Gateway Casinos Income Fund

Gateway Casinos Income Fund

March 17, 2005 23:57 ET

Gateway Casinos Income Fund reports strong annual results; records increases in revenue and cash distributions


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: GATEWAY CASINOS INCOME FUND

TSX SYMBOL: GCI.UN

MARCH 17, 2005 - 23:57 ET

Gateway Casinos Income Fund reports strong annual results; records increases
in revenue and cash distributions

(Gateway Casinos Income Fund will hold a conference call to discuss its
results for the three months and year ended December 31, 2004, on Friday,
March 18, 2005 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call
can be accessed by dialing: 1-800-814-3911 or 416-640-4127. A replay will
be available until April 1, 2005 at: 1-877-289-8525 or 416-640-1917.)

BURNABY, BC, March 17 - Gateway Casinos Income Fund (the "Fund")
(TSX: GCI.UN) is pleased to announce its results for the year ended
December 31, 2004.

Despite a number of significant changes to the competitive environment
for the Fund's casinos, most notably the opening of the River Rock Casino in
Richmond, BC in June, all six casinos performed very well during 2004,
resulting in increased revenue and EBITDA compared to 2003.

For 2004, the Fund generated EBITDA of $40.6 million on total revenue of
$96.6 million, compared to EBITDA of $38.9 million on total revenue of
$86.5 million in 2003. Included in the 2004 figures is revenue of $3.0 million
and expenses of $2.7 million from the operations of the Villa Hotel from its
acquisition on June 30 until it was shut down on October 31, 2004. Excluding
these, the Fund generated EBITDA of $40.3 million on revenue of $93.6 million

After interest, amortization and other expenses, net earnings for 2004
were $32.8 million, compared to net earnings of $34.0 million in 2003. This
reduction in net earnings from 2003 is primarily the result of an increase in
interest expense of approximately $1.0 million, from the increased debt in
2004 from the acquisition of the Villa Hotel, and an unrealized loss of
$1.5 million from a mark-to-market adjustment on an outstanding interest rate
swap contract. Excluding the unrealized loss, the Fund's casino operations
generated earnings of $34.2 million in the current year.

"2004 was a year of challenges for Gateway and we are very happy with our
results for the year," said Dave Gadhia, President of Gateway Casinos G.P.
Ltd. "Although the opening of the River Rock Casino in June of 2004 impacted
the revenue at the Burnaby Casino, the impact wasn't as large as we had
anticipated, and was offset by the increases at the Palace Casino and the
Lake City Casinos. We also made a number of operational changes at the
Burnaby Casino through the year to increase our competitive position, and we
believe that we will begin to see the results of these in 2005. The most
significant change was the opening of the 13,000 square foot expansion of the
Burnaby Casino on December 16, 2004, which took us from 300 slot machines to
679 slot machines."

Distributable Cash

During the year, the Fund generated distributable cash of $37.6 million,
or $1.4237 per unit and made distributions for the year of $1.3012 per unit.
The distributable cash generated in 2004 represents and increase of 3% over
the $36.5 million generated in 2003.

Update on the Burnaby Redevelopment

Rezoning efforts on the redevelopment of the Burnaby Casino are ongoing.
In February 2005 the rezoning application was the subject of a public hearing,
where it received no opposition, and the Burnaby City Council gave the
proposed bylaw second reading on March 7, 2005. Final rezoning approval is
expected to be received by the end of the second quarter of 2005.
Decommissioning of the low-rise portion of the hotel began in 2005 and we
anticipate beginning demolition in the second quarter of 2005.

Annual General Meeting

The Annual General Meeting of the Fund will be held on Thursday May 19,
2005 at 1:30pm (PST) at the Terminal City Club in Vancouver, British Columbia.

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.


Management's Discussion and Analysis

This management's discussion and analysis ("MD&A") of our operating
results and financial position is dated as of March 17, 2005, and should be
read in conjunction with the audited consolidated financial statements of the
Gateway Casinos Income Fund (the "Fund") for the year ended December 31, 2004,
as well as the accompanying notes, (the "Audited Financial Statements") which
are reported in Canadian dollars and have been prepared in accordance with
Canadian generally accepted accounting principles.

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; political or economic instability in local markets;
competition; 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.

Structure of the Fund

The Fund was launched on November 28, 2002, when it completed its initial
public offering and indirectly acquired the operating assets of 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, from wholly owned subsidiaries of Gateway Casinos Inc.
("GCI").

The casinos are operated by the Gateway Casinos Limited Partnership
("Gateway" or "the Partnership"), through operating agreements and licenses
with the British Columbia Lottery Corporation ("BCLC") and the Alberta Gaming
and Liquor Commission ("AGLC"). The Fund is, indirectly, a limited partner in
Gateway, and holds all of the voting rights with respect to its operations.
The Fund makes monthly cash distributions to its unitholders based on
Gateway's operating results.

On November 28, 2002, Gateway acquired the operating assets of the
Burnaby Casino, the four Lake City Casinos, and the Palace Casino for total
consideration of $275,539,000, consisting of Class A Units of the Partnership
with a stated capital of $227,180,000 and promissory notes of $48,359,000.
Concurrent with the acquisition, the Fund issued 10,567,000 units at a price
of $10 per unit pursuant to its initial public offering and a further
15,850,687 units at a price of $10 per unit to the shareholders of GCI (the
"GCI Shareholders"). Net proceeds of the offerings totaled $254,726,000, after
deducting offering expenses of $9,451,000. The proceeds were used to subscribe
for 2,550,269 units of Gateway Trust (the "Trust") and $229,524,000 of Trust
Notes bearing interest at 8.0% per annum. In turn, the Trust subscribed for
Class B units of the Partnership with a stated capital of $24,847,000 and
advanced secured loans of $227,180,000 to the GCI subsidiaries (the "Secured
Loans"). The Secured Loans bear interest at 8% per annum and are secured by
all the Class A Units of the Partnership and the proceeds from any
distributions or redemptions of these units.

After the completion of these transactions, the GCI Shareholders held 60%
of the outstanding units of the Fund.

During the year ended December 31, 2004, the GCI Shareholders reduced
their ownership of the Fund to 20% of the issued and outstanding units through
secondary offerings on February 10, 2004 and September 17, 2004. In
conjunction with these sales, the GCI shareholders paid $105,671,500 to one of
the subsidiaries of GCI as partial repayment of certain outstanding loans. In
accordance with the terms of the Secured Loans, the subsidiary of GCI was
required to pay the same amount to the Trust as a partial repayment of the
Secured Loan. The Trust used these funds to subscribe for additional Class B
units of the Partnership, and the Partnership used the funds to redeem Class A
units held by the subsidiary of GCI. The net impact to the consolidated
structure of the Fund was a reduction of $105,671,500 in both the Secured
Loans and the Class A units of the Partnership.

Fund Units
----------

The Fund had 26,417,687 units outstanding as at December 31, 2003,
December 31, 2004 and as at the date of this management's discussion and
analysis. There are no securities outstanding that are convertible into, or
exercisable or exchangeable for, units of the Fund.

Relationship Between the Class A Units of the Partnership & Secured Loans
-------------------------------------------------------------------------

The Class A Units of the Partnership, which are fully described in
note 14 to the Audited Financial Statements, entitle the holder to a
preferential allocation of income and distributable cash equal to 8.01% per
year of the stated capital of the Class A Units. All of the Class A units are
held by subsidiaries of GCI, and, along with all distributions from and
redemptions of the units, are pledged as security Secured Loans advanced by
the Trust.

Since the Fund's inception, the stated capital of the Class A units and
the amount outstanding under the Secured Loans have been equal. This
effectively balances the cash the Partnership pays out on the preferential
distribution on the Class A Units with the interest the subsidiaries of GCI
pay to the Trust on the Secured Loans, so that all the distributable cash
generated by the Partnership is available for distribution to unitholders of
the Fund.

Under the terms of the Partnership Agreement, the Partnership may redeem
the Class A Units in the event that the Trust subscribes for additional
Class B Units of the Partnership. If the Secured Loans are repaid in part or
in full, the Trust can use these proceeds to subscribe for additional Class B
Units of the Partnership, which can in turn redeem Class A Units. In this way,
the Fund can ensure that the stated capital of the Class A Units is equal to
the amount of the outstanding Secured Loans and maintain the balance between
the distributions on the Class A Units and the interest on the Secured Loans.

General

Gateway operates six casinos in Western Canada; five in British Columbia
and one in Alberta. The location of each casino, and the number of slot
machines and table games at December 31, 2004, is listed in the table below.

<<
Number of
slot machines
& electronic Number of
Casino Location games table games

Gateway Casino - Burnaby Burnaby, B.C. 679(1) 34
Lake City Casinos
Kamloops Kamloops, B.C. 300 8
Kelowna Kelowna, B.C. 300 12
Penticton Penticton, B.C. 224 10
Vernon Vernon, B.C. 210 8
Palace Casino Edmonton, AB 705(2) 31(3)

(1) On December 16, 2004 Gateway opened an expansion of the Burnaby
Casino, increasing the number of slot machines from 300 to 679.
(2) During 2004 the Palace Casino operated 672 slot machines, 23 Sega
Royal Ascot terminals and 10 VLTS. In February 2005 the number of
Sega Royal Ascot terminals was reduced to 11 and the number of slot
machines was increased to 684. There was no change in the total
number of electronic machines.
(3) The Palace Casino also operates a 6-table poker room.

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.

Western Canadian Casino Market
------------------------------

In Western Canada, the provincial governments have developed a casino
model where they contract third-party operators, like Gateway, to oversee the
day-to-day operations of casinos.

Under this model, the operators provide the facilities, the furniture and
fixtures, the labour, security, surveillance and administration required to
ensure the casinos operate efficiently. In return, they are paid a fee equal
to a percentage of the revenue generated at each casino. This fee differs
between provinces, as shown below:

British
Columbia Alberta

Slot machines and other electronic games 25% 15%
Table games 40% 50%

In both BC and Alberta, the provincial governments decide which games and
products will be available, set the rules of play (including the pay out on
slot machines and other electronic games), determine the procedures by which
the casinos must be operated, and monitor the operations. They also provide
and maintain all of the gaming equipment, including the slot machines. In BC,
this is the responsibility of the BCLC and in Alberta, the AGLC.

Alberta

The casino market in Alberta is a relatively mature gaming market. The
province has a total of 19 casinos and racing entertainment centers (also
known as racinos) and provides video lottery terminals ("VLTs") in over 1,000
locations. According to the AGLC, at March 31, 2004 there were a total of
6,513 slot machines and 5,992 VLTs in the province. There are five full-
service casinos and 217 VLT retailers in the Greater Edmonton region, serving
a population of approximately 945,000. At March 31, 2004, these facilities had
a total of 2,822 slot machines and 1,217 VLTs.

In 2002 the government of Alberta lifted a moratorium on new casino
facilities. Since that time the AGLC has considered 19 applications for
traditional casinos in five regions of the province, including Calgary and
Edmonton, and nine applications for native casinos in four regions, again
including Calgary and Edmonton. Applications for three traditional casinos and
two native casinos have been approved or are at the final stage in the
licensing process.

Casino Type Location Tourism Region
------ ---- -------- --------------

Camrose Casino Traditional Camrose Alberta Central Region
Alexis Nakota Sioux
Nation Native Whitecourt Alberta Central Region
Deerfoot Inn and Casino Traditional Calgary Calgary Region
Celebrations Casino
and Hotel Traditional Edmonton Edmonton Region
River Cree Resort and
Casino Native Enoch Edmonton Region

Source: Alberta Gaming and Lottery Commission

Both of the projects in the Edmonton region are expected to open sometime
in 2006. The Celebrations Casino and Hotel was advanced to the final licensing
stage in December 2004. It will be connected to an existing hotel in the
northwest section of Greater Edmonton, approximately eight kilometers from the
city centre. When completed, the casino is expected to have 600 slot machines,
31 table games, a dinner theatre and food and beverage facilities. We
understand that owners of the project are in the process of finalizing their
funding arrangements. Construction is estimated to take approximately fourteen
months from finalization of funding.

The River Cree Resort and Casino will be located on the lands of the
Enoch Cree First Nation, located west of the City of Edmonton. The development
includes a 255-room, four-star Marriott hotel, an ice sports complex, a
convention centre and a 78,000 square foot casino with 600 slot machines, 40
table games, a high-limit area and a 12-table poker room, as well as various
food and beverage and entertainment amenities. The casino is expected to open
in the fall of 2006.

British Columbia

By contrast, BC's casino market is relatively immature. On March 31,
2004, there were 19 casinos in the province, with a total of 3,832 slot
machines. In the Greater Vancouver region, there were nine casinos, serving a
population of approximately 2.0 million, with 1,271 slot machines.

BC continues to have a relatively low level of per capita gaming
expenditure compared to other Canadian provinces. According to a study by KPMG
of Canadian gaming revenue for the year ended March 31, 2003, BC's average
spend per capita on casinos was $202, compared to the Canadian average of
$229. When video lottery terminals ("VLTs") are added in, the Canadian average
rises to $466 per adult.

Changes to the BC Market

In recent years, there have been a number of significant changes in BC's
gaming market. In early 2003, the BCLC introduced a strategy to increase the
revenue generated by the province's casinos. The first step in this strategy
was to remove a cap of 300 slot machines and 30 table games per facility and
allow for the installation of new slot technology within the casinos. In March
2003, the BCLC began a program to replace a portion of BC's older "stepper
reel" slot machines with a new generation of interactive, video-based machines
popular in other gaming jurisdictions. By the end of the second quarter of
2003 approximately 25% of our slot machines had been replaced and an
additional 58 slot machines had been installed in our Lake City Casinos. Since
that date the BCLC has continued to ensure that our slot offerings compare to
those in other jurisdictions.

