PENINSULA GAMING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

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PENINSULA GAMING, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Basis of Presentation

Peninsula Gaming, LLC (“PGL” or the “Company”), a Delaware limited liability company, is a holding company with no independent operations. PGL’s subsidiaries consist of: (i) Diamond Jo, LLC, a Delaware limited liability company (“DJL”), which owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa; (ii) The Old Evangeline Downs, L.L.C., a Louisiana limited liability company (“OED”), which owns and operates the Evangeline Downs Racetrack and Casino, or racino, in St. Landry Parish, Louisiana and four off-track betting (“OTB”) parlors in Louisiana; (iii) Diamond Jo Worth Holdings, LLC, a Delaware limited liability company (“DJWH”), and (iv) Peninsula Gaming Corp. (“PGC”), a Delaware corporation with no assets or operations. The Company is a wholly owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware limited liability company (“PGP”).

DJWH is a holding company with no independent operations whose sole assets are its equity interests in its subsidiaries. DJWH’s subsidiaries consist of: (i) Diamond Jo Worth, LLC, a Delaware limited liability company (“DJW”), which owns a gaming license in Worth County, Iowa and constructed a new casino in Worth County, Iowa which opened in April 2006, and (ii) Diamond Jo Worth Corp. (“DJWC”), a Delaware corporation with no assets or operations.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring entries unless otherwise disclosed, necessary to present fairly the financial information of the Company for the interim periods presented and have been prepared in accordance with accounting principles generally accepted in the United States of America. The interim results reflected in the financial statements are not necessarily indicative of results expected for the full year or other periods.

The financial statements contained herein should be read in conjunction with the audited financial statements and accompanying notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Accordingly, footnote disclosure which would substantially duplicate the disclosure in the audited financial statements has been omitted in the accompanying unaudited financial statements.

Recent Developments

On July 13, 2006, the Iowa Racing and Gaming Commission approved DJW’s request to expand its new casino facility by approximately 30,000 square feet.  The proposed expansion is expected to add an additional 300 slot machines, 11 table games, a new poker room, a new buffet restaurant, an expanded casino bar and additional parking.  Construction of the expansion has commenced and is expected to be completed during the second quarter of 2007 for an aggregate cost of approximately $30 million. 

On September 27, 2006, DJL entered into an Offer to Purchase Real Estate, Acceptance and Lease (“Offer”) with the Dubuque County Historical Society (“Historical Society”). The Offer provides for, among other things, the purchase by DJL of 2.4 acres of real property (the “Expansion Tract”) for its fair market value in an amount not to exceed $2 million to facilitate DJL’s building of a new moored barge facility to expand its existing casino operations. In addition, DJL agreed to make a charitable contribution at closing in an amount equal to the difference between $2 million and the fair market value of the property. DJL will also make a charitable contribution of $1 million over ten annual installments, the first of such installments being due on the first anniversary of the closing of the real property purchase. The Offer also provides for the Historical Society to lease DJL’s existing building for 99 years at $1 per year and for DJL to transfer all of its rights, title and interest in the existing Diamond Jo vessel to the Historical Society at the Historical Society’s option. The lease and the transfer of the vessel are conditioned upon DJL commencing operation of its new moored barge facility. Closing of the Offer is contingent upon DJL receiving regulatory approval and satisfactory completion of its due diligence relating to its purchase of the Expansion Tract.

DJL’s proposed new moored barge facility is expected to include approximately 1,000 slot machines, 20 table games and a five table poker room.  Additional amenities are expected to include a 36 lane bowling center, three restaurants and an entertainment center.  Total cost of the project is expected to be approximately $55 million.

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In addition, OED intends to develop and construct a 116 room hotel and 30,000 square foot events center contiguous to its racino.  The total cost of the development is anticipated to be approximately $24 million and construction is expected to begin during the fourth quarter of 2006.

The Company is currently evaluating its financing options related to funding the casino development at DJL and the hotel and events center at OED.

2. Summary of Significant Accounting Policies

Goodwill and Licenses and Other Intangible Assets—    Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in connection with the acquisition of the Diamond Jo riverboat casino operations. Goodwill is not amortized but is reviewed at least annually for impairment and written down and charged to income when its recorded value exceeds its estimated fair value. During the first quarter of 2006 and 2005, DJL performed its annual impairment test on goodwill and determined that the estimated fair value of the DJL reporting unit exceeded its carrying value as of that date. Goodwill is subject to impairment by, among other things, significant changes in the gaming tax rates in Iowa, significant new competition which could substantially reduce profitability, non-renewal of DJL’s gaming license due to regulatory matters or lack of approval of gaming by the county electorate at scheduled referendums, and regulatory changes that could adversely affect DJL’s business.

