 2003 compared with only a portion of 2002.

                Depreciation expense increased by $1,111,000 primarily due to the Dover Downs Hotel and Conference Center being open for all of 2003 compared with only a portion of 2002 and information system upgrades in the casino and administrative departments.

                General and administrative expenses decreased by $744,000 to $4,317,000 from $5,061,000 in 2002, primarily due to cost cutting measures implemented to offset the effects of the decrease in gaming revenues, including reducing headcount and other administrative costs.

                Interest expense was $842,000 in 2003, none of which was capitalized. The Company incurred $1,254,000 of interest in 2002 of which $351,000 was capitalized. The Company’s average interest rate decreased from 2.95% during 2002 to 2.07% during 2003.

                The Company’s effective income tax rate was 40.7% for the years ended December 31, 2003 and 2002.

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                Net earnings were $17,237,000 in 2003 compared to $21,442,000 in 2002. The decrease of $4,205,000, or 19.6%, was primarily due to lower gaming revenues resulting from the enactment of the Delaware Clean Indoor Air Act and inclement weather and increased depreciation expense from the opening of the Dover Downs Hotel and Conference Center in April 2002, offset by increases in other operating revenues, lower general and administrative expenses and the receipt of $1,300,000 ($771,000 after income taxes) relating to the settlement of a business interruption insurance claim.

Liquidity and Capital Resources

                Net cash provided by operating activities was $27,807,000 for the year ended December 31, 2004 compared to $24,178,000 for the year ended December 31, 2003. The increase was primarily due to the increase in net earnings before depreciation and amortization and non-recurring charges (which did not require the use of cash) from $23,555,000 in 2003 to $25,551,000 in 2004, and the timing of payments to vendors.

                Net cash used in investing activities remained consistent at $6,329,000 for the year ended December 31, 2004 compared to $6,383,000 for the year ended December 31, 2003. The 2004 additions primarily consisted of the construction of 11,000 additional square feet of gaming space to accommodate the installation of 500 newly authorized video lottery (slot) machines within our existing casino complex and the purchase of a new customer management and slot data system.

                Net cash used in financing activities was $17,928,000 for the year ended December 31, 2004 compared to $16,493,000 for the year ended December 31, 2003. The increase in net cash used in financing activities in 2004 was primarily due to the repurchase of 2,691,321 shares of the Company’s outstanding common stock and Class A common stock for $32,555,000 during 2004 as compared to 169,945 shares for $1,523,000 during 2003. The Company increased its dividend in the second quarter of 2004 and paid $6,098,000 and $5,305,000 in cash dividends during 2004 and 2003, respectively. These increases were partially offset by higher net borrowings under our credit facility in 2004 in order to finance the aforementioned stock repurchases.

                On January 26, 2005, the Company’s Board of Directors declared a quarterly cash dividend on both classes of common stock of $.06 per share. The dividend is payable on March 10, 2005 to stockholders of record at the close of business on February 10, 2005.

                On October 23, 2002, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s outstanding common stock. The purchases may be made in the open market or in privately negotiated transactions as conditions warrant. The repurchase authorization does not obligate the Company to acquire any specific number of shares and may be suspended at any time. During 2004, Gaming & Entertainment purchased and retired 50,900 shares of its outstanding common stock pursuant to this plan at an average purchase price of $9.95 per share, not including nominal brokerage commissions. During 2003, the Company purchased and retired 169,945 shares of its outstanding common stock at an average purchase price of $8.90 per share, not including nominal brokerage commissions.

                On November 5, 2004, the Company’s Board of Directors authorized the Company to commence a tender offer to purchase up to 1,040,421 shares of its common stock and up to 1,607,506 shares of its Class A common stock at a fixed price of $12.00 per share. The offer commenced on Wednesday, November 10, 2004 and expired at 5:00 P.M., eastern standard time, on Friday, December 10, 2004. The Company purchased 1,040,421 shares of its common stock and 1,600,000 shares of its Class A common stock for $32,045,000, including expenses, in connection with the tender offer.

                Based on current business conditions, the Company expects to make capital expenditures of approximately $5,500,000 during 2005. These expenditures primarily relate to casino renovations, harness track lighting and the continued conversion of video lottery (slot) machines to ticket-in, ticket-out (cashless) technology. Additionally, the Company expects to contribute approximately $500,000 to its pension plans in 2005.

                Since our video lottery (slot) machine casino opened in 1995, we have been party to a management agreement with Caesars, under which Caesars was our agent to supervise, manage and operate our video lottery (slot) machine casino. Effective December 28, 2004, that management agreement expired and we opted not to renew the

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agreement. During the year ended December 31, 2004, although we remained contractually obligated to pay a management fee to Caesars, Caesars did not have any of its personnel physically assigned to our facility and we did not rely on any Caesars personnel or any Caesars systems or procedures in connection with our operations. Accordingly, we do not expect to incur any material costs to replace functions for which Caesars had responsibility under this agreement. Beginning in 2005, we will no longer be required to pay to Caesars a management fee. Caesars’ performance-based fees were $4,448,000 for the year ended December 31, 2004.

                We have a $57,500,000 unsecured revolving line of credit agreement, as amended effective November 5, 2004. At December 31, 2004, $51,950,000 was outstanding under the facility. Based on current business trends, we believe that our cash flows from operations and the funds available pursuant to our revolving credit facility will be sufficient to meet our short and long-term cash needs. Any significant expansion of our gaming facility that we may decide to undertake, any significant acquisitions, or any material adverse change in our operations could cause the need for additional financing. The Company expects that its net cash flows from operating activities and funds available from its credit facility will be sufficient to provide for its working capital needs and capital spending requirements at least through the next twelve months, as well as any cash dividends the Company’s Board of Directors may declare. We expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity.

                The introduction or expansion of gaming in and around our market area could have a material adverse effect on our cash flows and results of operations. See Part I, Item 1 — Business included elsewhere in this Annual Report on Form 10-K for further discussion.

Contractual Obligations

                At December 31, 2004, the Company had the following contractual obligations:

			Payments Due by Period
	Total		2005		2006 — 2007		2008 — 2009		Thereafter
Notes payable to banks	$	51,950,000	$	—	$	51,950,000	$	—	$	—
Purchase obligation	1,195,000		1,195,000		—		—		—
	$	53,145,000	$	1,195,000	$	51,950,000	$	—	$	—

                We have a $57,500,000 unsecured revolving line of credit agreement. At December 31, 2004, $51,950,000 was outstanding under the facility.

                At December 31, 2004, we have a purchase obligation related to the installation of a state-of-the-art customer management and slot data system. Installation was completed in the first quarter of 2004, though payments for the system extend into 2005.

Related Party Transactions

                See NOTE 10 — Related Party Transactions of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a full description of related party transactions.

Critical Accounting Policies

                The accounting policies described below are those the Company considers critical in preparing its consolidated financial statements and/or include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used.

Points Program

                The Company currently has a point loyalty program for its video lottery customers which allows them to earn points based on the volume of their video lottery activity. Prior to December 2004, the points could be redeemed for various services and merchandise throughout the gaming facility; however, they were not redeemable for cash or casino play. Effective December 2004, the Company changed its policy relating to its point loyalty program to

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allow points earned by customers to be redeemed for cash under certain circumstances. As a result, the Company recorded a non-recurring charge in the fourth quarter of 2004 to record the net impact of the program change. All points earned by customers are now expensed in the period they are earned. The estimated amount of points redeemable for cash is recorded as a reduction of revenue and the estimated amount of points redeemable for services and merchandise is recorded as gaming expense. In estimating the amount of the liability, which was $2,678,000 at December 31, 2004, the Company estimates a redemption rate, a cost of rewards to be offered and the mix of cash, goods and services for which reward points will be redeemed. We use historical data to estimate those amounts.

Accrued Pension Cost

                The benefits provided by the Company’s defined-benefit pension plans are based on years of service and employee’s remuneration over their employment with the Company. The Company establishes accrued pension costs in accordance with the provisions of Financial Accounting Standards Board Statement No. 87, Employers’ Accounting for Pensions. Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate, assumed rate of compensation increase, and expected long-term rate of return on assets. We evaluate these assumptions annually. The discount rate is the most significant assumption and is necessary to state expected future benefit payments at a present value on the measurement date. The discount rate assumption is based upon the yields on high quality bond rates for bonds with maturities that match our projected benefit payments. A lower discount rate increases the present value of benefit obligations and increases pension expense. A 1% reduction in the discount rate used would increase our pension expense by approximately $300,000.