The second phase of the BCLC strategy was to implement a new casino model
in the Greater Vancouver Regional District (the "GVRD"). Under this model
existing GVRD casinos are being consolidated to create a smaller number of
larger facilities, which will provide more entertainment options to customers.
Casino operators in the GVRD have embraced this new model. Since the beginning
of 2004, the following events occurred within BC's gaming market:

1. In April 2004, the Fraser Downs racetrack in Cloverdale, BC
opened a temporary gaming facility with 188 slot machines and
10 Touch Bet Roulette stations. On November 3, 2004, this
facility was replaced by a permanent facility, which holds
400 slot machines.

2. The BCLC began to introduce integrated voucher system ("IVS")
slot machine technology. This technology uses bar-coded tickets
to allow cashless play, permitting players to cash out at a
cashier or self-service terminal, or to use the tickets in other
IVS machines. IVS technology leads to higher operating margins,
as the operator benefits from lower labour costs associated with
cash handling and jackpot payouts, as well as a reduction in
machine downtime related to bill jams and empty machines.

3. On June 25, 2004, the first phase of the new River Rock Casino
Resort opened in Richmond, BC. This phase included a 70,000
square foot facility with 1,000 slot machines and 70 gaming
tables, a 20-table poker room, as well as a food court and
100-seat entertainment lounge. In November 2004, the second phase
opened, with a 400-seat buffet restaurant and a 200-seat sports
bar. A third phase is currently under construction and includes
an all-suite hotel, convention centre and a 1,000-seat show
lounge.

4. Two existing tables-only casinos in Richmond and Vancouver were
closed concurrently with the opening of the River Rock Casino.

5. On July 22, 2004, the Vancouver City Council approved a rezoning
application allowing between 600 and 900 slot machines to be
installed at the Hastings Racecourse. Management of Hastings
Racecourse has indicated that 600 slot machines will be installed
in the last quarter of 2005.

6. In September 2004, the City of Coquitlam approved the expansion
of the Coquitlam Casino, which will include additional casino
space, expanded food and beverage facilities, an
auditorium/theatre and a 1600-stall parkade. While the City has
given its approval for the installation of up to 1,000 slot
machines, management understands that on completion of the
expansion the casino will house 850 slot machines.

7. On December 16, 2004 Gateway opened the 13,000 square foot
expansion to the Burnaby Casino, adding 379 slot machines, all of
which are IVS capable, bringing the total number of slot machines
to 679. Liquor service was introduced at the casino in
January 2005.

8. On February 3, 2005 the new Edgewater Casino opened at the
Plaza of Nations in Vancouver. This facility has 600 slot
machine, 48 table games, a four-table poker room, food and
beverage amenities and a 454-seat theatre.

9. GCI, the former operator of the Fund's casinos, continued
construction on a new casino being built in Langley, BC,
approximately 45 minutes east of Vancouver. The casino is
scheduled to open in May 2005 and will hold 500 slot machines,
24 gaming tables, and a 8-table poker room. The Partnership has a
right of first offer from GCI on this facility (see "Transactions
with Related Parties - Right of First Offer and Pre-emptive
Right")

10. In January 2005 Gateway submitted a rezoning application to the
City of Burnaby for the development of a new casino, hotel and
convention centre on the site of the former Villa Hotel in
Burnaby, which was acquired in June 2004. The related bylaw was
the subject of a public hearing on February 24, 2005, where it
received no opposition, and received second reading from the
Burnaby City Council on March 7, 2005. Final rezoning approval is
anticipated to be received by the end of the second quarter of
2005.

In addition to the changes that are occurring in Greater Vancouver, the
new Treasure Cove Casino opened in Prince George, BC on September 16, 2004 and
the BCLC has introduced the concept of Community Gaming Facilities ("CGFs")
within rural communities in BC. The 15,000 square foot Treasure Cove Casino in
northern British Columbia includes 350 slot machines and 12 table games, plus
a restaurant and lounge, and a 300-seat show theatre.

CGFs will allow for the introduction of between 25 and 100 slot machines
into existing bingo halls. To date, the BCLC has approved applications for
CGFs in Dawson Creek, Williams Lake, Kelowna and Campbell River, and has
received expressions of interest from facilities in Powell River, Courtenay,
Fort Nelson, Kamloops, Mission, Port Alberni, Fort St. John and Prince George.
The first of these facilities was opened in October 2004 in Dawson Creek. The
facilities in Kamloops and Kelowna were opened in March 2005, with 50 slot
machines each.

With these recent changes, the BC gaming market now comprises 18 full-
service casinos and the Fraser Downs racino, providing over 6,200 slot
machines. In the GVRD there are now eight casinos and one racino with a total
of 3,209 slot machines.


Financial Performance


Selected Annual Information
---------------------------
(C$ in thousands, except per unit figures)


Year Year
ended ended
December December December December
31, 31, 31, 31,
2004 2003 2004 2003
----------------- -----------------

Revenue Total assets 209,039 285,529
-----------------
Table games 28,174 26,242 -----------------
Slot machines and Total long-term
other electronic financial
games 58,996 54,964 liabilities 163,869 249,180
Hotel revenue 3,029 - Unitholders'
Other 6,361 5,309 equity 21,446 22,991
----------------- -----------------
96,560 86,515 -----------------

Expenses 56,002 47,620
-----------------
Earnings before
interest,
amortization and
unrealized loss
on interest rate
swap 40,558 38,895
-----------------
-----------------

Net earnings 32,830 33,991
-----------------
-----------------
Basic and
fully-diluted
earnings per unit 1.24 1.29
-----------------
-----------------

Distributable
cash generated,
per unit 1.4235 1.3829
-----------------
-----------------
Distributions
declared,
per unit 1.3012 1.2760
-----------------
-----------------

Results of Operations
---------------------

Revenue

Gateway's revenue is primarily earned through fees paid by the BCLC for
operating the five BC casinos and by the AGLC for operating the Palace Casino.
We also generate revenue by providing related casino services such as food and
beverage, parking, foreign exchange services, and automated teller machines.

Total consolidated revenue for 2004 was $96.6 million. This includes
$3.0 million generated by the operations of the Villa Hotel from its
acquisition on June 30, 2004 to October 31, 2004 when it was closed in
anticipation of the redevelopment of the Burnaby Casino (see "Outlook").
Excluding the hotel revenue, total revenue for 2004 was $93.6 million, which
was an increase of 8.1% over total revenue of $86.5 million in 2003. On a
quarterly basis, revenue was:

2004
C$ in thousands Q1/04 Q2/04 Q3/04 Q4/04 Total
--------------------------------------------

Table games revenue 7,171 6,587 6,921 7,495 28,174
Slot machines and other
electronic games revenue 14,352 14,733 15,182 14,729 58,996
Hotel revenue - - 2,337 692 3,029
Other revenue 1,656 1,732 1,622 1,351 6,361
--------------------------------------------
23,179 23,052 26,062 24,267 96,560
--------------------------------------------
--------------------------------------------

As discussed in the 2003 MD&A, changes within BC's casino industry during
the last three quarters of 2003 resulted in significant increases to our
revenues. These changes include:

- The replacement of approximately 25% of our BC slot machines with
a new, more interactive slot product. This resulted in an increase
of approximately 25% in the average "win-per-day-per-machine" for
all our BC slot machines;
- The addition of 58 slot machines in our Lake City Casinos;
- A permanent three-hour increase in the daily operating hours at our
Burnaby Casino; and
- The introduction of Touch Bet Roulette at our Burnaby Casino.

All of these factors contributed to the substantial year-over-year
increases we recorded in table games and slot machine revenues in 2004.
Results for individual operations are discussed in more detail in "Operating
Segments" below.

There were no significant changes to our casino operations in the first
nine months of 2004. In October we began the construction work to expand the
Burnaby Casino. This expansion, which was completed and opened on December 16,
2004, added 13,000 square feet to the casino, allowing the installation of an
additional 379 slot machines. While this increased our slot machine revenue
during December, the gains were offset by the impacts of the construction on
revenues during late November and early December. Additionally, we generally
begin to see revenues taper off towards the end of the fourth quarter as we
near the holiday season, particularly at the Lake City Casinos and the Palace
Casino. The net impact of these factors was that total revenue for the fourth
quarter, excluding hotel revenue, was down slightly from the third quarter of
this year. Please see the discussion on operating segments below for
additional information.

Expenses

Total expenses for the year were $56.0 million, which represents 58% of
total revenue. Excluding hotel operating costs, expenses for the year were
$53.3 million, or 57% of revenue excluding hotel revenue. This compares to
expenses of $47.6 million, or 55% of revenue, in the same period of 2003.
Total expenses comprised the following:

Year Year
ended ended
December December
31, 31,
C$ in thousands 2004 2003
-----------------
Corporate and general administration 4,268 4,296
Cost of food & beverage services 1,935 1,602
Human resources 37,763 32,565
Marketing and promotions 2,016 1,962
Occupancy 3,085 2,493
Operating 4,216 4,702
Hotel operating costs 2,719 -
-----------------
56,002 47,620
-----------------
-----------------

Included in operating expenses are recoveries of previous years' expenses
from Facility Development Funds ("FDF") of $2,015,000 and $615,000, for the
years ended December 31, 2004 and 2003, respectively.

During 2004 the Fund finalized the terms of its long-term incentive plan
and adjusted its accounting treatment accordingly. The Fund accounts for
contributions beginning in the year the contribution was earned, with the
expense being recorded as part of Human Resources cost. To bring the total
amount of the 2003 award that has been expensed to the end of the current year
to the required amount under the finalized terms of the long-term incentive
plan, the Fund recorded a change in estimate adjustment of $641,000 in the
current year, which related to 2003. Details of the plan can be found in note
17 to the Audited Financial Statements.

Total expenses in 2004 and 2003 after adjusting for the above items were:

Year Year
ended ended
December December
31, 31,
C$ in thousands 2004 2003
-----------------
Total expenses as reported 56,002 47,620
FDF recovery of previous years' expenses 2,015 616
Adjustment for change in finalization of terms of
long term incentive plan (641) 641
-----------------
Net adjusted expenses 57,376 48,877
-----------------
-----------------

Excluding hotel operating costs of $2,719,000 in 2004, total adjusted
expenses were $54.7 million, which was an increase of 11.8% compared to 2003.

The majority of this increase is due to higher human resources costs.
Representing nearly 70% of the total, wages and benefits are the largest
component of our expenses. Consequently, we actively manage our labour
expenses, effectively matching them to visitation levels and patterns at our
casinos. Increases in labour costs at each of our operations represent the
primary reason for the overall increases in expenses compared to 2003, which
are discussed below in "Operating Segments".

Expenses on a quarterly basis were:

2004
C$ in thousands Q1/04 Q2/04 Q3/04 Q4/04 Total
--------------------------------------------
Corporate and general
administration 1,086 1,137 1,186 859 4,268
Cost of food & beverage
services 459 451 490 535 1,935
Human resources 8,427 9,535 9,168 10,633 37,763
Marketing and promotions 316 575 488 637 2,016
Occupancy 791 784 699 811 3,085
Operating 900 749 1,096 1,471 4,216
Hotel operating costs - - 1,925 794 2,719
--------------------------------------------
11,979 13,231 15,052 15,740 56,002
--------------------------------------------
--------------------------------------------

Percentage of total revenue 51.7% 57.40% 57.8% 64.9% 58.0%
--------------------------------------------
--------------------------------------------

Expenses in the fourth quarter of 2004 include approximately $1.0 million
of employee compensation expense related to the Fund's long-term incentive
plan, and the second quarter of 2004 includes approximately $600,000. $640,000
of the total relates to 2003, while the remainder represents the expenses for
all of 2004. In the future, the Fund will record the expense on a monthly
basis, which will eliminate the fluctuations in quarterly expenses. Please see
the additional discussion for quarterly EBITDA below under "Summary of
Quarterly Results".

EBITDA and Net Earnings

EBITDA is not a defined term under Canadian generally accepted accounting
principles, 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 interest and amortization ("EBITDA")
of $40.6 million for the year ended December 31, 2004, resulting in an EBITDA
margin of 42.0%, before the adjustment for the change in accounting policy
discussed above.

The reconciliation between EBITDA and net earnings is:

Year Year
ended ended
December December
31, 31,
C$ in thousands 2004 2003
-----------------

EBITDA 40,558 38,895

Interest income on secured loans 13,803 18,174
Income allocation on Class A Partnership Units (13,820) (18,197)
Interest expense, net (2,211) (1,226)
Unrealized loss on interest rate swap contracts (1,461) -
Loss on sale of assets - (124)
Amortization (4,039) (3,531)
-----------------
Net Earnings 32,830 33,991
-----------------
-----------------

As discussed above in "Structure of the Fund", the secured loans and
Class A partnership units were reduced by $105.7 million during 2004 in
connection with the reduction of ownership of the Fund by the GCI shareholders
to 20% (see "Capital Resources - Secured Loans and Class A Partnership Units"
for more information). This resulted in a reduction in interest income earned
on the secured loans, which was completely offset by a decrease in the income
allocation on Class A partnership units.

Interest expense incurred in 2004 increased by approximately $1.0 million
from 2003 due entirely to the increase in long-term debt during the year. As
discussed in "Contractual Obligations", Gateway increased its outstanding
long-term debt from $22.0 million at the end of 2003 to $48.6 million, in
connection with the acquisition of the Villa Hotel on June 30, 2004.

During the third quarter of 2004, the Fund issued $40 million of
long-term notes payable and used the funds to repay all of the outstanding
amounts under its revolving credit lines. This resulted in hedge accounting no
longer being applicable to the associated interest rate swap contract (see
"Change in Accounting Policies") and in the Fund was required to record the
contract at its fair value and record an unrealized mark-to-market loss on its
income statement. During the fourth quarter of 2004 the existing swap was
terminated and the market value was blended into a new interest rate swap
contract that matches the expected timing and draws on the construction
facility for the new Burnaby Casino (see "Contractual Obligations - Interest
Rate Risk"). Gateway has elected not to apply hedge accounting for this
contract, which is recorded at its fair value at December 31, 2004, resulting
in a net unrealized loss of $1.5 million for 2004.



