Overview

Our current debt consists of a seven year $225 million term loan which matures on June 8, 2014 (the "Term Loan") and a $20 million five year revolving credit facility (the "Revolving Credit Facility" together with the Term Loan, the "New Credit Facility"). On February 26, 2009, the Company received a notice of default on its New Credit Facility (see Note 10 to the Consolidated Financial Statements contained in this Form 10-K for the year ended December 31, 2008) from Wachovia Bank, National Association ("Wachovia"), the administrative agent. The notice of default (the "Notice") relates to our New Credit Facility and is the result of the Company's failure to provide a Deposit Account Control Agreement (a "DACA") from each of the Company's depository banks per a request made by Wachovia to the Company on October 14, 2008. The DACA that Wachovia requested the Company to execute was in a form that the Company ultimately determined to contain unreasonable terms and conditions as it would enable Wachovia to access all of the Company's operating cash and order it to be transferred to a bank account specified by Wachovia. The Notice further provides that as a result of the default, the Company will no longer have the option to request LIBOR Rate loans. As a result of losing the availability of LIBOR Rate loans under the New Credit Facility, the interest rate on the Term Loan will increase from approximately 7.5% to 8.5% and the interest rate for the Revolving Credit Facility will remain the same.

On March 25, 2009, we engaged XRoads Solution Group LLC as our financial advisor. Based on an extensive analysis of our current and projected liquidity, and with our financial advisor's input, we determined it was in the best interests of the Company to not pay the accrued interest of approximately $4 million on our $245 million New Credit Facility, which was due March 30, 2009. Consequently, we elected not to make the payment. The Company's failure to pay interest due on any loan within our New Credit Facility within a three-day grace period from the due date is an event of default under our New Credit Facility. We do not plan to pay the interest due within the three-day grace period. As a result of this event of default, the Company's lenders have the right to seek to charge additional default interest in the amount of 2% on the Company's outstanding principal and interest under our credit agreement (the "Credit Agreement"), and automatically charge additional default interest of 1% on any overdue amounts under the interest rate swap agreement (the "Swap Agreement") we entered in conjunction with our New Credit Facility. These defaults rates are in addition to the interest rates that would otherwise be applicable under the Credit Agreement and Swap Agreement. We believe that the Company's lenders will seek to apply these higher default interest rates as a result of the Company's failure to make the interest payment due on March 30, 2009.

We entered into discussions with Wachovia to negotiate a waiver or forbearance regarding the Notice and the anticipated payment default and an anticipated going concern default (see discussion below). If we are not successful in negotiating a waiver or forbearance agreement with the Company's lenders regarding the Notice and the anticipated payment and going concern defaults, Wachovia and the lenders under the New Credit Facility would: have the ability to accelerate repayment of all amounts outstanding under the New Credit Facility ($227.5 million at December 31, 2008), to commence foreclose on some or all of our assets securing the debt, or exercise other rights and remedies granted under the New Credit Facility and as may be available pursuant to applicable law. In addition, Wachovia, under our interest rate swap agreement, can terminate the interest rate swap agreement and accelerate repayment of the amount outstanding under that agreement ($30.2 million at December 31, 2008). If the New Credit Facility and interest rate swap indebtedness were to be accelerated, we would be required to refinance or restructure the payments on that debt. We cannot assure you that we would be successful in completing a refinancing or consensual out-of-court restructuring, if necessary. If we were unable to do so, we would likely be compelled to seek protection under Chapter 11 of the U. S. Bankruptcy Code.

Our independent registered public accounting firm has included an explanatory paragraph that expresses substantial doubt as to our ability to continue as a going concern in their audit report contained in this Form 10-K report for the year ended December 31, 2008.

We own and operate Riviera Las Vegas on the Las Vegas Strip in Las Vegas, Nevada, and Riviera Black Hawk in Black Hawk, Colorado.

Our capital expenditures for Riviera Las Vegas are geared primarily toward maintaining and upgrading our hotel rooms, gaming products, convention space, restaurants, bars and entertainment venues. In November 2007, we began a comprehensive hotel room remodel project in Las Vegas. Remodeled hotel rooms feature new Euro beds, flat screen televisions, furniture, carpeting, marble floors and granite countertops. As of December 31, 2008, we spent $18.7 million on this project and completed four of our five hotel towers. We expect to complete the remainder of the project when economic conditions improve. Our capital expenditures for Riviera Black Hawk are geared primarily toward maintaining and upgrading our gaming products, food and beverage venues and overall facility. In order to improve customer satisfaction, increase efficiencies, and reduce labor costs at both of our properties, we made substantial investments in technology including kiosks for hotel check-in, slot machine ticket redemption and player's club point redemptions.