Property and Equipment

                Property and equipment are recorded at cost. Depreciation is provided for financial reporting purposes using the straight-line method over estimated useful lives ranging from 5 to 10 years for furniture, fixtures and equipment and up to 40 years for facilities. These estimates require assumptions that are believed to be reasonable. Long-lived assets are evaluated for impairment when an event occurs that indicates an impairment may exist.

Recent Accounting Pronouncements

                See NOTE 3—Summary of Significant Accounting Policies of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

Factors That May Affect Operating Results; Forward-Looking Statements

                In addition to historical information, this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, proposed acquisitions, market forces, corporate strategies, consumer preferences, contractual commitments, legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ substantially from the anticipated results or other expectations expressed in our forward-looking statements. When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable” or similar words or expressions are used in this document, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given” or “there is no way to anticipate with certainty,” forward-looking statements are being made.

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

•              success of or changes in our growth strategies;

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•              our development and potential acquisition of new facilities;

•              anticipated trends in the gaming industry;

•              patron demographics;

•              general market and economic conditions, including consumer and corporate spending sentiment;

•              our ability to finance future business requirements;

•              our ability to effectively compete in the marketplace;

•              the availability of adequate levels of insurance;

•              our ability to successfully integrate acquired companies and businesses;

•              management retention and development;

•              changes in Federal, state, and local laws and regulations, including environmental, gaming license and tax legislation;

•              the effect of weather conditions or travel on attendance at our facilities;

•              military or other government actions; and

•              national or local catastrophic events.

                We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements. Given these risks and uncertainties, stockholders should not overly rely or attach undue weight to our forward-looking statements as an indication of our actual future results.

Our Gaming Activities Compete Directly With Other Gaming Facilities And Other Entertainment Businesses

                We compete in local and regional markets with horse tracks, off-track betting parlors, state run lotteries, casinos and other gaming facilities. We cannot be certain that we will maintain our market share or compete more effectively with our competitors. The introduction or expansion of gaming in neighboring jurisdictions, particularly Maryland, Virginia, Washington, D.C., Pennsylvania or New Jersey, or the legalization of additional gaming venues in Delaware, could have a material adverse effect on our cash flows and results of operations. From time to time legislation is proposed for adoption in these jurisdictions which if enacted, would further expand state gambling and wagering opportunities, including video lottery (slot) machines at racetracks. Enactment of such legislation could increase our competition and could adversely affect our business, financial condition and overall profitability. For example, in 2005, the Maryland Senate passed a bill providing for various gaming venues for the third straight year. The Maryland House responded by passing its own bill which differs as to permissible venues, numbers of machines authorized, tax structure and siting approvals. No consensus has yet been reached on compromise legislation capable of passing both the House and the Senate. Approximately 70% of our customers come from Maryland, Pennsylvania, Virginia and the District of Columbia. In July 2004, Pennsylvania adopted legislation which authorizes up to 61,000 slot machines at various existing and proposed venues throughout the state. It is difficult for us to predict the effect that such legislation will have on us, but we estimate that one or more facilities in Pennsylvania are likely to begin operations during 2006. Pennsylvania will have one of the highest effective tax rates on slot machine gaming in the country and will charge an up front $50,000,000 license fee to the horse racing

10

and casino venues that are granted a gaming license. Management has estimated that slot win from Pennsylvania patrons represents approximately 7% of our total slot win.

All Of Our Facilities Are In One Location

                Our facilities are located adjacent to one another at a single location in Dover, Delaware. Any prolonged disruption of operations at these facilities due to destruction of or material damage to the facilities or other reasons could adversely affect our financial condition and results of operations. We maintain property and business interruption insurance to protect against such types of disruption, but there can be no assurance that the proceeds of such insurance would be adequate to repair or rebuild our facilities in such event or to compensate us for lost profit during the period of any such disruption.

The Revocation, Suspension Or Modification Of Our Gaming Licenses Would Adversely Affect Our Gaming Business

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

Our Gaming Activities Are Subject To Extensive Government Regulation And Any Additional Government Regulation Or Taxation Of Gaming Activities Could Substantially Reduce Our Revenue Or Profit

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

                We believe that the prospect of significant additional tax revenue is one of the primary reasons why jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxes and fees in addition to normal federal and state corporate income taxes. These taxes and fees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations and will likely incur similar burdens in any other jurisdiction in which we may conduct gaming operations in the future. Any material increase in taxes or fees, or the adoption of additional taxes or fees, may have a material adverse effect on our future financial results.

                We are subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations are always subject to change, can be interpreted differently in the future, and new laws and regulations may be enacted which could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and our company. Furthermore, noncompliance with one or more of these laws and regulation could result in the imposition of substantial penalties against us.

We Do Not Own Or Lease Our Video Lottery (Slot) Machines And Related Technology

                We do not own or lease the video lottery (slot) machines or computer systems used by the State in connection with its video lottery gaming operations. The Lottery Director enters into contracts directly with the providers of the video lottery (slot) machines and computer systems. The State purchases or leases all equipment and the Lottery

11

Director licenses all technology providers. Our operations could be disrupted if a licensed technology provider violates its agreement with the State or ceases to be licensed for any reason. Such an event would be outside of our control and could adversely affect our gaming revenues.

Item 8.    Financial Statements And Supplementary Data

                Gaming & Entertainment’s consolidated financial statements and the Report of Independent Registered Public Accounting Firm included in this report are shown on the Index to Consolidated Financial Statements on page 16.

Part IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1)	Financial Statements — See accompanying Index to Consolidated Financial Statements on page 16.
(2)	Financial Statement Schedules — None.
(3)	Exhibits:
2.1	Amended and Restated Agreement Regarding Distribution and Plan of Reorganization, dated as of February 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 2.1 to the Form 10 filed on February 26, 2002, which was declared effective on March 7, 2002).
3.1	Certificate of Incorporation of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1 to the Form 10 filed on November 21, 2001, which was declared effective on March 7, 2002).
3.2	Amended and Restated By-laws of Dover Downs Gaming & Entertainment, Inc. dated March 1, 2002 (incorporated herein by reference to Exhibit 3.2 to the Form 10 filed on March 7, 2002).
4.1	Form of Common Stock Certificate of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 4.1 to the Form 10 filed on November 21, 2001, which was declared effective on March 7, 2002).
4.2	Rights Agreement dated as of January 2, 2002 between Dover Downs Gaming & Entertainment, Inc. and Mellon Investor Services, as Rights Agent (incorporated herein by reference to Exhibit 4.2 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).
10.1	Employee Benefits Agreement, dated as of January 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 10.2 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).
10.2	Transition Support Services Agreement, dated as of January 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 10.3 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).
10.3	Tax Sharing Agreement, dated as of January 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 10.4 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).

12

10.4	Real Property Agreement dated as of January 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 10.5 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).
10.5	Project Consulting and Management Agreement between Dover Downs, Inc. and Caesars World Gaming Development Corporation dated May 10, 1995 (incorporated herein by reference to the Registration Statement of Dover Downs Entertainment, Inc., Number 333-8147, on Form S-1 dated July 15, 1996, which was declared effective on October 3, 1996).
10.6	First Amendment to Project Consulting and Management Agreement between Dover Downs, Inc. and Caesars World Gaming Development Corporation dated October 25, 1996 (incorporated herein by reference to the Form 10-K of Dover Downs Entertainment, Inc. (Commission file number 1-11929) dated February 27, 2001).
10.7	Second Amendment to Project Consulting and Management Agreement between Dover Downs, Inc. and Caesars World Gaming Development Corporation dated December 2, 2000 (incorporated herein by reference to the Form 10-K of Dover Downs Entertainment, Inc. (Commission file number 1-11929) dated February 27, 2001).
10.8	Agreement between Dover Downs, Inc. and Delaware Standardbred Owners Association, Inc. dated October 22, 2003 (incorporated herein by reference to Exhibit 10.9 to the Form 10-K filed on March 9, 2004).
10.9	Credit Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, dated as of January 15, 2002 (incorporated herein by reference to Exhibit 10.10 to the Form 10 filed on January 16, 2002, which was declared effective on March 7, 2002).
10.10	Amended and Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of March 25, 2002 (incorporated herein by reference to Exhibit 10.6 to the Form 10-Q filed on May 10, 2002).
10.11	Amended and Restated Guaranty and Suretyship Agreement by and between Dover Downs, Inc. and Wilmington Trust Company, as agent, dated as of March 25, 2002 (incorporated herein by reference to Exhibit 10.7 to the Form 10-Q filed on May 10, 2002).
10.12	Amendment to Amended and Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of August 12, 2002 (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on November 4, 2002).
10.13	Second Amendment to Amended and Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of February 19, 2004 (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 9, 2004).
10.14	Third Amendment to Amended and Restated Credit Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of November 5, 2004 (incorporated herein by reference to Exhibit 10.14 to the Form 10-K filed on March 10, 2005).
10.15	Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Patrick J. Bagley dated June 16, 2004 (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on August 6, 2004).
10.16	Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Klaus M. Belohoubek dated June 16, 2004 (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on August 6, 2004).