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

-----------------------------------
2004
Q4 Q3 Q2 Q1
-----------------------------------
Revenue
Table games revenue 7,495 6,921 6,587 7,171
Slot machines and other
electronic games revenue 14,729 15,182 14,733 14,352
Hotel revenue 692 2,337 - -
Other revenue 1,351 1,622 1,732 1,656
-----------------------------------
Total revenue 24,267 26,062 23,052 23,179

Expenses 15,740 15,052 13,232 11,979
-----------------------------------
EBITDA(1) 8,527 11,010 9,820 11,200
-----------------------------------
-----------------------------------

Net earnings 6,249 8,044 8,558 9,979
-----------------------------------
-----------------------------------

Basic and diluted earnings per unit 0.24 0.30 0.32 0.38
-----------------------------------
-----------------------------------

Distributable Cash 9,299 9,105 9,047 10,159
-----------------------------------
-----------------------------------

Per unit 0.351 0.345 0.343 0.385
-----------------------------------
-----------------------------------



-----------------------------------
2003
Q4 Q3 Q2 Q1
-----------------------------------
Revenue
Table games revenue 7,536 6,478 6,076 6,152
Slot machines and other
electronic games revenue 14,406 14,800 13,868 11,886
Hotel revenue - - - -
Other revenue 1,514 1,411 1,208 1,176
-----------------------------------
Total revenue 23,456 22,689 21,152 19,214

Expenses 12,529 11,963 12,031 11,099
-----------------------------------
EBITDA(1) 10,927 10,726 9,121 8,115
-----------------------------------
-----------------------------------

Net earnings 10,032 9,292 7,827 6,840
-----------------------------------
-----------------------------------
Basic and diluted earnings per unit 0.38 0.35 0.30 0.26
-----------------------------------
-----------------------------------

Distributable Cash 9,226 10,260 9,107 7,939
-----------------------------------
-----------------------------------

Per unit 0.349 0.388 0.345 0.301
-----------------------------------
-----------------------------------
(1) EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA" and Net
Earnings"

As discussed above, Gateway finalized the terms of its long-term
incentive plan. Including the $641,000 change in estimate adjustment for 2003
contributions, expenses for 2004 include a total of $1,491,000 related to long-
term incentive plan contributions, of which $576,000 is included in the second
quarter of 2004 and the remainder in the fourth quarter of 2004. In future,
this item will be expensed monthly to eliminate the quarterly fluctuations in
EBITDA and net income seen in 2004. Had the long term incentive plan been
finalized at December 31, 2003, quarterly EBITDA would have been:


-----------------------------------
C$ in thousands 2004
Q4 Q3 Q2 Q1
-----------------------------------

EBITDA(1) as reported 8,527 11,010 9,821 11,200

Adjustment for finalization of
terms of long terms incentive plan 65 - 576 -
2004 compensation expense from
long-term incentive plan 986 - - -
2003/2004 compensation expense
recorded quarterly (247) (246) (247) (246)
-----------------------------------
Adjusted quarterly EBITDA(1) 9,331 10,764 10,150 10,954
-----------------------------------
-----------------------------------


-----------------------------------
C$ in thousands 2003
Q4 Q3 Q2 Q1
-----------------------------------

EBITDA(1) as reported 10,927 10,726 9,121 8,115

Adjustment for change in
accounting policy - - - -
2004 compensation expense from
long-term incentive plan - - - -
2003/2004 compensation expense
recorded quarterly (161) (160) (154) (153)
-----------------------------------
Adjusted quarterly EBITDA(1) 10,766 10,566 8,961 7,955
-----------------------------------
-----------------------------------
(1) EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA" and Net
Earnings"

Operating Segments
------------------

The Partnership has three primary operating segments based on geographic
markets. These are the Burnaby Casino, the Lake City Casinos and the Palace
Casino. During the third quarter of 2004, the Partnership also operated the
Radisson Villa Hotel in Burnaby, after acquiring it on June 30, 2004. These
operations were temporary, as the hotel was shut down on October 31, 2004 in
anticipation of its demolition in connection with the redevelopment of the
Burnaby Casino. Operations of the hotel have not been included in this
discussion of operating segments. Readers can refer to note 21, Segmented
Information, to the Audited Financial Statements for additional information.

Burnaby Casino


Three months ended Year ended
C$ in thousands December 31, December 31,
2004 2003 % change 2004 2003 % change
-----------------------------------------------------
Revenue
Table games
revenue 4,875 4,942 17,693 16,332
Slot machine
revenue 5,343 5,611 21,443 20,393
Other revenue 171 313 1,155 1,026
-----------------------------------------------------
10,389 10,866 -4.4% 40,291 37,751 6.7%
-----------------------------------------------------

Operating expenses
Human resources 3,412 2,900 12,135 10,257
Occupancy 89 207 605 781
Other operating
expenses 867 757 3,017 2,292
-----------------------------------------------------
4,368 3,864 13.0% 15,757 13,330 18.2%
-----------------------------------------------------

Operating earnings
before amortization 6,021 7,002 -14.0% 24,534 24,421 -0.3%
----------------- -----------------
----------------- -----------------

During the year ended December 31, 2004, total revenues at the Burnaby
Casino rose by $2.5 million compared to the same period in 2003. All revenue
categories showed year-over-year increases. The increase in table games
revenue is primarily due to a full year's impact of the three hour increase in
operating hours implemented in August 2003, as well as the introduction of
craps and the move to 24-hour operations in June 2004. While the increase in
operating hours also had a minor impact on the slot machine revenues for 2004,
the greatest increase came from a full year's operation of the new, more
interactive product that replaced some of the casino's older slot machines in
the second quarter of 2003.

As we reported in the second quarter, the June 25, 2004 opening of the
River Rock Casino in Richmond, BC impacted slot machine revenue at the Burnaby
Casino. Almost immediately, we saw a drop in the average win per machine per
day of approximately $100, or 12%, where it remained until the opening of our
expanded facility. Burnaby's table game revenues have not been impacted by
River Rock at all, with results remaining consistent with the averages
achieved prior to the Richmond casino's opening. As Gateway receives only a
portion of net win as its revenue, each $1 decrease in total slot machine and
table games win translates to a $0.25 and $0.40 decrease in our revenue,
respectively.

Revenue at the Burnaby Casino in the fourth quarter of 2004 was
approximately $480,000 lower than during the same period in 2003. Most of this
decrease came from the slot machines and was primarily due to the impact of
the River Rock Casino. Average win per slot machine per day (prior to the
opening of the expansion) was approximately $91 lower in the fourth quarter of
2004 than in the same period of 2003.

On December 16, 2004, Gateway opened a 13,000 square foot expansion of
the Burnaby Casino. This added 11,000 square feet of new gaming space,
allowing for the installation of 379 additional slot machines and bringing the
total number of slot machines in operation to 679. The expansion also included
the introduction of liquor service to the gaming floor and the expansion of
the smoking room from 70 slot machines to 195 slot machines.

The year-over-year rise in the Burnaby Casino's expenses is primarily due
to increased wages and benefits, which are related to:

- the increase in the facility's operating hours from 18 hours per day
to 21 hours per day, implemented in August 2003;
- the introduction of the game of craps in June 2004; and
- the increase in operating hours from 21 hours per day to 24 hours per
day, implemented in June 2004
- planned wage increases
- additional wages related to extensive training for all casino
personnel

On June 19, 2004, we introduced the game of craps at the Burnaby Casino.
As this game is much more labour-intensive than other table games, it costs
more to operate. However, this is offset by a higher commission rate paid by
BCLC on the game. Operators in BC receive:

- 75% of the net win up to a net win of $270,000 per quarter, plus
- 40% of net win in excess of $270,000 per quarter.

During the last week of June, the Burnaby Casino's operating hours were
increased to 24 hours per day. Although this does not have a significant
impact on our revenue, the change increases our daily operating costs,
primarily through increased labour costs. This initiative was necessary to
stay competitive with other local casinos, as our customers remain at our
casino, rather than leaving to play at another facility that offers longer
hours.

During the last half of 2004 the Partnership made a significant
commitment to increasing the efficiency and improving the level of customer
service at the Burnaby Casino through extensive training. All casino employees
went through a one-day customer service seminar that was developed
specifically for casinos. Additionally all casino management employees were
given three days of management training focusing on leadership skills,
communications and conflict resolution. This training resulted in an
additional $62,000 of wage costs during the year. We believe that this
expenditure will provide excellent returns, allowing us to ensure that our
customer service exceeds best-of-class standards to maintain our market
position as the competitive environment increases.

In addition, the expansion of the casino adds approximately $2.5 million
in annual labour costs, of which $100,000 is included in the fourth quarter
from the 16 days of expanded operations.

Occupancy costs for the Burnaby Casino were reduced in the third quarter,
as we acquired the casino property with the acquisition of the Villa Hotel and
no longer have to pay rent.

The following table compares the Burnaby Casino's results for the four
quarters of 2004:

C$ in thousands
Q1/04 Q2/04 Q3/04 Q4/04 Total
--------------------------------------------
Revenue
Table games revenue 4,594 4,095 4,128 4,876 17,693
Slot machine revenue 5,691 5,401 5,008 5,343 21,443
Other revenue 373 336 276 170 1,155
--------------------------------------------
10,658 9,832 9,412 10,389 40,291
--------------------------------------------

Operating expenses
Human resources 2,706 2,959 3,058 3,412 12,135
Occupancy 224 208 84 89 605
Other operating expenses 609 751 790 867 3,017
--------------------------------------------
3,539 3,918 3,932 4,368 15,757
--------------------------------------------

Operating earnings before
amortization 7,119 5,914 5,480 6,021 24,534
--------------------------------------------
--------------------------------------------


Lake City Casinos

Three Months
ended Year ended
C$ in thousands December 31, December 31,
% %
2004 2003 change 2004 2003 change
-------------------------- --------------------------
Revenue
Table games
revenue 966 924 3,979 3,583
Slot machines and
other electronic
games revenue 6,546 6,292 26,811 24,904
Food & beverage
revenue 159 148 648 564
Other revenue (124) 9 174 112
-------------------------- --------------------------
7,547 7,373 2.4% 31,612 29,163 8.4%
-------------------------- --------------------------

Operating expenses
Human resources 3,913 3,692 15,080 13,700
Occupancy 374 (288) 1,230 517
Other operating
expenses 1,037 886 3,300 3,047
FDF expense
recovery (175) (615) (2,015) (615)
-------------------------- --------------------------
5,149 3,675 40.1% 17,595 16,649 5.7%
-------------------------- --------------------------

Operating earnings
before amortization 2,398 3,698 -35.2% 14,017 12,514 12.5%
----------------- -----------------
----------------- -----------------

Total revenue at the Lake City Casinos for 2004 was $2.4 million higher
than 2003, due mainly to increases in both table games revenue and slot
machine revenue.

The primary driver of the increased slot machine revenue was the upgrade
of slot machines in all four casinos and the installation of additional
machines at the Vernon and Kamloops casinos. As both of these changes occurred
in the first half of 2003, the 2003 results reflect their impact for less than
a full year, whereas 2004 represents a full year of results from the new
machines. No additional machines were added to the Lake City Casinos in 2004.

Operating expenses for both 2003 and 2004 include recoveries from the FDF
of previous years' expenses, as detailed in the following table. Additionally,
occupancy costs for the fourth quarter 2003 include an adjustment of
approximately $640,000 in the FDF rent recovery related to the first three
quarters of 2003. Excluding these recoveries, total expenses for the fourth
quarter of 2004 were $5.3 million, or an increase of 8.0% over the same period
in 2003, and $19.6 million for the year, or an increase of 13.6%.

Three Months
ended Year ended
C$ in thousands December 31, December 31,
% %
2004 2003 change 2004 2003 change
-------------------------- --------------------------

Operating expenses 5,149 3,675 17,595 16,649
FDF expense
recoveries 175 615 2,015 615
FDF rent recovery
adjustment - 640 - -
-----------------------------------------------------
5,324 4,930 8.0% 19,610 17,264 13.6%
-------------------------- --------------------------

The rise in expenses in 2004 is mainly due to the $1,380,000 increase in
human resource costs in 2004. This is primarily related to scheduled wage
increases under our contract with employees and the impact of a new collective
agreement effective September 2004. On September 5, 2004, the collective
agreement covering the majority of the Lake City Casino employees, excluding
managers, supervisors and surveillance staff, expired. Negotiations were
ongoing throughout the fourth quarter of 2004 and on January 27, 2005 the
employees ratified a new three-year collective agreement that provided for
annual increases of 2.4% per year. This is equal to the rate of inflation for
the province of B.C. for the year ended November 30, 2004 and was retroactive
to the expiry of the previous contract.

The following table compares our results for each quarter of 2004.



C$ in thousands
Q1/04 Q2/04 Q3/04 Q4/04 Total
--------------------------------------------
Revenue
Table games revenue 962 975 1,076 966 3,979
Slot machines and other
electronic games revenue 6,143 6,723 7,399 6,546 26,811
Food & beverage revenue 147 166 176 159 648
Other revenue 47 182 69 (124) 174
--------------------------------------------
7,299 8,046 8,720 7,547 31,612
--------------------------------------------

Operating expenses
Human resources 3,546 3,745 3,876 3,913 15,080
Occupancy 270 277 309 374 1,230
Food & beverage 86 97 110 104 397
Other operating expenses 615 640 715 933 2,903
FDF expense recovery (533) (612) (695) (175) (2,015)
--------------------------------------------
3,984 4,147 4,315 5,149 17,595
--------------------------------------------

Operating earnings before
amortization 3,315 3,899 4,405 2,398 14,017
--------------------------------------------
--------------------------------------------

The quarterly fluctuations in gaming revenue are consistent with the
historical operations of the Lake City Casinos. The third quarter of the year
is typically the busiest, as visitor levels increase with summer tourism in
the Okanagan region, and the first and fourth quarters are typically the
slowest.

