Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

November 13, 2007 17:55 ET

Gateway Casinos Income Fund Reports Third Quarter Fiscal 2007 Financial Results

BURNABY, BRITISH COLUMBIA--(Marketwire - Nov. 13, 2007) - Gateway Casinos Income Fund (the "Fund" or "Gateway") (TSX:GCI.UN), one of the largest casino operators in Western Canada, today reported its financial results for the three- and nine-month periods ended September 30, 2007.

Q3 2007 Highlights

- Total revenue of $41.2 million, a 6.1% increase compared with $38.8 million in Q3 2006

- EBITDA(i) of $15.9 million, compared with $16.0 million for the same period in 2006

- Net earnings of $11.4 million, or $0.35 per basic unit and fully diluted unit, compared with $11.7 million, or $0.38 per basic unit and $0.37 per unit on a fully diluted basis, in Q3 2006

- Generated distributable cash of $14.0 million, or $0.433 per unit, and paid distributions of $12.1 million or $0.375 per unit

- Reached an agreement with the United Food and Commercial Workers Union to end the strike at the Palace Casino in Edmonton, Alberta.

"While the strike at the Palace Casino affected consolidated financials for this quarter, all our other properties continued to perform strongly, highlighted by significant slot machine revenue growth at our Burnaby and Lake City properties and continued quarter-over-quarter gains at Cascades," said Dave Gadhia, CEO of Gateway Casinos G.P. Inc. "We were pleased to resolve the labour dispute at the Palace casino, and are working diligently to return to pre-strike business levels at this property."

Consolidated revenue for the first quarter of 2007 increased 6.1% to $41.2 million, compared with $38.8 million in the same period last year. Cascades continued to perform strongly with revenues rising 13.9% in Q3 2007 compared with Q3 2006. Lake City and Burnaby also reported year-over-year sales increases of 9.9% and 6.1%, respectively. Growth was driven by continued strong performance from slot machines and other electronic games, where revenues rose 9.2% in Q3 2007 compared to Q3 2006. The growth from these three facilities helped to partially offset the 19.3% revenue decline at the Palace Casino caused by the strike that began on September 9, 2006 and ended on July 11, 2007.

For the three months ended September 30, 2007, the Fund generated EBITDA of $15.9 million (EBITDA margin of 38.6%), compared with EBITDA of $16.0 million (EBITDA margin of 41.2%) in the third quarter of 2006. The reduction in EBITDA margin in the third quarter of 2007 is primarily due to the impact of the strike at the Palace Casino and to the inclusion of Cascades, which operates at a lower EBITDA margin than the Burnaby Casino.

After amortization and net interest expense, the Fund generated net earnings of $11.4 million, or $0.35 per basic unit and fully diluted unit, for the third quarter of 2007. This compares with $11.7 million, or $0.38 per basic unit and $0.37 per fully diluted unit, in the third quarter of 2006.

For the third quarter, the Fund generated distributable cash of $14.0 million, or $0.433 per unit, and paid distributions of $12.1 million or $0.375 per unit. Under the agreement with New World Gaming, the Fund will continue to pay its regular monthly cash distribution to Fund unitholders of $0.125 per unit until the expiry of the Offer, including a pro-rata distribution for any partial monthly period.

(i) EBITDA is not a defined term under Canadian generally accepted accounting principles. Management has determined EBITDA is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Please refer to the discussion under "EBITDA" and Net Earnings in the Management's Discussion & Analysis.

New World Gaming Acquisition

On October 22, 2007, it was announced that the expiry date for the acquisition of Gateway Casinos Income Fund by New World Gaming Partners Ltd. ("New World Gaming") had been extended to November 14, 2007. On November 12, 2007 New World Gaming announced that they had received the necessary gaming approvals, consents and registration required from the Alberta Gaming and Liquor Commission and the British Columbia Gaming Policy and Enforcement Branch in relation to the Offer.

New World Gaming continues to pursue regulatory approval from the British Columbia Lottery Corporation ("BCLC"), the receipt of which is anticipated, but cannot be assured. Following receipt of approval from the BCLC, all gaming regulatory conditions to New World Gaming's Offer will be satisfied.

Subject to satisfaction or waiver of the remaining conditions to the Offer, including the requirement that 66 2/3% of the issued and outstanding Units are tendered to the Offer, the Offer is expected to be completed on November 14, 2007.

About the Fund

The Fund is an unincorporated, open-ended limited purpose trust established under the laws of British Columbia, which operates the Burnaby Casino in Greater Vancouver, BC, the Palace Casino in Edmonton, Alberta and the Lake City Casinos in Kamloops, Kelowna, Penticton and Vernon, BC. Headquartered in Burnaby, BC, the Fund is one of the largest casino operators in Western Canada.

To find out more about Gateway Casinos Income Fund (TSX: GCI.UN), visit our website at http://www.gatewaycasinosincomefund.com.

GATEWAY CASINOS INCOME FUND

MANAGEMENT'S DISCUSSION & ANALYSIS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") of our operating results and financial position is dated as of November 13, 2007, and should be read in conjunction with the unaudited interim consolidated financial statements of Gateway Casinos Income Fund (the "Fund") for the three and nine months ended September 30, 2007 (the "Quarterly Financial Statements"), the audited consolidated financial statements of the Fund for the year ended December 31, 2006 (the "2006 Financial Statements"), as well as the accompanying notes to both, and the management's discussion and analysis for the year ended December 31, 2006, dated March 20, 2007 (the "2006 MD&A"). The Quarterly Financial Statements are reported in Canadian dollars and have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") for interim financial statements.

Forward-looking statements

This management's discussion and analysis may contain forward-looking statements, which reflect management's expectations regarding the future growth, results of operations, performance and business prospects and opportunities of the Fund and its subsidiaries. Forward-looking statements typically contain words such as "anticipates", "believes", "continue", "could", "expects", "indicates", "plans" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including the effects, as well as changes in: national and local business and economic conditions; competition within the gaming business; consumer preferences, spending patterns and demographic trends; legislation and governmental regulation. Although the forward-looking statements contained in this management's discussion and analysis are based upon what management believes to be reasonable assumptions, the Fund cannot assure readers that actual results will be consistent with these forward-looking statements.

Additional information about these factors can be found under Risk Factors in our Annual Information Form dated March 31, 2007.

We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Structure of the Fund

The structure of the Fund has not changed from that presented in the 2006 MD&A. The Fund had 32,373,472 units outstanding as at September 30, 2007 and at the date of this MD&A.

As discussed in the 2006 MD&A, the acquisition agreement for the Cascades Casino provided for an adjustment to the purchase price in early 2007, based on the actual distributable cash generated by Cascades in the 12 months ended December 31, 2006. Based on the results of Cascades for 2006 the maximum purchase price adjustment was payable, and the amount was recorded as a liability as at December 31, 2006. On April 2, 2007, the Fund issued 546,571 units at a price of $19.44 to satisfy the liability.

During the third quarter of 2007 the Fund issued a total of 53,034 units on the conversion of convertible debentures. These debentures were converted into units of the Fund at the conversion rate of $19.10 per unit of the Fund.

General

Gateway operates seven casinos in Western Canada; six in British Columbia and one in Alberta. The location of each casino and the number of slot machines and table games at September 30, 2007, is listed in the table below.




Number
of slot Percent Number
machines & of Slots of
electronic converted table
Casino Location games to TITO games
--------------------------------------------------------------------------
Gateway Casino - Burnaby Burnaby, B.C. 677 100% 32
Cascades Casino Langley, B.C. 539 100% 26 (1)

Lake City Casinos
Kamloops Kamloops, B.C. 301 100% 8
Kelowna Kelowna, B.C. 342 100% 10
Penticton Penticton, B.C. 228 100% 9 (2)
Vernon Vernon, B.C. 210 100% 8

Palace Casino(3) Edmonton, AB 706 100% 25 (4)

Totals 3,003 100%(5) 118
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(1) The Cascades Casino also operates an 8-table poker room.
(2) The Penticton Casino also operates two poker tables.
(3) Employees at the Palace Casino were on strike from September 9, 2006
to July 10, 2007 and the casino had operated on a reduced basis during
that period.
(4) The Palace Casino also operates a 7-table poker room.
(5) Slot machines at all locations have now been converted to TITO
(Ticket-In Ticket-Out)


In Canada, most gaming activities, including casino operations, are conducted and managed by the provincial governments. They retain the majority of the revenue generated after pay out to customers, and use these funds to support charitable organizations and government initiatives. The gaming industry is generally considered to include lotteries, bingo games, pari-mutuel wagering (such as horse racing) and games typically associated with casinos, such as table games and slot machines. Casino revenue is measured in terms of "win", which is the amounts wagered on gaming activities, less pay out to customers.

Economic and industry factors affecting the Western Canadian gaming market are substantially unchanged from those presented in the 2006 MD&A.

Industry Definitions

"Win" is the amounts wagered on gaming activities, less payout to customers.

"Drop" is the amount players buy in at a table.

"Hold percentage" is equal to the win divided by the drop.

Financial Performance



Summary of Quarterly Results
(C$ in thousands except per unit figures.)

2007 2006 2005
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
--------------------------------------------------------------------------

Revenue
Table games
revenue 9,159 8,001 8,305 8,810 9,328 8,656 7,116 7,175
Slot machines
and other
electronic
games revenue 27,502 24,330 22,736 22,276 25,183 20,934 17,002 16,902
Hotel revenue 492 453 432 412 420 214 - -
Other revenue 4,038 3,575 3,490 4,019 3,882 2,964 2,126 1,639
--------------------------------------------------------------------------
Total revenue 41,191 36,359 34,963 35,517 38,813 32,768 26,244 25,716

Expenses 25,293 24,835 22,765 24,270 22,807 19,901 15,523 15,866
--------------------------------------------------------------------------
EBITDA (1) 15,898 11,524 12,198 11,247 16,006 12,867 10,721 9,850
--------------------------------------------------------------------------

Net earnings
(loss) 11,364 (19,649) 8,109 8,402 11,661 10,759 9,197 8,716
--------------------------------------------------------------------------
Basic earnings
(loss)
per unit 0.35 (0.61) 0.26 0.27 0.38 0.38 0.35 0.33
Diluted earnings
(loss) per unit 0.35 (0.61) 0.25 0.27 0.37 0.37 0.35 0.33
--------------------------------------------------------------------------

Distributable
cash generated
from Operations 13,994 10,217 10,111 9,051 14,240 11,554 10,263 8,940
--------------------------------------------------------------------------
Per unit 0.433 0.319 0.325 0.291 0.476 0.403 0.389 0.338
--------------------------------------------------------------------------
(1) EBITDA is not a defined term under Canadian GAAP. See discussion under
"EBITDA" and "Net Earnings"


Results of Operations

The Fund's results of operations include the results of the Burnaby Casino, the Lake City Casinos and the Palace Casino from the Fund's inception, and the results of the Cascades Casino from its acquisition date of May 19, 2006.

Revenue

Gateway's revenue is primarily earned through fees paid by the British Columbia Lottery Corporation (BCLC) for operating the six B.C. casinos and by the Alberta Gaming and Liquor Commission (AGLC) for operating the Palace Casino. The Fund also generates revenue by providing related casino services such as food & beverage, hotel, convention facilities, parking, foreign exchange services, and automated teller machines.



Three months ended Nine months ended
September 30, September 30,
% %
C$ in thousands 2007 2006 change 2007 2006 change
--------------------------------------------------------------------------
Table games revenue 9,159 9,328 25,465 25,100
Slot machines and other
electronic games
revenue 27,502 25,183 74,568 63,119
Hotel revenue 492 420 1,377 634
Other revenue 4,038 3,882 11,103 8,971
--------------------------------------------------------------------------
Total Revenue 41,191 38,813 6.1% 112,513 97,824 15%
--------------------------------------------------------------------------


Total consolidated revenue in the third quarter of 2007 was approximately 6.1% greater than the third quarter of 2006. The increase is due primarily to the revenue generated by slot machines and other electronic games. Slot machine revenue continued its growth trend as the Burnaby, Cascades and Lake City facilities saw year over year revenue growth of 10%, 18.7% and 9.9%, respectively. This helped to partially offset the impact of the downturn of revenues at the Palace Casino due to the strike that began on September 9, 2006. The strike was resolved on July 11, 2007 and operations began to return to normal during the third quarter; however, revenues at the Palace Casino continued to be below those generated prior to the strike. A full discussion of these items is included in the Operating Segments section below.