13

10.17	Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Timothy R. Horne dated June 16, 2004 (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed on August 6, 2004).
10.18	Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Melvin L. Joseph dated June 16, 2004 (incorporated herein by reference to Exhibit 10.4 to the Form 10-Q filed on August 6, 2004).
10.19	Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Denis McGlynn dated June 16, 2004 (incorporated herein by reference to Exhibit 10.5 to the Form 10-Q filed on August 6, 2004).
10.20	Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Edward J. Sutor dated June 16, 2004 (incorporated herein by reference to Exhibit 10.6 to the Form 10-Q filed on August 6, 2004).
10.21	Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Henry B. Tippie dated June 16, 2004 (incorporated herein by reference to Exhibit 10.7 to the Form 10-Q filed on August 6, 2004).
10.22	Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by reference to Exhibit A to the Company’s Proxy Statement filed on March 29, 2004).
10.23	Form of Incentive Stock Option Agreement Used with Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on November 3, 2004).
10.24	Form of Restricted Stock Grant Agreement Used with Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed on November 3, 2004).
21.1	List of Subsidiaries of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit 21.1 to the Form 10-K filed on March 10, 2005).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Information Statement dated as of March 7, 2002 (incorporated herein by reference to Exhibit 99.1 to the Form 10 filed on March 7, 2002).
99.2	Audit Committee Charter of Dover Downs Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit B to the Company’s Proxy Statement filed on March 29, 2004).

14

Signatures

                Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: May 20, 2005	Dover Downs Gaming & Entertainment, Inc.
	Registrant
	BY:	/s/ Denis McGlynn
		Denis McGlynn
		President and Chief Executive Officer
		and Director

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

/s/ Timothy R. Horne	Sr. Vice President-Finance,	May 20, 2005
Timothy R. Horne	Treasurer and Chief Financial Officer
/s/ Henry B. Tippie	Chairman of the Board	May 20, 2005
Henry B. Tippie
/s/ Kenneth K. Chalmers	Director and Chairman	May 20, 2005
Kenneth K. Chalmers	of the Audit Committee
/s/ R. Randall Rollins	Director	May 20, 2005
R. Randall Rollins
/s/ Patrick J. Bagley	Director	May 20, 2005
Patrick J. Bagley
/s/ John W. Rollins, Jr.	Director	May 20, 2005
John W. Rollins, Jr.
/s/ Jeffrey W. Rollins	Director	May 20, 2005
Jeffrey W. Rollins

15

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Statement of Management Responsibility	17
Report of Independent Registered Public Accounting Firm	18
Consolidated Statement of Earnings and Comprehensive Earnings for the years ended December 31, 2004, 2003 and 2002	19
Consolidated Balance Sheet at December 31, 2004 and 2003	20
Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002	21
Notes to the Consolidated Financial Statements	22

16

STATEMENT OF MANAGEMENT RESPONSIBILITY

                Dover Downs Gaming & Entertainment, Inc. and subsidiaries (the “Company’s”) management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information included in the Company’s 2004 Annual Report on Form 10-K. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and reflect the effects of certain estimates and judgments made by management.

                The Company’s management maintains an effective system of internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management’s authorization. The system is regularly monitored by direct management review and by internal auditors who conduct an extensive program of audits throughout the Company. The Director of Internal Audit reports directly to the Audit Committee of the Board of Directors. We have confidence in our financial reporting, the underlying system of internal controls, and our people, who are objective in their responsibilities and operate under the Company’s Code of Business Conduct and the highest level of ethical standards. These standards are a key element of the Company’s control system.

                The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the framework in Internal Control - Integrated Framework, management of the Company has assessed the Company’s internal control over financial reporting to be effective as of December 31, 2004. There have not been any changes in the Company’s internal control over financial reporting identified in the fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

                The Audit Committee of the Board of Directors, which is composed entirely of independent directors, has direct and private access to and meets regularly with management, the internal auditors and the independent auditors to review accounting, reporting, auditing and internal control matters.

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

17

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Dover Downs Gaming & Entertainment, Inc.:

                We have audited the accompanying consolidated balance sheets of Dover Downs Gaming & Entertainment, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of earnings and comprehensive earnings and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dover Downs Gaming & Entertainment, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

                We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Dover Downs Gaming & Entertainment, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

KPMG LLP

Philadelphia, Pennsylvania

March 8, 2005

18

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF EARNINGS

AND COMPREHENSIVE EARNINGS

	Years ended December 31,
	2004		2003		2002
Revenues:
Gaming	$	193,922,000	$	175,023,000	$	193,723,000
Other operating	33,795,000		32,476,000		26,083,000
Gross revenues	227,717,000		207,499,000		219,806,000
Less — promotional allowances	19,973,000		18,667,000		13,331,000
— non-recurring gaming charge	448,000		—		—
	207,296,000		188,832,000		206,475,000
Expenses:
Gaming	152,725,000		138,423,000		148,817,000
Non-recurring gaming charge	1,802,000		—		—
Other operating	13,013,000		9,899,000		10,351,000
General and administrative	4,603,000		4,317,000		5,061,000
Depreciation	6,791,000		6,287,000		5,176,000
	178,934,000		158,926,000		169,405,000
Operating earnings	28,362,000		29,906,000		37,070,000
Interest expense	762,000		842,000		903,000
Earnings before income taxes	27,600,000		29,064,000		36,167,000
Income taxes	11,219,000		11,827,000		14,725,000
Net earnings	16,381,000		17,237,000		21,442,000
Change in minimum pension liability	—		127,000		(127,000		)
Comprehensive earnings	$	16,381,000	$	17,364,000	$	21,315,000
Net earnings per common share (Note 3):
Basic	$	0.62	$	0.65	$	0.80
Diluted	$	0.62	$	0.65	$	0.80

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

19

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEET

	December 31,
	2004			2003
ASSETS
Current assets:
Cash	$	17,688,000		$	14,138,000
Accounts receivable	2,919,000			1,914,000
Due from State of Delaware	10,080,000			8,670,000
Inventories	2,147,000			1,801,000
Prepaid expenses and other	2,220,000			2,414,000
Receivable from Dover Motorsports, Inc.	2,000			—
Deferred income taxes	2,168,000			878,000
Total current assets	37,224,000			29,815,000
Property and equipment, net	123,076,000			122,344,000
Total assets	$	160,300,000		$	152,159,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,801,000		$	6,516,000
Purses due horsemen	9,082,000			7,957,000
Accrued liabilities	11,990,000			6,015,000
Payable to Dover Motorsports, Inc.	—			96,000
Income taxes payable	651,000			53,000
Deferred revenue	195,000			261,000
Total current liabilities	28,719,000			20,898,000
Notes payable to banks	51,950,000			31,225,000
Deferred income taxes	6,861,000			5,061,000
Commitments and contingencies (see Notes to the Consolidated Financial Statements)
Stockholders’ equity:
Preferred stock, $.10 par value; 1,000,000 shares authorized; issued and outstanding: none	—			—
Common stock, $.10 par value; 74,000,000 shares authorized; issued and outstanding: December 31, 2004-9,363,791 and 2003-10,333,112 shares	936,000			1,033,000
Class A common stock, $.10 par value; 50,000,000 shares authorized; issued and outstanding: December 31, 2004-14,475,059 and 2003-16,145,059 shares	1,448,000			1,615,000
Additional paid-in capital	35,764,000			67,454,000
Retained earnings	35,156,000			24,873,000
Deferred compensation	(534,000		)	—
Total stockholders’ equity	72,770,000			94,975,000
Total liabilities and stockholders’ equity	$	160,300,000		$	152,159,000