Our primary marketing focus in Las Vegas is to maximize gaming revenues and grow revenue per available room, or RevPar. To maximize gaming revenues, we market directly to members of our Club Riviera utilizing customized mail offerings and special promotions to entice players to visit and game at the property. We frequently use complimentary room, food and beverage and entertainment products to increase player visits and gaming revenues. We also use various promotions to entice hotel guests that are not members of Club Riviera to join the Club Riviera and game at the property. To grow RevPar, we are leveraging our recently remodeled hotel rooms and significant convention space to entice meeting planners and convention coordinators to choose Riviera Las Vegas for their events. Moreover, we are showcasing our new hotel room product to grow our tour and travel and Internet sales.

In addition to the above, we continuously strive to maximize the number of people who patronize Las Vegas but who are not guests in our hotel. We achieve this by capitalizing on our prime Las Vegas Strip location, convention center proximity and availability of several popular entertainment productions.

We have implemented and will continue to implement promotions to attract competing hotel customers to our property to enjoy our amenities. We are well situated for walk-in traffic on the Las Vegas Strip near several major properties including Circus Circus, Las Vegas Hilton, Las Vegas Convention Center, Wynn Las Vegas and the Fontainebleau project, which is scheduled to open late in 2009. Additionally, we are close to several timeshare and condominium projects. While we benefit from our proximity to several major properties, the closure of the Stardust, Frontier and Westward Ho and ongoing construction activities have caused a major reduction in walk-in traffic. We anticipate that our walk-in traffic will be adversely impacted for the foreseeable future.

The Black Hawk market caters primarily to slot machine players from the Denver area. Therefore, our primary marketing focus in Black Hawk is to grow and maintain the number of quality players in our players club and utilize effective direct marketing techniques, including direct mail offers and special promotions, to entice customers to visit and game at our property. Our location is conducive to walk-in customers as the Isle of Capri, which is one of the largest casinos in Black Hawk, is located directly across the street from our casino. Also, Riviera Black Hawk is the first property off of Main Street as you drive into Black Hawk from the Denver Metro area and our parking garage is the first and most easily accessible in the area. Until recently, only limited stakes gaming, which is defined as a maximum single bet of $5.00, was legal in the Black Hawk/Central City market. However, on January 13, 2009, residents of Black Hawk voted to enable Black Hawk casino operators to extend casino hours, add the games of craps and roulette and increase the maximum betting limit to $100 per bet. July 1, 2009 is the earliest we are permitted to implement increased betting limits, extended hours or add the games of craps or roulette. We are evaluating various marketing and operating strategies related to these changes.

Results of Operations

2008 Compared to 2007

The following table sets forth, for the periods indicated, certain operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues displayed in this table and discussed in this section are net of cash rebates and promotional allowances. EBITDA from properties is presented on the following schedule:

(Dollars in thousands)                       2008          2007         Incr/(Dec)        Incr%
Net Revenues:
Riviera Las Vegas                          $ 128,031     $ 151,505     $    (23,474 )       -15.5 %
Riviera Black Hawk                            41,729        53,990          (12,261 )       -22.7 %
Total Net Revenues                         $ 169,760     $ 205,495     $    (35,735 )       -17.4 %

Property EBITDA
Riviera Las Vegas                          $  18,748     $  30,166     $    (11,418 )       -37.9 %
Riviera Black Hawk                            12,209        19,133           (6,924 )       -36.2 %
Property EBITDA (1)                        $  30,957     $  49,299     $    (18,342 )       -37.2 %

Other costs and expenses:
Corporate expenses
Share-based compensation                         795           966             (171 )       -17.7 %
Other corporate expense                        3,857         4,745             (888 )       -18.7 %
Depreciation and amortization                 14,883        13,116            1,767          13.5 %
Mergers, acquisitions and development
costs, net                                       191           611             (420 )       -68.7 %
Asset Impairments                                  -            72              (72 )          NM
Loss on retirement of bonds                        -        12,878          (12,878 )          NM
Change in fair value of derivative
instruments                                    3,556        13,272           (9,716 )       -73.2 %
Interest expense, net                         17,091        21,897           (4,806 )       -21.9 %
                                              40,373        67,557          (27,184 )       -40.2 %

Net loss before income tax provision          (9,416 )     (18,258 )          8,842          48.4 %
Income tax provision                          (2,446 )           -           (2,446 )          NM
Net loss                                     (11,862 )     (18,258 )          6,396          35.0 %

