HARRAHS ENTERTAINMENT INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 1-10410

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HARRAH'S ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE I.R.S. NO. 62-1411755
(State of Incorporation) (I.R.S. Employer Identification No.)

ONE HARRAH'S COURT
LAS VEGAS, NEVADA 89119
(Current address of principal executive offices)

(702) 407-6000
(Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

At July 31, 2002, there were 111,715,739 shares of the Company's Common
Stock outstanding.

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PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements of
Harrah's Entertainment, Inc., a Delaware corporation, have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and notes necessary for complete financial statements in conformity
with generally accepted accounting principles. The results for the periods
indicated are unaudited, but reflect all adjustments (consisting only of normal
recurring adjustments) that management considers necessary for a fair
presentation of operating results. Results of operations for interim periods are
not necessarily indicative of a full year of operations. These Consolidated
Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in our 2001 Annual
Report to Stockholders.

2

HARRAH'S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

See accompanying Notes to Consolidated Condensed Financial Statements.

3

HARRAH'S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(UNAUDITED)

4

HARRAH'S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (CONTINUED)

(UNAUDITED)

See accompanying Notes to Consolidated Condensed Financial Statements.

5

HARRAH'S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying Notes to Consolidated Condensed Financial Statements.

6

HARRAH'S ENTERTAINMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

See accompanying Notes to Consolidated Condensed Financial Statements.

7

HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2002

(UNAUDITED)

NOTE 1--BASIS OF PRESENTATION AND ORGANIZATION

Harrah's Entertainment, Inc. ("Harrah's Entertainment", the "Company", "we",
"our" or "us", and including our subsidiaries where the context requires) is a
Delaware corporation. Our casino entertainment facilities, operating under the
Harrah's, Rio, Showboat, and Harveys brand names, include casino hotels in Reno,
Lake Tahoe, Las Vegas and Laughlin, Nevada; two casino hotel properties in
Atlantic City, New Jersey; a casino hotel in Central City, Colorado; a
land-based casino in New Orleans, Louisiana; riverboat and dockside casinos in
Joliet and Metropolis, Illinois; East Chicago, Indiana; Council Bluffs, Iowa;
Shreveport and Lake Charles, Louisiana; Tunica and Vicksburg, Mississippi; and
North Kansas City and St. Louis, Missouri; and a greyhound racetrack and
land-based casino in Council Bluffs, Iowa. We also manage casinos on Indian
lands near Phoenix, Arizona; Cherokee, North Carolina; and Topeka, Kansas.

We have reclassified certain amounts for the prior year to conform with our
presentation for 2002.

NOTE 2--ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142

We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. SFAS No. 142
provides new guidance regarding the recognition and measurement of intangible
assets, eliminates the amortization of certain intangibles and requires annual
assessments for impairment of intangible assets that are not subject to
amortization.

We have completed our implementation review of the goodwill and other
intangible assets arising from our prior acquisitions and determined that
non-recurring impairment charges of $91.2 million, net of tax benefits of
$2.8 million, were required. These charges, which are reported in our
Consolidated Condensed Statements of Income as a change in accounting principle,
relate to goodwill and the trademark acquired in our 1999 acquisition of Rio
Hotel and Casino, Inc. ("Rio"). Since the acquisition of Rio, competition has
intensified in the market and Rio has greatly reduced its emphasis on
international high-end table games play, a significant component of its business
at the time of the acquisition. We determine the fair value of an operating unit
as a function, or multiple, of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), a common measure used to value and buy or sell cash
intensive businesses such as casinos. The calculated multiple for Rio indicated
that the fair value of the property, based on an EBITDA indicator, fell short of
the carrying value, and recognition of an impairment of $86 million of goodwill
was appropriate. The fair value of the Rio trademark was assessed by applying a
"relief from royalty" methodology, which ascribed a value to the trademark
derived as the present value of a percentage of forecasted future revenues.
Because the Rio has not sustained the level of revenues assumed in the original
computation to assign a value to the trademark, future revenue assumptions were
reassessed and it was determined that the fair value of the trademark was
$5.2 million, net of tax benefit of $2.8 million, less than the carrying value.
Rio's tangible assets were assessed for impairment applying the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
and our analysis indicated that the carrying value of the tangible assets was
not impaired.