Licenses and other intangibles as of September 30, 2006 and December 31, 2005 consist of the acquired licenses and tradename associated with the purchase of OED and the first two payments in June 2005 and May 2006, respectively, for DJW’s gaming license under an executory agreement with the State of Iowa. The licenses and tradename have indefinite lives as the Company has determined that there are no legal, regulatory, contractual, economic or other factors that would limit their useful lives, and the Company intends to renew and operate the licenses and use the tradename indefinitely. In addition, other key factors in the Company’s assessment that these licenses have an indefinite life include: (1) the Company’s license renewal experience confirms that the renewal process is perfunctory and renewals would not be withheld except under extraordinary circumstances; (2) the renewals related to these licenses confirm the Company’s belief that the renewal process could be completed without substantial cost and without material modification of the licenses; (3) the economic performance of the operations related to the licenses support the Company’s intention of operating the licenses indefinitely; and (4) the continued limitation of gaming licenses in the States of Louisiana and Iowa limits competition in the jurisdictions where these licenses are maintained. Indefinite lived intangible assets are not amortized but are reviewed at least annually for impairment and written down and charged to income when their recorded value exceeds their estimated fair value. The Company’s annual impairment testing performed during the quarters ended March 31, 2006 and 2005 resulted in no impairments.

Impairment of Long-Lived Assets—  Long-lived assets are reviewed for impairment when management plans to dispose of assets or when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Assets held for disposal are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using an undiscounted future cash flow analysis or other accepted valuation techniques. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. During the quarter ended June 30, 2006, management determined the undiscounted future cash flows of its Alexandria OTB did not support the recoverability of the fixed assets attributable to the OTB’s operation. As such, the Company recognized an impairment charge for the OTB’s assets that exceeded their estimated fair market value. The impairment charge of $0.4 million is included in depreciation and amortization in the consolidated statement of operations and is part of the OED operating segment.

As discussed in Note 1, DJL entered into the Offer with the Historical Society and the Offer, as of September 30, 2006, was subject to significant contingencies.  DJL may be required to accelerate depreciation on certain depreciable assets that will either be contributed to the Historical Society or will  not be utilized at its new facility.  Beginning on the date the significant contingencies are satisfied or become probable of resolution and through the period that DJL estimates commencing operations at the new facility, DJL will  depreciate the remaining net book value of those assets less their estimated fair market value at the date of contribution or estimated net realizable value.

Stock Based Compensation—    Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) Shared-Based Payment (“SFAS No. 123R”). As allowed under the provisions of SFAS

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No. 123R the Company has applied SFAS No. 123R prospectively to new awards and to awards modified, repurchased, or cancelled after the required effective date. The Company continues to account for any portion of awards outstanding at the date of initial application of SFAS No. 123R using the accounting principles historically applied to those awards, Accounting Principles Board Opinion No. 25 , Accounting for Stock Issued to Employees . The Company did not have any new awards and there were no modifications, repurchases, or cancellations of awards issued prior to January 1, 2006 during the three and nine months ended September 30, 2006. There were no payments to employees related to awards during the three and nine months ended September 30, 2006 and 2005. As of September 30, 2006, there was approximately $7.5 million related to nonvested awards not yet recognized in the consolidated statement of operations. The unrecognized value of awards is expected to vest over approximately two years unless vested earlier per the terms of the awards. See footnote 6 for more information regarding the terms of outstanding awards.

The following table illustrates the effect on net income (loss) to common member’s interest if the Company had accounted for employee stock-based compensation using the fair value method for all periods (in thousands):

Units granted by PGP to Company employees contain a put option exercisable by the employee and are recorded at their fair market value (based on a market multiple of total segment operating earnings) with a corresponding expense recorded within the statement of operations based on the percentage vested.

Use of Estimates—    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates involve the periodic review of the carrying value of assets for impairment, the estimated useful lives for depreciable assets and the estimated liability for slot club awards.

In addition, an estimated loss from a loss contingency is recorded when information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires the use of judgment. Many of these legal contingencies can take years to be resolved. An adverse outcome could have a material impact on financial condition, results of operations, and cash flows.