The first three quarters of 2007 saw gains in almost all revenue segments as compared to the first three quarters of 2006. Notably, slot revenue increased by 18.1% during that time period.

The following table compares our total revenue in the third quarter of 2007 with each of the five previous quarters.



C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06
--------------------------------------------------------------------------

Table games revenue 9,159 8,001 8,305 8,810 9,328 8,656
Slot machines and other
electronic games revenue 27,502 24,330 22,736 22,276 25,183 20,934
Other revenue 4,038 3,575 3,490 4,019 3,882 2,964
--------------------------------------------------------------------------
Revenue from gaming
operations 40,699 35,906 34,531 35,105 38,393 32,554
Hotel revenue 492 453 432 412 420 214
--------------------------------------------------------------------------
Total revenue 41,191 36,359 34,963 35,517 38,813 32,768
--------------------------------------------------------------------------


Table revenues in the third quarter of 2007 increased by approximately $1.16 million, or 14.5%, as compared to the second quarter of 2007 due primarily to higher table wins at the Palace Casino. Table revenues show quarter-over-quarter improvements as operational changes to improve table play continue to positively impact results.

Slot revenues increased by $3.17 million in the third quarter of 2007 from the second quarter of 2007 due to quarter-over-quarter gains at all locations.

Further discussion of the third quarter results is included in the Operating Segments section below.

Expenses

Total expenses for the third quarter were $25.3 million or 61.4% of total revenues.



Three months ended Nine months ended
September 30, September 30,
% %
C$ in thousands 2007 2006 change 2007 2006 change
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Corporate and
general
administration 1,640 1,575 4,776 4,338
Cost of food &
beverage services 1,495 1,546 4,297 3,556
Human resources 15,781 15,524 45,697 39,227
Marketing and
promotions 2,210 799 6,557 3,053
Occupancy 1,277 979 3,459 2,571
Casino Operating
Expenses 2,831 2,343 7,952 5,418
Hotel Operating
Expenses 59 41 154 67
--------------------------------------------------------------------------
Total Expenses 25,293 22,807 10.9% 72,892 58,230 25.2%
--------------------------------------------------------------------------

Percentage of total
revenue 61.4% 58.8% 64.8% 59.6%
-------------------------------------- ------------


Total expenses in the third quarter of 2007 were $2.49 million higher than the third quarter of 2006. The increase is mainly attributable to higher marketing and occupancy costs.

The increase in marketing and promotions expenses was partially the result of the Fund's increased emphasis on marketing and promotion activities in the current year. In addition, increased player adoption of the BC Gold Card resulted in higher marketing expenses through increased marketing and programs, such as the player points program, directed specifically to cardholders. Finally, the Fund received a one-time reimbursement of $914,000 of marketing fees from the BCLC in the third quarter of 2006; this payment did not recur in 2007. Excluding this recovery, market and promotions expenses in 2006 would have been $1,713,000, or $497,000 lower than 2007.

The increases in occupancy costs and casino operating expenses were primarily the result of a reduction in Facility Development Compensation (FDC) operational recoveries, as, by April 2007, the Lake City casinos had recovered all remaining historical approved eligible costs. See the Lake City Operating Segment section below.

The following table compares the expenses in the third quarter of 2007 with the previous five quarters.



C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06
--------------------------------------------------------------------------
Corporate and general
administration 1,640 1,559 1,577 1,782 1,575 1,649
Cost of food & beverage
services 1,495 1,416 1,386 1,645 1,546 1,189
Human resources 15,781 15,522 14,394 15,445 15,524 13,101
Marketing and promotions 2,210 2,257 2,090 2,109 799 1,439
Occupancy 1,277 1,171 1,011 984 979 822
Casino Operating Expenses 2,831 2,858 2,263 2,258 2,343 1,675
Hotel Operating Expenses 59 52 43 47 41 26
--------------------------------------------------------------------------
Total Expenses 25,293 24,835 22,764 24,270 22,807 19,901
--------------------------------------------------------------------------

Percentage of total
revenue 61.4% 68.3% 65.1% 68.3% 58.8% 60.7%
--------------------------------------------------------------------------


Total expenses in the third quarter of 2007 were approximately $458,000 or 1.8% higher than the second quarter of 2007, due mainly to higher occupancy costs resulting from Lake City having recovered all historical approved eligible expenses under the FDC program by April 2007, as well as slightly higher human resource expense related to the settlement of the strike at the Palace Casino.

Expenses are discussed in more detail in the Operating Segments discussion below.

EBITDA and Net Earnings (Loss)

EBITDA is not a defined term under Canadian GAAP, nor does it have a standard, agreed upon meaning. Accordingly, the Fund's EBITDA may not be directly comparable to EBITDA reported by other issuers. Management has determined EBITDA is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

The Fund generated earnings before future income tax expense, interest, income allocation on Class A units, transaction costs, unrealized gain or loss on interest rate swap contract, amortization, write-off of deferred financing costs and loss on sale of assets ("EBITDA") of $15.898 million for the third quarter of 2007, for an EBITDA margin of 38.6%. This compares to $16.006 million, or an EBITDA margin of 41.2%, in the third quarter of 2006. The reduction in EBITDA margin in the third quarter of 2007 is primarily due to the impact of the strike at the Palace Casino, which has not yet fully recovered to pre-strike levels.

The Fund generated net earnings of $11.364 million, or basic and fully diluted earnings per unit of $0.35, for the third quarter of 2007. This compares to net earnings of $11.661 million, or $0.38 basic earnings per unit and $0.37 on a fully diluted basis, in the third quarter of 2006.

The Fund also incurred $914,000 in transaction costs during the third quarter of 2007 related to the strategic alternative review that resulted in the offer by New World Gaming, which is discussed in this MD&A under the heading "Acquisition of Gateway Casinos Income Fund by New World Gaming".

Excluding this item, net earnings would have been $12.278 million or $0.38 per unit.

The reconciliation between EBITDA and Net Earnings is:



Three months ended Nine months ended
September 30, September 30,
C$ in thousands 2007 2006 2007 2006
--------------------------------------------------------------------------

EBITDA 15,898 16,006 39,621 39,594

Interest income on secured
loans 3,806 3,806 11,296 9,069
Income allocation on Class A
Partnership Units (3,812) (3,812) (11,310) (9,081)
Future income tax expense - - (26,497) -
Interest expense, net (946) (1,222) (3,040) (2,844)
Transaction costs (914) - (2,634) -
Unrealized gain (loss) on
interest rate swap contracts (129) (562) 579 223
Amortization (2,510) (2,555) (7,752) (5,197)
Loss on sale of property
and equipment - - (4) (147)
Write-off of deferred
financing costs on
converted debentures (30) - (434) -
-------------------- -----------------
Net Earnings (Loss) 11,364 11,661 (175) 31,617
-------------------- -----------------
-------------------- -----------------


The net earnings for the nine months ended September 30, 2007 was $31.79 million lower than net earnings in the same period in 2006. This is primarily due to the future income tax expense recorded in the second quarter. During the second quarter of 2007, the Federal Government passed into law a new tax on income trust distributions, commencing in 2011. The Fund recorded a future income tax expense of $26.5 million based on the taxable temporary differences between the accounting basis and tax basis of its assets which are expected to reverse after January 1, 2011. Excluding the impact of the tax, net earnings for the nine months ended September 30, 2007 was $26.3 million, or $5.3 million lower than 2006. This new tax is discussed in this MD&A under the heading "Tax on Income Trusts".

The increase in the interest income on secured loans and in the income allocation on Class A Partnership units is related to the additional secured loans and Class A Partnership units that were issued in connection with the acquisition of the Cascades Casino on May 19, 2006.

During the first nine months of 2007, the Fund incurred $2.6 million in transaction costs related to the strategic alternative review that resulted in the offer by New World Gaming, which is discussed in this MD&A under the heading "Acquisition of Gateway Casinos Income Fund by New World Gaming".

Operating Segments

The Partnership has four primary operating segments based on geographic markets. These are the Burnaby Casino, the Cascades Casino, the Lake City Casinos and the Palace Casino.

Although the Consolidated Statements of Earnings for the nine months ended September 30, 2007 include corporate and general administration expenses, future income tax expense, interest income on secured loans, income allocation on Class A Partnership Units, interest expense, transaction costs, unrealized gain/loss on interest rate swap contract, loss on sale of assets and write-off of deferred financing costs in determining net earnings, these items are not expenses of any one operating segment and have not been included in the following discussion.

Burnaby Casino



Three months ended Nine months ended
September 30, September 30,
% %
C$ in thousands 2007 2006 change 2007 2006 change
--------------------------------------------------------------------------

Revenue
Table games revenue 4,100 4,131 12,338 12,852
Slot machine revenue 8,727 7,937 25,008 22,820
Food & beverage revenue 533 496 1,585 1,515
Other revenue 283 294 754 811
--------------------------------------------------------------------------
Total Revenue 13,643 12,858 6.1% 39,685 37,998 4.4%
--------------------------------------------------------------------------

Operating expenses
Human resources 4,261 4,247 12,461 12,422
Occupancy 113 105 355 318
Food & beverage 343 317 1,014 917
Other operating
expenses 1,663 1,106 5,086 3,670
--------------------------------------------------------------------------
Total Operating Expenses 6,380 5,775 10.5% 18,916 17,327 9.2%
--------------------------------------------------------------------------

Operating earnings
before amortization 7,263 7,083 2.6% 20,769 20,671 0.5%
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Total revenue at the Burnaby Casino for the third quarter of 2007 rose by $785,000 or 6.1%, compared to the same period in 2006.

Slot revenue in the third quarter of 2007 was $790,000, or 10%, higher than the revenues recorded in the third quarter of 2006. Slot revenue for the nine months ended September 30, 2007 was $2,188,000 or 9.6% higher than the same period in 2006. The increase is mainly due to the continued impact of the wide area progressive slot machines and the BC Gold player points program, which were both launched during 2006 and have seen increased participation through 2007.

While table revenue in the third quarter of 2007 was consistent with the revenue in the third quarter of 2006, Burnaby's table revenue for the nine months ended September 30, 2007 was $514,000, or 4.0%, lower than the same period in 2006. This decrease was primarily a result of poor win percentages during the first two quarters of 2007 in Burnaby's high limit area, which recovered during the third quarter of 2007.

Total expenses for the third quarter of 2007 were $6.38 million, which was $605,000 or 10.5%, higher than the third quarter in 2006. Total expenses for the nine months ended September 30, 2007 were $1,589,000, or 9.2%, higher than the same period in 2006. The increase was driven primarily by higher marketing expenses, resulting in part from a one-time $480,000 reimbursement of marketing expenses by the BCLC in the third quarter of 2006. Excluding this recovery, other operating expenses in the third quarter would have been $77,000 higher than the third quarter of 2006. The continued growth in participation of the BC Gold player points program has also resulted in higher marketing costs compared to the same periods in 2006. In addition, on April 1, 2006, the joint marketing fee paid to the BCLC increased from 0.75% to 1.5% of net win, which amounted to an increase in marketing and promotion expenses at the Burnaby Casino of $325,000 in the nine months ended September 2007 from the same period in 2006. These funds, as well as those paid by other operators, are placed in a joint marketing fund held by the BCLC to promote B.C.'s casino industry, both within and outside the province. Of the Fund's casinos, the Burnaby Casino and Cascades Casino are the only two casinos that currently contribute to this fund. As control of the funds rests with the BCLC, the Fund reports these as expenses in the period incurred, rather than reporting them as prepaid expenses to be recognized at a later date in connection with the related marketing activities. The nature of these fees also results in higher marketing and promotion expenses to the Fund as revenues increase.

The following table compares the Burnaby Casino's results for third quarter of 2007 with the last five quarters.



C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06
--------------------------------------------------------------------------
Revenue
Table games revenue 4,100 3,970 4,268 4,508 4,131 4,448
Slot machine revenue 8,727 8,361 7,920 7,638 7,937 7,718
Food & beverage revenue 533 536 516 508 496 507
Other revenue 283 302 169 387 294 263
--------------------------------------------------------------------------
Total Revenue 13,643 13,169 12,873 13,041 12,858 12,936
--------------------------------------------------------------------------

Operating expenses
Human resources 4,261 4,195 4,005 4,369 4,247 4,158
Occupancy 113 114 128 66 105 105
Food & beverage 343 356 315 347 317 314
Other operating expenses 1,663 1,620 1,803 1,685 1,106 1,484
--------------------------------------------------------------------------
Total Operating Expenses 6,380 6,285 6,251 6,467 5,775 6,061
--------------------------------------------------------------------------

Operating earnings before
amortization 7,263 6,884 6,622 6,574 7,083 6,875
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Table games revenue rose by $130,000, or 3.2%, for the third quarter of 2007 when compared to the second quarter of 2007 however remains below the levels experienced in the first quarter of 2007 and previous quarters. The increase from the second quarter was mainly due to an improvement of high limit table performance in the month of September compared to the second quarter. The volatility of the high limit games is within industry norms, however management is continually looking for ways to improve the economics.