Palace Casino

Three Months
ended Year ended
C$ in thousands December 31, December 31,
% %
2004 2003 change 2004 2003 change
-------------------------- --------------------------
Revenue
Table games revenue 1,653 1,671 6,502 6,327
Slot machines and
other electronic
games revenue 2,841 2,507 10,742 9,667
Food & beverage
revenue 1,097 969 4,022 3,413
Other revenue 42 77 362 194
-------------------------- --------------------------
5,633 5,224 7.8% 21,628 19,601 10.3%
-------------------------- --------------------------

Operating expenses
Human resources 2,256 2,221 8,921 8,608
Occupancy 346 376 1,249 1,195
Food & beverage 414 343 1,528 1,248
Other operating
expenses 633 690 2,338 2,294
-------------------------- --------------------------
3,649 3,630 1.4% 14,036 13,345 5.4%
-------------------------- --------------------------

Operating earnings
before amortization 1,984 1,594 22.3% 7,592 6,256 20.8%
------------------ ------------------
------------------ ------------------

In 2004, total revenue at the Palace Casino increased $2.0 million from
2003, with the majority of this gain coming from gaming revenue. The growth
was due in part to higher overall traffic levels in the casino, particularly
for the slot machines, while 2003 results were negatively impacted by a 10-day
stretch of extremely cold weather in Edmonton in February 2003, which resulted
in reduced revenues for the first quarter of 2003. Growth in food and beverage
revenues is consistent with growth in gaming revenues.

Counteracting the overall growth in gaming revenue was a reduction
related to the discontinued operation of the Sega Royal Ascot Electronic
Racing Game. As discussed in the 2003 MD&A, the Partnership was required to
sell its Sega game to the AGLC on December 31, 2003. In connection with this,
the AGLC restructured the compensation related to operating the Sega game,
reducing it from 75% of net win to 15%. We estimate that this change resulted
in an annual reduction in slot machine and electronic games revenue of
approximately $360,000, net of direct expenses. To mitigate this loss, in
February 2005 12 of the 23 Sega stations were replaced with slot machines,
which have a significantly higher win per day per machine.

Total expenses at the Palace Casino were approximately 5.2% greater
during 2004 than in 2003. This is equally split between increased labour costs
and increased food and beverage costs. Of the $313,000 increase in human
resources costs, approximately 50% represents higher wage rates related to the
implementation of a new three-year contract in the third quarter of 2003. The
remaining rise in labour costs is a result of the casino's increased floor
traffic. The higher food and beverage costs result from the higher food and
beverage sales.

During the third quarter of 2004, Edmonton was hit by a severe storm that
caused flooding and damage in many areas, including at the West Edmonton Mall,
where our casino is located. The specific area that was damaged was not in the
vicinity of the casino and, although there was some minor water leakage, the
Palace Casino did not suffer any harm. However, due to water damage in the
electrical room that supplies the casino, the Palace was without power for
approximately six hours from the late afternoon until the late evening on the
day of the flood. Serious flooding in other areas of the mall resulted in
shutdown of the entire complex in the late afternoon. Operations returned to
normal once power was restored. This reduced revenue by approximately $18,000.

The following table compares the Palace Casino's quarterly results for
2004.

C$ in thousands
Q1/04 Q2/04 Q3/04 Q4/04 Total
--------------------------------------------
Revenue
Table games revenue 1,614 1,517 1,718 1,653 6,502
Slot machines and other
electronic games revenue 2,518 2,609 2,774 2,841 10,742
Food & beverage revenue 984 942 999 1,097 4,022
Other revenue 106 107 107 42 362
--------------------------------------------
5,222 5,175 5,598 5,633 21,628
--------------------------------------------

Operating expenses
Human resources 2,175 2,256 2,234 2,256 8,921
Occupancy 295 297 311 346 1,249
Food & beverage 379 354 381 414 1,528
Other operating expenses 547 564 594 633 2,338
--------------------------------------------
3,396 3,471 3,520 3,649 14,036
--------------------------------------------

Operating earnings before
amortization 1,826 1,704 2,078 1,984 7,592
--------------------------------------------
--------------------------------------------

Outlook
-------

BC Operations

As discussed earlier in this MD&A, BC's gaming market underwent a
significant transformation in 2004. Although we don't anticipate changes to
occur at a similar pace, more growth is expected, including:

1. The opening of the Edgewater Casino in downtown Vancouver on
February 3, 2005.

2. The anticipated opening of the Cascades Casino in Langley in the
second quarter of 2005.

3. The expansion of the Coquitlam Casino, which is anticipated to be
completed during the third quarter of 2005.

4. The introduction of slot machines at the Hastings Racecourse,
expected in the fourth quarter of 2005.

5. The opening of CGFs in Kamloops and Kelowna in March 2005, each
with 50 slot machines.

Although the opening of CGFs in Kamloops and Kelowna will introduce a new
gaming product into cities where the Fund was previously the only provider of
slot machines, we do not believe they will have any significant impact on Lake
City Casinos revenues. The BCLC has indicated that their objective in
introducing this new concept is to support the bingo industry. Therefore to
ensure that the slot machines in CGFs do not overshadow the bingo operations,
the slot machines to be introduced will be of lower denominations than casino
slot machines, which will result in lower jackpots and payouts. We believe
that this differentiation will allow us to maintain our existing market and
result in only minimal impact to our operations. If we assume that the slot
machines in the CGFs will achieve similar win levels as experienced in our
Kamloops and Kelowna casinos, we believe that the maximum impact to our
revenue will be approximately 5%.

Of the changes to the casino market in 2005, we believe the opening of
the Edgewater Casino, the expansion of the Coquitlam Casino and the
introduction of slot machines at Hastings Racecourse may have the potential to
negatively impact the Burnaby Casino's results, as they are relatively close
to our location. As we have discussed in the past, Gateway has developed a two-
stage response to these threats. The first step was the expansion of the
existing Burnaby Casino, which opened on December 16, 2004. As discussed
earlier, the Burnaby Casino was expanded during the fourth quarter by
approximately 13,000 square feet, which allowed for the installation of an
additional 379 slot machines, and brought the total to 679 machines. As part
of this expansion we also increased the size of the smoking room, from 70 slot
machines to 195 slot machines, and introduced liquor service.

By the end of 2005, the gaming market in the immediate area of the
Burnaby Casino is expected to be as follows:

Distance
No. of No. of from
slot table Burnaby Other
Casino machines games Location Casino amenities

Burnaby Smoking room, liquor
Casino 679 32 Burnaby - service, bistro style
restaurant


Coquitlam License restaurant and
Casino 850 60 Coquitlam 15 km expanded food &
beverage, show lounge,
future conference
centre
Edgewater
Casino 600 48 Vancouver 12 km Bistro, future theatre

Hastings Live and telecast horse
Racecourse 500 - Vancouver 5 km racing, restaurant

This is a significant increase in supply but, as we have discussed in
previous reports, we believe there is sufficient unmet demand in the market to
support these new facilities, as well as all of the other projects currently
in the works. Lyle Hall of Hall Hospitality Advisors, Inc., one of Canada's
foremost gaming consultants, recently estimated the annual win potential for
the Greater Vancouver casino market to be approximately $850 million. We
believe this figure is conservative and that the region's potential annual win
is closer to $1 billion. During the year ended March 31, 2004, total win for
the GVRD was $470 million.

While we believe the recent expansion of the Burnaby Casino will help to
mitigate the majority of the competitive pressure from the increased gaming
supply, we are also undertaking a second initiative to further increase the
Burnaby Casino's competitive strength. This involves building a brand new,
large-scale facility that is more in keeping with the BCLC's new model for
GVRD casinos.

On June 30, 2004, Gateway acquired the assets of Villa Hotels Ltd.
("Villa Hotels") in Burnaby, BC. Villa Hotels was the former landlord of the
Burnaby Casino and the owner/operator of the Radisson Hotel Burnaby (the
"Villa Hotel"), located directly across the street from the existing Burnaby
Casino. The purchase price of $24.2 million, including expenses, was paid in
cash, less approximately $7.8 million in outstanding mortgages on the
property, which were assumed by the Partnership.

As discussed above, the first phase of the redevelopment project entailed
expanding the existing facility. The second phase of the project involves
demolishing the low-rise portion of the Villa Hotel and building a new 100,000
square foot casino, full-service restaurant, a new lobby for the hotel, a
convention center and a sports bar, as well as upgrading the existing 200
rooms in the tower portion of the hotel. The new casino will house up to 1,000
slot machines, 60 table games, an 20-table poker room, a high-limit gaming
area, an entertainment lounge and central bar, and the necessary back-of-house
amenities. Upon opening the new facility, the existing casino will be
converted back into 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.

Due to its strategic location on the Trans Canada Highway, the hotel,
commonly known as the Villa Hotel, has been a Vancouver landmark for many
years. We intend to capitalize on this historic recognition by using modern
European villa architecture in the new facility's design. The preliminary
design has been endorsed by both the BCLC and the City of Burnaby.

Development is expected to cost approximately $75 million, with the total
project cost, including the purchase price, estimated at approximately
$100 million. We estimate that approximately 85% of this will be eligible for
additional compensation from the Facility Development Fund for the Burnaby
Casino (see "Capital Resources - Facility Development Fund").

Construction of the new facility is subject to successful rezoning, which
we anticipate receiving in the second quarter of 2005. Subject to receiving
all necessary approvals, the casino is expected to open in the second quarter
of 2007.

Alberta Operation

On July 1, 2005, a ban on smoking in bars, casinos and bingo halls in the
City of Edmonton will come into effect. While Gateway will attempt to
counteract any impact from this new bylaw through marketing and other
measures, we anticipate that the ban could lead to an immediate decline in the
Palace Casino's revenues of up to 15%. Based on the experience of other
jurisdictions that have experienced a smoking ban in recent years, we
anticipate that revenues will return to their pre-ban levels within nine to 12
months of its implementation.

As discussed earlier, two new casinos have been approved for the Edmonton
area. Of these, only the River Cree Resort and Casino is likely to have the
potential to impact Gateway's operations at the Palace Casino. The
Celebrations Casino and Hotel will be located north east of Edmonton's city
centre, outside of the Palace Casino's primary market area.

The River Cree Resort and Casino, which is scheduled for completion in
the fall of 2006 will be located on the Enoch Cree Nation reserve on the
northwest outskirts of Edmonton, less than 10 kilometres from the Palace
Casino. We believe that our strategic location within the West Edmonton Mall,
as well as our established reputation and position in the market, will provide
Gateway with a strong competitive advantage over this facility.

Liquidity

Distributable Cash
------------------

Distributable cash is not a defined term under Canadian generally
accepted accounting principles, 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 about 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's policy is to pay distributable cash to unitholders on a
monthly basis to the maximum extent possible. Distributable cash is defined as
the Fund's cash flow from operating activities before changes in non-cash
working capital items, less required principal payments on debt, less capital
expenditures, net of recoveries from the FDF, less any reserves determined by
the Trustees to be reasonable and necessary for the operations of the Fund.

During the year ended December 31, 2003, the Partnership completed a
renovation of the Kamloops Casino for a total cost of $675,000. This was
funded through a loan of $700,000 from GCI (see note 13 to the Audited
Financial Statements). For the purposes of calculating distributable cash,
these capital expenditures have been excluded, with loan payments reducing
distributable cash when made.

Both the costs of the expansion of the Burnaby Casino, as well as costs
incurred for the redevelopment of the Burnaby Casino, have been excluded from
the calculation of distributable cash in 2004, as they were funded from
sources other than operations. Of the $3.6 million spent on the Burnaby
expansion, $2.4 million had been recovered from FDF before the end of the
year, while the remainder is expected to be recovered in the first quarter of
2005. By the end of December 2004, Gateway had spent approximately
$1.6 million on the redevelopment of the Burnaby Casino, of which $1.3 million
had been recovered from FDF. The remaining amounts, plus the financing fees of
$979,000 for the long-term notes and the bank credit facilities, were funded
from the proceeds generated by the issue of the long-term notes in August
2004. The calculation of distributable cash also excludes the FDF received for
these projects and the proceeds from the issue of the long-term notes.

Distributable cash for the years ended December 31, was as follows:

C$ in thousands Year ended
December 31
2004 2003

Cash flows from operating activities before changes
in non-cash working capital items 39,957 37,646

Maintenance capital expenditures(1) (1,214) (680)
FDF reimbursement received for property and equipment
purchases 641 1,202
Payments made on Kamloops Casino renovation loan (424) (276)
Payments on long-term debt, net (152) (400)
Employee profit sharing plan contributions (1,202) (960)
-----------------

Distributable cash for the period 37,606 36,532
-----------------
-----------------
Per unit 1.4235 1.3829
-----------------
-----------------
(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.