Property EBITDA Margins (2)
Riviera Las Vegas                               14.6 %        19.9 %           -5.3 %
Riviera Black Hawk                              29.3 %        35.4 %           -6.1 %

(1) Property EBITDA consists of earnings before interest, income taxes, depreciation and amortization. EBITDA is presented solely as a supplemental disclosure because we believe that it is a widely used measure of operating performance in the gaming industry and a principal basis for valuation of gaming companies by certain investors. We use property-level EBITDA (EBITDA before corporate expenses) as the primary measure of operating performance of our properties, including the evaluation of operating personnel. EBITDA should not be construed as an alternative to operating income, as an indicator of operating performance, as an alternative to cash flow from operating activities, as a measure of liquidity, or as any other measure determined in accordance with accounting principles generally accepted in the United States of America. We have significant uses of cash flows, including capital expenditures, interest payments and debt principal repayments that are not reflected in EBITDA. Also, other gaming companies that report EBITDA information may calculate EBITDA in a different manner than we do (see footnote 18 for reconciliation to net.

(2) Property EBITDA margins represent property EBITDA as a percentage of net revenues by property.

Riviera Las Vegas

Revenues

Net revenues for the twelve months ended December 31, 2008 were $128.0 million, a decrease of $23.5 million, or 15.5%, from $151.5 million for the comparable period in the prior year.

Casino revenues for the twelve months ended December 31, 2008 were $50.6 million, a decrease of $11.1 million, or 18.1%, from $61.7 million for the comparable period in the prior year. Casino revenues are comprised of slot machine and table game revenues. In comparison to the same period in the prior year, slot machine revenue was $39.0 million, a decrease of $8.2 million, or 17.3%, from $47.2 million and table game revenue, including revenue from poker, was $11.5 million, a decrease of $3.0 million, or 20.4% from $14.5 million. Slot machine win per unit per day for the twelve months ended December 31, 2008 was $115.00, a decrease of $17.22, or 13.0%, from $132.22 for the comparable period in the prior year. Slot machine and table game revenues decreased primarily due to lower slot machine and table game amounts wagered as a result of reduced hotel occupancy, the effect of a weak economy on consumer spending and encumbered access due to construction at neighboring projects.

Hotel room rental revenues for the twelve months ended December 31, 2008 were $52.4 million, a decrease of $7.5 million, or 12.5%, from $59.9 million for the comparable period in the prior year. The room rental revenue decrease was primarily attributable to 16.1% and 11.5% decreases in leisure and convention segment occupied rooms, respectively, as a result of higher travel costs, the weaker economy and increased competition. For the twelve months ended December 31, 2008, hotel occupancy was 83.8% in comparison to 93.0% for the comparable period in the prior year. The hotel room occupancy percentage is calculated by dividing total occupied rooms by total rooms available for sale. 6.3% of our hotel rooms were unavailable during 2008 due to our room remodeling project referenced above. For the twelve months ended December 31, 2008, 46.9% and 34.2% of total occupied rooms were leisure and convention segment rooms, respectively. Average daily room rental rate, or ADR, was $82.81 for the twelve months ended December 31, 2008, a decrease of $0.06, or 0.1%, from $82.87 for the comparable period in the prior year. ADR decreased primarily as a result of a $9.23, or 17.2%, leisure segment ADR reduction mostly offset by a $9.03, or 9.1% convention segment ADR improvement. Revenue per available room, or RevPar, was $69.40, a decrease of $7.65, or 9.9%, from $77.05 for the comparable period in the prior year. The decrease in RevPar was due primarily to lower occupancy as described above. Room rental revenues include revenues associated with rooms provided to high-value guests on a complimentary basis. These revenues were $7.8 million for the twelve months ended December 31, 2008 and are included in promotional allowances and deducted from total revenues.

Food and beverage revenues for the twelve months ended December 31, 2008 were $23.4 million, a decrease of $3.7 million, or 13.7%, from $27.1 million for the comparable period in the prior year. The decrease is due to a $2.8 million food revenue and $0.9 million beverage revenue reduction primarily as a result of the weak economy, reduced hotel occupancy, less gaming customers and strategic closure of select food and beverage outlets during low volume periods. Food covers decreased primarily in the buffet, coffee shop and the sports book delicatessen and drinks served decreased primarily in the casino bars. Food and beverage revenues include items offered to high-value guests on a complimentary basis. These revenues were $10.1 million for the twelve months ended December 31, 2008 and are included in promotional allowances and deducted from total revenues.