Slot machine revenue continued to perform well during the third quarter of 2007 and achieved a new all-time high for this property. The third quarter slot machine revenues were $8.7 million which were $366,000 or 4.4% higher than the previous quarter.

Total expenses in the third quarter of 2007 were $95,000 or 1.5% higher than the previous quarter, an increase which is consistent with expectations given the additional operating day in the third quarter.

Operating earnings before amortization for the third quarter of 2007 represented 53.2% of revenues, compared with 52.3% in the second quarter of 2007 and 55.1% for the third quarter of 2006.

Cascades Langley Casino & Hotel

Reported results for Cascades represent the period from acquisition on May 19, 2006. The following table compares the Cascades Casino's results for the first three quarters of 2007 with the three reporting periods of 2006:



May 19 to
June 30,
C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 2006
--------------------------------------------------------------------------

Revenue
Table games
revenue 2,711 2,541 2,592 2,656 2,600 1,415
Slot machine
revenue 6,936 6,464 6,021 5,739 5,844 2,658
Food & beverage
revenue 1,261 1,302 1,424 1,785 1,213 637
Hotel revenue 492 453 432 412 420 214
Other revenue 481 448 484 298 354 113
--------------------------------------------------------------------------
Total Revenue 11,881 11,208 10,953 10,890 10,431 5,037
--------------------------------------------------------------------------

Operating expenses
Human resources 4,530 4,472 4,271 4,307 4,426 2,243
Occupancy 213 224 242 255 201 70
Food & beverage 610 634 647 872 638 297
Hotel Expenses 59 52 43 47 41 26
Other operating
expenses 1,631 1,780 1,569 1,616 1,070 658
--------------------------------------------------------------------------
Total Operating
Expenses 7,043 7,162 6,772 7,097 6,376 3,294
--------------------------------------------------------------------------

Operating earnings
before amortization 4,838 4,046 4,181 3,793 4,055 1,743
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Total revenues in the third quarter of 2007 increased by $1.45 million, or 13.9%, compared to the third quarter of 2006. Table games revenue was $111,000, or 4.2%, higher in the third quarter of 2007 than the same period in 2006. Slot machine revenue was $1.09 million, or 18.7%, higher than the third quarter of 2006. As at Burnaby, the wide area progressive slot machines and the BC Gold player points program, which were both launched during 2006, contributed to the growth in slot machine revenue. Other revenue in the third quarter of 2007 was $127,000 higher than the same period in 2006, mainly as Cascades is generating higher ATM revenue as a result of additional transaction volume and higher fees per transaction in the current year than in 2006.

Total expenses in the third quarter of 2007 were $667,000, or 10.5% higher than the same period in 2006. This increase was partially due to the impact of a one-time $278,000 marketing fee reimbursement by the BCLC in the third quarter of 2006. Excluding this recovery, expenses in the current quarter would have been $389,000 or 6.1%, higher than the third quarter of 2006. In addition, as at the Burnaby casino, the continued growth in participation rates of the BC Gold player points program has resulted in higher marketing costs in the three and nine months ended September 30, 2007 compared to the same periods in 2006. Also, the significant increase in slot machine revenue resulted in a corresponding increase in the BCLC joint marketing fee which is calculated as a percentage of net win.

Table games revenue in the third quarter of 2007 rose $170,000 or 6.7% from the previous quarter. This increase is attributed to a combination of increased volume of play and higher hold percentages than Cascades experienced in the second quarter.

Slot machine revenue continued its pattern of quarter-over-quarter growth, and rose by approximately $472,000 or 7.3% from the second quarter of 2007. Average win per machine per day in the third quarter of 2007 was $557, compared to $521 in the second quarter of 2007.

Food & beverage revenue in the third quarter declined by $41,000, or 3.2%, compared to the second quarter of 2007, as corporate and other functions in the convention centre decreased due to the normal summer lull in bookings for these functions.

Hotel revenue rose $39,000 or 8.6% from the second quarter. For the third quarter, the hotel achieved an average occupancy rate of 63% and average room rate of $116 compared to average occupancy of 59% and average room rate of $109 during the previous quarter.

Total expenses for the third quarter of 2007 were $119,000 lower than the second quarter, mainly due to lower marketing expenses in the third quarter. As a result of lower than expected ticket sales in preceding months, the Summit Theatre was kept dark for the month of August and entertainment expenses and related advertising costs were minimized while a new program was planned for the Fall of 2007. Overall human resources expenses were slightly higher in the third quarter of 2007, which is consistent with the additional operating day in the third quarter.

Lake City Casinos



Three months ended Nine months ended
September 30, September 30,
% %
C$ in thousands 2007 2006 change 2007 2006 change
--------------------------------------------------------------------------

Revenue
Table games revenue 1,268 1,197 3,371 3,243
Slot machines revenue 9,758 8,877 26,460 24,220
Food & beverage revenue 572 464 1,428 1,064
Other revenue 222 221 502 508
--------------------------------------------------------------------------
Total Revenue 11,820 10,759 9.9% 31,761 29,035 9.4%
--------------------------------------------------------------------------

Operating expenses
Human resources 4,203 4,253 12,552 12,178
Occupancy 643 385 1,553 1,077
Food & beverage 309 277 827 702
Other operating
expenses 1,059 885 3,315 2,807
FDC expense recovery (6) (604) (929) (1,606)
--------------------------------------------------------------------------
Total Expenses 6,208 5,196 19.5% 17,318 15,158 14.3%
--------------------------------------------------------------------------

Operating earnings
before amortization 5,612 5,563 0.9% 14,443 13,877 4.1%
--------------------------------------------------------------------------


Revenues at the Lake City Casinos continued their strong organic growth in the third quarter of 2007, increasing approximately 9.9% from the same period in 2006. Much of this increase is derived from the continued growth in slot machine revenue. Slot machine revenue increased by 9.9% in the third quarter of 2007 compared with the same period in 2006. The Fund attributes the increases in casino revenues to the continued growth in the Thompson-Okanagan region, one of the fastest-growing areas in Canada, as well as the continuing impact of the introduction of wide-area progressive slot machines, the BC Gold player points program, and the conversion of all slot machines to ticket-in-ticket-out technology, which was started during 2006 and completed during 2007.

Table revenues in the third quarter of 2007 were $177,000 or 16.2% higher than the second quarter of 2007 and $71,000 or 5.9% higher than the third quarter of 2006. The Penticton casino has operated a small poker area for the past year. During this time the overall usage of the poker area has continued to increase.

Food & beverage revenues increased by $108,000 or 23.3% from the third quarter of 2006, mainly due to the introduction of liquor services at the Kamloops Casino in January 2007. Expenses related to food and beverage increased in line with the increase in sales.

Occupancy expenses were higher in the third quarter of 2007 as all remaining historical FDC eligible approved expenses were recovered by mid-April 2007. Prior to this, the Lake City Casinos were recovering approximately $1.1 million per annum in FDC recoveries that were recorded as an offset against occupancy costs and approximately $2.0 million per annum in other FDC expense recoveries.

Human resource expenses for the nine months ended September 30, 2007 were $374,000 higher than the same period in 2006. This increase was due mainly to the additional staffing requirements for liquor service in Kamloops, increases in customer service staffing levels and regularly scheduled wage increases for all hourly employees. The Lake City Casinos' three-year collective agreement with the BCGEU expired on September 4, 2007. Pre-negotiation meetings were held in late September and late November dates have been set to begin negotiations toward a new collective agreement.

The other operating expenses for the third quarter were $174,000, or 19.7%, higher than the third quarter of 2006 due primarily to the receipt of a one-time marketing fee reimbursement from the BCLC in September 2006 in an amount of $156,000. The increased player adoption of the BC Gold Card player points program also resulted in higher marketing costs in the quarter.

The following table compares the Lake City Casinos' results for the third quarter of 2007 with the last five quarters.



C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06
--------------------------------------------------------------------------

Revenue
Table games revenue 1,268 1,091 1,012 1,013 1,197 1,044
Slot machines revenue 9,758 8,711 7,991 7,780 8,877 8,055
Food & beverage revenue 572 471 385 357 464 363
Other revenue 222 149 131 222 221 151
--------------------------------------------------------------------------
Total Revenue 11,820 10,422 9,519 9,372 10,759 9,613
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Operating expenses
Human resources 4,203 4,254 4,094 4,188 4,253 4,039
Occupancy 643 551 359 372 385 334
Food & beverage 309 275 243 221 277 241
Other operating expenses 1,059 1,153 1,103 1,024 885 1,023
FDC expense recovery (6) (191) (732) (568) (604) (662)
--------------------------------------------------------------------------
Total Expenses 6,208 6,042 5,068 5,237 5,196 4,975
--------------------------------------------------------------------------

Operating earnings before
amortization 5,612 4,380 4,451 4,135 5,563 4,638
--------------------------------------------------------------------------
--------------------------------------------------------------------------


The quarterly fluctuations in gaming revenue are due to seasonal variations. Typically, the first and fourth quarters are not as strong as the busy tourist seasons in the second and third quarters. The increase in the third quarter revenues for 2007 is consistent with previous years. Other revenue was higher by $73,000, or 49.0%, mainly due to the installation of an ATM machine at the Penticton location.

Total expenses for the third quarter of 2007, before FDC expense recovery, were consistent with the second quarter of 2007. Other operating expenses were lower than the second quarter by $94,000, or 8.2%, as a result of a seasonal decrease in marketing expenses and training costs which are normally higher just prior to the peak summer season.

Palace Casino



Three months ended Nine months ended
September 30, September 30,
% %
C$ in thousands 2007 2006 change 2007 2006 change
--------------------------------------------------------------------------

Revenue
Table games revenue 1,080 1,400 1,913 4,989
Slot machines and
other electronic
games revenue 2,081 2,525 3,679 7,577
Food & beverage
revenue 578 730 1,195 2,357
Other revenue 108 110 237 400
--------------------------------------------------------------------------
Total Revenue 3,847 4,765 (19.3%) 7,024 15,323 (54.2%)
--------------------------------------------------------------------------

Operating expenses
Human resources 2,417 2,223 5,263 6,835
Occupancy 309 288 872 903
Food & beverage 232 314 564 1,003
Other operating
expenses 695 685 2,057 1,873
--------------------------------------------------------------------------
Total Expenses 3,653 3,510 4.1% 8,756 10,614 (17.5%)
--------------------------------------------------------------------------

Operating earnings
before amortization 194 1,255 (1,732) 4,709
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Total revenue in the third quarter of 2007 was $3.847 million, which is down 19.3%, or $918,000, from the same period in 2006 due to the impact of the strike.

During the third quarter of 2007, the Fund resolved the Palace labour dispute which had resulted in a strike of all Palace non-management employees since September 9, 2006. On July 9, 2007 the Fund and the United Food and Commercial Workers ("UFCW") announced that a tentative agreement had been reached that would end the labour dispute. On July 11, 2007 the agreement was ratified with 86% of the staff members voting in favour of the agreement. The agreement is retroactive to November 1, 2005 and has a four-year term. This contract includes annual wage increases of 3% in the first year and 4% in each of the remaining three years. The cost of retroactive wage increases had been previously accrued in the results for the relevant periods. Additionally, employees received signing bonuses of $1,200 per part-time employee and $3,000 per full-time employee. The costs of these signing bonuses were reported in the third quarter.

During the period of the strike, the Palace Casino was operating on a reduced basis. During peak periods on Friday and Saturday, the casino operated 15 table games, two poker tables, and approximately 626 slot machines and electronic games on both floors of the facility, as well as the deli on the main floor and full operation of the Booker's Steak and Prime Rib restaurant. During non-peak periods, the casino operated on the main floor only and provided 411 slot machines and electronic games, up to 15 table games, two poker tables and operated the deli. The casino was offering live entertainment on weekends.