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

20

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

	Years ended December 31,
	2004			2003			2002
Operating activities:
Net earnings	$	16,381,000		$	17,237,000		$	21,442,000
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	6,791,000			6,287,000			5,176,000
Amortization of credit facility origination fees	62,000			31,000			60,000
Amortization of deferred compensation	67,000			—			—
Deferred income taxes	165,000			1,116,000			2,642,000
Changes in assets and liabilities:
Accounts receivable	(1,005,000		)	1,077,000			(415,000		)
Due from State of Delaware	(1,410,000		)	954,000			(1,480,000		)
Inventories	(346,000		)	(647,000		)	(288,000		)
Prepaid expenses and other	132,000			(1,068,000		)	136,000
Receivable from/payable to Dover Motorsports, Inc.	(98,000		)	371,000			(793,000		)
Accounts payable	(909,000		)	(575,000		)	(3,870,000		)
Purses due horsemen	1,125,000			(1,709,000		)	2,097,000
Accrued liabilities	5,975,000			62,000			1,001,000
Income taxes payable/prepaid income taxes	943,000			912,000			(1,975,000		)
Deferred revenue	(66,000		)	130,000			99,000
Net cash provided by operating activities	27,807,000			24,178,000			23,832,000
Investing activities:
Capital expenditures	(6,329,000		)	(6,383,000		)	(20,652,000		)
Net cash used in investing activities	(6,329,000		)	(6,383,000		)	(20,652,000		)
Financing activities:
Borrowings from revolving debt	226,905,000			158,480,000			171,178,000
Repayments of revolving debt	(206,180,000		)	(168,145,000		)	(130,288,000		)
Repayment of debt to Dover Motorsports, Inc.	—			—			(45,000,000		)
Credit facility origination fees	—			—			(137,000		)
Dividends paid	(6,098,000		)	(5,305,000		)	(3,333,000		)
Repurchase of common stock	(32,555,000		)	(1,523,000		)	—
Proceeds from stock options exercised	—			—			73,000
Change in payable to/receivable from Dover Motorsports, Inc.	—			—			1,730,000
Net cash used in financing activities	(17,928,000		)	(16,493,000		)	(5,777,000		)
Net increase (decrease) in cash	3,550,000			1,302,000			(2,597,000		)
Cash, beginning of year	14,138,000			12,836,000			15,433,000
Cash, end of year	$	17,688,000		$	14,138,000		$	12,836,000
Supplemental information:
Interest paid	$	650,000		$	980,000		$	630,000
Income taxes paid	$	10,112,000		$	10,325,000		$	14,081,000

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

21

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Business Operations

                References in these footnotes to “the Company,” “Gaming & Entertainment,” “we,” “us,” and “our” mean Dover Downs Gaming & Entertainment, Inc. and its wholly owned subsidiaries.

                Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots — a 91,000 square foot video lottery (slots) casino complex; the Dover Downs Hotel and Conference Center — featuring luxury accommodations with conference, banquet, fine dining, ballroom and concert hall facilities; and Dover Downs Raceway — a harness racing track with pari-mutuel wagering on live and simulcast horse races.

                Gaming & Entertainment has two wholly owned subsidiaries: Dover Downs, Inc. and Dover Downs Management Corp. Dover Downs, Inc. was incorporated in 1967 and began motorsports and harness racing operations in 1969. In June of 1994, legislation authorizing video lottery operations in the State of Delaware (the “State”) was adopted. The Company’s video lottery (slots) casino operations began on December 29, 1995. As a result of several restructurings, Dover Downs, Inc. became a wholly owned subsidiary of Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) (“DVD”), and became the operating entity for all of DVD’s gaming operations.

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

                The Company is authorized to conduct video lottery operations as a “Licensed Agent” under the Delaware State Lottery Code. Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994, the Delaware State Lottery Office administers and controls the operation of the video lottery.

                The Company’s license from the Delaware Harness Racing Commission (the “Commission”) to hold harness race meetings on our premises and to offer pari-mutuel wagering on live and simulcast horse races must be renewed on an annual basis. In order to maintain its license to conduct video lottery operations, the Company is required to maintain its harness horse racing license. The Company has received an annual license from the Commission for the past 36 consecutive years and management believes that its relationship with the Commission remains good.

                Our entertainment complex is located in Dover, the capital of the State of Delaware. Approximately 70% of our customers come from Maryland, Pennsylvania, Virginia and the District of Columbia. In July 2004, Pennsylvania adopted legislation which authorizes up to 61,000 slot machines at various existing and proposed venues throughout the state. It is difficult for us to predict the effect that such legislation will have on us, but we estimate that one or more facilities in Pennsylvania are likely to begin operations in 2006. Management has estimated that slot win from Pennsylvania patrons represents approximately 7% of our total slot win.

                Due to the nature of the Company’s business activities, it is subject to various federal, state and local regulations.

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NOTE 2—Dover Motorsports, Inc. Spin-off Of Its Gaming Business

                Dover Motorsports, Inc. (“DVD”), formerly Dover Downs Entertainment, Inc., completed its tax-free spin-off of Dover Downs, Inc., its gaming business, effective March 31, 2002. To accomplish the spin-off, DVD contributed 100 percent of the issued and outstanding common stock of Dover Downs, Inc. to the Company, and then distributed all of the capital stock of the Company to DVD stockholders. Holders of DVD common stock or Class A common stock received 0.7 shares of Gaming & Entertainment common stock or Class A common stock for each share of DVD common stock or Class A common stock owned at the close of business on March 18, 2002, the record date for the spin-off. Each share of common stock or Class A common stock distributed was accompanied by one stock purchase right. Based on an Internal Revenue Service Private Letter Ruling, the spin-off is tax-free to DVD and its stockholders, except for cash received for any fractional shares.

                Immediately following the spin-off, DVD owned no shares of the Company, and Gaming & Entertainment became an independent public company. A total of 9,998,976 shares of Gaming & Entertainment common stock and 16,638,359 shares of Gaming & Entertainment Class A common stock were distributed in connection with the spin-off. Also as part of the spin-off, a $9.5 million payable to DVD was cancelled.

                In conjunction with the spin-off, the Company and DVD entered into various agreements that addressed the allocation of assets and liabilities between the two companies and that define the companies’ relationship after the separation. These are the Agreement Regarding Distribution and Plan of Reorganization, the Real Property Agreement, the Employee Benefits Agreement, the Transition Support Services Agreement and the Tax Sharing Agreement.

                The Agreement Regarding Distribution and Plan of Reorganization set forth the principal corporate transactions required to effect the separation of the gaming business from the motorsports business, and the continuation of the gaming business following such separation, including the allocation between the Company and DVD of certain assets and liabilities, and the distribution of shares of the Company’s common stock and Class A common stock. As a result of the spin-off, all assets and liabilities relating to the gaming business were assumed and are owned by the Company or its subsidiaries, and all assets and liabilities relating to the motorsports business were assumed and are owned by DVD or its subsidiaries.

                The Real Property Agreement governs certain real property transfers, leases and easements affecting the Company’s Dover, Delaware facility.

                The Employee Benefits Agreement provided for the transfer of Company employees from employee benefits under plans or programs sponsored by DVD to those sponsored by the Company. In connection with the spin-off and pursuant to the terms of the Employee Benefits Agreement, DVD arranged for the transfer of the assets and liabilities associated with DVD’s defined-benefit pension plan and the 401(k) plan sponsored by DVD with respect to employees who became employees of the Company (or remain employed by Dover Downs, Inc.) after the spin-off to the Company.

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

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

•              continues to be the sole and exclusive agent for the Company in all matters relating to the income, franchise, property, sales and use tax liabilities of the Company;

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•              subject to the Company’s obligation to pay for items relating to its gaming business, bears any costs relating to tax audits, including tax assessments and any related interest and penalties and any legal, litigation, accounting or consulting expenses;

•              continues to have the sole and exclusive responsibility for the preparation and filing of consolidated federal and consolidated state income tax returns; and

•              subject to the right and authority of the Company to direct DVD in the defense or prosecution of the portion of a tax contest directly and exclusively related to any Gaming & Entertainment tax adjustment, generally has the powers, in DVD’s sole discretion, to contest or compromise any claim or refund on the Company’s behalf.