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HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 2--ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142
(CONTINUED)
The following tables set forth information concerning our goodwill and other
intangible assets as of June 30, 2002:

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(a) Values of some intangible assets are preliminary subject to finalization of
the purchase price allocation of the Harveys acquisition.

The aggregate amortization expense for the quarter and six months ended
June 30, 2002, for those assets that will continue to be amortized under the
provisions of SFAS No. 142 was $0.2 million and $1.8 million, respectively.
Estimated annual amortization expense for those assets for the years ending
December 31, 2002, 2003, 2004, 2005 and 2006 is $4.2 million, $4.8 million,
$4.8 million, $4.8 million and $4.5 million, respectively.

With the adoption of SFAS No. 142, we ceased amortization of goodwill and
other intangible assets that were determined to have an indefinite useful life.
The information below depicts our results

9

HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 2--ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142
(CONTINUED)
for the quarter and six months ended June 30, 2001, on a pro forma basis, as if
SFAS No. 142 had been implemented at the beginning of that period.

NOTE 3--ACQUISITIONS

On June 7, 2002, a subsidiary of the Company acquired additional common
shares of JCC Holding Company, which, together with its subsidiary, Jazz Casino
Company LLC (collectively, "JCC"), owns and operates the Harrah's New Orleans
casino. This acquisition increased our ownership interest in JCC from 49% to 63%
and required a change in our accounting treatment for our investment in JCC from
the equity method to full consolidation of JCC in our financial statements. We
began consolidating JCC in our financial results on June 7, 2002.

We paid $18.3 million ($10.54 per share) for the additional ownership
interest in JCC and we purchased approximately $45.8 million of JCC's Senior
Notes. The terms of our agreement with the investor from which we purchased the
equity interest of JCC require us to pay an additional amount to

10

HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 3--ACQUISITIONS (CONTINUED)
that former investor if we purchase any JCC shares from other shareholders at a
price higher than $10.54 per share on or before December 31, 2002.

The purchase price allocation arising from our acquisition of the additional
14% ownership of JCC is in the early stages and is expected to be completed by
December 31, 2002. We expect to assign any difference between the purchase price
and the fair value of the additional interest purchased to an intangible asset,
which will be amortized over the remaining life of the business pursuant to the
agreements with the city and state under which the casino is operated.

On July 31, 2002, we announced an agreement with JCC whereby we will acquire
the remaining shares of JCC common stock for $10.54 per share, or a total of
approximately $54 million. We also agreed to assume or retire all of JCC's
outstanding debt that we do not already own of approximately $29.3 million par
value. The acquisition is subject to the approval of JCC stockholders, as well
as gaming regulatory approvals and other customary conditions, and is expected
to be completed during the fourth quarter of 2002.

On July 31, 2001, we completed our acquisition of Harveys Casino Resorts
("Harveys"). We paid approximately $294 million for all of the equity interests
in Harveys, assumed approximately $350 million in outstanding debt and paid
approximately $17 million in acquisition costs. We also assumed a $50 million
contingent liability. This liability is contingent on the results of a
referendum to be decided by the voters in Pottawattamie County, Iowa, in
November 2002. If the referendum passes, we will pay an additional $50 million
in acquisition costs. If the referendum does not pass, the excursion gambling
boat license may remain valid until January 26, 2004; however, the Bluffs Run
Casino would have to cease gaming operations in a relatively short time after
the referendum date. Management believes that the referendum will pass; however,
in the event the referendum does not pass and gaming operations cease in
Pottawattamie County, we would likely have a significant impairment related to
the carrying value of our assets in Iowa. We financed our acquisition, and
retired Harveys assumed debt, with borrowings under our bank credit facility
(see Note 5). We are in the process of finalizing the valuations of certain
intangible assets and of the Colorado assets; thus, the allocation of the
purchase price, as presented in the Notes to the Consolidated Financial
Statements in our 2001 Annual Report, is subject to refinement.