The casino continues its return to full operational status, with table games, poker, slot machines and food and beverage facilities now operating at approximately 75% of the levels reached before the strike. Revenues have not yet fully recovered; by the end of September, total monthly revenues were approximately 77% of pre-strike revenue levels.

During the third quarter of 2007, the Fund launched its planned marketing program to re-introduce the Palace Casino to the market after the strike, commencing with a four-day Customer Appreciation Days event at the end of September. Additional marketing activities in the fall of 2007 are expected to further improve the Palace Casino's recovery.

Total expenses in the third quarter of 2007 were $3.653 million, which were $143,000 higher than the same period in 2006. The Palace experienced a minor increase in expenses despite the significant drop in revenue between the third quarter of 2007 and the same period in 2006. This was due to the casino expending all necessary efforts, particularly in human resources and marketing, to return operating capacity to pre-strike levels in order to stimulate the return of customers to the casino and the associated recovery of revenue.

During the fourth quarter of 2006, two new casinos were opened in the city of Edmonton; the River Cree Resort and Casino and the Century Casino and Hotel. As previously indicated, management was anticipating a possible decline in revenues as a result of the opening of the River Cree Resort and Casino, however, the strike has made it difficult to assess the real impact of this competition to date. This issue will continue to be monitored.

The following table compares the Palace Casino's quarterly results for third quarter of 2007 with the last five quarters.



C$ in thousands Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06
--------------------------------------------------------------------------

Revenue
Table games revenue 1,080 399 434 620 1,400 1,748
Slot machines and other
electronic games revenue 2,081 794 804 1,070 2,525 2,503
Food & beverage revenue 578 298 319 388 730 777
Other revenue 108 69 61 139 110 153
--------------------------------------------------------------------------
Total Revenue 3,847 1,560 1,618 2,217 4,765 5,181
--------------------------------------------------------------------------

Operating expenses
Human resources 2,417 1,388 1,458 1,690 2,223 2,286
Occupancy 309 281 282 293 288 313
Food & beverage 232 151 181 205 314 338
Other operating expenses 695 752 610 611 685 611
--------------------------------------------------------------------------
Total Expenses 3,653 2,572 2,531 2,799 3,510 3,548
--------------------------------------------------------------------------

Operating earnings (loss)
before amortization 194 (1,012) (913) (582) 1,255 1,633
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Slot and table revenues increased in the third quarter of 2007 as compared to the second quarter of 2007 due to the successful conclusion of the labour dispute. Other revenues were also higher as patrons began to return to this location.

Overall expenses for the third quarter of 2007 were higher by $1.081 million or 42% as compared to the second quarter. During the strike, management had previously reduced expenses wherever possible to address the decline in the volume of casino patrons. The increases in human resource costs in the third quarter compared to the second are due to increased service levels as the Palace Casino returns to normal pre-strike operating levels, as well as to the costs of a one-time signing bonus paid to employees as part of the union settlement agreement. Food and beverage expenses increased in line with the increase in food and beverage revenues. Other expenses actually decreased by $57,000 from the second quarter; higher marketing costs associated with the ramp-up of the casino after the strike were more than offset by lower legal and related labour dispute costs due to the end of the strike.

Outlook

B.C. Operations

GVRD Market Developments

The GVRD market has undergone a number of changes in the recent years, as the BCLC and casino operators work to fully implement the BCLC's new model of a smaller number of larger facilities with more gaming and non-gaming amenities. A number of projects are still being completed.

1) Starlight Casino, New Westminster, B.C.

The Starlight Casino is a new 100,000 square foot casino currently under development in the Queensborough area of New Westminster, B.C., which sits on the eastern border of the City of Richmond. The new facility will operate approximately 850 slot machines and 45 table games, as well as a 12-table poker room, two private VIP gaming rooms. The facility will also have a 140-seat show lounge and will feature extensive food & beverage services and a cafe. The casino will be connected to a popular interactive sports bar concept, operated by Schanks Athletic Club, and a high-end Chinese restaurant, operated by the Kirin Restaurant Group. Construction began in December 2005 and the facility is projected to open in the winter of 2007/2008.

2) Hastings Racecourse slot machine installation

The Hastings Racecourse in Vancouver has been approved for the installation of 600 slot machines within the existing racetrack facilities. Rezoning approval was granted in July 2004; however, the project has yet to receive its development permit due to legal issues surrounding the approval of slot machines by the City. Shortly after approval, the Hastings Park Conservancy, a local-area residents group, filed suit against the City of Vancouver in the B.C. Supreme Court, claiming that the rezoning by-law was not within their powers. The court found in favour of the City in August 2006, however, the Hastings Park Conservancy subsequently filed an appeal.

Subsequent to the end of the third quarter it was announced that, pursuant to an interim agreement with the BCLC, the company would be installing 150 slot machines in an existing area at Hastings Racecourse. A second phase development would see, subject to BCLC approval, the number of slot machines increase to 600 as part of a larger development on the site. The announcement indicated that the installation of the first 150 machines was expected to be completed during the fourth quarter of 2007 and second phase of development was expected to be complete by late 2008 or early 2009. The announcement also indicated that the redevelopment of Hastings Racecourse and the proposed installation of slot machines is subject to the City of Vancouver permit process, the execution of the formal operating agreement with the City of Vancouver and conclusion of a definitive Casino Operational Services Agreement ("COSA") with BCLC. The initial 150 slot machines opened to the general public on November 10, 2007.

3) Redevelopment of the Burnaby Casino

The Fund is currently developing a new facility for the Burnaby Casino across the street from the existing casino on the site of the former Radisson Hotel, purchased in 2004. The new Burnaby facility includes a 100,000 square foot casino, a full-service restaurant, a new lobby for the hotel and a convention centre, as well as upgrades to the 200 rooms in the tower portion of the hotel. The new casino will house up to 1,000 slot machines, up to 54 table games, a VIP gaming area, a 16-table poker room, as well as the necessary back-of-house amenities. The casino will also expand on the food & beverage alternatives currently offered at the Burnaby Casino by providing a number of quick serve food choices, an entertainment lounge with bar and a central bar on the main floor of the casino. Once the new facility is opened, the existing casino will be converted back into a parkade, with an additional level and a half of parking constructed. This structure will be connected to the new casino by a covered overhead walkway, allowing easy and comfortable access to the casino.

In December 2006, the Fund announced that Delta Hotels has been contracted to manage the hotel, convention centre and restaurant within the new Burnaby Casino facility. This agreement is expected to enhance the visibility of an already high profile location. The partnership with the Delta Hotels will enable management to focus on its core strength of the operations of the casino. With Delta Hotels as manager, we expect to generate higher average occupancy at the hotel, which may also translate into increased traffic at our casino. The hotel will be positioned as a four-star hotel and convention centre primarily serving the substantial unmet business demand surrounding the Burnaby Casino. Delta Hotels will manage the hotel, convention centre and restaurant for a period of 10 years from opening, with a 10-year extension option. The Fund will operate the casino and all food & beverage operations within it, including a food court, multiple bars and an entertainment lounge.

Based on advice from Delta Hotels, the level of finishings for the hotel and the full service restaurant has been enhanced from original design plans. While this resulted in minor increases in the budget in the previous quarters, the changes are expected to generate increased revenue for the hotel and restaurant. Additionally they were part of the commitment to BCLC that resulted in the introduction of the accelerated FDC discussed in the Capital Resources section below.

Excluding the cost of the acquisition of the property in June 2004, the total redevelopment project for the Burnaby Casino is now estimated at approximately $135 million including pre-opening costs, recruitment, training, furniture and equipment. The figure also includes standard construction contingencies to allow for any potential cost increases related to those components of the project not yet awarded. The Fund estimates that approximately 85% of the total budget of $160 million, including the cost of the acquisition of the Villa Hotel, will be eligible for recovery under FDC. During the fourth quarter of 2006 the Fund submitted its budget, allocated amongst the various project components, to the BCLC to determine the costs eligible for FDC. During the first quarter of 2007 we received provisional approval from BCLC to draw up to $35 million against costs incurred to date, and Gateway drew approximately $11 million in recoveries in February 2007. The provisionally approved amount was increased to $43.1 million in June. We recovered $2.2 million from FDC in the second quarter and a further $1.4 million in the third quarter.

During the third quarter Gateway submitted a request to BCLC for a portion of the hotel development costs to be eligible for FDC. The BCLC is currently reviewing this request and the final FDC approval and the overall percentage eligibility will be determined once this request has been processed.

The construction continues to be materially on time for a late spring/early summer 2008 opening and is on budget. Management does not expect any material changes in either.

Potential Expansion / Redevelopment of the Lake City Casinos

As discussed in the Fund's annual report, management is currently considering relocations or expansions to the Lake City Casinos. The existing Lake City Casinos were opened in 1998 through 2000, with the Kamloops Casino undergoing an update in June 2003. Operations in the region continue to perform well and customer feedback and reviews have been very positive. In addition, there has been significant growth in the region in past years and the rate of population growth has continued to accelerate, with current forecasts at approximately 2% per annum. The Fund believes it is an opportune time to address longer term needs and intends to make an investment in the area to capitalize on growth opportunities in these markets, ensuring its long-term commitment to each of the communities. The strategic focus is to meet growing demand for gaming offerings and provide a more complete entertainment experience for customers. The Fund believes that opportunities exist for expansion or relocation of the casinos in Kelowna, Kamloops and Vernon. Preliminary plans for each are detailed below, which are subject to approval by BCLC and the relevant municipalities. The preliminary capital cost for all three projects is estimated to be approximately $50 million which management anticipates will be approximately 100% eligible for FDC.

Kelowna Casino

The Kelowna Casino is located in the Grand Okanagan Resort and Conference Centre. The Casino is currently 21,000 square feet and hosts 342 slot machines and 10 table games. The facility includes limited food & beverage services. Management believes that the Kelowna market can support a larger facility and is investigating alternatives to approximately double the size of the facility to increase the size of the gaming floor, as well as to provide for enhanced food & beverage services and live entertainment. Preliminary plans envision expanding the casino to approximately 40,000 square feet, which will allow for 600 slot machines and 16 table games, as well as a 6-table poker room, a small entertainment stage and a full service restaurant.

Management is working with the owners of the Grand Okanagan to develop the expansion plans. Once final agreements are in place, development and construction of the new space is expected to take 18 to 24 months. Any expansion will be undertaken directly by the Grand Okanagan. Gateway will be responsible for funding the interior finishings and will enter into a long-term lease for the entire space.

Kamloops Casino

The Kamloops Casino is located within the Executive Inn in downtown Kamloops. The current facility is 14,400 square feet and hosts 301 slot machines and 8 table games. Our initial plans are to build a new 35,000-square foot freestanding casino with up to 450 slot machines, 12 tables and a 6-table poker room on a 1.24 acre site immediately to the north of the hotel. In addition, we are looking to incorporate a small pub-style restaurant/lounge with stage area into the design. The plan also includes an underground parking garage with approximately 225 designated spaces for casino guests.

The land for the new casino was acquired in September 2006 for $2.85 million.

The Fund is evaluating a number of design options for this project, including the feasibility of a comprehensive joint development with the owners of the hotel. Timing of the development of the new casino is dependent on the outcome of these evaluations.

Vernon Casino

The Vernon Casino is currently located in 12,000 square feet at the Village Green Hotel. It was opened in 1998 and no longer reflects the populations' expectations for casinos. The Fund's plans envision relocating the facility to a newly developed 300,000 square foot neighborhood shopping center located on Highway 97 in the north end of Vernon. This is a high traffic location in the middle of a new large-scale retail and business park development, convenient to the city population and the North Okanagan trading areas.

In the third quarter of 2006, the Fund finalized negotiations and entered into a long-term lease for the property. This development was purchased by a new developer in late 2006 and the lease was renegotiated to the Fund's benefit.

During the first quarter of 2007, Lake City Casinos entered into an offer to lease a 30,000 square foot single purpose building to be constructed at the Silverstar Shopping Center located at 100-400 Anderson Way in Vernon. The lease term will be 10 years with two renewal terms of 10 years, beginning when Lake City takes possession of the property. The landlord shall provide 265 parking stalls on the property for our exclusive use plus an additional 35 non-dedicated parking stalls on the adjacent lot. The offer includes an option for Gateway to purchase the casino property. The building is expected to be completed in the fall of 2008 and the new casino is anticipated to contain up to 400 slot machines, six live tables, two electronic tables and a small poker room with two poker tables. Site preparation has commenced and permits are expected by the end of November 2007.