Refer to NOTE 10—Related Party Transactions for further discussion.

NOTE 3—Summary of Significant Accounting Policies

                Basis of consolidation and presentation—The consolidated financial statements include the accounts of Gaming & Entertainment and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated. The consolidated financial statements for periods prior to the effective date of the spin-off have been prepared on the historical cost basis and present the Company’s results of operations and cash flows directly related to DVD’s gaming operations.

                The consolidated financial statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of Gaming & Entertainment in the future or had it operated as a separate, independent company for periods prior to the effective date of the spin-off. The consolidated financial statements included herein for periods prior to the effective date of the spin-off on March 31, 2002 do not reflect any changes in the financing and operations of Gaming & Entertainment that occurred as a result of the spin-off.

                Inventories—Inventories, primarily food and beverage items, are stated at the lower of cost or market with cost being determined on the first-in, first-out basis.

                Property and equipment—Property and equipment is stated at cost. Depreciation is provided for financial reporting purposes using the straight-line method over the following estimated useful lives:

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

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

                Interest capitalization—Interest is capitalized in connection with the construction of major facilities. The capitalized interest is amortized over the estimated useful life of the asset to which it relates. During the year ended December 31, 2004, the Company incurred $779,000 of interest cost, of which $17,000 was capitalized. During the year ended December 31, 2003, the Company incurred $842,000 of interest cost, none of which was capitalized. During the year ended December 31, 2002, the Company incurred $1,254,000 of interest cost, of which $351,000 was capitalized.

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

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                Point loyalty program—The Company currently has a point loyalty program for its video lottery customers which allows them to earn points based on the volume of their video lottery activity. Prior to December 2004, the points could be redeemed for various services and merchandise throughout the gaming facility; however, they were not redeemable for cash or casino play.                Effective December 2004, the Company changed its policy relating to its point loyalty program to allow points earned by customers to be redeemed for cash under certain circumstances. As a result, the Company recorded a non-recurring charge in the fourth quarter of 2004 to record the net impact of the program change. All points earned by customers are now expensed in the period they are earned. The estimated amount of points redeemable for cash is recorded as a reduction of revenue and the estimated amount of points redeemable for services and merchandise is recorded as gaming expense. In estimating the amount of the liability, which was $2,678,000 at December 31, 2004, the Company estimates a redemption rate, a cost of rewards to be offered and the mix of cash, goods and services for which reward points will be redeemed. We use historical data to estimate those amounts.

                Revenue and expense recognition—Gaming revenues represent (i) the net win from video lottery (slot) machine wins and losses and (ii) commissions from pari-mutuel wagering. Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.

                For the video lottery operations, which account for more than 80% of gross revenues for all periods presented, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in the Company’s consolidated financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the video lottery operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to the Company as its commission for acting as a Licensed Agent. Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the video lottery (slot) machines and associated computer systems, and (iii) for harness horse racing purses. The Company recognizes revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

                The retail value of hotel rooms, food, beverage and other items that are provided to customers without charge has been included in gross revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statement of earnings. The Company’s operating margin for other operating activities is computed by netting promotional allowances against other operating revenues less other operating expenses.

                Advertising costs—The cost of general advertising is charged to operations as incurred.

                Earnings per share—Basic and diluted earnings per share (“EPS”) are calculated in accordance with FASB Statement No. 128, Earnings Per Share. Weighted average shares used in computing basic and diluted EPS are as follows:

	Years ended December 31,
	2004	2003	2002
Basic EPS	26,339,000	26,511,000	26,643,000
Effect of dilutive securities	75,000	26,000	82,000
Diluted EPS	26,414,000	26,537,000	26,725,000

                Dilutive securities include stock options and unvested restricted stock awards.

                For the years ended December 31, 2004, 2003 and 2002, options to purchase an average of 280,180, 667,960 and 243,639 shares of common stock, respectively, were outstanding, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common stock during the period.

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                Earnings per share amounts and weighted average shares outstanding for periods prior to April 1, 2002, the day after the effective date of the spin-off from DVD, are presented on a pro forma basis to reflect such spin-off.

                The pro forma average outstanding common shares and Class A common shares were derived from DVD’s common shares and Class A common shares outstanding for the periods presented using the distribution ratio of 0.7 shares of Gaming & Entertainment common stock and Class A common stock for each share of DVD common stock and Class A common stock, respectively. Outstanding stock options of Gaming & Entertainment were calculated assuming the stock options related to each individual who became a Gaming & Entertainment employee or both a DVD and a Gaming & Entertainment employee subsequent to the spin-off were outstanding Gaming & Entertainment options during each period presented.

                Accounting for stock-based compensation—The Company has a stock incentive plan which provides for the grant of stock options and/or restricted stock to officers and key employees. The Company accounts for stock options in accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. Statement No. 123 defines a fair-value based method of accounting for stock-based compensation plans; however, it allows the continued use of the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has elected to continue to use the intrinsic value method and based on this method did not record any stock-based compensation expense related to its stock options during the years ended December 31, 2004, 2003 and 2002. The Company’s restricted stock vests based on continued employment with the Company. Restricted stock awards result in compensation expense as discussed in NOTE 9—Stockholders’ Equity.

                The following table illustrates the effect on net earnings and net earnings per common share if the Company had applied the fair-value recognition provisions of Statement No. 123 to stock-based employee compensation related to its stock options and awards:

	Years ended December 31,
	2004			2003			2002
Net earnings, as reported	$	16,381,000		$	17,237,000		$	21,442,000
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects	67,000			—			—
Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects	(641,000		)	(608,000		)	(285,000		)
Pro forma net earnings	$	15,807,000		$	16,629,000		$	21,157,000
Net earnings per common share:
Basic — as reported	$	0.62		$	0.65		$	0.80
Basic — pro forma	$	0.60		$	0.63		$	0.79
Diluted — as reported	$	0.62		$	0.65		$	0.80
Diluted — pro forma	$	0.60		$	0.63		$	0.79

                For disclosure purposes, the Company determined compensation expense for its stock options based upon the fair value at the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2004	2003		2002
Risk-free interest rate	n/a	3.73	%	4.68	%
Volatility	n/a	45	%	45	%
Expected dividend yield	n/a	2.10	%	1.10	%
Expected life (in years)	n/a	7.50		6.25

                The weighted-average fair value of options granted during the years ended December 31, 2003 and 2002 was $4.02 and $4.33, respectively.  No stock options were granted during the year ended December 31, 2004. The fair value of restricted stock awards granted during the year ended December 31, 2004 was $11.62 per share.

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                Use of estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

                Fair value of financial instruments—The carrying amount reported in the balance sheet for current assets and current liabilities approximates their fair value because of the short maturity of these instruments. The carrying value of long-term debt at December 31, 2004 and 2003 approximates its fair value based on the interest rates available on similar borrowings.

                Segment information—The Company accounts for its operating segment in accordance with FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information. Statement No. 131 establishes guidelines for public companies in determining operating segments based on those used for internal reporting to management. Based on these guidelines, the Company reports information under a single gaming and entertainment segment.

                Recent accounting pronouncements—In December 2004, the FASB issued Statement No. 123 (Revised 2004) Share-Based Payment. Statement No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. It will require companies to recognize in the statement of earnings the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The statement eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, that the Company currently uses. The Company is required to adopt Statement No. 123R beginning in the third quarter of 2005. The Company has not yet determined the impact of applying the various provisions of the statement; however, adoption of the statement is expected to increase the amount the Company records as compensation expense in 2005.