The results of operations of the properties acquired in the acquisition of
Harveys have been included in our consolidated financial statements since the
July 31, 2001, date of acquisition. The following unaudited pro forma
consolidated financial information for the Company has been prepared assuming
that (1) the Harveys acquisition and the extinguishment of debt assumed in that
acquisition and (2) the acquisition of the additional ownership interest in and
the consolidation of JCC had both

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HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 3--ACQUISITIONS (CONTINUED)
occurred on January 1, 2001. The information also assumes that SFAS No. 142 was
effective for the acquisitions on January 1, 2001.

These unaudited pro forma results are presented for comparative purposes
only. The pro forma results are not necessarily indicative of what our actual
results would have been had the Harveys acquisition and the debt extinguishments
and the JCC acquisition been completed as of the beginning of the period, or of
future results.

NOTE 4--STOCKHOLDERS' EQUITY

In addition to its common stock, Harrah's Entertainment has the following
classes of stock authorized but unissued:

Preferred stock, $100 par value, 150,000 shares authorized
Special stock, $1.125 par value, 5,000,000 shares authorized--
Series A Special Stock, 2,000,000 shares designated

In July 2001, our Board of Directors authorized the purchase of up to
6 million shares of the Company's stock in the open market. These purchases are
funded through available cash and borrowings from our bank credit facility (see
Note 5). During the first six months of 2002, we purchased 2.3 million shares at
an average price of $45.09 per share, leaving 1.6 million shares available for
purchase pursuant to the authorization, which expires December 31, 2002. During
July 2002, our Board of Directors authorized the purchase of up to 2 million
additional shares pursuant to a program to expire on December 31, 2002.

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HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 5--DEBT

REVOLVING CREDIT FACILITIES

At January 1, 2002, the Company had revolving credit and letter of credit
facilities (collectively, the "Bank Facility"), which provided us with borrowing
capacity of $1.853 billion. The Bank Facility consisted of a five-year
$1.525 billion revolving credit and letter of credit facility maturing in 2004
and a separate $328 million revolving credit facility, which is renewable
annually at the borrower's and lenders' options. On April 25, 2002, the 364-day
facility was renewed and the available borrowing capacity of that facility was
increased from $328 million to $332 million, providing a total borrowing
capacity of $1.857 billion pursuant to our Bank Facility. As of June 30, 2002,
the Bank Facility bears interest based upon 80 basis points over LIBOR for
current borrowings under the five-year facility and 85 basis points over LIBOR
for the 364-day facility. In addition, there is a facility fee for borrowed and
unborrowed amounts, which is currently 20 basis points on the five-year facility
and 15 basis points on the 364-day facility. The interest rate and facility fee
are based on our current debt ratings and leverage ratio and may change as our
debt ratings or leverage ratio change. There are options on each facility to
borrow based on the prime rate. As of June 30, 2002, $1.175 billion in
borrowings were outstanding under the Bank Facility with an additional
$88.8 million committed to back letters of credit. After consideration of these
borrowings and the impact of the increased capacity available to us under the
364-day facility, $593.2 million of additional borrowing capacity was available
to the Company as of June 30, 2002.

COMMERCIAL PAPER

To provide the Company with cost-effective borrowing flexibility, we have a
$200 million Commercial Paper program that is used to borrow funds for general
corporate purposes. Although the debt instruments are short-term in tenor, they
are classified as long-term debt because the Commercial Paper is backed by our
Bank Facility and we have committed to keep available capacity under our Bank
Facility in an amount equal to or greater than amounts borrowed under this
program. At June 30, 2002, $80 million was outstanding under this program.

SHORT-TERM BORROWINGS

In a program designed for short-term borrowings at lower interest rates than
the rates paid under our Bank Facility, we have an uncommitted line of credit
agreement with a lender pursuant to which we can borrow up to $31 million for
periods of ninety days or less. Borrowings bear interest at current market
rates. At June 30, 2002, we had borrowed $31 million under this agreement. This
agreement does not decrease our borrowing capacity under our Bank Facility.