B.C. Smoking Ban

During the first quarter of 2007 the B.C. government passed legislation to ban smoking in all indoor public spaces. The ban is expected to come into effect on January 1, 2008, and will apply to all enclosed buildings "to which the public are ordinarily invited or permitted access", including restaurants, bars, clubs, casinos, etc. Management is currently assessing the impact of the ban on its operations, as well as the development plans for the redevelopment of the Burnaby Casino. From an operational perspective, as the ban will impact all casinos in B.C. equally, management expects that any impact will be temporary. Similar bans in other jurisdictions have seen an immediate impact of up to approximately 10% of revenue, which returns within six to 12 months. A limited smoking ban implemented by the Workers Compensation Board of B.C. in 2001 resulted in a 12% reduction in revenue at the Burnaby Casino, which was fully recovered within seven months. A similar ban implemented in Edmonton on July 1, 2005 saw an impact in line with this, which was fully recovered prior to the strike on September 9, 2006. Management anticipates that the impact to our B.C. casinos will be within the parameters experienced in other jurisdictions. The ban also has implications for the design of the new Burnaby Casino, which had included separate smoking areas within the slot area of the casino floor. Management is now working through the proposed legislation to determine how it can modify the design to include specific areas for the casino's smoking patrons.

Alberta Operations

Palace Casino Strike

On July 10, 2007 the UFCW members approved a four-year contract by a vote of 86%. The new contract is retroactive to the expiry of the previous contract on November 1 2005 and includes increases of 3% in the first year and 4% in the other three years. The agreement also contained a provision for substantial signing bonuses for both full- and part-time employees of $3,000 and $1,200, respectively. There are also changes to the company's health and benefits plan. Management believes that this settlement provides an excellent foundation to rebuild its working relationship with all stakeholders.

The majority of staff have now returned to work and the casino is nearly fully operational. Revenues have begun to return, however, they are not yet at pre-strike levels. Management is working on a variety of initiatives, including a new marketing campaign, to re-launch the casino. Results of this will be seen in future quarters.

Market Developments

As discussed above, two new casinos were opened in the Edmonton area during late 2006. Of these, only the River Cree Resort and Casino is likely to impact Gateway's operations at the Palace Casino. The Century Casino and Hotel will be located northeast of Edmonton's city centre, outside of the Palace Casino's primary market area.

The new River Cree Resort and Casino, which opened on October 26, 2006, includes a 255-room, four-star hotel, an ice sports complex, a convention centre and a 62,000 square foot casino with 600 slot machines, 40 table games and 12 poker tables. The resort is located on the Enoch Cree Nation reserve on the northwest outskirts of Edmonton, less than 10 kilometres from the Palace Casino. As the casino provides essentially the same gaming products as the Palace Casino, we believe that, all things being equal, our strategic location within the West Edmonton Mall, our high levels of customer service and our established reputation and position in the market will provide the Palace Casino with a strong competitive advantage that would mitigate or prevent any significant long term impact. However, the River Cree Resort and Casino is located on native land and is therefore not subject to the smoking ban implemented in the City of Edmonton. While the River Cree have agreed to restrict smoking to approximately 30% of their facility, under an agreement with the City that relates to the provision of services to the casino, they enjoy an advantage over other casinos in Edmonton. This could lead to a permanent loss of customers at the Palace Casino, which we estimate may be up to 15%. Any impact of the River Cree Casino on the Palace Casino has been masked by the impact of the strike at the Palace Casino and management cannot provide an estimate of the impact of the new competition.

Tax on Income Trusts

On October 31, 2006 the Government of Canada (Department of Finance) announced a proposal to tax the distributions of income trusts, effectively treating income trusts as corporations for tax purposes effective on January 1, 2011. Under the proposed rules, distributions would first be taxed at the Fund level, at a rate that is currently set at 31.5%. The net amount would then be paid to unitholders, where it would be treated as dividends and subject to the dividend tax rules. The proposal was formalized in Bill C-52, which became law on June 12, 2007.

This tax may have an impact on the Fund's future cash available for distribution. In addition, it may adversely impact the marketability of the Fund's units and, therefore, the ability of the Fund to undertake future financings and acquisitions.

In light of the proposed acquisition of the Fund by New World Gaming, management has not invested significant resources in considering the impact of this tax. Should the proposed acquisition not be completed, management will review the tax in detail and consider the potential impact it may have on the Fund and its unitholders. However, the tax does not impact the Fund's business model or current growth plans. The Fund continues to generate strong cash flow and has sound business fundamentals. In addition, the Fund will experience growth from the expected increase in demand for gaming and from the redevelopment of the Burnaby Casino and expansions of three of the four Lake City Casinos. The tax changes do not impact these plans, as debt facilities are in place to finance these projects and the Fund has no near-term need to obtain additional equity capital.

As a result of the new tax, commencing with the quarter ending June 30, 2007, the Fund was required to recognize the future income tax assets and liabilities expected to arise when the tax on distributions becomes applicable. The future income tax assets and liabilities are based on the temporary differences between the tax basis of assets and liabilities of the Fund and Partnership and the corresponding amounts recorded in the Fund's financial statements, to the extent these temporary differences will not have reversed by 2011. Based on its assets and liabilities as at September 30, 2007, the Fund has estimated that it has a future income tax liability of $26,497,000, based on the expected tax rate of 31.5% for 2011. As a result, a one-time non-cash charge to earnings in this amount was recorded in the second quarter of 2007.

Acquisition of Gateway Casinos Income Fund by New World Gaming

On April 3, 2007 the Fund announced that it had entered into a support agreement (the "Agreement") with New World Gaming Partners Ltd. ("New World Gaming"), a joint venture owned by Publishing and Broadcasting Limited ("PBL") and Macquarie Bank Limited ("Macquarie"), providing for the acquisition by New World Gaming of all of the outstanding units of the Fund.

Under the terms of the agreement, New World Gaming has offered (the "Offer") to acquire all of the outstanding units of the Fund by way of a take-over bid at a price of C$25.26 per unit in cash, representing an aggregate price of approximately C$800 million. This price represents a premium of 25.7% based on the C$20.10 closing price for the Fund units on the Toronto Stock Exchange on April 2, 2007 and a 37.8 % premium to the 90-day volume-weighted average unit price. In addition to the acquisition of the outstanding units of the Fund, New World Gaming has made a concurrent take-over bid for the Fund's 5.35% convertible debentures at a price of C$1,322.51 per C$1,000 principal amount of debentures. Collectively the transaction ascribes an aggregate enterprise value to the Fund of approximately C$886 million.

Certain of Gateway's unitholders (the "GCI Unitholders"), including certain of Gateway's trustees and senior officers, holding approximately 31.4% of the Fund's fully diluted units, have agreed to support the Offer and tender their units to the bid.

The Board of Trustees of Gateway, based upon the unanimous recommendation of a Special Committee of the Board of Trustees, has unanimously recommended that unitholders accept the Offer and that the convertible debenture holders accept the offer being made by New World Gaming for such debentures. In its consideration of this matter, the Special Committee received advice from its legal advisor, Lawson Lundell LLP, and its financial advisor, RBC Capital Markets ("RBC"). RBC has rendered an opinion to the Special Committee that the consideration per unit offered pursuant to the Offer is fair, from a financial point of view, to unitholders other than the GCI Unitholders and that the consideration offered for the convertible debentures is fair, from a financial point of view, to the holders of Gateway convertible debentures.

The Agreement between the Fund and New World Gaming provides for, among other things, a non-solicitation covenant on the part of the Fund, subject to customary "fiduciary out" provisions that entitle the Fund to consider and accept a superior proposal, a right in favour of New World Gaming to match any superior proposal and the payment to New World Gaming of a termination payment of approximately C$24 million if the transaction is not completed as a result of the superior proposal and in certain other circumstances. A copy of the Agreement is available on SEDAR at www.sedar.com.

Under the agreement with New World Gaming, the Fund will continue to pay its regular monthly cash distribution to Fund unitholders of C$0.125 per unit until the expiry of the Offer, including a pro-rata distribution for any partial monthly period.

The Offer will be subject to certain conditions, including acceptance of the Offer by holders of at least 66 2/3% of the outstanding units of the Fund. The transaction is also subject to regulatory approvals, including from the B.C. Gaming Policy and Enforcement Branch, the British Columbia Lottery Corporation, and the Alberta Gaming and Liquor Commission as well as receipt of certain third party consents.

New World Gaming has also entered into a separate transaction to acquire substantially all of the assets of Gateway Casinos Inc. ("GCI"), which operates the Baccarat Casino in Edmonton, Alberta, and all of the outstanding shares of Star of Fortune Gaming Management (B.C.) Corp. ("SOF") (50% owned by GCI), which operates the Royal City Star Casino and is developing the Starlight Casino, both in Greater Vancouver, B.C. GCI and SOF are privately held companies whose operations are managed by Gateway. Gateway has a right of first offer over all of GCI's operations, including its 50% stake in SOF.

On October 22, 2007, it was announced that the expiry date for the acquisition of the Fund by New World Gaming had been extended to November 14, 2007. On November 12, 2007 New World Gaming announced that they had received the necessary gaming approvals, consents and registration required from the AGLC and the British Columbia Gaming Policy and Enforcement Branch in relation to the Offer.

New World Gaming continues to pursue regulatory approval from the BCLC, the receipt of which is anticipated, but cannot be assured. Following receipt of approval from the BCLC, all gaming regulatory conditions to New World Gaming's Offer will be satisfied.

Subject to satisfaction or waiver of the remaining conditions to the Offer, including the requirement that 66 2/3% of the issued and outstanding Units are tendered to the Offer, the Offer is expected to be completed on November 14, 2007.

Liquidity

Distributable Cash

Distributable cash is not a defined term under Canadian GAAP, nor does it have a standard, agreed upon meaning. As such, the Fund's distributable cash may not be directly comparable to distributable cash reported by other income funds or similar issuers. Distributable cash is presented because the Fund's policy is to pay distributable cash to unitholders on a monthly basis to the maximum extent possible. Management believes that distributable cash is a useful measure as it provides investors with an indication of cash available for distribution. This non--GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Distributable cash is defined as the Fund's cash flow from operating activities net of non-cash working capital items, less required principal payments on debt, less maintenance capital expenditures, net of recoveries from the FDC, plus proceeds from sales of assets, less any reserves determined by the Trustees to be reasonable and necessary for the operations of the Fund.

On August 4, 2006, the Canadian Securities Administrators ("CSA") issued Staff Notice 52-306, which clarified the CSA's expectations about the presentation of distributable cash of income trusts. The Fund's calculation was generally consistent with the CSA's position, with one minor exception. The CSA recommended that the calculation of distributable cash be reconciled to the most comparable GAAP measure, which they determined to be cash flow from operations after changes in net working capital items. The Fund's calculation has historically been reconciled to cash flow from operations before changes in non-cash working capital items. During the third quarter of 2006 the Fund modified its definition of distributable cash to be consistent with the CSA's recommendations. This change does not impact the calculation of the Fund's distributable cash, as changes in non-cash working capital items are now added back or subtracted, as appropriate, in determining distributable cash.

Consistent with previous periods, costs incurred for the redevelopment of the Burnaby Casino and the potential Lake City redevelopment have been excluded from the calculation of distributable cash, as they will be funded solely from debt and/or recoveries from the Facility Development Fund. Debt financing and any associated FDC received is also excluded in the calculation.

Distributable cash for the three and nine months ended September 30, 2007 and September 30, 2006 was as follows:



Three Months ended Nine Months ended
C$ in thousands September 30, September 30,
except per unit amounts 2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Cash flows from operating activities 17,838 17,623 34,601 38,341

Funding of prior year's long-term
incentive program - - 2,342 1,492
Changes in non-cash working capital
items (3,383) (2,383) (654) (1,820)

Maintenance capital expenditures (1) (156) (322) (712) (1,371)
FDC reimbursement received for
property and equipment purchases 260 256 358 662

Sale of property and equipment - - - 61
Long-term incentive plan contribution
to be made for current year (565) (374) (1,695) (1,123)

------------------------------------
Distributable cash generated by
operations for the period 13,994 14,800 34,240 36,242
------------------------------------
------------------------------------
Per unit 0.433 0.476 1.075 1.261
------------------------------------
------------------------------------
(1) Maintenance capital expenditures include only those costs related to
ongoing operation of existing casinos and exclude costs associated
with expansions and new developments that are funded by debt.