Distributions were made on a monthly basis as follows:

Distribution per unit Payment Date
-------------------------------------------
January 2004 $ 0.105 February 27, 2004
February 2004 0.105 March 31, 2004
March 2004 0.105 April 30, 2004
April 2004 0.105 May 31, 2004
May 2004 0.105 June 30, 2004
June 2004 0.105 July 30, 2004
July 2004 0.105 August 31, 2004
August 2004 0.105 September 30, 2004
September 2004 0.105 October 29, 2004
October 2004 0.110 November 30, 2004
November 2004 0.110 December 31, 2004
December 2004 0.1362(1) January 31, 2005
------------------
$ 1.3012

(1) The December distribution included a regular monthly distribution of
$0.11 per unit plus a special, year-end distribution of $0.0262
per unit

The special year-end distribution reflects our conservative approach to
managing the Fund. Management regularly reviews the underlying fundamentals of
the casino operations and makes recommendations to the Board of Trustees about
the level of monthly distributions. It is our policy to increase the amount of
regular distributions only when there has been a sustainable increase in
Gateway's operations. To this end, we wanted to be reasonably certain that the
increases in our results recorded through the year were not anomalies and that
the full effect of the changes in the BC market had been determined, such that
we would be able to sustain the higher level of distributions. The result was
that we retained excess distributable cash within the Fund during the first
eight months of the year, which was passed on to our unitholders through the
special distribution in December.

Management anticipates that the Fund will generate sufficient
distributable cash in 2005 to maintain its current monthly distribution level.

Contractual Obligations
-----------------------

The following contractual obligations were outstanding at December 31,
2004:

C$ in thousands

Less than 1 - 3 4 - 5 After 5
Total 1 year years Years years

Long-term debt
Promissory note(1) 900 90 180 180 450
Credit Facilities - - - - -
Long term notes 40,000 - - - 40,000
Mortgages 7,713 7,713 - - -
Lease obligations(2) 17,486 1,982 3,982 2,870 8,652
------------------------------------------------
66,099 9,785 4,162 3,050 49,102
------------------------------------------------

(1) repayable in 120 equal monthly payments of $7,500 beginning
January 1, 2005
(2) for the Partnership's casino locations, as well as certain office
equipment and office space


Issue of Long-Term Notes

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. Under the terms of the agreement, Gateway GP issued $40 million
of notes, which bear interest at 6.565%, payable quarterly in arrears, and
mature on August 4, 2011. Proceeds from the offering were used to repay
$37,460,000 outstanding under the Partnership's credit facility and for
certain costs incurred on the redevelopment of the Burnaby Casino in 2004. The
remaining amount is available to fund expenditures related to the
redevelopment of the Burnaby Casino.

Full details of the long-term notes are provided in note 12(b) to the
Audited Financial Statements.

Bank Credit Facility

The Partnership has an available bank credit facility with Bank of
Montreal to provide for a total of $70,000,000 in two facilities (the "Credit
Facilities"). Facility A provides for a maximum of $10 million, available to
the Partnership as a revolving facility. Facility B is a $60 million
construction facility for the redevelopment of the Burnaby Casino. Both
facilities can be drawn as prime-based loans or Bankers Acceptances ("BA's"),
which bear interest at prime plus 0% to 0.50% or BA rates plus 0.875% to
1.50%, respectively, based on the ratio of Debt to EBITDA on a quarterly
basis. Interest on Facility B will be capitalized until completion of the
redevelopment. Thereafter, Facility B will be amortized over a 10-year period,
with the outstanding amount due in full at maturity. The outstanding amount of
Facility B must be permanently reduced to a maximum of $40,000,000 by June 30,
2007.

The Credit Facilities have an initial maturity of three years and can be
extended at the Partnership's request for additional 364-day periods, subject
to a maximum maturity date of three years prior to the maturity of the Casino
Operational Services Agreement (COSA) for the Burnaby Casino. Currently, the
Burnaby COSA matures on March 1, 2011, however the British Columbia Lottery
Corporation has indicated that it will enter into a new 10-year COSA, with an
option to renew for an additional 10 years, upon the opening of the new
Burnaby Casino.

The Partnership is currently negotiating to increase the amount of
Facility B to fund all of the construction costs of the redevelopment of the
Burnaby Casino. We are confident that these negotiations will be successful.

Full details of the Credit Facilities are provided in note 12(c) to the
Audited Financial Statements.

Long-Term Notes Shelf Facility

In addition to the long-term notes issued on August 4, 2004, Gateway has
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.

Interest Rate Risk

The Partnership is subject to interest rate risk on its Credit
Facilities, as the interest payable is based on a floating rate of interest.
The Fund manages exposure to this risk through the use of interest rate swaps
with approved creditworthy counterparties. The Fund does not hold or issue
derivative financial instruments for trading or speculative purposes.

During 2004, the Partnership had one interest rate swap agreement
outstanding with a notional principal amount of $21,500,000 to hedge the
interest rate risk associated with its former credit facilities. The
Partnership applied hedge accounting to this interest rate swap and neither
the notional amount nor the fair value were reported on the Fund's
consolidated balance sheet. When these credit facilities were repaid in full
in August 2004, the interest rate swap no longer qualified for hedge
accounting and the Partnership was required to record the fair value on its
balance sheet.

On December 14, 2004 the Partnership wound up the former interest rate
swap agreement and entered into a forward start interest rate swap contract to
hedge the interest rate risk on the expected drawings on Facility B of the
Credit Facility. The fair value of the former interest rate swap at
December 14, 2004 was a loss of $1,245,760. This amount was blended into the
new forward start swap and no cash was payable by the Partnership.

As at December 31, 2004, the Fund had one interest rate swap contract
outstanding, as follows:

C$ in thousands amount Maturity date Fair value

Interest rate swap contract nil September 1, 2011 (1,461)

The term of the interest rate swap begins February 1, 2005 and the
notional amount increases on a monthly basis to match the expected draws on
Facility B of the Credit Facility used to finance the redevelopment of the
Burnaby Casino. Under the terms of the swap contract, the Fund pays interest
to the counterparty equal to a fixed rate of 5.17% on the notional amount,
payable monthly in arrears, and receives interest equal to a floating rate on
the notional amount. Management will attempt to match the term of the floating
rate payment to that of the floating rate on the Credit Facility. The net
effect of this contract is to fix the rate of interest on the Credit Facility
over the term of the swap contract at a rate equal to 5.17% plus the
applicable rate premium in accordance with the terms of the Credit Facility.

We have determined that the outstanding interest rate swap does not meet
the requirements for hedge accounting under CICA Accounting Guideline AcG - 13
- "Hedging Relationships". Accordingly the interest rate swap is being
accounted for based on the accounting treatment for derivatives. Under this
treatment, the contract is "marked-to-market" at each balance sheet date and
any changes in the fair value are reported as a gain or loss on the income
statement. The fair value of the interest rate swap is reported on the balance
sheet as a long-term liability. Monthly payments on the interest rate swap are
recorded as a reduction in the long-term liability. Under this method the
interest expense reported on the income statement will reflect only the
amounts paid under the terms of the Credit Facility, and not the net cash
amount at the effective fixed rate.

The fair value of the interest rate swap reflects the estimated amount
the Fund would have to pay if it were to unwind the contract at the reporting
date.

Capital Resources

Capital Expenditures
--------------------

Capital expenditures for the year totaled $6.1 million. Of this,
approximately $3.6 was for the expansion of the Burnaby Casino and
$1.3 million was related to the redevelopment of the Burnaby Casino. The
remaining $1.2 million represents maintenance capital expenditures for
Gateway's operations.

The total costs of the expansion of the Burnaby Casino were below the
budgeted cost of $4.0 million.

Currently, with the exception of the redevelopment of the Burnaby Casino
discussed earlier, there are no commitments for capital expenditures in 2005
other than for the maintenance capital expenditures. Management anticipates
that the amount of maintenance capital expenditures required in 2005 will
approximate the expenditures incurred in 2004.

Facility Development Funds
--------------------------

Gateway's agreements with the BCLC include a provision for additional
compensation equal to eligible capital and operating expenses from a Facility
Development Fund ("FDF") equal to 3% of the total net win generated at the
five B.C. casinos. This additional 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.

Of the total capital expenditures for the year, approximately
$5.5 million were eligible for reimbursement from the FDF funds, including all
of the costs of the expansion of the Burnaby Casino and the redevelopment of
the Burnaby Casino. Those capital expenditures that were not eligible for
reimbursement primarily represent costs incurred at the Fund's corporate
office and at the Palace Casino in Alberta.

During the year ended December 31, 2004, the Partnership received
$4.4 million for capital expenditures, including $2.4 million related to the
expansion of the Burnaby Casino and $1.6 million related to the redevelopment
of the Burnaby Casino. The remaining $1.2 million from the expansion of the
Burnaby Casino is expected to be received during the first quarter of 2005.

In addition to the FDF reimbursements for capital expenditures, the Fund
received approximately $3.5 million in reimbursement of operating costs.

C$ in thousands Year ended
December 31,
2004
-------------

Total FDF funds generated during the year 7,406
-------------
-------------

Reimbursements:
Capital 4,421
Operating 3,462
-------------
7,883
-------------
-------------

Secured Loans and Class A Partnership Units
-------------------------------------------

February 2004 Secondary Offering

On February 10, 2004, the GCI Shareholders completed the sale of
4,000,000 units of the Fund, reducing their ownership of the Fund to
approximately 45%. The Fund did not receive any of the proceeds of the
offering.

In connection with this transaction, $40,000,000 of the outstanding
Secured Loans was repaid to the Gateway Casinos Trust (the "Trust"). The Trust
used the proceeds from the repayment of the secured loans to subscribe for
additional Class B Units of the Gateway Casinos Limited Partnership (the
"Partnership") and the Partnership used the proceeds from the issue of Class B
Units to redeem $40,000,000 of Class A Units held by the Vendors.

September 2004 Secondary Offering

On September 17, 2004, the GCI Shareholders completed the sale of
6,567,150 units of the Fund, reducing their ownership of the Fund to 20%. The
Fund did not receive any of the proceeds of the offering.

In connection with this transaction, $65,671,500 of the outstanding
Secured Loans was repaid to the Gateway Casinos Trust (the "Trust"). The Trust
used the proceeds from the repayment of the secured loans to subscribe for
additional Class B Units of the Gateway Casinos Limited Partnership (the
"Partnership") and the Partnership used the proceeds from the issue of Class B
Units to redeem $65,671,500 of Class A Units held by the Vendors.

As a condition of approval for the sale, the GCI shareholders provided
the provincial gaming regulators with a commitment to maintain their
collective ownership of the Fund at a minimum of 20% of the issued and
outstanding units, and the Fund provided the regulators with a commitment that
it would offer a sufficient number of units from any future treasury offering
to the GCI shareholders to enable them to maintain their 20% ownership, and
that it would not proceed with any offering if the GCI shareholders do not
subscribe for and take up the required number of units.

Transactions with Related Parties

The Fund had the following transactions with related parties during the
current year:

1. The costs of the secondary offerings, totaling $608,000, were
paid directly by the Fund and reimbursed to the Fund by the GCI
shareholders from the proceeds of the secondary offerings. As at
December 31, 2004, $294,000 was owing to the Fund, which was
repaid subsequent to the end of the year.

2. The Fund provides management and administrative services to GCI
with respect to its casino operations. Under the terms of a
management agreement, the Fund charges a fee to GCI equivalent to
GCI's proportionate share of management and administrative
expenses. 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
$1,563,000 to GCI for the year ended December 31, 2004
($1,417,000 for the year ended December 31, 2003), which is
recorded in the Audited Financial Statements as a reduction of
administration expenses.

3. The Partnership has a contract with a subsidiary of GCI for
Automated Teller Machine ("ATM") services at the Burnaby Casino.
The Partnership manages the vault cash and provides first line
service, and receives a flat fee of $500,000 per annum, payable
in equal monthly installments. The vault cash is provided by the
subsidiary of GCI. During the year ended December 31, 2004 the
Partnership earned a fee of $500,000 (2003 - $500,000), which is
included in other revenue.

4. Effective November 5, 2003, the Partnership entered into a
contract with a subsidiary of GCI for ATM services at the Palace
Casino. The Partnership 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 subsidiary
of GCI. During the year ended December 31, 2004, the Partnership
earned a fee of $390,000 ($19,000 for the year ended December 31,
2003), which is included in other revenue.

5. Effective February 17, 2004, the Partnership entered into a
contract with a subsidiary of GCI for ATM services at the
Kamloops Casino. The Partnership Partnership 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 subsidiary of GCI. During the year
ended December 31, 2004, the Partnership earned a fee of $147,000
($nil for the year ended December 31, 2003), which is included in
other revenue.

6. During the year ended December 31, 2003, GCI loaned $700,000 to
the Partnership to finance the renovations at the Kamloops
Casino. The loan matures on April 30, 2006, is non-interest
bearing and is repayable in monthly installments equal to the
incremental cash flow generated by the additional 25 slot
machines installed in the casino, plus the amount of the
reimbursement received from the FDF related to the incremental
revenue. Repayments began on June 1, 2003 and the Partnership
repaid $276,000 during the year ended December 31, 2003. The
remaining amount was repaid in full during the current year.

7. The Fund leases its corporate office space from a company
controlled by the Chairman and Chief Executive Officer of Gateway
Casinos G.P. Inc. under a lease agreement dated November 28,
2002. The lease includes use of the office space, as well as
provision of certain office equipment and reception. The lease
expires July 31, 2008 and the monthly rent is $15,400 plus
operating costs. During the year the Fund paid a total of
$273,000 under this lease (2003 - $ 246,000).

Right of First Offer and Pre-emptive Right

In connection with the acquisition of the operations of the Burnaby
Casino, the Lake City Casinos and the Palace Casinos on November 28, 2002, the
Partnership entered into an agreement with GCI where the Partnership acquired
a right of first offer on all of GCI's then existing and future operations
pertaining or relating to the gaming industry, with the exception of GCI's
management contract for the Casino of the Rockies in Cranbrook, B.C. GCI is at
various stages of redevelopment on a number of the projects, including the new
Cascades Casino in Langley, and has stated that it intends to offer the
redeveloped operations to the Fund once they are completed and have reached a
level of maturity in earnings. Management of the Fund estimates that this will
be six to twelve months from opening of each facility.