JCC DEBT

With the increase of our ownership interest in JCC to 63% and the subsequent
consolidation of JCC into our financial statements, our long-term debt now
includes $24.7 million, net of discounts, of JCC's Senior Notes due 2008 (the
"JCC Notes"). The JCC Notes bear interest at LIBOR plus 2.75% per annum payable
quarterly. Principal payments of 50% of JCC's free cash flow, as defined in
JCC's Senior Note agreement, are due for the fiscal years ending March 31, 2003,
through March 31, 2005, and payments of $6 million annually are due for the
fiscal years ending March 31, 2006, through

13

HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 5--DEBT (CONTINUED)
March 31, 2008. JCC is subject to debt covenants under its Senior Note
agreement, which restrict, among other things, certain payments, transactions
with affiliates, dividend payments, liens, incurrence of additional
indebtedness, asset sales, mergers and consolidations, payment of certain
indebtedness, capital expenditures and investments or loans.

NOTE 6--SUPPLEMENTAL CASH FLOW DISCLOSURES

CASH PAID FOR INTEREST AND TAXES

The following table reconciles our interest expense, net of interest
capitalized, per the Consolidated Condensed Statements of Income, to cash paid
for interest:

NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES

NEW ORLEANS CASINO

JCC owns and operates a land-based casino in New Orleans, Louisiana, in
which the Company has an ownership interest and which is managed by a subsidiary
of the Company. The Company has guaranteed an annual payment obligation of JCC
owed to the State of Louisiana of $50 million in the first year, which expired
March 31, 2002, and $60 million for three subsequent years. We receive a fee of
2% of the average amount at risk for providing this guarantee. We also hold
approximately $99 million aggregate principal amount of the debt of JCC and are
providing a $35 million revolving credit facility to JCC at market terms. At
June 30, 2002, no funds were outstanding from JCC under the revolving credit
facility; however, the amount available under the credit facility was reduced by
$0.7 million, which was committed to back letters of credit on behalf of JCC.

JCC leases the site on which Harrah's New Orleans is located under the
provisions of a long-term lease expiring in 2024. The lease agreement provides
for a minimum lease payment of $12.5 million per year. Additional rents based on
various percentages of gross gaming and non-gaming revenues are also payable
under the terms of the lease lease. The lease contains three consecutive 10-year
renewal options.

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HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
NATIONAL AIRLINES, INC.

We are exposed to up to $12.25 million of liability under a letter of credit
issued on behalf of National Airlines, Inc. ("NAI"), which expires August 30,
2002. We have an agreement with another investor of NAI whereby that investor is
obligated to reimburse us for approximately 56% of amounts that we may pay under
the letter of credit and amounts that we funded under another letter of credit.
During second quarter 2001, a subsidiary of the Company filed a lawsuit against
the other investor for breach of contract due to the investor's failure to
reimburse the Company for his share of the $8.6 million we have paid against the
second letter of credit. As contractually permitted, the guarantor elected to
submit the issue to arbitration and the arbitrator has tentatively ruled in our
favor. We expect this ruling to be finalized during third quarter 2002. If we
are required to fund under the remaining letter of credit and are unsuccessful
in collecting from the other investor, we would record additional losses of up
to $10.8 million for NAI.

CONTRACTUAL COMMITMENTS

We continue to pursue additional casino development opportunities that may
require, individually and in the aggregate, significant commitments of capital,
up-front payments to third parties, guarantees by the Company of third party
debt and development completion guarantees. Excluding guarantees and commitments
for the New Orleans casino discussed above, as of June 30, 2002, we had
guaranteed third party loans and leases of $204.1 million, which are secured by
certain assets, and had commitments of $358.9 million for construction-related
and other obligations.

The agreements pursuant to which we manage casinos on Indian lands contain
provisions required by law that provide that a minimum monthly payment be made
to the tribe. These obligations have priority over scheduled payments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, we must pay the shortfall to
the tribe. Such advances, if any, would be repaid to us in future periods in
which operations generate cash flow in excess of the required minimum payment.
These commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. As of June 30, 2002, the
aggregate monthly commitment pursuant to these contracts for the three managed
Indian-owned facilities now open, which extend for periods of up to 67 months
from June 30, 2002, is $1.1 million.