Total distributions declared for the third quarter of 2007 were $12.1 million, bringing distribution for the first nine months of 2007 to $36.0 million. Distributions were paid on a monthly basis as follows:



Distribution Distribution
period per unit Payment Date
---------------------------------
January 2007 $ 0.1250 February 28, 2007
February 2007 $ 0.1250 March 30 , 2007
March 2007 $ 0.1250 April 30, 2007
April 2007 $ 0.1250 May 31, 2007
May 2007 $ 0.1250 June 29 , 2007
June 2007 $ 0.1250 July 31, 2007
July 1 - 25 2007 $ 0.1000 July 31, 2007
July 26 - 31 2007 $ 0.0250 August 31, 2007
August 2007 $ 0.1250 September 28, 2007
September 1 - 26 2007 $ 0.1083 October 1, 2007
September 27 - 30 2007 $ 0.0167 October 29, 2007
--------------
$ 1.1250
--------------


The shortfall between distributable cash generated and distributions in the first nine months of the year has been funded through excess distributable cash generated in previous years and from FDC recoveries related to the Burnaby redevelopment that were not used to fund development costs (see "Facility Development Commission" below).

In the third quarter of 2007, the Fund generated sufficient distributable cash from operations to pay distributions. Management expects that in the remainder of 2007 the Fund will recover the shortfall in distributable cash during the first half of 2007 in order to maintain its current monthly distribution level.

Contractual Obligations

The following contractual obligations were outstanding at September 30, 2007:



Less
than 1 1 - 3 4 - 5 After 5
C$ in thousands Total year years years years
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Long-term debt
Promissory note(1) 900 90 180 180 450

Long term notes 100,888 - 488 40,000 60,400
Lease obligations (2) 17,759 3,559 4,217 3,153 6,830
-------------------------------------------------
119,547 3,649 4,885 43,333 67,680
-------------------------------------------------
-------------------------------------------------

(1) repayable in 120 equal monthly payments of $7,500 beginning January
1, 2007
(2) for the Partnership's leased casino locations, as well as certain
office equipment and office space


Capital Resources

Capital Expenditures

Capital expenditures for the quarter ended September 30, 2007 totaled $156,000, incurred as follows:



$
Burnaby Casino $ 12,000
Lake City Casinos $ 63,000
Cascades $ 37,000
Palace Casino $ 20,000
Corporate office $ 24,000
---------
$ 156,000
---------
---------


The majority of the costs represent regular maintenance capital expenditures.

Additionally the Fund spent $7.9 million on the redevelopment of the Burnaby Casino during the quarter ended September 30, 2007, bringing the total for the first nine months to $30.5 million. These costs were funded from the credit facilities and FDC recoveries.

Issue of Long-Term Notes and Shelf Facility

On August 4, 2004, the Partnership and its general partner, Gateway Casinos G.P. Inc. ("Gateway GP") completed a private placement of long-term notes payable and arranged an uncommitted shelf facility of up to US$45.6 million (or the Canadian dollar equivalent) whereby the Partnership and/or Gateway GP can, subject to acceptance by the lender, issue additional notes with terms of between five years and seven years, bearing interest at rates to be determined at the time of issue based on then-current market factors.

During December 2006, Gateway entered into an agreement in principle to increase the amount of its shelf facility to US$65 million (or the Canadian dollar equivalent). The increase is designed to provide for the required reduction of Facility B of the bank credit facilities discussed above. Formal documentation of the new shelf facility has not been finalized.

In addition to the increase in the shelf facility, Gateway was able to negotiate a forward rate lock to take advantage of the flat yield curve, and committed to issue C$70 million of new seven-year notes on June 30, 2008 at a rate of 5.71%.

Facility Development Commission

Gateway's agreements with the BCLC include a provision for additional compensation equal to eligible capital and operating expenses from Facility Development Compensation ("FDC") equal to 3% of the total net win generated at the six B.C. casinos. This compensation is in addition to the fee paid for operating the casinos. Accumulated funds are held in trust in accounts managed by Gateway and additional compensation is issued from these accounts.

During the first quarter of 2007, Gateway received preliminary approval for recovery of up to $35 million of the costs incurred on the redevelopment of the Burnaby Casino and drew $11.0 million from the Burnaby FDC account to recover against costs incurred on the project to date. The preliminary approval was increased to $43.1 million in June, 2007. During the second and third quarters of 2007, Gateway drew a further $2.2 million and $1.4 million, respectively, from the account.

Final approval from the BCLC is subject to agreement on the basis for allocating the cost of the acquisition of land to the various project components. Once this has been finalized, the percentage of the budget eligible for FDC recovery will be determined.

During the first nine months of 2007, the Fund has received a total of $14.6 million of FDC recoveries related to the redevelopment of the Burnaby Casino. In accordance with our definition of distributable cash, these amounts have not been included in the calculation above. However, only approximately $8.0 million of this has been needed to fund development costs, as the remaining amounts have been financed through the credit facilities, leaving $46.6 million of cash available. This has been used to fund the shortfall in distributable cash for the first nine months, as well as leaving cash available for future use.

Accelerated Facility Development Commission

During the fourth quarter of 2006, the BCLC unveiled an initiative to improve the economic model of casino redevelopment in the province, which was developed in consultation with casino service providers to recognize the recent significant increases in development costs. The Accelerated Facility Development Commission ("AFDC") provides for an additional amount equal to 2% of the gross win (in addition to the 3% FDC) to recover the capital costs of the redeveloped casino property, and is applicable to projects approved by the BCLC after July 1, 2006. AFDC payments will be payable weekly beginning on the later of April 1, 2007 or the opening of the redeveloped property. The AFDC is a one-time initiative that is limited to the initial redevelopment of a property. Once the approved eligible costs of the redevelopment are recovered through the existing FDC and the AFDC, the service provider is no longer eligible for AFDC on the project and recovery will revert back to the 3% FDC only.

Although the AFDC applies only to projects approved by the BCLC after July 1, 2006, Gateway has received written confirmation from the BCLC that the program will apply to the Burnaby Casino.

Transactions with Related Parties

The Fund had the following transactions with related partied during the quarter ended September 30, 2007:

1. The Fund provides management and administrative services to GCI. Pursuant to the terms of the management agreement, the Fund charges a fee to GCI equivalent to GCI's proportionate share of management and administrative expenses incurred by the Fund. The proportionate share is determined annually based upon a combination of factors including revenue, with consideration given to time spent by senior executives of the Fund on GCI matters relating to sourcing and developing opportunities in the gaming industry. The Fund charged a fee of $590,000 (2006 - $872,000) to GCI for the nine months ended September 30, 2007, which is recorded as a reduction of administration expenses. The decrease of the fee compared to prior year is due to acquisition of Cascades from GCI on May 19, 2006.

2. Until April, 2007, the Partnership had a contract with a subsidiary of GCI for ATM services at the Burnaby Casino. The Partnership managed the vault cash and provided first line service, and received a flat fee $750,000 per annum, payable in monthly instalments. During the nine months ended September 30, 2007, the Partnership earned a fee of $210,000 (2006 - $375,000), which is included in other revenue. The contract was terminated on April 11, 2007.

3. Until April, 2007, the Partnership had a contract with a subsidiary of GCI for ATM services at the Palace Casino. The Partnership received a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the nine months ended September 30, 2007, the Partnership earned a fee of $12,000 (2006 - $47,000), which is included in other revenue. The contract was terminated on April 11, 2007.

4. Until April, 2007, the Partnership had a contract with a subsidiary of GCI for ATM services at the Kamloops Casino. The Partnership received a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the nine months ended September 30, 2007, the Partnership earned a fee of $74,000 (2006 - $120,000), which is included in other revenue. The contract was terminated on April 11, 2007.

5. In connection with the acquisition of Cascades on May 19, 2006, the Partnership entered into a contract with a subsidiary of GCI for ATM services at Cascades. The Partnership received a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the nine months ended September 30, 2007, the Partnership earned a fee $184,000 (2006 - $115,000), which is included in other revenue. The contract was terminated on April 11, 2007.

6. In April 2007, the Partnership entered into a contract with a GCI subsidiary to provide ATM services at the Baccarat Casino in Edmonton, Alberta. The GCI subsidiary provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the Partnership from the arm's length third party ATM service provider. During the period from inception of the agreement until September 30, 2007, the GCI subsidiary earned a fee of $278,000 (2006 - nil). The Partnership offset the ATM fee revenue received from the third party service provider with the amount earned by the GCI subsidiary, resulting in no impact on the financial statements of the Fund.

7. In connection with the acquisition of Cascades, GCI agreed to fund the completion of the construction of a 500-stall parkade at Cascades. The parkade was completed in January 2007.

Critical Accounting Estimates

Fair Value of Net Assets Acquired in Business Acquisitions

As part of the accounting for acquisitions made during the year, management estimates the fair market value of assets acquired for the purpose of allocating the purchase price. Where necessary, management supplements its estimates with opinions of independent third party advisors.

Goodwill Impairment Test

Goodwill is tested for impairment at least on an annual basis, normally at year-end, or when other conditions exist that may indicate that impairment could exist in the carrying value of goodwill. To identify whether goodwill impairment exists, the Fund compares the fair value of the reporting unit to which the goodwill relates to its carrying amount. When the carrying amount of the reporting unit exceeds its fair value, the carrying value is reduced to the fair value. Any excess of the carrying value of the goodwill over its fair value is charged to operations in the period the impairment occurred.

Future Income Taxes

In June 2007, federal legislation was substantively enacted to implement a tax on distributions paid by publicly traded income trusts in Canada, commencing in 2011. As a result, the Fund is required to recognize the future income tax assets and liabilities expected to arise when the tax on distributions becomes applicable. The future income tax assets and liabilities are based on the temporary differences between the tax basis of assets and liabilities of the Fund and Partnership and the corresponding amounts recorded in the Fund's financial statements, to the extent these temporary differences will not have reversed by 2011. Future tax assets or liabilities are calculated using the tax rates for the periods in which the differences are expected to be settled. Future tax assets are recognized to the extent they are considered more likely than not to be received.

Internal Control Over Financial Reporting

Management have ensured that internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There are no changes in internal control over financial reporting in the most recent quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Additional Information

Additional information relating to the Fund is available on SEDAR (www.sedar.com) and on the Fund's website (www.gatewaycasinosincomefund.com), including its Annual Information Form dated March 31, 2007 and all public filings.

Gateway Casinos Income Fund

Consolidated Financial Statements

3rd Quarter Report 2007

For the nine months ended September 30, 2007

(Unaudited)

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim consolidated financial statements of the Fund have been prepared by and are the responsibility of the Fund's management.

The Fund's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

Gateway Casinos Income Fund
Consolidated Balance Sheets
(Unaudited - expressed in thousands of dollars, except per unit and number of units figures)




September December
30, 2007 31, 2006
$ $

Assets

Current assets
Cash and cash equivalents 42,635 33,960
Accounts receivable 2,408 2,845
Facility development commission receivable 405 11,326
Inventory 326 298
Prepaid expenses 744 1,238
Prepaid employee compensation (note 8) - 175
Current portion of prepaid rent 804 804
--------------------
47,322 50,646
Prepaid rent 3,551 4,153
Property and equipment 70,290 72,844
Deferred financing costs 1,491 2,333
Deferred development costs 48,551 21,005
Goodwill 17,182 17,182
Due from Related Parties 375 -
Intangible assets 80,217 83,836
Secured loans 188,784 188,784
--------------------
457,763 440,783
--------------------
--------------------
Liabilities

Current liabilities
Gaming revenue payable to BCLC and AGLC 11,282 10,286
Accounts payable and accrued liabilities 17,495 18,046
Due to related parties - 11,127
Distribution payable to unitholders 3,506 4,822
Current portion of long-term debt 90 90
--------------------
32,373 44,371
Interest rate swap contract 321 901
Convertible debentures (note 7) 20,521 33,432
Long-term debt 101,698 73,798
Future income taxes (note 3) 26,497 -
Class A Partnership Units 188,784 188,784
--------------------
370,194 341,286
--------------------

Unitholders' Equity
Trust Units - net of issue costs (note 7) 126,376 101,924
Equity portion of convertible debentures (note 7) 1,100 1,806
Cumulative earnings 145,040 145,215
Cumulative distributions declared (184,947) (149,448)
--------------------
87,569 99,497
--------------------
457,763 440,783
--------------------
--------------------

Organization and nature of operations (note 1)

Basis of presentation (note 2)

Approved by the Board of Trustees of Gateway Casinos Income Fund

Trustee Trustee
----------------------------- ---------------------------

The accompanying notes are an integral part of these interim consolidated
financial statements.