NOTE 4—Property and Equipment

                Property and equipment consists of the following as of December 31:

	2004			2003
Land	$	1,842,000		$	1,842,000
Casino facility	32,014,000			28,132,000
Hotel facility	65,602,000			65,974,000
Harness racing facilities	7,977,000			7,930,000
General facilities	14,856,000			14,224,000
Furniture, fixtures and equipment	34,304,000			28,973,000
Construction in progress	499,000			3,068,000
	157,094,000			150,143,000
Less accumulated depreciation	(34,018,000		)	(27,799,000		)
	$	123,076,000		$	122,344,000

                Depreciation expense was $6,791,000, $6,287,000 and $5,176,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

                At December 31, 2004, we have a $1,195,000 purchase obligation related to the installation of a state-of-the-art customer management and slot data system. Installation was completed in the first quarter of 2004, though payments for the system extend into 2005. Capital expenditures and the change in accounts payable in the Company’s consolidated statement of cash flows for the year ended December 31, 2004 have been adjusted accordingly.

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NOTE 5—Accrued Liabilities

                Accrued liabilities consist of the following as of December 31:

	2004		2003
Point loyalty program	$	2,678,000	$	—
Payroll and related items	1,874,000		1,455,000
Win due to Delaware State Lottery Office	3,559,000		1,810,000
Pension	1,603,000		931,000
Other	2,276,000		1,819,000
	$	11,990,000	$	6,015,000

NOTE 6—Indebtedness

                The Company has a $57,500,000 credit facility, as amended effective November 5, 2004, that expires on October 31, 2007. Interest is based, at the Company’s option, upon (i) LIBOR plus 0.75% or (ii) the base rate (the greater of the prime rate or the federal funds rate plus 0.5%) minus 1%. The terms of the credit facility contain, among others, minimum net worth, interest coverage and maximum leverage covenant requirements. Material adverse changes in the Company’s results of operations could impact its ability to maintain financial ratios necessary to satisfy these requirements. The facility is for seasonal funding needs, capital improvements and other general corporate purposes. At December 31, 2004, the Company was in compliance with all terms of the facility and there was $51,950,000 outstanding at a weighted average interest rate of 3.25%. At December 31, 2004, $5,550,000 was available pursuant to the facility.

NOTE 7—Income Taxes

                The current and deferred income tax provisions are as follows:

	Years ended December 31,
	2004		2003		2002
Current:
Federal	$	8,691,000	$	8,450,000	$	9,491,000
State	2,363,000		2,261,000		2,592,000
	11,054,000		10,711,000		12,083,000
Deferred:
Federal	127,000		849,000		2,066,000
State	38,000		267,000		576,000
	165,000		1,116,000		2,642,000
Total income taxes	$	11,219,000	$	11,827,000	$	14,725,000

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

	Years ended December 31,
	2004		2003		2002
Federal tax at statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	5.7	%	5.7	%	5.7	%
Other	(0.1	)%	—	%	—	%
Effective income tax rate	40.6	%	40.7	%	40.7	%

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

	2004			2003
Deferred tax assets:
Point loyalty program	$	1,089,000		$	—
Accrued expenses	1,026,000			832,000
Other	103,000			294,000
Total deferred tax assets	2,218,000			1,126,000
Deferred tax liabilities:
Depreciation — property and equipment	(6,911,000		)	(5,309,000		)
Total deferred tax liabilities	(6,911,000		)	(5,309,000		)
Net deferred tax liabilities	$	(4,693,000	)	$	(4,183,000	)
Amounts recognized in the consolidated balance sheet:
Current deferred tax assets	$	2,168,000		$	878,000
Noncurrent deferred tax liabilities	(6,861,000		)	(5,061,000		)
	$	(4,693,000	)	$	(4,183,000	)

                Deferred income taxes relate to the temporary differences between financial accounting income and taxable income. During the year ended December 31, 2004, current deferred income tax assets increased primarily due to the change in how the Company accounts for its point loyalty program. All reward points earned by customers are now expensed in the period earned in determining financial accounting income; however, they continue to be expensed when redeemed in determining taxable income.

                Prior to the spin-off, the Company was included as part of DVD’s consolidated federal income tax return; however, the income tax expense presented in the consolidated financial statements has been computed on a separate return basis. The Company and DVD have entered into a Tax Sharing Agreement to reflect each company’s rights and obligations relating to payments and refunds of taxes that are attributable to periods beginning before and including the date of the spin-off described in NOTE 2—Dover Motorsports, Inc. Spin-off Of Its Gaming Business. The agreement provides for payments between the companies to reflect tax liabilities that may arise before, after and because of the spin-off. During the third quarter of 2002, pursuant to the Tax Sharing Agreement, the Company paid DVD $2.7 million for its portion of DVD’s 2002 consolidated federal income tax liability. Since the spin-off of the Company from DVD was effective on March 31, 2002, DVD’s 2002 federal income tax return included the operations of the Company for the first quarter of the year.

                For the year ended December 31, 2003, DVD reported a net operating loss for federal income tax purposes. The loss was carried back to 2001, a period prior to the spin-off, which generated an alternative minimum tax credit carryforward, a portion of which is required to be paid to DVD under the Tax Sharing Agreement; therefore, during the fourth quarter of 2003 Gaming & Entertainment recorded a $330,000 payable to DVD for the Company’s portion of the carryforward. Gaming & Entertainment paid the amount in the first quarter of 2004.

NOTE 8—Pension Plans

                The Company maintains a non-contributory, tax qualified defined benefit pension plan. All of Gaming & Entertainment’s full time employees are eligible to participate in the pension plan. Benefits provided by the Gaming & Entertainment pension plan are based on years of service and employees’ remuneration over their term of employment. Pension costs are funded in accordance with the provisions of the Internal Revenue Code. The Company also maintains a non-qualified, non-contributory defined benefit pension plan for certain employees to restore pension benefits reduced by federal income tax regulations. The cost associated with the plan is determined using the same actuarial methods and assumptions as those used for the Company’s qualified pension plan.

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                The following table sets forth the plans’ funded status and amounts recognized in the Company’s consolidated balance sheet as of December 31:

	2004			2003
Change in benefit obligation:
Benefit obligation at beginning of period	$	4,305,000		$	3,415,000
Service cost	895,000			714,000
Interest cost	258,000			206,000
Actuarial gain	(151,000		)	(30,000		)
Benefit obligation at end of period	5,307,000			4,305,000
Change in plan assets:
Fair value of plan assets at beginning of period	2,297,000			1,081,000
Actual gain on plan assets	150,000			241,000
Employer contribution	300,000			975,000
Fair value of plan assets at end of period	2,747,000			2,297,000
Unfunded status	(2,560,000		)	(2,008,000		)
Unrecognized net loss	889,000			1,000,000
Unrecognized prior service cost	68,000			77,000
Net amount recognized	$	(1,603,000	)	$	(931,000	)

                The liabilities recognized in the Company’s consolidated balance sheet as of December 31, 2004 and 2003 were $1,603,000 and $931,000, respectively.

                The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5,307,000, $4,048,000 and $2,747,000 respectively, as of December 31, 2004, and $4,305,000, $3,069,000 and $2,297,000, respectively, as of December 31, 2003.

                The Company plans to contribute approximately $500,000 to its pension plans in 2005.

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

2005	$	71,000
2006	$	89,000
2007	$	114,000
2008	$	137,000
2009	$	166,000
2010-2014	$	1,773,000

The Company was required to record a minimum pension liability in its consolidated balance sheet at December 31, 2002, which is required when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. The effect of this adjustment was to increase pension liabilities by $300,000, increase intangible assets by $85,000, increase deferred income tax assets by $88,000 and recognize other comprehensive loss of $127,000. In 2003, the Company was required to reverse this minimum pension liability. Because these adjustments had no cash impact, the effect has been excluded from the accompanying consolidated statement of cash flows.

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                The components of net periodic pension cost are as follows:

	Years ended December 31,
	2004			2003			2002
Service cost	$	895,000		$	714,000		$	429,000
Interest cost	258,000			206,000			132,000
Expected return on plan assets	(225,000		)	(146,000		)	(63,000		)
Recognized net actuarial loss	35,000			51,000			28,000
Amortization of prior service cost	9,000			9,000			6,000
	$	972,000		$	834,000		$	532,000

                The principal assumptions used to determine the net periodic pension cost for the years ended December 31, 2004, 2003 and 2002, and the actuarial value of the projected benefit obligation at December 31, 2004 and 2003 (the measurement dates) for the Company’s pension plans are as follows:

	Net Periodic Pension Cost						Projected Benefit Obligation
	2004		2003		2002		2004		2003
Weighted-average discount rate	6.25	%	6.5	%	7.0	%	6.25	%	6.25	%
Weighted-average rate of compensation increase	5.0	%	5.0	%	5.0	%	5.0	%	5.0	%
Expected long-term rate of return on plan assets	9.0	%	9.0	%	9.0	%	n/a		n/a

                For 2004, the Company assumed a long-term rate of return on plan assets of 9.0%. In developing the 9.0% expected long-term rate of return assumption, the Company reviewed asset class return expectations and long-term inflation assumptions and considered its post spin-off and DVD’s pre spin-off historical compounded return, which was consistent with our long-term rate of return assumption.