SEVERANCE AGREEMENTS

As of June 30, 2002, we have severance agreements with 36 of our senior
executives, which provide for payments to the executives in the event of their
termination after a change in control, as defined. These agreements provide,
among other things, for a compensation payment of 1.5 to 3.0 times the
executive's average annual compensation, as defined, as well as for accelerated
payment or accelerated vesting of any compensation or awards payable to the
executive under any of our incentive plans. The estimated amount, computed as of
June 30, 2002, that would be payable under the agreements to these executives
based on earnings and stock options aggregated approximately $125.2 million.

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HARRAH'S ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2002

(UNAUDITED)

NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
TAX SHARING AGREEMENTS

In connection with the 1995 spin-off of certain hotel operations (the "PHC
Spin-off") to Promus Hotel Corporation ("PHC"), we entered into a Tax Sharing
Agreement with PHC wherein each company is obligated for those taxes associated
with their respective businesses. Additionally, we are obligated for all taxes
for periods prior to the PHC Spin-off date which are not specifically related to
PHC operations and/or PHC hotel locations. Our obligations under this agreement
are not expected to have a material adverse effect on our consolidated financial
position or results of operations.

SELF-INSURANCE

We are self-insured for various levels of general liability, workers'
compensation and employee medical coverage. We also have stop loss coverage to
protect against unexpected claims. Insurance claims and reserves include
accruals of estimated settlements for known claims, as well as accruals of
actuarial estimates of incurred but not reported claims.

NOTE 8--LITIGATION

We are involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, we believe that the final outcome of these matters will not have
a material adverse effect upon our consolidated financial position or our
results of operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the financial position and
operating results of Harrah's Entertainment, Inc. (referred to in this
discussion, together with its consolidated subsidiaries where appropriate, as
"Harrah's Entertainment", the "Company", "we", "our" and "us") for the second
quarter and the first six months of 2002 and 2001, updates, and should be read
in conjunction with, Management's Discussion and Analysis of Financial Condition
and Results of Operations presented in our 2001 Annual Report on Form 10-K.

ADOPTION OF NEW ACCOUNTING STANDARD

We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. SFAS No. 142
provides new guidance regarding the recognition and measurement of intangible
assets, eliminates the amortization of certain intangibles and requires annual
assessments for impairment of intangible assets that are not subject to
amortization. An initial impairment analysis is required as of the date of
adoption and any resulting impairment loss is recognized as the effect of a
change in accounting principle. Early adoption of Statement 142 was not allowed.

During the first quarter of 2002, we completed our implementation review of
the intangible assets arising from prior acquisitions and determined that
non-recurring impairment charges of $91.2 million, net of tax benefits of
$2.8 million, or $0.80 per share--diluted, were required. The charges relate to
intangible assets acquired in the Company's 1999 acquisition of Rio Hotel and
Casino, Inc.

Adoption of SFAS No. 142 resulted in the cessation of amortization of most
intangible assets as of January 1, 2002. The provisions of this new accounting
standard cannot be applied retroactively and prior period results are not to be
adjusted for this change in accounting principle. However, it does require that
pro forma results be presented to depict what results would have been had the
new rules been in force in the prior periods. The pro forma amounts for prior
year presented in Note 2 of our Notes to Consolidated Condensed Financial
Statements reflect the add-back of this amortization expense to the Company's
previously reported results.

CONSOLIDATION OF HARRAH'S NEW ORLEANS

On June 7, 2002, a subsidiary of the Company acquired additional common
shares of JCC Holding Company, which, together with its subsidiary, Jazz Casino
Company LLC (collectively, "JCC"), owns and operates the Harrah's New Orleans
casino. This acquisition increased our ownership interest in JCC from 49% to 63%
and required a change in our accounting treatment for our investment in JCC from
the equity method to full consolidation of JCC in our financial statements. We
began consolidating JCC in our financial results on June 7, 2002.