Reclassifications—    Certain prior year amounts have been reclassified to conform with the current year presentation. These reclassifications did not have any effect on the Company’s financial position or net income or loss to common member’s interest in the three and nine months ended September 30, 2006 and 2005.  In our condensed consolidated statements of operations for the three and nine months ended September 30, 2006, we classified certain accrued expenses related to our player loyalty program as casino expenses.  We previously presented such changes as promotional allowances.  In the consolidated statement of operations for the three and six months ended September 30, 2005, we reclassified $0.1 million and $0.4 million, respectively, from promotional allowances to casino expense to be consistent with our 2006 presentation.

Recently Issued Accounting Standards—    In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework from measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 indicates, among other things, a fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absense of a principal market, the most advantageous market for the asset or liability. SFAS 157 is effective for the Company’s year ending December 31, 2008. The Company is currently evaluating the impact of SFAS 157 on the Company’s financial statements.

3. Property and Equipment

Property and equipment at September 30, 2006 and December 31, 2005 is summarized as follows (in thousands):

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Depreciation and amortization expense for the three months ended September 30, 2006 and 2005 was $5.4 million and $4.2 million, respectively.  Depreciation and amortization expense for the nine months ended September 30, 2006 and 2005 was $15.2 million and $12.1 million, respectively.

Included in the total amount of depreciation and amortization expense for the nine months ended September 30, 2006 is an impairment charge of approximately $0.4 million associated with long-lived assets at OED’s Alexandria OTB.  Based on historic and expected future cash flows of the Alexandria OTB operations, the carrying value of the leasehold improvements and certain other assets are not expected to be recovered by future cash flows and were written down by the amount the carrying value of the assets exceeded their estimated fair market value.  OED closed the Alexandria OTB in July of 2006 and recorded a lease termination loss of approximately $0.1 million.

4. Debt

Long-term debt consists of the following (in thousands):

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Principal maturities of debt (excluding discount and debt repaid during the period January 1, 2006 through September 30, 2006) for each of the years ended December 31 are summarized as follows (dollars in thousands):

On August 31, 2006, DJW entered into the First Supplemental Indenture to the Indenture dated as of July 19, 2005 (the “DJW Supplemental Indenture”) which permitted, among other things, the issuance by DJW on August 31, 2006 of an additional $20 million principal amount of DJW Notes, the proceeds of which are to be used in part to fund the DJW casino expansion as discussed in Note 1. In addition, the DJW Supplemental Indenture also eliminates certain restrictions on DJW’s ability to pay certain fees under various management agreements, increased the amount of indebtedness permitted to be incurred under DJW’s senior credit facility from $2.5 million to $5.0 million and requires DJW to offer to buy back a portion of the DJW Notes on a semi-annual basis, beginning March 31, 2007, with 50% of Excess Cash Flow (as defined therein).

As of September 30, 2006, the Company had $15.4 million outstanding under its $50.0 million senior secured credit facility (“PGL Credit Facility”). As of September 30, 2006, DJW did not have any outstanding advances under its $2.5 million senior secured credit facility. In addition, as of September 30, 2006, the Company had outstanding letters of credit under the PGL Credit Facility and the DJW Credit Facility of approximately $0.7 and $0.3 million, respectively, resulting in available borrowings thereunder of $33.9 and $2.2 million, respectively.

The Company’s 8 ¾% senior secured notes due 2012 (the “Peninsula Gaming Notes”), the DJW Notes, the PGL Credit Facility and the DJW Credit Facility each contain various restrictive covenants, all with which the Company was in compliance as of September 30, 2006.

5. Commitments and Contingencies

Under the Company’s and PGP’s operating agreements, the Company and PGP have agreed, subject to a few exceptions, to indemnify and hold harmless PGP and PGP’s members from liabilities incurred as a result of their positions as members of the Company and as members of PGP, respectively.

In October 2003, OED filed a Petition for Declaratory Judgment in St. Landry Parish, Louisiana, naming as opposing parties the Secretary of the Department of Revenue and Taxation for the State of Louisiana, the St. Landry Parish School Board and the City of Opelousas. OED seeks a judgment declaring that sales taxes are not due to the defendants on purchases made by OED and its contractors in connection with the construction and furnishing of the Evangeline Downs Racetrack and Casino, which was constructed in St. Landry Parish in 2003-2004. OED’s action is based on Louisiana statutory law which provides that racetracks are not required to pay taxes and fees other than those provided in the racing statutes, and that taxes and fees provided in the racing statutes are in lieu of, among other things, all state and local sales taxes. The St. Landry Parish School

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Board and the City of Opelousas have questioned the application of the racing statutes to the construction and furnishing of the casino portion of the facility, thereby leading to the filing of this action. OED anticipates that the Secretary of the Department of Revenue and Taxation for the State of Louisiana may take the same position.