The agreement also provides the Partnership with a pre-emptive right over
any acquisition opportunities pertaining or relating to the gaming industry
identified by GCI.

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.

Change in Accounting Policies

The Fund implemented the following change in its accounting policies
during the current year:

Effective January 1, 2004, the Fund adopted new guidelines for hedge
accounting in accordance with the CICA's Accounting Guideline 13, "Hedging
Relationships" ("AcG-13"). AcG-13 establishes certain conditions for when
hedge accounting may be applied. Under AcG-13, the Fund's interest rate swap
contract outstanding at the beginning of the current year was considered to be
an effective hedge of the Fund's underlying interest rate exposure on the
Credit Facilities and the hedge accounting continued to apply. This resulted
in the hedging settlement gains and losses being included in net income in the
same period as the hedged interest expense on the credit facilities, as had
been previously done.

During the three months ended September 30, 2004, the Fund repaid all
of the outstanding amounts under the revolving credit facilities.
Accordingly, under AcG-13, the outstanding interest rate swap was no
longer considered to be effective and hedge accounting ceased to
apply. This resulted in the Fund having to recognize the fair value
of the swap contract in its financial statements and record an
unrealized mark-to-market loss in its results for the year.

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 17, 2005 and all public
filings.


Gateway Casinos Income Fund

Consolidated Financial Statements
December 31, 2004 and 2003
(expressed in thousands of dollars)



Auditors' Report

To the Unitholders of
Gateway Casinos Income Fund

We have audited the consolidated balance sheets of Gateway Casinos Income
Fund (the "Fund") as at December 31, 2004 and 2003 and the consolidated
statements of earnings and cumulative earnings and cash flows for the
years then ended. These financial statements are the responsibility of
the Fund's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Fund as at
December 31, 2004 and 2003 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally
accepted accounting principles.

Chartered Accountants

Vancouver, British Columbia
February 18, 2005


Gateway Casinos Income Fund
Consolidated Balance Sheets
As at December 31, 2004 and 2003
-------------------------------------------------------------------------
(expressed in thousands of dollars)
2004 2003
$ $
Assets

Current assets
Cash and cash equivalents 20,171 13,789
Accounts receivable 806 856
Facility development fund receivable (note 6) 1,117 128
Due from related parties (note 18) 834 100
Inventory 195 137
Prepaid expenses 865 371
Prepaid employee compensation (note 17) 89 960
Current portion of prepaid rent (note 7) 804 804
--------------------------
24,881 17,145

Prepaid rent (note 7) 5,761 6,565

Property and equipment (notes 7 and 8) 20,358 5,460

Deferred financing cost 845 -

Deferred development costs 247 -

Goodwill 17,182 9,787

Intangible assets (note 9) 18,257 19,392

Secured loans (notes 10 and 14) 121,508 227,180
--------------------------
209,039 285,529
--------------------------
--------------------------
Liabilities

Current liabilities
Gaming revenue payable to BCLC and AGLC 5,883 3,975
Accounts payable and accrued liabilities 6,530 4,706
Mortgages payable (note 11) 7,713 -
Distribution payable to unitholders (note 5) 3,598 4,253
Loan due to related party (note 13) - 424
--------------------------
23,724 13,358

Interest rate swap contract (notes 16 and 19) 1,461 -

Long-term debt (note 12) 40,900 22,000

Class A Partnership Units (note 14) 121,508 227,180
--------------------------
187,593 262,538
--------------------------
Unitholders' Equity

Issuance of trust units - net of issue costs
(note 15) 22,993 22,993

Cumulative earnings 69,443 36,613

Cumulative distributions declared (70,990) (36,615)
--------------------------
21,446 22,991
--------------------------
209,039 285,529
--------------------------
--------------------------
Organization and nature of operations (note 1)

Basis of presentation (note 2)

Commitments (note 20)

Approved by the Board of Trustees of Gateway Casinos Income Fund


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

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



Gateway Casinos Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
For the years ended December 31, 2004 and 2003
-------------------------------------------------------------------------
(expressed in thousands of dollars, except per unit and number of units
figures)
2004 2003
$ $
Revenue
Table games 28,174 26,242
Slot machines and other electronic games 58,996 54,964
Food and beverage services 4,673 3,977
Hotel 3,029 -
Other (note 18(b)) 1,688 1,332
--------------------------
96,560 86,515
--------------------------
Expenses
Corporate and general administration
(note 18(c)) 4,268 4,296
Cost of food and beverage services 1,935 1,602
Hotel operating 2,719 -
Human resources 37,763 32,565
Marketing and promotions 2,016 1,962
Occupancy 3,085 2,493
Operating 4,216 4,702
--------------------------
56,002 47,620
--------------------------
Earnings before the following 40,558 38,895

Interest income on secured loans (note 10) 13,803 18,174
Income allocation on Class A Partnership Units
(note 14) (13,820) (18,197)
Interest expense - net (2,211) (1,226)
Unrealized mark-to-market loss on interest
rate swap (notes 16 and 19) (1,461) -
Amortization
Property and equipment (1,967) (1,720)
Intangible assets (1,134) (1,125)
Prepaid rent (note 7) (804) (686)
Deferred financing costs (134) -
Loss on the sale of assets - (124)
--------------------------
Net earnings for the year 32,830 33,991

Cumulative earnings - Beginning of year 36,613 2,622
--------------------------
Cumulative earnings - End of year 69,443 36,613
--------------------------
--------------------------
Basic and fully diluted earnings per unit 1.24 1.29
--------------------------
--------------------------
Weighted average number of units 26,417,687 26,417,687
--------------------------
--------------------------

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



Gateway Casinos Income Fund
Consolidated Statements of Cash Flows
For the years ended December 31, 2004 and 2003
-------------------------------------------------------------------------
(expressed in thousands of dollars)
2004 2003
$ $
Cash flows from operating activities
Net earnings for the year 32,830 33,991
Items not affecting cash
Long-term intensive plan compensation 1,627 -
Unrealized mark-to-market loss on interest
rate swap 1,461 -
Amortization of property and equipment 1,967 1,720
Amortization of intangible assets 1,134 1,125
Amortization of prepaid rent 804 686
Amortization of deferred financing costs 134 -
Loss on sale of assets - 124
--------------------------
39,957 37,646
Changes in non-cash working capital items 2,810 (616)
--------------------------
42,767 37,030
--------------------------

Cash flows from investing activities
Purchase of property and equipment (6,111) (1,355)
Facility development funds received for
property and equipment purchases (note 6) 4,420 1,202
Sale of property and equipment 260 117
Acquisition of hotel operations, net of
cash acquired (note 4) (16,288) -
Repayment of secured loans (note 10) 105,672 -
Development costs (247) -
--------------------------
87,706 (36)
--------------------------
Cash flows from financing activities
Distributions paid (35,030) (32,362)
Due from related parties - net (734) (8,196)
Long-term debt proceeds (repayments) 18,748 (1,600)
Loan advanced by related party - net (note 13) (424) 424
Redemption of Class A Partnership Units
(note 14) (105,672) -
Financing costs (979) -
--------------------------
(124,091) (41,734)
--------------------------
Increase (decrease) in cash and
cash equivalents 6,382 (4,740)

Cash and cash equivalents - Beginning of year 13,789 18,529
--------------------------
Cash and cash equivalents - End of year 20,171 13,789
--------------------------
--------------------------
Supplemental cash flow information
Interest paid 1,372 1,330
--------------------------
--------------------------

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



Gateway Casinos Income Fund
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
-------------------------------------------------------------------------
(tabular amounts expressed in thousands of dollars, except for per unit
and number of units figures)

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. During the year, the Fund acquired the net assets
of Villa Hotels Ltd. in Burnaby, B.C. (note 4) which it operated from
July to October 2004.

On November 28, 2002, the Fund issued 10,567,000 units at a price of
$10.00 per unit pursuant to an initial public offering and a further
15,850,687 units at a price of $10.00 per unit to the shareholders of
Gateway Casinos Inc. ("GCI") for total net proceeds of $254,726,000
after deducting expenses of the offering of $9,451,000.

Nature of operations

The Burnaby 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
renew for an additional 10 years, subject to certain conditions. The
Casino Facility License from the AGLC has a one-year term that
expires on October 31, 2006 and has 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 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.

3 Significant accounting policies

These consolidated financial statements reflect the following
significant accounting policies:

Revenue recognition

Revenues from table games, slot machines and other electronic games
consist of the Fund's share of the gaming win pursuant to its
operating agreements with the BCLC and the AGLC and are recognized
daily based on the daily net gaming win at each of the Fund's
casinos. Revenues from hotel and food and beverage operations are
recognized as the related goods and services are provided or sold.

Use of estimates

The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of
revenues and expenses during the period. While management believes
that these estimates and assumptions are reasonable, actual results
could vary significantly.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with a
maturity, at date of purchase, of three months or less.

Property and equipment

Property and equipment are recorded at cost less amortization and
facilities development funding from the BCLC. Management reviews
property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Recoverability is assessed by management by comparing
the carrying amount to the estimated future net cash flows the assets
are expected to generate. Where the carrying value exceeds estimated
net cash flows, the assets are written down to fair value.

Amortization is provided for over the estimated useful lives of the
assets on a straight-line basis at the following annual rates:

Buildings 4%
Furniture and other equipment 20% - 40%
Computer equipment 40%
Leasehold improvements terms of the leases


Goodwill

Goodwill is recorded at cost and is not amortized. The Fund tests
goodwill annually for impairment, or more frequently if events or
changes in circumstances indicate that the asset may be impaired. Any
excess of carrying value over fair value will be charged to income in
the period in which the impairment is determined.

Intangible assets

Intangible assets represent the fair value at date of acquisition
attributable to casino operating agreements or licenses acquired
through the acquisition of operating casinos. Intangible assets are
amortized on a straight-line basis over the term of the related
agreement or license, including any extension option.

Management reviews intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying amount may not
be recoverable. Recoverability is assessed by management by comparing
the carrying amount to the estimated future net cash flows the assets
are expected to generate. Where the carrying value exceeds estimated
net cash flows, the assets are written down to fair value.

Facility development fund recoveries

The Fund receives facilities development funding pursuant to the
Burnaby and Lake City COSAs for eligible capital and operating
expenditures.

Reimbursements of eligible capital and operating expenditures from
the facility development fund ("FDF") are recorded as a reduction in
the cost of the related assets or operating expenses, respectively,
based on when the expenditures are incurred and the amount of funds
accumulated in the related FDF account held in trust. If there are
not sufficient funds available for reimbursement when the
expenditures are incurred, the cost of the related asset or operating
expense is not reduced until funds are available.

Deferred financing costs

Deferred financing costs include expenditures incurred in connection
with the completion of the private placement of long-term notes and
the credit facilities. These costs are amortized over the term of the
related financing.

Deferred development costs

Deferred development costs include expenditures incurred in
connection with the development of facilities. If a project is
abandoned, all related deferred costs are written off.

Hedge accounting

Effective January 1, 2004 the Fund adopted new guidelines for hedge
accounting in accordance with the CICA's Accounting Guideline 13,
"Hedging Relationships" ("AcG-13"). AcG-13 establishes certain
conditions for when hedge accounting may be applied, including the
identification, designation, documentation and effectiveness of
hedging relationships.

Income taxes

Income taxes are not provided for in the Fund as the policy of the
Fund and the Trust is to distribute all of their taxable income to
unitholders on an annual basis.

4 Acquisition of Radisson Hotel Burnaby

On June 30, 2004, the Partnership acquired the net assets of Villa
Hotels Ltd. in Burnaby, B.C., which operated as the Radisson Hotel
Burnaby, for total consideration of $24,177,000 including costs of
the transaction. The purchased assets include the current premises of
the Burnaby Casino. The acquisition has been accounted for by the
purchase method and the results of the acquired business have been
included in the consolidated results of the Fund from the date of
acquisition until the shutdown of the hotel on October 31, 2004. The
allocation of net assets acquired, at fair value, was as follows:

$

Cash and cash equivalents 24
Other current assets 308
Property and equipment 16,548
Goodwill 7,395
Current liabilities (98)
------------
Net assets acquired 24,177
Mortgages assumed (note 11) (7,865)
------------
Net cash consideration 16,312
------------
------------

5 Distributions to unitholders

During the year ended December 31, 2004 and 2003, the Fund declared
distributions to its unitholders of $34,375,000 or $1.3012 per unit
and $33,709,000 or $1.276 per unit, respectively. The amounts and
record dates of these distributions are as follows:

Amount Per unit
$ $

Year ended December 31, 2004
January 31 2,774 .105
February 29 2,774 .105
March 31 2,774 .105
April 30 2,774 .105
May 31 2,774 .105
June 30 2,774 .105
July 31 2,774 .105
August 31 2,774 .105
September 30 2,774 .105
October 31 2,905 .110
November 30 2,906 .110
December 31 3,598 0.1362
-------------------------
34,375 1.3012
-------------------------
-------------------------

Amount Per unit
$ $

Year ended December 31, 2003
January 31 2,642 .10
February 28 2,642 .10
March 31 2,642 .10
April 30 2,642 .10
May 30 2,642 .10
June 30 2,642 .10
July 31 2,642 .10
August 29 2,642 .10
September 30 2,773 .105
October 31 2,773 .105
November 28 2,774 .105
December 31 4,253 .161
-------------------------
33,709 1.276
-------------------------
-------------------------

During December 2004, the Fund declared a distribution of $3,598,000
(2003 - $4,253,000) to unitholders of record on December 31, 2004,
which was paid subsequent to year-end and is reported as a current
liability at December 31, 2004.

6 Trusts funds and liabilities

Cash floats

Under the terms of the COSAs, cash floats of $6,450,000 (2003 -
$3,490,000) for the casinos located in British Columbia are provided
by the BCLC. These funds are used in the operations of the Fund but
are not reflected in these financial statements. The Fund has
provided the BCLC with letters of credit totalling $6,450,000 as
security for the cash floats provided.