Gateway Casinos Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
(Unaudited - expressed in thousands of dollars, except per unit and number
of units figures)

Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
$ $ $ $
Revenue
Table games 9,159 9,328 25,465 25,100
Slot machines and other
electronic games 27,502 25,183 74,568 63,119
Food and beverage 2,944 2,903 8,197 6,786
Hotel revenue 492 420 1,377 634
Other 1,094 979 2,906 2,185
----------------------------------------------
41,191 38,813 112,513 97,824
----------------------------------------------
Expenses
Corporate and general
administration 1,640 1,575 4,776 4,338
Cost of food and beverage
services 1,495 1,546 4,297 3,556
Human resources (note 8) 15,781 15,524 45,697 39,227
Marketing and promotions 2,210 799 6,557 3,053
Occupancy 1,277 979 3,459 2,571
Hotel operating 59 41 154 67
Casino operating 2,831 2,343 7,952 5,418
----------------------------------------------
25,293 22,807 72,892 58,230
----------------------------------------------
Earnings before the
following 15,898 16,006 39,621 39,594

Future income tax expense
(note 3) - - (26,497) -
Interest income on secured
loans 3,806 3,806 11,296 9,069
Income allocation on Class
A Partnership Units (3,812) (3,812) (11,310) (9,081)
Interest expense - net (946) (1,222) (3,040) (2,844)
Transaction costs (note 4) (914) - (2,634) -
Unrealized mark-to-market
gain on interest rate swap (129) (562) 579 223
Amortization
Property and equipment (1,001) (1,166) (3,392) (2,383)
Intangible assets (1,206) (1,037) (3,335) (1,887)
Prepaid rent (201) (201) (603) (603)
Deferred financing costs (101) (151) (422) (324)
Write-off of deferred
financing costs on
converted debentures
(note 7) (30) - (434) -
Loss on sale of assets - - (4) (147)
----------------------------------------------
Net earnings (loss) for the
period 11,364 11,661 (175) 31,617

Cumulative earnings -
Beginning of period 133,675 125,152 145,215 105,196
----------------------------------------------
Cumulative earnings -
End of period 145,040 136,813 145,040 136,813
----------------------------------------------
----------------------------------------------
Basic earnings (loss) per
unit 0.35 0.38 (0.01) 0.72
----------------------------------------------
----------------------------------------------
Diluted earnings (loss)
per unit 0.35 0.37 (0.01) 0.71
----------------------------------------------
----------------------------------------------
Weighted average number of
units
Basic 32,352,745 31,110,362 31,851,625 28,738,241
Fully diluted 33,489,393 32,942,823 33,307,203 29,644,402
----------------------------------------------
----------------------------------------------

The accompanying notes are an integral part of these interim consolidated
financial statements.



Gateway Casinos Income Fund
Consolidated Statements of Cash Flows
(Unaudited - expressed in thousands of dollars, except per unit and number
of units figures.)

Three Nine
months ended months ended
September 30 September 30
2007 2006 2007 2006
$ $ $ $

Cash flows from operating activities
Net earnings (loss) for the period 11,364 11,661 (175) 31,617
Items not affecting cash
Future income tax expense - - 26,497 -
Long-term incentive plan compensation 369 374 2,148 1,123
Unrealized mark-to-market gain on
interest rate swap 129 562 (579) (223)
Loss on sale of assets - - 4 147
Interest accretion on convertible
debenture 54 88 208 152
Write-off of deferred financing costs 30 - 434 -
Amortization of property and
equipment 1,001 1,166 3,108 2,383
Amortization of intangible assets 1,206 1,037 3,619 1,887
Amortization of prepaid rent 201 201 603 603
Amortization of deferred financing
costs 101 151 422 324
---------------- -----------------
14,455 15,240 36,289 38,013

Funding of long-term incentive plan - - (2,342) (1,492)
Changes in non-cash working capital
items 3,383 2,383 654 1,820
---------------- -----------------
17,838 17,623 34,601 38,341
---------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (156) (3,176) (712) (4,232)
Development costs (7,908) (5,271) (30,451) (11,192)
Facility development commissions
received for development costs
and property and equipment 1,666 256 15,043 663
Proceeds on sale of asset - - - 61
Issue of secured loans - - - (67,275)
Acquisition of Cascades assets, net
of cash received - (5) - (108,865)
---------------- -----------------
(6,398) (8,196) (16,120) (190,840)
---------------- -----------------
Cash flows from financing activities
Distributions paid (12,138) (11,153) (36,816) (29,778)
Due to (from) related parties - net (642) (9,482) (875) 462
Long-term debt proceeds 8,100 7,000 27,900 9,000
Issuance of convertible debentures - - - 33,600
Issuance of Fund units - - - 78,930
Issuance of Class A units of the Fund - - - 67,275
Deferred financing costs - - (15) (4)
---------------- -----------------
(4,680) (13,635) (9,806) 159,485
---------------- -----------------

Increase (decrease) in cash and cash
equivalents 6,760 (4,208) 8,675 6,986
Cash and cash equivalents -
Beginning of period 35,875 33,825 33,960 22,631
---------------- -----------------
Cash and cash equivalents -
End of period 42,635 29,617 42,635 29,617
---------------- -----------------
---------------- -----------------
Supplemental cash flow information
Interest paid 1,518 879 4,524 2,673
---------------- -----------------
---------------- -----------------

The accompanying notes are an integral part of these interim consolidated
financial statements.


Gateway Casinos Income Fund

Notes to Consolidated Financial Statements

September 30, 2007

(Unaudited)

1 Organization and nature of operations Organization

The Gateway Casinos Income Fund (the "Fund") is an unincorporated open-ended limited purpose trust established under the laws of the Province of British Columbia pursuant to the Declaration of Trust made as of October 10, 2002, as amended and restated on November 14, 2002. The Fund was established to invest indirectly, through the Gateway Casinos Trust (the "Trust"), in all of the Class B Partnership Units of the Gateway Casinos Limited Partnership (the "Partnership"), which operates the Burnaby Casino in Greater Vancouver, British Columbia, the four Lake City Casinos in the Thompson/Okanagan region of British Columbia and the Palace Casino in Edmonton, Alberta. In 2004, the Fund acquired the net assets of Villa Hotels Ltd. in Burnaby, B.C., which it operated from July to October 2004 and is currently redeveloping. On May 19, 2006, the Fund acquired the Cascades Langley Casino and Hotel (note 5).

Nature of operations

The Burnaby Casino, Cascades Casino and the Lake City Casinos are operated pursuant to Casino Operational Services Agreements ("COSAs") between the Partnership and the British Columbia Lottery Corporation ("BCLC"). The Palace Casino is operated pursuant to a Casino Facility License, a Casino Gaming Retailer Agreement, and a Video Lottery Retailer Agreement between the Partnership and the Alberta Gaming and Liquor Commission ("AGLC"). The COSAs for the Burnaby Casino and the Lake City Casinos provide for a 10-year term commencing in 2001 (except for the Penticton Casino, which commenced in 2000), with an option to extend for an additional 10 years, subject to certain conditions. The COSA for the Cascades Casino also provides for a 10-year term, with an option to extend for an additional 10 years, subject to certain conditions, commencing in 2005. The Casino Facility License from the AGLC has a three-year term that expires on October 31, 2009. Prior to 2006, the Palace Casino Facility License was issued for a term of one year only, and had been renewed annually since 1996. Prior to 1996, the Palace Casino (from its opening in 1989) operated under casino support agreements with individual charities. The other agreements with the AGLC have no specified term and are effective until terminated, at the AGLC's discretion or for certain specified reasons. The Partnership earns gaming revenues based on an agreed percentage of the total win from table games, slot machines and other electronic games as consideration for providing operational services to the BCLC and AGLC.

The operating agreements related to the Partnership's casinos provide that the applicable governing body may suspend or terminate the rights of the Partnership to provide services under the agreements for certain specified reasons. The future operations of the casinos depend on the continuation of the operating agreements.

2 Basis of presentation

These consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") for interim financial statements and include the accounts of the Fund, the Trust, the Partnership and its general partner, Gateway Casinos G.P. Inc., and the Lake City Limited Partnership and its general partner, Lake City Casinos Limited. Intercompany transactions and balances have been eliminated. The disclosures contained in these unaudited interim consolidated financial statements do not include all the requirements of GAAP for annual financial statements.

These interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the Fund for the year ended December 31, 2006.

Certain prior period balances in these interim consolidated financial statements have been reclassified to conform to the current period presentation.

3 Significant accounting policies

These interim consolidated financial statements follow the same accounting principles and methods of their application as the annual audited consolidated financial statements of the Fund, except as follows:

Future Income Taxes

In June 2007, federal legislation was substantively enacted to implement a tax on distributions paid by publicly traded income trusts in Canada, commencing in 2011. As a result, the Fund is required to recognize the future income tax assets and liabilities expected to arise when the tax on distributions becomes applicable. The future income tax assets and liabilities are based on the temporary differences between the tax basis of assets and liabilities of the Fund and Partnership and the corresponding amounts recorded in the Fund's financial statements, to the extent these temporary differences will not have reversed by 2011. Future tax assets or liabilities are calculated using the tax rates for the periods in which the differences are expected to be settled. Future tax assets are recognized to the extent they are considered more likely than not to be received.

4 Offer by New World Gaming Partners Ltd.

On April 3, 2007, the Fund entered into a support agreement (the "Agreement") with New World Gaming Partners Ltd. ("New World Gaming"), a joint venture owned by Publishing and Broadcasting Limited ("PBL") and Macquarie Bank Limited ("Macquarie"), providing for the acquisition by New World Gaming of all of the outstanding units of the Fund.

Under the terms of the agreement, New World Gaming will offer (the "Offer") to acquire all of the outstanding units of the Fund by way of a take-over bid at a price of C$25.26 per unit in cash, representing an aggregate price of approximately C$800 million. This price represents a premium of 25.7% based on the C$20.10 closing price for the Fund units on the Toronto Stock Exchange on April 2, 2007 and a 37.8 % premium to the 90-day volume-weighted average unit price. In addition to the acquisition of the outstanding units of the Fund, New World Gaming will make a concurrent take-over bid for the Fund's 5.35% convertible debentures at a price of C$1,322.51 per C$1,000 principal amount of debentures.

Certain of the Fund's unitholders (the "GCI Unitholders"), including certain of the Fund's trustees and senior officers, holding approximately 31.4% of the Fund's fully diluted units, have agreed to support the Offer and tender their units to the bid.

The Board of Trustees of Gateway, based upon the unanimous recommendation of a Special Committee of the Board of Trustees, has unanimously recommended that unitholders accept the Offer and that the convertible debenture holders accept the offer being made by New World Gaming for such debentures. In its consideration of this matter, the Special Committee received advice from its legal advisor, Lawson Lundell LLP, and its financial advisor, RBC Capital Markets ("RBC"). RBC has rendered an opinion to the Special Committee that the consideration per unit offered pursuant to the Offer is fair, from a financial point of view, to unitholders other than the GCI Unitholders and that the consideration offered for the convertible debentures is fair, from a financial point of view, to the holders of Gateway convertible debentures.

The Agreement between the Fund and New World Gaming provides for, among other things, a non-solicitation covenant on the part of the Fund, subject to customary "fiduciary out" provisions that entitle the Fund to consider and accept a superior proposal, a right in favour of New World Gaming to match any superior proposal and the payment to New World Gaming of a termination payment of approximately C$24 million if the transaction is not completed as a result of the superior proposal and in certain other circumstances.

Under the agreement with New World Gaming, the Fund will continue to pay its regular monthly cash distribution to Fund unitholders of C$0.125 per unit until the expiry of the Offer, including a pro-rata distribution for any partial monthly period.

The Offer will be subject to certain conditions, including acceptance of the Offer by holders of at least 66 2/3% of the outstanding units of the Fund. The transaction is also subject to regulatory approvals, including from the BC Gaming Policy and Enforcement Branch, the British Columbia Lottery Corporation, and the Alberta Gaming and Liquor Commission as well as receipt of certain third party consents.