OED filed a motion for summary judgment, which was scheduled for hearing in July 2005. The defendants filed responses, generally arguing that the exemption under the racing statutes should not extend to the purchase of goods, materials and services which were unrelated to horse racing. Prior to the hearing, it was discovered by OED that OED’s contractor (and the contractor’s subcontractors) had paid sales taxes on many purchases related to the construction of the new racetrack and casino, and that OED, in its payments to the contractor, had reimbursed the contractor for such sales taxes. In light of this discovery, the parties agreed to continue indefinitely the hearing on the motion for summary judgment. In November and December 2005, OED filed refund claims totaling $0.6 million. There has not yet been a ruling on OED’s refund claims, and as a result, OED has not recorded the refund claims.

While OED has paid certain sales taxes on the construction of the new racetrack and casino and relating to the purchase of slot machines at the casino, it has not paid sales taxes on many purchases associated with the construction and furnishing of the facility. Accordingly, an adverse ruling on this matter may result in OED being required to pay sales taxes to the defendants and having its refund claims denied. In October 2006, the Louisiana Department of Revenue and Taxation notified OED that additional taxes and interest totaling approximately $0.3 million were due for the period January 1, 2002 through December 31, 2004.  Based on this information, during the three months ended September 30, 2006, the Company accrued the $0.3 million and an additional $1.1 million related to sales taxes that the Company may be required to pay for the years 2005 and 2006 and for local parish and city taxes.  Of the accrued amount, approximately $0.6 and $0.4 million was recorded in general and administrative expense and interest expense, respectively, in the condensed consolidated statement of operations for the three and nine month period ended September 30, 2006. The remaining balance of the accrued amount totaling approximately $0.4 million was capitalized in fixed assets.  In accordance with Louisiana law, OED plans to protest this assessment and is requesting a ruling on its refund claims.  OED plans to appeal should its written protest prove unsuccessful.

In October 2005, OED filed a request to arbitrate certain claims against the general contractor of its racino relating to improper construction of the horse racetrack at the racino. OED is pursuing a claim for damages of approximately $7.1 million against the general contractor to recoup its track reconstruction costs and other related damages. OED believes it is too early to determine the results of the arbitration and, accordingly, has not recorded any damage claim as an asset.

Other than as described above, neither the Company nor its subsidiaries are parties to, and none of the Company’s or its subsidiaries’ property is the subject of, any pending legal proceedings other than litigation arising in the normal course of business. Management does not believe that adverse determinations in any or all such other litigation would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In accordance with legislation passed in Iowa in 2004, all excursion gambling boat licensees, including DJL, were subject to a one time assessment in an amount based on the licensee’s adjusted gross receipts to be deposited into the Rebuild Iowa Infrastructure Fund. DJL’s total assessment is $2.1 million, which was paid in two equal payments of $1.1 million in May 2005 and May 2006, respectively, and DJL recorded the payments as a long term deposit on its consolidated balance sheet. Beginning in July 2010, DJL may offset gaming taxes in an amount equal to 20% of the total assessment in each of the succeeding five fiscal years thereafter. DJW was not included in this assessment as it did not have a gaming license at the time of the assessment.

Dubuque Racing Association, Ltd. (the “DRA”) holds a joint license with DJL to conduct gambling games under Iowa statutes. The DRA owns Dubuque Greyhound Park (“DGP”), a traditional greyhound racetrack with 1,000 slot machines, 20 table games and amenities including a gift shop, restaurant and clubhouse. During 2005, DJL entered into an amendment to its operating agreement under the joint gambling license (the “Amended Operating Agreement”) with the DRA. The Amended Operating Agreement provides for, among other things, that beginning on February 17, 2006, the day that DGP began operating video poker machines, and continuing until August 30, 2006, DRA shall pay to DJL $0.33 for each $1.00 of reduction in DJL’s adjusted gross gaming receipts, subject to a maximum 15% decline and certain payment deferral conditions. On August 31, 2006, a gambling operation commenced business within 125 miles of Dubuque, Iowa.  As such, in accordance with the Amended Operating Agreement, DJL’s adjusted gross receipts must first be reduced by 7% prior to calculating the reduction in adjusted gross receipts on which the $0.33 calculation is based. Pursuant to the Amended Operating Agreement, the DRA shall continue to pay DJL $.33 for each $1.00 until the earlier of December 31, 2008 or when

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DJL opens its new gaming facility. During the three and nine months ended September 30, 2006, DJL recorded revenues of approximately $0.5 million and $1.2 million, respectively related to this agreement, of which approximately $1.0 million was included in accounts receivable on the condensed consolidated balance sheet as of September 30, 2006.