Facility development fund

The COSAs provide that a facility development fee, equal to 3% of the
total win from table games and slot machines at the casinos located
in British Columbia, shall be deposited into an FDF account from
which the casino may draw, as reimbursement for eligible capital and
operating expenditures, subject to the approval of the BCLC.

The FDF funds are held in trust by the Fund and have not been
reflected in these financial statements.

The COSAs require that separate FDF accounts be maintained for the
Burnaby Casino and for the Lake City Casinos.

a) Burnaby Casino

The activity during the period and balance of cash held in trust
for reimbursement of eligible expenditures are as follows:

2004 2003
$ $

Balance - Beginning of year 3,405 381
Additions from gaming revenue 3,887 3,673
Funds transferred to GCI (78) -
Funds released
Capital (4,010) (234)
Operating (354) (415)
-------------------------
Balance - End of year 2,850 3,405
-------------------------
-------------------------

On November 28, 2002, the opening balance of the FDF account
maintained for the Burnaby Casino included $78,000 of FDF
additions from gaming revenue earned by casinos operated by GCI.
During the year ended December 31, 2004, the funds were paid back
to GCI.

During year ended December 31, 2004, the Fund incurred eligible
expenditures at the Burnaby Casino of $5,123,000 related to
property and equipment additions (2003 - $204,000) and $230,000
related to operating costs (2003 - $490,000).

The eligible expenditures related to capital and operating
expenditures that have not yet been reimbursed at December 31,
2004 of $1,117,000 (2003 - $128,000) are recorded as receivable.

b) Lake City Casinos

The Lake City Casinos have incurred approved eligible expenditures
in excess of FDF funds available for reimbursement. In accordance
with generally accepted accounting principles, the amount
receivable on account of reimbursement of the excess eligible
expenditures is not recorded as an asset of the Fund in these
financial statements. Reimbursements are made, and recognized in
these financial statements, as FDF funds are accumulated.

The activity during the period and balance of unrecovered eligible
expenditures are as follows:

2004 2003
---------------------------- ---------
Capital Operating Total Total
$ $ $ $

Balance - Beginning of year - 11,030 11,030 13,292

Eligible expenditures
incurred 411 60 471 995
Reimbursement from FDF funds (411) (3,108) (3,519) (3,257)
--------------------------------------
Balance - End of year - 7,982 7,982 11,030
--------------------------------------
--------------------------------------

The $7,982,000 of unrecovered eligible operating expenditures at
December 31, 2004 (2003 - $11,030,000) relates to the approximate
capital cost of leased casino premises. Recovery of these amounts
is recorded as a reduction of occupancy and operating costs, as
appropriate, when funds are received.

Progressive jackpot funds

Progressive jackpot funds are held in trust by the Fund and have not
been reflected in these financial statements. The progressive jackpot
liability represents the potential payout to progressive jackpot
winners. Revenues in these financial statements are recorded net of
amounts related to the progressive jackpot. The progressive jackpot
funds held in trust by the Fund at December 31, 2004 are $621,000
(2003 - $903,000).

7 Prepaid rent

During 2001, the Palace Casino was expanded and renovated at a total
cost of approximately $12 million (including additions to furniture
and equipment). As compensation for a portion of the costs of the
renovation, the lease of the casino premises was amended to reflect a
reimbursement through the reduction of casino rent. The casino
building is leased for a 15-year term commencing September 2001 and
rent payments include a fixed amount plus contingent rent based on
revenues.

During the year ended December 31, 2003, the Fund completed
negotiations with the landlord of the Palace Casino with respect to
the amount of the rent reimbursement from the landlord related to the
expansion and renovation of the casino premises. The existing lease
was amended to reflect that the Fund is not required to pay rent
payments exceeding a minimum guaranteed rent amount until a notional
amount of $8.5 million plus interest at 8.5% is recovered by the Fund
from the landlord, subject to the limitation that the recovery period
shall not extend past March 1, 2013. This settlement represents an
increase of the reimbursement amount by $3.5 million from $5 million
as previously agreed, and an equivalent amount has been reclassified
from property and equipment to prepaid rent. The Fund is amortizing
the prepaid rent of $8.5 million to rent expense on a straight-line
basis over the term of the lease.

The activity during the period and balance of prepaid rent are as
follows:

2004 2003
$ $

Balance - Beginning of year 7,369 4,555

Additions - 3,500
Amortization (804) (686)
-------------------------
Balance - End of year 6,565 7,369
-------------------------
-------------------------

Current portion 804 804
Long-term portion 5,761 6,565
-------------------------
Balance - End of year 6,565 7,369
-------------------------
-------------------------

Reimbursable portion of rent is as follows:

2004 2003
$ $

Balance - Beginning of year 8,491 8,604

Interest accumulated during the period 712 729
Reimbursement through reduction of casino
rent during the year (1,064) (842)
-------------------------
Balance - End of year 8,139 8,491
-------------------------
-------------------------

8 Property and equipment

2004
--------------------------------------
Accumulated
Cost amortization Net
$ $ $

Land 3,620 - 3,620
Buildings 12,669 175 12,494
Furniture and other equipment 1,848 896 952
Computer equipment 370 270 100
Leasehold improvements 5,692 2,500 3,192
--------------------------------------
24,199 3,841 20,358
--------------------------------------
--------------------------------------

2003
--------------------------------------
Accumulated
Cost amortization Net
$ $ $

Land 50 - 50
Buildings 84 4 80
Furniture and other equipment 1,273 416 857
Computer equipment 266 127 139
Leasehold improvements 5,661 1,327 4,334
--------------------------------------
7,334 1,874 5,460
--------------------------------------
--------------------------------------

The COSAs for the Burnaby Casino and the Lake City Casinos and the
Casino Facility License for the Palace Casino provide that certain
gaming equipment is the property of the BCLC and AGLC, respectively.
Accordingly, any costs related to gaming equipment provided by and
owned by the BCLC and AGLC have not been included in these financial
statements. Also see note 7.

9 Intangible assets

2004 2003
$ $

Cost 20,623 20,623
Accumulated amortization (2,366) (1,231)
-------------------------
Net 18,257 19,392
-------------------------
-------------------------

10 Secured loans

In connection with the acquisition of the casino operations on
November 28, 2002, the Trust issued $227,180,000 of secured loans to
the wholly owned subsidiaries of GCI (the "Vendors"). The secured
loans bear interest at 8.0% per annum, payable monthly in arrears,
and are secured by the Class A Partnership Units held by the Vendors
(representing 100% of the Class A Partnership Units outstanding at
December 31, 2003), all distributions on account of such units, and
all redemption proceeds of such units. The secured loans mature on
November 28, 2032 and are payable in full at maturity. If and
whenever any Vendor redeems Class A Partnership Units owned by the
Vendor, the Vendor will pay the redemption amount as a repayment of
the secured loan without penalty. In no event may a Vendor redeem any
Class A Partnership Units without the consent of the Trust. The loan
agreement also provides for the borrower to make optional
prepayments, subject to certain conditions.

During the year ended December 31, 2004, repayments of $105,672,000
were made and interest on the secured loans was $13,803,000 (2003 -
$18,174,000).

11 Mortgages

In connection with the acquisition of the Radisson Hotel Burnaby, the
Partnership assumed two mortgages with a total outstanding balance of
$7,865,000. The mortgage due October 31, 2005 bears interest at 7.59%
per annum and is repayable in monthly blended payments of principal
and interest of $37,709. The mortgage due December 1, 2005 bears
interest at 7.70% and is repayable in monthly blended payments of
principal and interest of $37,823.

The amounts outstanding under these mortgages as at December 31, 2004
were:

$

Due October 31, 2005 3,515
Due December 1, 2005 4,198
------------
7,713
------------
------------

The mortgages are collateralized by first and second charges on the
lands and premises acquired from Villa Hotels Ltd.

12 Long-term debt
2004 2003
$ $

Promissory note 900 900
Long-term notes 40,000 -
Revolving operating facility - 21,100
-----------------------
40,900 22,000
-----------------------
-----------------------

a) Promissory note

The promissory note is unsecured and is payable in 120 equal
monthly instalments of $7,500 plus interest at prime plus 1.5%,
beginning January 1, 2005.

b) Long-term notes

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. Under the terms of the
agreement, Gateway GP issued $40 million of notes, which bear
interest at 6.565%, payable quarterly in arrears, and mature on
August 4, 2011.

In addition to the notes issued on closing, the lender has
provided 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.

c) Credit facilities

On June 30, 2004, in connection with the acquisition of the
Radisson Hotel Burnaby (note 4), the Partnership renegotiated a
bank facility with the Bank of Montreal to provide for a total of
$70 million in two facilities (the "Credit Facilities").
Facility A provides for a maximum of $50 million including the
$20,800,000 outstanding at June 30, 2004 under the previous
facility. On closing, the Partnership drew an additional
$16,660,000 to fund the cash payment of the acquisition.
Facility A must be permanently reduced to a maximum of $10 million
in the future as a condition precedent of accessing a $60 million
construction facility ("Facility B") for the redevelopment of the
Burnaby Casino. The $10 million Facility A is available to the
Partnership as a revolving facility.

Both facilities can be drawn as prime-based loans or Bankers
Acceptance ("BA"), which bear interest prime plus 0% to 0.50% or
BA rates plus 0.875% to 1.50%, respectively, based on the ratio of
Debt to EBITDA on a quarterly basis. Interest on Facility B will
be capitalized until completion of the redevelopment. Thereafter,
Facility B will be amortized over a 10-year period, with the
outstanding amount due in full at maturity. The outstanding amount
of Facility B must be permanently reduced to a maximum of
$40 million by June 30, 2007.

The Credit Facilities have an initial maturity of three years and
can be extended at the Partnership's request for additional
364-day periods, subject to a maximum maturity date of three years
prior to the maturity of the COSA for the Burnaby Casino.
Currently the Burnaby COSA matures on March 1, 2011, however the
British Columbia Lottery Corporation has indicated that it will
enter into a new 10-year COSA, with an option to renew for an
additional 10 years, on opening of the new Burnaby Casino.

All amounts payable under the credit facilities were repaid during
the year ended December 31, 2004 from the proceeds of the issue of
long-term notes.

The Credit Facilities and the long-term notes are secured by general
security agreements, providing a first charge over all assets of the
Partnership, excluding the lands and premises of the Radisson Hotel
Burnaby, a third charge over the lands and premises of the Radisson
Hotel Burnaby and guarantees of certain subsidiaries of the Fund.

13 Loan due to related party

During the year ended December 31, 2003, GCI loaned $700,000 to the
Partnership to finance renovations of the Kamloops Casino. The loan
was to mature on April 30, 2006, was non-interest bearing and was
repayable in monthly instalments equal to the incremental cash flow
generated by the additional 25 slot machines installed in the casino
plus the amount of the reimbursement received from the FDF pursuant
to the incremental revenue. Repayments began on June 1, 2003 and the
Partnership repaid the outstanding balance of $424,000 during the
year ended December 31, 2004 (2003 - $276,000).

14 Class A Partnership Units

In connection with the acquisition of casino operations on
November 28, 2002, the Partnership issued Class A Partnership Units
with a stated capital of $227,180,000 to the Vendors. The Class A
Partnership Units entitle the holder thereof to:

a) a preferential, non-cumulative allocation of accrued income and
distributable cash over all other partnership interests in the
Partnership, equal to 8.01% per annum of the capital attributed to
Class A Partnership Units;

b) a preference over all other interests in the Partnership, on
distributions of capital and accrued income in the event of a
liquidation, dissolution or winding-up or other distribution of
the assets of the Partnership for the purpose of winding up its
affairs, after payment of or other proper division of all of the
liabilities of the Partnership, to a maximum of the capital
attributed to the Class A Partnership Units, together with accrued
income;

c) redeem Class A Partnership Units from time to time at the
redemption price equal to the capital attributed to the Class A
Partnership Units plus any accrued but unpaid income to the date
of redemption. In no event may a holder redeem any Class A
Partnership Units without the consent of the Trust; and

d) vote on amendments to the Limited Partnership Agreement which add,
change or remove the rights, privileges, restrictions or
conditions attached to the Class A Partnership Units or create a
new class of units equal or superior to the Class A Partnership
Units or as required by law, but in all other circumstances, the
Class A Partnership Units will be non-voting.

The Class A Partnership Units, as well as all distributions and
redemptions of the units, have been pledged as security for the
secured loans (note 10).

The Class A Partnership Units have the attributes of a liability and
have been reflected as such in these consolidated financial
statements.

During the year ended December 31, 2004, the Partnership redeemed
$105,672,000 Class A Partnership Units and allocated income of
$13,820,000 (2003 - $18,197,000) to the Class A Partnership Units.

Redemption of Class A Partnership Units and repayment of secured
loans

a) Secondary offering of units on February 10, 2004

The Fund entered into an underwriting agreement with a syndicate
of underwriters in connection with a secondary offering of
4,000,000 units of the Fund owned by the shareholders of GCI, the
former operator of the Fund's casinos. This transaction closed on
February 10, 2004. The Fund did not receive any of the proceeds
from the offering.

Upon completion of this transaction, the shareholders of GCI paid
$40,000,000 to the Vendors as partial repayment of certain loans
outstanding between the Vendors and the selling unitholders. In
accordance with the terms of the secured loans, the Vendors were
required to repay the $40,000,000 to the Trust as a partial
repayment of the secured loans. The Trust used the proceeds from
the repayment of the secured loans to subscribe for additional
Class B Units of the Partnership and the Partnership used the
proceeds from the issue of Class B Units to redeem $40,000,000 of
Class A Partnership Units held by the Vendors.

b) Secondary offering of units on September 17, 2004

The Fund entered into an underwriting agreement with a syndicate
of underwriters in connection with a secondary offering of
6,567,150 units of the Fund owned by the shareholders of GCI. This
transaction closed on September 17, 2004. The Fund did not receive
any of the proceeds from the offering.