                The Company’s pension plan asset allocation at December 31, 2004 and 2003, and target allocation for 2005 are as follows:

	Percentage of Plan				Target
	Assets at December 31,				Allocation
Asset Category	2004		2003		2005
Equity securities	76	%	72	%	70	%
Debt securities	23	%	19	%	20	%
Other (money market mutual funds)	1	%	9	%	10	%
Total	100	%	100	%	100	%

                The Company’s investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international equity and fixed income securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

                Pursuant to the terms of the Employee Benefits Agreement, DVD arranged for the transfer of the assets and liabilities associated with the 401(k) plan sponsored by DVD with respect to employees who are now Gaming & Entertainment employees to Gaming & Entertainment. Effective January 1, 2003, the Company maintains its own defined contribution 401(k) plan which permits participation by substantially all employees. Prior to January 1, 2003, the Company participated in DVD’s 401(k) plan. The Company’s matching contributions to the 401(k) plan were approximately $50,000 for each of the years ended December 31, 2004 and 2003.

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NOTE 9—Stockholders’ Equity

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

													Accumulated
				Class A			Additional						Other			DVD
	Common			Common			Paid-in			Retained			Comprehensive			Equity			Deferred
	Stock			Stock			Capital			Earnings			Loss			Investment			Compensation
Balance at Dec. 31, 2001	$	—		$	—		$	—		$	—		$	—		$	102,653		$	—
Net earnings from January 1, 2002 through March 31, 2002	—			—			—			—			—			5,168			—
Cancellation of payable to DVD	—			—			—			—			—			9,520			—
Spin-off transaction	1,000			1,664			114,677			—			—			(117,341		)	—
DVD debt paid down on April 1, 2002	—			—			(45,000		)	—			—			—			—
Net earnings from April 1, 2002 through December 31, 2002	—			—			—			16,274			—			—			—
Proceeds from stock options exercised	1			—			72			—			—			—			—
Dividends paid, $.125 per share	—			—			—			(3,333		)	—			—			—
Transfer of pension liability from DVD	—			—			(789		)	—			—			—			—
Change in minimum pension liability, net of income taxes of $88	—			—			—			—			(127		)	—			—
Conversion of Class A common stock to common stock	49			(49		)	—			—			—			—			—
Balance at Dec. 31, 2002	1,050			1,615			68,960			12,941			(127		)	—			—
Net earnings	—			—			—			17,237			—			—			—
Dividends paid, $.20 per share	—			—			—			(5,305		)	—			—			—
Change in minimum pension liability, net of income taxes of $88	—			—			—			—			127			—			—
Repurchase and retirement of common stock	(17		)	—			(1,506		)	—			—			—			—
Balance at Dec. 31, 2003	1,033			1,615			67,454			24,873			—			—			—
Net earnings	—			—			—			16,381			—			—			—
Dividends paid, $.22 per share	—			—			—			(6,098		)	—			—			—
Issuance of restricted stock awards	5			—			596			—			—			—			(601		)
Amortization of deferred compensation	—			—			—			—			—			—			67
Conversion of Class A common stock to common stock	7			(7		)	—			—			—			—			—
Repurchase and retirement of common stock	(109		)	(160		)	(32,286		)	—			—			—			—
Balance at Dec. 31, 2004	$	936		$	1,448		$	35,764		$	35,156		$	—		$	—		$	(534	)

                Gaming & Entertainment has 125,000,000 shares of authorized capital stock which consists of 74,000,000 shares of common stock, par value $.10 per share; 50,000,000 shares of Class A common stock, par value $.10 per share; and 1,000,000 shares of preferred stock, par value $.10 per share.

                The holders of common stock are entitled to one vote per share and the holders of our Class A common stock are entitled to 10 votes per share. There is no cumulative voting. Shares of Class A common stock are convertible at any time into our shares of common stock on a one-for-one basis at the option of the stockholder. Subject to rights of any preferred stockholder, holders of our common stock and Class A common stock are entitled to receive on a

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pro rata basis such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. At the discretion of the Company’s Board of Directors, it may pay to the holders of common stock a cash dividend greater than the dividend, if any, paid to the holders of Class A common stock.

                Under Delaware law, a change of ownership of a Licensed Agent will automatically terminate its license 90 days after the change of ownership occurs, unless the Lottery Director determines after application to issue a new license to the new owners. Change of ownership may occur if any new individual or entity acquires, directly or indirectly, 10% or more of the Licensed Agent or if more than 20% of the legal or beneficial interest in the Licensed Agent is transferred, whether by direct or indirect means. The Commission may require extensive background investigations of any new owner acquiring a 10% or greater interest in a Licensed Agent, including criminal background checks. Accordingly, the Company has a restrictive legend on its shares of common stock which require that (a) any holders of common stock found to be disqualified or unsuitable or not possessing the qualifications required by any appropriate gaming authority could be required to dispose of such stock and (b) any holder of common stock intending to acquire 10% or more of the outstanding common stock of the Company must first obtain prior written approval from the Delaware State Lottery Office.

                The Company adopted a stockholder rights plan in 2002 prior to the effective date of the spin-off from DVD. The rights are attached to and trade in tandem with our common stock and Class A common stock. Each right entitles the registered holder to purchase from the Company one share of common stock at a purchase price of $200 per share. The rights, unless earlier redeemed by our Board of Directors, will detach and trade separately from our common stock upon the occurrence of certain events such as the unsolicited acquisition by a third party of beneficial ownership of 10% or more of our outstanding combined common stock and Class A common stock or the announcement by a third party of the intent to commence a tender or exchange offer for 10% or more of our outstanding combined common stock and Class A common stock. After the rights have detached, the holders of such rights would generally have the ability to purchase such number of either shares of our common stock or stock of an acquirer of the Company having a market value equal to twice the exercise price of the right being exercised, thereby causing substantial dilution to a person or group of persons attempting to acquire control of the Company. The rights may serve as a significant deterrent to unsolicited attempts to acquire control of Gaming & Entertainment, including transactions involving a premium to the market price of our stock. The rights expire on January 1, 2012, unless earlier redeemed.

                On January 26, 2005, the Company’s Board of Directors declared a quarterly cash dividend on both classes of common stock of $.06 per share. The dividend is payable on March 10, 2005 to stockholders of record at the close of business on February 10, 2005.

                On October 23, 2002, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s outstanding common stock. The purchases may be made in the open market or in privately negotiated transactions as conditions warrant. The repurchase authorization does not obligate the Company to acquire any specific number of shares and may be suspended at any time. During the year ended December 31, 2004, Gaming & Entertainment purchased and retired 50,900 shares of its outstanding common stock at an average purchase price of $9.95 per share, not including nominal brokerage commissions. During the year ended December 31, 2003, the Company purchased and retired 169,945 shares of its outstanding common stock at an average purchase price of $8.90 per share, not including nominal brokerage commissions. At December 31, 2004, the Company had remaining repurchase authority of 1,779,155 shares.

                On November 5, 2004, the Company’s Board of Directors authorized the Company to commence a tender offer to purchase up to 1,040,421 shares of its common stock and up to 1,607,506 shares of its Class A common stock at a fixed price of $12.00 per share. The offer commenced on Wednesday, November 10, 2004 and expired at 5:00 P.M., eastern standard time, on Friday, December 10, 2004. The Company purchased 1,040,421 shares of its common stock and 1,600,000 shares of its Class A common stock for $32,045,000, including expenses, in connection with the tender offer.