New World Gaming has also entered in a separate transaction to acquire substantially all of the assets of Gateway Casinos Inc. ("GCI"), which operates the Baccarat Casino in Edmonton, Alberta, and all of the outstanding shares of Star of Fortune Gaming Management (B.C.) Corp. ("SOF") (50% owned by GCI), which operates the Royal City Star Casino and is developing the Starlight Casino, both in Greater Vancouver, B.C. GCI and SOF are privately held companies whose operations are managed by Gateway. Gateway has a right of first offer over all of GCI's operations, including its 50% stake in SOF.

5 Acquisition of Cascades Langley Hotel and Casino

On April 18, 2006, the Partnership entered into an acquisition agreement with Gateway Casinos Inc. ("GCI") and Gateway Langley Holdings Ltd. ("GLHL") to acquire substantially all of the operating assets related to the Cascades Langley Casino and Hotel ("Cascades"). The transaction was initially valued at approximately $106.3 million and closed on May 19, 2006. The purchase price was satisfied through the issue of 4,692,675 units of the Fund and $32.6 million in cash from the net proceeds of an offering by the Fund (the "Offering") of 5.35% convertible extendible unsecured subordinated debentures (the "Debentures"). Under Canadian GAAP, where equity is issued in connection with an acquisition, the acquirer must value the units on the basis of the quoted market price of the units two days before and after the acquisition was announced. Using this methodology, for accounting purposes the units issued were valued at $16.82 per unit, compared to the value of $15.70 per unit used for the determination of the purchase price, resulting in a value of $112.7 million for accounting purposes.

The agreement provided for an adjustment to the purchase price in early 2007, based on the actual distributable cash (see definition of distributable cash in the notes to the audited consolidated financial statements for the Fund for the year ended December 31, 2006) generated by Cascades in the 12 months ended December 31, 2006. If the actual distributable cash was less than the estimated distributable cash of $10.8 million, then units issued to GCI in connection with the transaction were to have been surrendered to the Fund at a price of $15.70 per unit and distributions paid on the surrendered units repaid in full. If the actual distributable cash was greater than the estimated distributable cash, the Fund was to issue additional units at a price equal to the 10-day volume weighted average price of the units on the date of issue. Any adjustment to the purchase price was subject to a maximum of 10% of the initial transaction value, or $10.63 million; 676,910 of the units issued to GCI, and any future cash distributions on them, were held in escrow until settlement of the purchase price adjustment.

Based on the results of Cascades for 2006, the maximum purchase price adjustment was payable, and the amount was recorded as a liability as at December 31, 2006. On April 2, 2007, the Fund issued 546,571 units at a price of $19.44 to satisfy the liability.

The net assets acquired by the Partnership at fair value, including the purchase price adjustment, were as follows:



$
(thousands)
Cash and cash equivalents 3,554
Accounts receivable 399
Inventory 102
Prepaid expenses 97
Property and equipment 52,945
Intangible assets 70,122
Gaming revenue payable to BCLC (1,225)
Accounts payable and accrued liabilities (2,651)
-----------

Total purchase price (including costs of acquisition) 123,343
-----------
-----------


The intangible assets represent the value ascribed to the COSA for the Cascades, and are being amortized over the remaining term of the agreement, including the term of the renewal option which will be 19 years.

As part of the transaction, GCI indirectly retained the right to receive approximately $26.2 million from the BCLC under its FDC program relating to costs incurred in connection with the construction and development of Cascades. In consideration, the Partnership agreed to assign the FDC receivable from the BCLC to GCI by way of a note payable equal to the amount of the FDC receivable. The note is unsecured and is repayable as, and when, the Partnership receives a recovery of the FDC receivable from Cascades, subject to the Partnership's preferential right to recover any eligible maintenance capital expenditures at Cascades prior to repayment under the note. Due to its contingent nature, the note is not reflected on the Fund's balance sheet. During the period from May 19, 2006 to September 30, 2007, the Partnership paid $4,708,000 against this note, including $1,653,000 from January 1 to June 30, 2007 and $858,000 from July 1 to September 30, 2007. The balance of the note outstanding at September 30, 2007 was $21,449,000.

GCI also agreed to fund the completion of the construction of a 500-stall parkade. The project was completed in December 2006 at a total cost of approximately $9.5 million, of which approximately $4.6 million had been incurred at closing. This project is estimated to be 100% eligible for recovery under the FDC and the Partnership has agreed to assign the related FDC receivable to GCI, by way of a similar note payable as with the construction FDC receivable.

6 Credit Facilities

On May 1, 2006, the Fund entered into an agreement with a syndicate of Canadian chartered banks to provide total debt financing of $220 million. Funds will be used to provide construction financing for the Burnaby redevelopment and the potential expansion/relocation of the Lake City Casinos in Kamloops, Kelowna and Vernon. The total financing comprises a $30 million revolving credit facility, a $175 million committed construction facility and $15 million committed construction contingency facility.

Interest on all facilities will be paid monthly in arrears and is based on Gateway's ratio of debt to EBITDA for the period. The Fund's debt to Last Twelve Months (LTM) EBITDA (EBITDA is defined by the Fund as earnings before gain/loss on sale of assets, interest, income allocation on Class A units, amortization and unrealized gain on interest rate swap contract) ratio must not exceed certain thresholds. These thresholds start at a maximum of 3.75:1 and step down in increments of 0.25, reaching 2.5:1 by the end of the fourth quarter of 2010. The Fund must also maintain a fixed charge coverage ratio of not less than one to one, on a rolling four quarter basis. Additionally, the agreement requires that the amounts outstanding under the construction and contingency facilities be reduced by $70 million at substantial completion.

The revolving credit facility has a term of three years and requires interest only payments, while the committed construction and contingency facilities have three year terms commencing at the end of an estimated two-year construction period. During the construction period the Fund is required to make interest-only payments, which will be capitalized as part of the construction loan, after which principal becomes payable in monthly instalments equal to the amount of funds received from the FDC. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

7 Convertible Debentures

Issuance

On April 25, 2006, the Fund issued $35 million of extendible convertible debentures. The maturity date of the debentures initially was June 30, 2006 and was automatically extended to June 30, 2011 upon closing of the Acquisition.

The debentures bear interest at 5.35% payable semi-annually in arrears on June 30 and December 31, each year, commencing December 31, 2006. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount.

The debentures are not redeemable by the Fund prior to June 30, 2009. Subsequent to this date, the debentures may be redeemed in whole or in part at the option of the Fund, at a price equal to their principal amount plus accrued and unpaid interest, provided that the market price preceding the date on which the notice of redemption is given is at least 125% of the conversion price.

Conversion

During the nine months ended September 30, 2007, $13,686,000 of the debentures was converted into 716,539 units of the Fund. A proportional amount of the carrying value of the liability and equity components, totaling $13,117,000 and $706,000 respectively, of the converted debentures have been transferred to the balance of Trust Units in Unitholders' Equity.

As a result of the conversion, a proportional amount of deferred financing costs related to the issuance of the convertible debentures was written off in the period.

8 Long Term Incentive Plan

The Fund has adopted a long-term incentive plan (the "Plan") to provide full-time employees, officers and trustees/directors of the Fund with compensation opportunities that will enhance the ability of the Fund to attract, retain and motivate key personnel and reward officers and employees for significant performance and cash growth. Details of the Plan are provided in the notes to the audited consolidated financial statements for the Fund for the year ended December 31, 2006. Contributions to the Plan are recorded as prepaid employee compensation and are charged to earnings based on the vesting provisions of the Plan using the graded amortization method.

During the quarter ending June 30, 2007, the Board of Trustees waived all vesting requirements for any amounts outstanding at that time that had not yet vested, to allow participants to tender their units to the offer by New World Gaming. The Fund recorded a $648,000 charge to earnings to write off the remaining balance of prepaid compensation expense in the second quarter of 2007.

9 Distributions to unitholders

During the nine month period ended September 30, 2007, the Fund declared distributions to its unitholders of $35,500,000 or $1.2083 per unit. Subsequent to the end of the period, the Fund declared a distribution of $541,000 or $0.0167 per unit related to the operations of September 2007. In addition, the Fund declared distributions of $4,047,000 or $0.125 per unit related to the operations of October 2007 and, in connection with the offer by New World Gaming (see note 4), a special stub cash distribution of $1,888,000 or $0.05833 per unit related to the period from November 1 to 14, 2007. The amounts and record dates of these distributions are as follows:



Amount Per unit
$ $
(thousands)
Declared during the period
February 26 3,889 0.12500
March 26 3,889 0.12500
April 25 4,005 0.12500
May 25 4,033 0.12500
June 26 4,040 0.12500
July 25 4,045 0.12500
July 25 (for the period July 1 - July 25) 3,236 0.10000
August 24 809 0.12500
September 26 4,047 0.12500
September 26 (for the period September 1 - 26) 3,506 0.10830
--------------------

35,499 1.20830
Declared subsequent to the period,
related to the period
October 24 (for the period September 27 - 30) 541 0.01670
--------------------
--------------------

36,040 1.22500
--------------------
--------------------

Declared subsequent to the period, related to the
subsequent period
October 24 (for the period October 1 - 24) 3,133 0.09677
November 5 (for the period October 25 - 31) 913 0.02823
November 5 (for the period November 1 - 14) 1,888 0.05833
--------------------

6,475 0.20003
--------------------
--------------------


10 Segmented information

The Fund has four reporting segments: the Burnaby Casino, Cascades Langley Casino and Hotel, the Lake City Casinos, and the Palace Casino. All business of the Fund is conducted in Canada.



Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
$ $ $ $
(thousands)

Revenue
Burnaby Casino 13,643 12,858 39,685 37,998
Cascades Langley
Casino and Hotel 11,881 10,431 34,042 15,468
Lake City Casinos 11,820 10,759 31,762 29,035
Palace Casino 3,847 4,765 7,024 15,323
-------------------------- ---------------------------
41,191 38,813 112,513 97,824
-------------------------- ---------------------------

Earnings before
long-term incentive
plan compensation
expense, corporate
and general
administration,
future income
tax expense,
interest, income
allocation on
Class A Partnership
Units, transaction
costs, unrealized
mark-to-market
gain on interest
rate swap,
amortization and
loss on sale of
property and
equipment
Burnaby Casino 7,263 7,083 20,769 20,671
Cascades Langley
Casino and Hotel 4,838 4,055 13,065 5,798
Lake City Casinos 5,612 5,563 14,443 13,877
Palace Casino 194 1,254 (1,732) 4,709
-------------------------- ---------------------------
17,907 17,955 46,545 45,055

Long-term incentive
plan compensation
expense (369) (374) (2,148) (1,123)
Corporate and
general
administration (1,640) (1,575) (4,776) (4,338)
-------------------------- ---------------------------
Earnings before
the following 15,898 16,006 39,621 39,594
-------------------------- ---------------------------

Amortization
Burnaby Casino (64) (99) (264) (298)
Cascades Langley
Casino and Hotel (1,756) (1,459) (5,337) (2,074)
Lake City Casinos (339) (579) (1,013) (1,703)
Palace Casino (268) (297) (846) (908)
-------------------------- ---------------------------
(2,427) (2,434) (7,460) (4,983)
-------------------------- ---------------------------

Future income
tax expense - - (26,497) -
Interest income
on secured loans 3,806 3,806 11,296 9,069
Income allocation
on Class A
Partnership Units (3,812) (3,812) (11,310) (9,081)
Unrealized mark-
to-market gain
(loss) on interest
rate swap (129) (562) 579 223
Transaction costs (914) - (2,634) -
Amortization of
corporate property
and equipment (41) (39) (126) (98)
Amortization of
deferred financing
costs (41) (82) (166) (116)
Interest
expense - net (946) (1,222) (3,040) (2,844)
Write-off of deferred
financing costs (30) - (434) -
Loss on sale of
property and
equipment - - (4) (147)
-------------------------- ---------------------------
(4,534) (4,345) (39,796) (7,977)

Net earnings (loss)
for the period (11,364) 11,661 (175) 31,617
-------------------------- ---------------------------
-------------------------- ---------------------------

Property and equipment
additions(1)
Burnaby Casino 12 11 128 138
Cascades Langley
Casino and Hotel 37 24 252 24
Lake City Casinos 63 3,064 237 3,598
Palace Casino 20 31 53 177
Corporate 24 46 42 295
-------------------------- ---------------------------
156 3,176 712 4,232

-------------------------- ---------------------------
-------------------------- ---------------------------

(1) Excluding recoveries from FDC.


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