Upon completion of this transaction, the shareholders of GCI paid
$65,671,500 to the Vendors as partial repayment of certain loans
outstanding between the Vendors and the selling unitholders. In
accordance with the terms of the secured loans, the Vendors were
required to repay the $65,671,500 to the Trust as a partial
repayment of the secured loans. The Trust used the proceeds from
the repayment of the secured loans to subscribe for additional
Class B Units of the Partnership and the Partnership used the
proceeds from the issue of Class B Units to redeem $65,671,500 of
Class A Partnership Units held by the Vendors.

15 Trust units

The Declaration of Trust authorizes the Fund to issue an unlimited
number of units in one class. Each unit is transferable and
represents an equal undivided beneficial interest in any distribution
from the Fund and in any net assets of the Fund in the event of
termination or winding up of the Fund.

Units are redeemable at any time at the option of the holder at
amounts related to market prices of the units at the time. In the
case of unitholders who hold units entitling them to more than 10% of
the votes that may be cast to appoint Fund Trustees (a "Significant
Interest") and who receive prior approval from the BCLC and AGLC, or
unitholders who do not hold a Significant Interest, the redemption
price will be paid in cash, subject to a maximum of $50,000 in cash
redemptions by the Fund in any one month (provided that the Fund's
Trustees may at their sole discretion waive the $50,000 limitation).
Where unitholders are not entitled to cash redemptions, the
redemption price will be paid and satisfied by way of an in specie
distribution of securities or assets held by the Fund, subject to any
applicable regulatory approvals.

On November 28, 2002, the Fund issued 10,567,000 units at a price of
$10.00 per unit pursuant to its initial public offering, together
with a concurrent issue of 15,850,687 units to the shareholders of
GCI at a price of $10.00 per unit pursuant to a private placement.
Expenses of the offering amounted to $9,451,000 and were charged
against unitholders' equity.

Amount
Units $

Units issued on November 28, 2002
Initial public offering 10,567,000 105,670
Private placement 15,850,687 158,507
Expenses of offering - (9,451)
-------------------------

26,417,687 254,726
Reduction to reflect excess of consideration
paid over Historical Book Values - (231,733)
-------------------------

Balance as at December 31, 2004 and 2003 26,417,687 22,993
-------------------------
-------------------------


Due to the related party nature of the acquisition of the assets of
the Burnaby Casino, Lake City Casinos and the Palace Casino, the
value of unitholders' equity has been reduced by the excess of the
consideration paid over the Historical Book Values of the net assets
acquired.

16 Mark-to-market loss on interest rate swap

In connection with its initial public offering, the Fund entered into
an interest rate swap contract to manage the interest rate risk on
$21,500,000 of the amount outstanding under the revolving credit
facility at that time. The Fund applied hedge accounting to the
interest rate swap contract, which resulted in the hedging settlement
gains and losses being included in net income in the same period as
the hedged interest expense on the revolving credit facilities. Upon
repayment of the outstanding amounts under the credit facilities (see
note 12), the interest rate swap contract no longer qualified for
hedge accounting. Accordingly the Fund recorded the market value of
the contract on its balance sheet. On December 14, 2004, the Fund
terminated the existing interest rate swap contract and rolled the
imbedded loss into a new forward-start interest rate swap agreement
with an effective date in February 2005 (see note 19). The Fund has
elected to not apply hedge accounting to this contract and has
recorded the fair value in its balance sheet at December 31, 2004.
Changes in the market value of the contract are recorded on the
consolidated statement of earnings as unrealized mark-to-market gains
or losses on interest rate swap.

17 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.
Bonuses, in form of units of the Fund, will be provided to eligible
participants on an annual basis where the Distributable Cash (as
defined in the Plan) of the Fund exceeds specified threshold amounts.

If distributable cash per unit exceeds the threshold amounts, a
percentage of the distributable cash (the "Participation Rate") is
contributed by the Fund into a long-term incentive pool. The funds in
the pool are used to purchase units of the Fund in the open market,
to be provided to eligible employees as bonus compensation. Threshold
amounts and participation rates are as follows:

Participation
Distribution cash per unit rate

Greater than $1.20 per unit, but less than $1.25 10%
Greater than or equal to $1.25, but less than $1.30 15%
Greater than or equal to $1.30 20%

The Plan, including the designation of eligible employees and
allocation of the long-term incentive pool, is administered by the
Compensation and Corporate Governance Committee of the Fund. The Plan
provides for Units of the Fund to vest for the benefit of the
employees as follows:

60% immediately upon grant
20% one year after grant
20% two years after grant

For the year ended December 31, 2003, the contributions to the Plan
were reported as "deferred employee compensation" on the balance
sheet and were being charged to income as "amortization of deferred
employee compensation" in future years in accordance with the
estimated vesting provisions of the Plan.

The Plan was finalized in the year ended December 31, 2004 and the
accounting methodology was amended accordingly on a prospective
basis. Contributions to the Plan are recorded as prepaid employee
compensation and are charged to earnings based on the finalized
vesting provisions of the Plan using the graded amortization method.
The change in estimated liability of $641,000 was charged to income
in the current year. The accrual for 2004 is $1,202,000 of which
$986,000 has been expensed in the year.

18 Related party transactions and amounts

As at December 31, 2004, the Fund had a net amount receivable from
GCI and the Vendors of $834,000 (2003 - $100,000), comprising the
following:

2004 2003
$ $

Income allocations on Class A Partnership
Units (note 14) (824) (1,546)
Net operating costs(a) 128 (101)
Interest receivable on the secured loans
(note 10) 823 1,544
ATM fee(b) 25 -
Administration fee(c) 388 203
Costs related to secondary offerings(d) 294 -
---------------------
Net amount receivable 834 100
---------------------
---------------------

a) The Partnership, GCI and the Vendors incurred costs on behalf of
each other in the normal course of business. During the year ended
December 31, 2004, the net of total costs incurred were $228,000
by the Partnership on behalf of GCI and the Vendors (2003 -
$115,000 incurred by GCI and the Vendors on the Partnership's
behalf).

The net balance due from related parties as at December 31, 2004
includes $128,000 (2003 - $101,000) of operating costs incurred by
the Partnership on the related party's behalf.

b) In connection with the acquisition on November 28, 2002, the
Partnership entered into a contract with a subsidiary of GCI for
Automated Teller Machine ("ATM") services at the Burnaby Casino.
The Partnership receives a flat fee of $500,000 per annum, payable
in equal monthly instalments. During the year ended December 31,
2004, the Partnership earned a fee of $500,000, which is included
in other revenue (2003 - $500,000).

Effective November 5, 2003, the Partnership entered into a
contract with a subsidiary of GCI for ATM services at the Palace
Casino. The Partnership receives a fee per ATM transaction equal
to the fee per ATM transaction received by the subsidiary of GCI.
During the year ended December 31, 2004, the Partnership earned a
fee of $390,000 (2003 - $19,000), which is included in other
revenue.

Effective February 17, 2004, the Partnership entered into a
contract with a subsidiary of GCI for ATM services at the Kamloops
Casino. The Partnership receives a fee per ATM transaction equal
to the fee per ATM transaction received by the subsidiary of GCI.
During the year ended December 31, 2004, the Partnership earned a
fee of $147,000 which is included in other revenue.

c) The Fund provides management and administrative services to GCI, a
company owned by unitholders holding 20% of the outstanding units
of the Fund as at December 31, 2004. 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. 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 $1,563,000 to
GCI for the year ended December 31, 2004 (2003 - $1,417,000),
which is recorded as a reduction of administration expenses.

d) During the year, the Fund completed two secondary offerings
(note 14). The costs relating to these offerings were paid by the
Fund and are being reimbursed by the shareholders of GCI. The
total costs receivable as at December 31, 2004 was $294,000 and
has been repaid subsequent to the year ended December 31, 2004.

The Fund leases its corporate office space from a company
controlled by the Chairman and Chief Executive Officer of Gateway
Casinos G.P. Inc. and a Trustee of the Fund under a lease
agreement dated November 28, 2002. The lease includes use of the
office space, as well as provision of certain office equipment and
reception. The lease expires July 31, 2008 and the monthly rent is
$15,400 plus operating costs. During the year ended December 31,
2004, the Fund incurred lease expense of a total of $273,000
(2003 - $246,000) under this lease.

Also see notes 1, 10, 13, 14 and 15.

19 Financial instruments

Fair value of financial instruments

The fair value of cash and cash equivalents, accounts receivable, FDF
receivable, due from related parties, gaming revenue payable to BCLC
and AGLC, accounts payable and accrued liabilities, mortgages
payable, loan due to related party, and distributions payable to
unitholders approximate their carrying value due to the relatively
short-term nature of these instruments. The fair value of the Fund's
long-term debt approximates its carrying value as the fixed rate
applicable under the agreement was entered into near the year-end
date and there have been no significant changes in the interest rate
since that time.

The fair value of the secured loans and the Class A Partnership Units
is not practicable to determine given the many factors, terms and
conditions that would influence such a determination. Any
distributions on or redemptions of the Class A Partnership Units are,
pursuant to the terms of the secured loans, offset by interest
received or repayments of the secured loans. Therefore, the financial
exposures of the two instruments are offset accordingly.

Interest rate swap

The Fund enters into interest rate swap contracts with approved
creditworthy counterparties to manage the Fund's exposure to interest
rate risk. The Fund does not hold or issue derivative financial
instruments for trading or speculative purposes.

During December 2004, the Fund cancelled the interest rate swap
contract that was existing and entered into a forward start interest
rate swap contract that is not effective until February 2005.

As at December 31, 2004, the Fund had one interest rate swap contract
outstanding, as follows:

2004
--------------------------------------------
Notional
amount Maturity date Fair value
$ $

Interest rate swap
contract - September 1, 2011 (1,461)


2003
--------------------------------------------
Notional
amount Maturity date Fair value
$ $

Interest rate swap
contract 21,500 June 14, 2007 (1,150)

The fair value of the interest rate swap reflects the estimated
amount the Fund would have to pay if it were to unwind the contract
at the reporting date.

20 Commitments

Operating lease commitments

The Fund leases certain office equipment and premises for office
space as well as its casino locations. At December 31, 2003, future
minimum operating lease payments were as follows:

$

Year ending December 31
2005 1,982
2006 2,009
2007 1,973
2008 1,564
2009 1,306
2009 and beyond 8,652
------------
17,486
------------
------------

The above table includes only the minimum guaranteed rent payments in
respect of the Palace Casino (note 7).

21 Segmented information

The Fund has four reporting segments: the Burnaby Casino, the Lake
City Casinos, the Palace Casino and the Villa Hotel. The accounting
policies for the segments are as described in note 3. All business of
the Fund is conducted in Canada.

2004 2003
$ $

Revenue
Burnaby Casino 40,291 37,751
Lake City Casinos 31,612 29,163
Palace Casino 21,628 19,601
Villa Hotel 3,029 -
----------------------
96,560 86,515
----------------------
----------------------


2004 2003
$ $
Earnings before corporate and general
administration, loss on sale of assets,
interest, income allocation on Class A
Partnership Units, unrealized mark-to-market
loss on interest rate swap and amortization
Burnaby Casino 24,534 24,421
Lake City Casinos 14,017 12,514
Palace Casino 7,592 6,256
Villa Hotel 310 -
-------------------------
46,453 43,191
Long-term incentive plan compensation expense (1,627) -
Corporate and general administration (4,268) (4,296)
-------------------------
Earnings before the following 40,558 38,895
-------------------------
Amortization
Burnaby Casino (205) (78)
Lake City Casinos (2,277) (2,247)
Palace Casino (1,289) (1,206)
Villa Hotel (200)
-------------------------
(3,971) (3,531)
Interest income on secured loans 13,803 18,174
Income allocation on Class A Partnership Units (13,820) (18,197)
Unrealized mark-to-market loss on interest
rate swap (1,461) -
Amortization on corporate assets (68) -
Interest expense - net (2,211) (1,226)
Loss on sale of assets - (124)
-------------------------
(7,728) (4,904)
-------------------------
Net earnings 32,830 33,991
-------------------------
-------------------------

Property and equipment additions(1)
Burnaby Casino 5,228 374
Lake City Casinos 492 865
Palace Casino 162 116
Corporate 107 -
Villa Hotel 16,670 -
-------------------------
22,659 1,355
-------------------------
-------------------------
(1) Excluding recoveries from FDF.


Segment assets
2004 2003
-------------------------------------------- --------
Lake
Burnaby City Palace Villa
Casino Casinos Casino Hotel Total Total
$ $ $ $ $ $

Property and
equipment 164 1,688 2,192 16,210 20,254 5,460
-----------------------------------------------------
-----------------------------------------------------

Goodwill - 9,526 261 7,395 17,182 9,787
-----------------------------------------------------
-----------------------------------------------------

Intangible assets - 18,257 - - 18,257 19,392
-----------------------------------------------------
-----------------------------------------------------

Total segment
assets 27,056 34,488 16,000 23,683 101,227 55,000
-----------------------------------
-----------------------------------

Other unallocated
assets 107,812 230,529
------------------

Total assets 209,039 285,529
------------------
------------------
>>


%SEDAR: 00017654E



-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Bradley D. Bardua
    CA, Chief Financial Officer
    Gateway Casinos G.P. Inc.
    Phone: (604) 412-0166
    Fax: (604) 412-0117
    E-mail: bbardua@gatewaycasinos.com
    To find out more about Gateway Casinos Income Fund (TSX: GCI.UN),
    visit our website at www.gatewaycasinosincomefund.com.