Entertainment revenues for the twelve months ended December 31, 2008 were $13.4 million, a decrease of $0.1 million, or 0.5%, from $13.5 million for the comparable period in the prior year. The decrease is primarily due to reduced ticket sales for all of our shows except "ICE", an ice skating show that opened April 23, 2007. Entertainment revenues include items offered to high-value guests on a complimentary basis. These revenues were $3.6 million for the twelve months ended December 31, 2008 and are included in promotional allowances and deducted from total revenues.

Other revenues for the twelve months ended December 31, 2008 were $6.4 million, an increase of $0.3 million, or 5.7%, from $6.1 million for the comparable period in the prior year. The increase in other revenues, which are comprised primarily of rental income, was due to new agreements to lease portions of our parking space and additional rental income from the Banana Leaf Asian Restaurant, which opened in February 2008, and Club de Soleil, a timeshare marketing company.

Costs and Expenses

Casino costs and expenses for the twelve months ended December 31, 2008 were $28.6 million, a decrease of $4.2 million, or 13.1%, from $32.8 million for the comparable period in the prior year. The decrease in casino costs and expenses was due primarily to a reduction in slot machine and table game payroll and related costs to partially offset the $11.1 million decrease in casino revenue. Reductions in slot and table game payroll and related costs were partially offset with higher marketing and promotional costs primarily due to increased competition and poor economic conditions.

Room rental costs and expenses for the twelve months ended December 31, 2008 were $25.4 million, a decrease of $2.7 million, or 9.6%, from $28.1 million for the comparable period in the prior year. The decrease in room rental costs and expenses was primarily due to an 88,100, or 12.9%, reduction in occupied hotel rooms. As a result, payroll and related costs and operating expenses were reduced accordingly.

Food and beverage costs and expenses for the twelve months ended December 31, 2008 were $19.2 million, a decrease of $3.2 million, or 14.2%, from $22.4 million for the comparable period in the prior year. The decrease in food and beverage cost and expenses was due primarily to a reduction in food and beverage cost of goods, payroll and related costs and other expenses to offset a $3.7 million food and beverage revenue decrease. Additionally, several food and beverage outlets have been closed during low volume periods to reduce costs and expenses.

Entertainment costs and expenses for the twelve months ended December 31, 2008 were $8.0 million, a decrease of $0.6 million, or 7.3%, from $8.7 million for the comparable period in the prior year. The decrease in entertainment costs and expenses is primarily due to payroll and related costs savings.

General and administrative costs and expenses for the twelve months ended December 31, 2008 were $26.8 million, a decrease of $1.2 million, or 4.0%, from $28.0 for the comparable period in the prior year. The decrease in general and administrative cost and expenses was primarily due a $0.8 million reduction in the incentive compensation expense. There was no incentive compensation expense for the twelve months ended December 31, 2008.

Other expenses for the twelve months ended December 31, 2008 were $1.2 million, a decrease of $0.2 million, or 8.8%, from $1.4 million for the comparable period in the prior year. The decrease in other expenses was due primarily to cost savings initiatives to partially offset the decrease in net revenues.

Income from Operations

Income from operations for the twelve months ended December 31, 2008 was $9.3 million, a decrease of $14.2 million, or 60.3%, from $23.5 million for the comparable period in the prior year. The decrease is primarily due to lower casino and room rental revenues without offsetting reductions in costs and expenses. Operating margins were 7.3% for the twelve months ended December 31, 2008 in comparison to 15.5% for the comparable period in the prior year. Operating margins decreased primarily due to revenue decreases in our high margin slot machine and room rental operations and a $1.5 million increase in depreciation and amortization expenses as a result of asset additions mostly attributable to our hotel room remodeling project described above.

Riviera Black Hawk

Revenues

Net revenues for the twelve months ended December 31, 2008 were $41.7 million, a decrease of $12.3 million, or 22.7%, from $54.0 million for the comparable period in the prior year.

Casino revenues for the twelve months ended December 31, 2008 were $40.7 million, a decrease of $11.9 million, or 22.6%, from $52.6 million for the comparable period in the prior year. The decrease in casino revenues is primarily due to a slot machine revenue decrease of $11.7 million, or 22.7%, to $39.6 million from $51.3 million for the comparable period in the prior year. Slot machine revenue per unit per day was $127.73, a decrease of $28.04, or 18.0%, from $155.77 for the comparable period in the prior year. The decrease in slot machine revenue was primarily the result of less slot machine wagering due to the effects of high fuel costs, a weak economy and the smoking ban in Colorado which went into effect January 1, 2008.