We paid $18.3 million ($10.54 per share) for the additional ownership
interest in JCC and we purchased approximately $45.8 million of JCC's Senior
Notes. The terms of our agreement with the investor from which we purchased the
equity interest of JCC require us to pay an additional amount to that former
investor if we purchase any JCC shares from other shareholders at a price higher
than $10.54 per share on or before December 31, 2002.

The purchase price allocation arising from our acquisition of the additional
14% ownership of JCC is in the early stages and is expected to be completed by
December 31, 2002. We expect to assign any difference between the purchase price
and the fair value of the additional interest purchased to an intangible asset,
which will be amortized over the remaining life of the business pursuant to the
agreements with the city and state under which the casino is operated.

On July 31, 2002, we announced an agreement with JCC whereby we will acquire
the remaining shares of JCC common stock for $10.54 per share, or a total of
approximately $54 million. We also

17

agreed to assume or retire all of JCC's outstanding debt that we do not already
own of approximately $29.3 million par value. The acquisition is subject to the
approval of JCC stockholders, as well as gaming regulatory approvals and other
customary conditions, and is expected to be completed during the fourth quarter
of 2002.

OPERATING RESULTS AND DEVELOPMENT PLANS

OVERALL

Second quarter 2002 revenues increased 18.0% over second quarter 2001, and
net income increased 79.7% from the same period last year. These record results
were driven by our acquisition of Harveys Casino Resorts ("Harveys") on
July 31, 2001, the return on recent capital investments at targeted properties,
same-store sales growth, our on-going emphasis on cost control strategies,
reduced interest expense due to lower rates on our variable rate debt, the
cessation of goodwill amortization and the consolidation of JCC into our
financial results as of June 7, 2002.

For the six months ended June 30, 2002, revenues were up 15.7% and income
before extraordinary items and the cumulative effect of a change in accounting
principle increased 86.0% from the same period last year. With the exception of
the consolidation of JCC's results in our financial statements, year-over-year
increases for the first six months were driven by the same factors that drove
our second quarter increases.

Although the Harveys acquisition was the primary reason for the increase in
our second quarter revenues in 2002 over 2001, gaming revenues at our other
owned properties continued to grow, reaffirming the success of our strategy to
grow same store sales through customer loyalty programs.

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The following table compares second quarter 2002 gaming revenues to second
quarter 2001 gaming revenues for our Company-owned properties, including those
acquired over the past three years.

To facilitate discussion of our operating results, our properties have been
grouped as follows:

In the following discussions of the operating results for our properties, we
define operating profit as revenues less direct operating expenses and
depreciation and amortization, excluding amortization of intangible assets.

WESTERN REGION

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The increases in Western Region revenues for the second quarter and first
six months of 2002 from the comparable periods last year were due to the
inclusion of results from the Harveys casinos in Lake Tahoe and Colorado. These
two properties, which were acquired July 31, 2001, contributed $42.3 million and
$82.0 million in combined revenues in second quarter and the first six months,
respectively, of 2002. Revenues at our Las Vegas properties increased over the
second quarter and first six months of 2001 levels, demonstrating the success of
continued efforts of these properties to recover from the effects of the
September 11, 2001, terrorist attacks on travel, which had a more severe impact
on our Las Vegas properties, due to their status as fly-in, destination resorts,
than on our other properties.

Second quarter 2002 operating profit increased 71.9% over second quarter
2001, driven by improved performance at the Rio primarily due to
cost-containment measures and the decision to exit the high-end international
table games business in third quarter 2001 and by the addition of the Harveys
casinos. Those same factors drove the increase in operating profit of 43.5% for
the first six months of 2002 over the prior year period. The six-month
year-over-year increase was partially offset by declines in operating profit at
Harrah's Las Vegas during first quarter 2002 when room rates and walk-in traffic
remained below prior year levels due to effects on travel of the September 11,
2001 terrorist attacks and at Harrah's Laughlin, where operating profit was
impacted by costs associated with a motorcycle gang incident in April 2002.
Laughlin's business returned to normal in May.