In connection with obtaining its gaming license, DJW is required to pay the Iowa Racing and Gaming Commission under an executory agreement a license fee of $5.0 million due in five annual installments of $1.0 million. DJW paid the first two $1.0 million installments in June 2005 and May 2006, respectively, with the remaining installments due in May 2007, 2008 and 2009. Also, DJW is required to pay its qualified sponsoring organization, Worth County Development Authority (“WCDA”) which holds the joint gaming license with DJW, 5.76% of the casino’s adjusted gross receipts on an ongoing basis.  For the three and nine months ended September 30, 2006, DJW expensed approximately $1.0 million and $1.9 million, respectively, related to this obligation.

In addition, DJW is required to construct, or cause a third party to construct, a 100 room hotel near the casino within 18 months of opening the casino to maintain its gaming license. In April 2006, DJW entered into a lease agreement with a third party developer in which DJW agreed to lease a parcel of land adjacent to the casino to the third party developer. In addition, the third party developer agreed to construct a 102 room hotel on that parcel of land. The lease is for an initial term of 20 years and 6 months and includes an option for the developer to extend the lease for an additional 15 years. Lease payments shall be equal to 2% of adjusted gross revenue (as defined in the lease agreement) of the hotel plus payments of additional rent to reimburse DJW for utilities and common area costs and expenses incurred by DJW. The lease also contains a purchase option whereby, at any time during the first seven years subsequent to the opening of the hotel, DJW can elect to purchase the hotel from the third party developer for a purchase price established in the lease agreement. The hotel is expected to open in November 2006.

During the first quarter of 2006, DJW entered into various agreements with the State of Iowa and a local business in which DJW has agreed, in exchange for land and other assets, to build an elevated water storage and water treatment facility at an estimated cost of approximately $1 million and to provide, at no charge, water and sanitary service to the State of Iowa for its interstate rest service located near the casino and to the local business.  The estimated cost of the free services has been accrued as a liability and capitalized as a cost of the land and other asset acquisitions.

On September 27, 2006, DJL entered into an agreement with the Historical Society which provides for, among other things, (i) the purchase by DJL of the Expansion Tract for its fair market value in an amount not to exceed $2 million, (ii) DJL’s making a charitable contribution at closing of the purchase of the Expansion Tract in an amount equal to the difference between $2 million and the fair market value of the property and (iii) DJL’s making a charitable contribution of $1 million over ten annual installments, the first of such installments being due on the first anniversary of closing.   The agreement also provides for the Historical Society to lease DJL’s existing building for 99 years at $1 per year and for DJL to transfer all of its right, title and interest in the existing Diamond Jo vessel to the Historical Society at the Historical Society’s option. Closing of the agreement is contingent upon DJL receiving regulatory approval and satisfactory completion of its due diligence relating to its purchase of the Expansion Tract.

6. Related Party Transactions

During the three months ended September 30, 2005 and the nine months ended September 30, 2006 and 2005, the Company recorded distributions of $0.5 million, $1.2 million and $1.8 million, respectively, to PGP primarily for (i) certain consulting and financial advisory services related to PGP’s development expenses, (ii) board fees and actual out-of-pocket expenses incurred by members of the board of managers of PGP in their capacity as a board member and (iii) tax, accounting, legal and administrative costs and expenses related to PGP. These amounts were recorded as member distributions. Net distributions were zero for the three months ended September 30, 2006. In addition, during the three months ended September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005, the Company expensed $0.1 million, $0.1 million, $0.2 million and $0.1 million, respectively, as an affiliate management fee, related to other compensation and board fees payable to board members of PGP representing services provided to PGL.

In accordance with a management services agreement between OED Acquisition LLC (“OEDA”), a wholly owned subsidiary of PGP, and OED, under which OED pays to OEDA a base management fee of 0.44% of net revenue (less net food and beverage revenue) plus an incentive fee based on earnings before interest, taxes, depreciation, amortization and other non-recurring charges, OED expensed $0.2 million, $0.2 million, $0.7 million and $0.5 million in affiliate management fees payable to OEDA during the three months ended September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005, respectively.

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