                The Company has a stock incentive plan which provides for the grant of up to 1,500,000 shares of stock to our officers and key employees through stock options and/or awards valued in whole or in part by reference to our common stock, such as restricted stock awards. Under the plan, option grants must have an exercise price of not less than 100% of the fair market value of the underlying shares of common stock at the date of the grant. The stock options have

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eight-year terms and generally vest equally over a period of six years from the date of grant. The restricted stock vests an aggregate of twenty percent each year beginning on the second anniversary date of the grant. During the year ended December 31, 2004, the Company granted 52,000 shares of restricted stock to certain officers and key employees at a fair-market value of $11.62 per share on the grant date and no shares were forfeited. The aggregate market value of the restricted stock at the date of issuance has been recorded as deferred compensation, a separate component of stockholders’ equity, and is being amortized on a straight-line basis over the six-year service period.

                Option activity was as follows:

	December 31,
	2004			2003			2002
Number of options:
Outstanding at beginning of year	862,360			612,160			—
Spin-off issuances	—			—			393,446
Granted	—			309,000			277,000
Exercised	—			—			(10,781		)
Expired	(105,270		)	(58,800		)	(47,505		)
Outstanding at end of year	757,090			862,360			612,160
Exercisable at end of year	267,535			254,116			173,091
Weighted average exercise price:
Options granted	$	—		$	9.52		$	12.05
Options exercised	$	—		$	—		$	6.74
Options outstanding	$	10.32		$	10.02		$	10.27
Options exercisable	$	10.45		$	9.24		$	8.35

                As of December 31, 2004, 2003 and 2002, there were 680,129, 626,859 and 877,059 shares, respectively, available under the stock incentive plan for granting options or stock awards.

                The following table summarizes information about the stock options outstanding under the Company’s option plan as of December 31, 2004:

				Weighted
		Weighted		Average		Weighted
		Average		Remaining		Average
	Number	Exercise		Contractual	Number	Exercise
Range of Exercise Prices	Outstanding	Price		Life	Exercisable	Price
$6.74-$9.94	479,383	$	9.40	4.84 yrs	147,512	$	9.38
$11.16-$13.31	277,707	$	11.92	4.65 yrs	120,023	$	11.77
$6.74-$13.31	757,090	$	10.32	4.77 yrs	267,535	$	10.45

NOTE 10—Related Party Transactions

                During the years ended December 31, 2004, 2003 and 2002, Gaming & Entertainment allocated costs of $1,241,000, $1,969,000 and $495,000, respectively, to DVD for certain administrative and operating services. Additionally, DVD allocated costs of $116,000 to Gaming & Entertainment for the year ended December 31, 2004. The allocations were based on an analysis of each company’s share of the costs. In connection with DVD’s 2004 and 2003 NASCAR event weekends at Dover International Speedway, Gaming & Entertainment provided certain catering services for which DVD was invoiced $933,000 and $443,000, respectively. Additionally, DVD invoiced Gaming & Entertainment $238,000 and $206,000, respectively, for tickets purchased to the 2004 and 2003 events and other services related to the Dover events. As of December 31, 2004 and 2003, Gaming & Entertainment’s consolidated balance sheet includes a $2,000 receivable from and $96,000 payable to DVD, respectively, for the aforementioned items. The Company received payment for the $2,000 receivable in the first quarter of 2005. The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been unrelated entities and/or had otherwise independently managed these functions; however, management believes that these costs are reasonable.

                For the year ended December 31, 2003, DVD reported a net operating loss for federal income tax purposes. The loss was carried back to 2001, a period prior to the spin-off, which generated an alternative minimum tax credit carryforward, a portion of which is required to be paid to DVD under the Tax Sharing Agreement; therefore, during the

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fourth quarter of 2003 Gaming & Entertainment recorded a $330,000 payable to DVD for the Company’s portion of the carryforward. Gaming & Entertainment paid the amount in the first quarter of 2004.

                During the third quarter of 2002, pursuant to the Tax Sharing Agreement, the Company paid DVD $2.7 million for its portion of DVD’s consolidated federal income tax liability for 2002. Since the spin-off of the Company from DVD was effective on March 31, 2002, DVD’s 2002 federal income tax return included the operations of the Company for the first quarter of the year.

                The Company’s use of DVD’s 5/8-mile harness racing track is pursuant to an easement granted to the Company by DVD which does not require the payment of any rent. Under the terms of the easement, the Company has exclusive use of the harness track during the period beginning November 1 of each year and ending April 30 of the following year, together with set up and tear down rights for the two weeks before and after such period. The harness track is located on property owned by DVD and is on the inside of DVD’s motorsports superspeedway. The Company’s indoor grandstands are used by DVD at no charge in connection with its motorsports events. DVD also leases its principal executive office space from the Company. Various easements and agreements relative to access, utilities and parking have also been entered into between DVD and the Company relative to their respective Dover, Delaware facilities.

                In conjunction with the Company’s spin-off from DVD, the two companies entered into various agreements that addressed the allocation of assets and liabilities between the companies and that define the companies’ relationship after the separation. These are the Agreement Regarding Distribution and Plan of Reorganization, the Real Property Agreement, the Employee Benefits Agreement, the Transition Support Services Agreement and the Tax Sharing Agreement. The companies have several common directors and officers. Refer to NOTE 2—Dover Motorsports, Inc. Spin-off Of Its Gaming Business for further discussion.

                Henry B. Tippie, the Chairman of the Company’s Board of Directors, controls in excess of fifty percent of the voting power of the Company. This means that Mr. Tippie has the ability to determine the outcome of the election of directors at the Company and to determine the outcome of many significant corporate transactions, many of which only require the approval of a majority of the Company’s voting power.

                Mr. Tippie’s voting control with respect to the Company emanates from his personal holdings of Common Stock and Class A Common Stock, from his status as executor of the Estate of John W. Rollins, the Company’s largest stockholder, and from certain shares as to which he has voting rights pursuant to a voting agreement with another one of our directors. As of March 8, 2005, Mr. Tippie has control over approximately 51.1% of the voting power of the Company.

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

NOTE 11—Commitments and Contingencies

                In May 1995, Dover Downs, Inc., a subsidiary of the Company, entered into a long-term management agreement with Caesars World Gaming Development Corporation (“Caesars”) to act as our agent to manage our video lottery casino for which Caesars was paid a management fee based on the operating results of the casino. Effective December 28, 2004, that management agreement expired and the Company opted not to renew the agreement. These performance-based fees were $4,448,000, $5,042,000 and $7,440,000 for the years ended December 31, 2004, 2003 and 2002.

                The Company is a party to ordinary routine litigation incidental to its business. Management does not believe that the resolution of any of these matters is likely to have a serious adverse effect on our results of operations, financial condition or cash flows.

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                The Company has employment, severance and noncompete agreements with certain of its officers and directors under which certain change of control, severance and noncompete payments and benefits might become payable in the event of a change in control of the Company, defined to include a tender offer or the closing of a merger or similar corporate transactions. In the event of such a change in control of the Company and the subsequent termination of employment of all employees covered under these agreements, the maximum contingent liability would be approximately $4,962,000.

NOTE 12—Quarterly Results (unaudited)

	March 31		June 30		September 30		December 31 (a)
Year Ended December 31, 2004
Net revenues	$	50,560,000	$	50,527,000	$	54,945,000	$	51,264,000
Operating earnings	$	7,629,000	$	7,686,000	$	8,581,000	$	4,466,000
Net earnings	$	4,434,000	$	4,458,000	$	4,982,000	$	2,507,000
Net earnings per share-basic	$	0.17	$	0.17	$	0.19	$	0.10
Net earnings per share-diluted	$	0.17	$	0.17	$	0.19	$	0.10
Year Ended December 31, 2003
Net revenues	$	44,199,000	$	48,042,000	$	50,299,000	$	46,292,000
Operating earnings	$	6,968,000	$	7,643,000	$	8,256,000	$	7,039,000
Net earnings	$	4,007,000	$	4,385,000	$	4,782,000	$	4,063,000
Net earnings per share-basic	$	0.15	$	0.17	$	0.18	$	0.15
Net earnings per share-diluted	$	0.15	$	0.17	$	0.18	$	0.15

(a)	Included in the Company’s 2004 fourth quarter results is a net, non-recurring charge of $2,250,000 ($1,338,000 after income tax benefit) relating to the change in the Company’s point loyalty program.
	Included in the Company’s 2003 fourth quarter results are proceeds of $1,300,000 ($771,000 after income taxes) relating to the settlement of a business interruption insurance claim.

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

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