EASTERN REGION

Our Eastern Region properties reported record revenues for the second
quarter and the first six months of 2002. Harrah's Atlantic City revenues
increased by 8.9% in the second quarter and by 5.0% in the first six months over
the comparable periods in 2001. These increases were driven by the opening of
the new hotel tower and the addition of 500 slot machines at this property in
second quarter 2002. Showboat Atlantic City revenues increased 1.6% in the
second quarter and 4.3% in the first six months over the comparable periods in
2001. These record revenues were achieved despite construction disruptions at
both properties.

Harrah's Atlantic City posted record operating profit for the second quarter
and the first six months of 2002, with increases of 13.9% and 11.9%,
respectively, over the second quarter and the first six months of 2001. Showboat
Atlantic City's operating profit increased 17.6% over second quarter last year
and increased 16.3% over the comparable six-month period in 2001. Property
enhancements and effective cost containment drove the improved results at both
properties.

In May 2002, Harrah's Atlantic City opened its 452-room addition, which
increased the hotel's capacity to more than 1,600 rooms, and completed a project
that created an additional 28,000 square feet of casino floor space and expanded
a buffet area. These capital improvements cost approximately $193 million,
$159.8 million of which had been spent at June 30, 2002.

20

Construction is underway on a $90 million, 544-room hotel tower at Showboat
Atlantic City, which is expected to open in the third quarter of 2003. As of
June 30, 2002, $13.3 million had been spent on this project.

CENTRAL REGION

Illinois/Indiana--Combined second quarter 2002 revenues at Harrah's Joliet,
Harrah's East Chicago and Harrah's Metropolis set new second quarter records,
increasing 12.4% over combined revenues in second quarter last year. Harrah's
Joliet continued to benefit from the conversion from riverboats to barges in
September 2001. Harrah's Metropolis also benefited from capital improvements
made at that property and from the conversion to the Harrah's brand in September
of last year. In first quarter 2002, we completed the opening of the
$47 million hotel at Harrah's East Chicago. Combined second quarter 2002
operating profit for these properties remained flat when compared to the prior
year period despite approximately $12.4 million in net charges against profit in
second quarter 2002 to adjust our year-to-date gaming tax accruals for estimated
additional taxes due to recent gaming tax increases in Illinois and Indiana. For
properties subject to a graduated tax rate, we accrue our gaming tax liability
over the course of the year based on our estimate of the annual effective gaming
tax rate for the property. The state legislatures in Illinois and Indiana passed
legislation during second quarter 2002 raising the gaming tax rates in those
states. In Illinois, the maximum graduated gaming tax rate was increased from
35% to 50% effective July 1, 2002. The Indiana legislation, also effective
July 1, 2002, increased the base gaming tax rate from 20% to 22.5% and increased
the admission tax from $2 to $3 per patron per cruise.

The Indiana legislation also includes provisions that allow casinos to
convert from cruising to dockside operations. If a casino elects to become a
dockside operation, the gaming tax rate structure changes to a graduated scale
with a maximum tax rate of 35%. The impact of the increase in the gaming tax
rate will be partially mitigated by a change in the methodology for determining
the amount of admission tax payable, which will be adjusted from charging the
tax per patron per cruise to a charge per admission. We intend to convert our
Harrah's East Chicago operation from cruising to dockside during third quarter
2002. Our estimate of the impact of these events on our accrual balances as of
June 30, 2002, was an increase in accrued gaming taxes of $14.6 million,
partially offset by an estimated $2.2 million reduction on admission tax
exposure.

For the first six months of 2002, combined revenues increased 11.8% over the
same period last year. Operating profit increased 14.1% due to accelerated
depreciation in 2001 on the boats that were taken out of service at Joliet due
to that property's conversion from riverboats to barges.