Food and beverage revenues for the twelve months ended December 31, 2008 were $5.1 million, a decrease of $0.2 million, or 4.1%, from $5.3 million for the comparable period in the prior year. The decrease is primarily due to a 10.9% reduction in buffet covers due to fewer gaming customers. We frequently provide high value guests with complimentary food and beverage to increase casino revenues. In fact, nearly three quarters of food and beverage revenues are related to complimentary issuances. These revenues are included in promotional allowances and deducted from total revenues as described in Note 1 of the Notes to the Consolidated Financial Statements included in this document.

Other revenues for the twelve months ended December 31, 2008 were $0.4 million, a decrease of $0.2 million, or 29.1%, from $0.6 million for the comparable period in the prior year. The decrease in other revenues, which are comprised primarily of transaction fee revenues from automatic teller machines (ATMs), was attributable principally to a reduction in ATM transactions in conjunction with less casino wagering.

Costs and Expenses

Casino costs and expenses for the twelve months ended December 31, 2008 were $19.2 million, a decrease of $4.1 million, or 17.8%, from $23.3 million for the comparable period in the prior year. The decrease in casino expenses is primarily due to a reduction in slot and table game payroll and related costs which partially offsets the $11.9 million decrease in casino revenue.

General and administrative expenses for the twelve months ended December 31, 2008 were $9.0 million, a decrease of $1.0 million, or 10.2%, from $10.0 million for the comparable period in the prior year. The decrease in general and administrative expenses was due primarily to a $0.4 million health insurance credit and a $0.4 million reduction in the incentive compensation expense. There was no incentive compensation expense for the twelve months ended December 31, 2008.

Food and beverage expenses for the twelve months ended December 31, 2008 were $1.3 million, a decrease of $0.2 million, or 10.6%, from $1.5 million for the comparable period in the prior year. The decrease was the primarily due to payroll and related costs savings.

Income from Operations

Income from operations for the twelve months ended December 31, 2008 were $6.7 million, a decrease of $6.0 million, or 46.7%, from $12.7 million for the comparable period in the prior year. The decrease is primarily due to the $11.9 million decrease in casino revenues without offsetting reductions in costs and expenses. Operating margins were 16.1% for the twelve months ended December 31, 2008 in comparison to 23.3% for the comparable period in the prior year. Operating margins decreased primarily due to the revenue decrease in our high margin slot machine operations and increased depreciation and amortization expenses.

Consolidated Operations

Income from operations

Income from operations for the twelve months ended December 31, 2008 were $11.2 million, a decrease of $18.6 million, or 62.3%, from $29.8 million for the comparable period in the prior year. The decrease is principally due to a $35.7 million, or 17.4%, reduction in net revenues to $169.8 million from $205.5 million for the comparable period in the prior year. The decrease in net revenues was partially offset by a $17.2 million, or 9.8%, reduction in total costs and expenses to $158.5 million from $175.7 million for the comparable period in the prior year. Operating margins were 6.6% for the twelve months ended December 31, 2008 in comparison to 14.5% for the comparable period in the prior year. Operating margins decreased primarily as a result of the revenue reductions in our high margin slot machine operations and a $1.8 million increase in depreciation and amortization expense.

Other Expense

Other expenses for the twelve months ended December 31, 2008 were $20.6 million, a decrease of $27.4 million, or 57.0%, from $48.0 million for the comparable period in the prior year. The decrease is primarily due to a $12.9 million loss on retirement of debt in the prior year, a decrease of $9.7 million in the amount recorded for unrealized loss on derivatives and a decrease of $4.8 million in interest expense, net of interest income. The loss on retirement of debt resulted from the retirement of our 11% Notes as described below under Liquidity and Capital Resources. The decrease in the unrealized loss on derivatives was due primarily to lower interest rates resulting in an increase in the fair value of our interest rate swap liability. The decrease in interest expense was the result of reduced borrowing costs associated with our New Credit Facility executed June 2007.

Net Loss

Net loss for the twelve months ended December 31, 2008 was $11.9 million, an improvement of $6.4 million, or 35.0%, from a net loss of $18.3 million for comparable period in the prior year. The improvement is due to the $27.4 million reduction in other expenses which was partially offset by the $18.6 million decrease in consolidated income from operations and a $2.4 million income tax provision for the twelve months ended December 31, 2008 in comparison to no income tax provision for the prior year. The $2.4 million income tax provision was recorded in order to increase our valuation allowance as we currently do not believe that it is more likely than not that we can utilize the deferred tax assets (see Note 12 within the consolidated financial statements below).

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