Louisiana--Combined second quarter 2002 revenues from our Shreveport and
Lake Charles properties increased 4.4% over second quarter 2001 as Harrah's
Shreveport's 13.5% increase more than offset the 5.9% decline at Harrah's Lake
Charles. Combined operating profit for second quarter 2002 increased 2.5% over
the year-ago quarter, with the 35.4% increase at Shreveport largely offset by
the 37.0% decline at Lake Charles. Shreveport's year-over-year improvements were
primarily attributable to the 514-room hotel and player amenities that opened in
first quarter 2001. In second quarter 2001, Shreveport's operating profit was
affected by higher costs driven by the competitive Shreveport market

21

and increased depreciation associated with the newly constructed assets. Our
Lake Charles property has been affected by increased competition, including the
addition of slot machines at a horse racing track located closer to one of our
Texas feeder markets than our property and additional Indian casino offerings.
Operating profits at both Louisiana properties were impacted by increases in
gaming taxes that were effective in second quarter 2001. At Shreveport, gaming
taxes increased one percentage point in 2001, increased another one percentage
point on April 1, 2002, and will increase another one percentage point in 2003.
At Lake Charles, gaming taxes increased from 18.5% to 21.5% of gaming revenues
in 2001.

For the six months ended June 30, 2002, combined Shreveport and Lake Charles
revenues were 5.7% higher than in the first six months of 2001 and combined
operating profit was 11.1% higher than in the year-ago period.

Also contributing to results in Louisiana was the consolidation of JCC into
our financial results effective June 7, 2002. Subsequent to its consolidation,
JCC contributed $18.6 million in revenues and $2.7 million in operating profit
to our second quarter and six months results.

In first quarter 2002, the voters of Calcasieu Parish, Louisiana, approved a
competitor's proposed riverboat casino in Lake Charles. This will be the
fifteenth and final riverboat gaming license to be issued by the State of
Louisiana under the legislation legalizing riverboat gaming in that State. We
cannot predict the effect on our Company of another casino facility in the Lake
Charles area.

Mississippi--Combined second quarter 2002 revenues at our Mississippi
properties increased 7.3% and operating profit increased by $1.4 million, or
77.1%, over second quarter 2001. The improved results are primarily due to cost
containment measures implemented at both of our Mississippi properties.

Missouri--Combined second quarter 2002 revenues at our Missouri properties
increased 0.9% and operating profit was 11.6% higher than in second quarter last
year. The improved results are primarily attributable to cost containment
measures.

For the first six months, revenues at our Missouri properties decreased 0.7%
due to increased competition, but operating profit, aided by cost containment
measures, was 8.6% higher than in the first six months of 2001.

Iowa--On a combined basis, our two properties in Iowa, which were acquired
in July 2001, contributed $58.6 million in total revenues and $11.5 million in
operating profit to our second quarter 2002 results and $119.5 million in total
revenues and $21.8 million in operating profit for the six months ended
June 30, 2002.

Pursuant to Iowa law, a county-wide referendum must be held every eight
years to re-approve gambling activities both at racetracks and on riverboats. In
November 2002, the voters of Pottawattamie County, Iowa, where our operations
are located, will vote on a referendum to determine whether or not gaming will
be allowed to continue in that county. If the referendum passes, we will pay an
additional $50 million in acquisition costs related to our acquisition of
Harveys in 2001. If the referendum does not pass, the excursion gambling boat
license may remain valid until January 26, 2004; however, the Bluffs Run Casino
would have to cease gaming operations in a relatively short time after the
referendum date. We believe that the referendum will pass; however, we cannot
provide any assurances in this regard. In the event the referendum does not pass
and gaming operations cease in Pottawattamie County, we would likely have a
significant impairment related to the carrying value of our assets in Iowa.

The Iowa Supreme Court issued an opinion in June 2002 that reduced the
gaming tax rate on gaming revenues earned by casinos at dog tracks operating in
the state, including our Bluffs Run Casino. Casinos at dog tracks are taxed at a
higher rate than the riverboat casinos operating in Iowa.

22

The Court ruled this disparity is unconstitutional and opined that the casinos
at dog tracks should be taxed at the same rate as the riverboat casinos. This
reduces the tax rate for Bluffs Run from 32% to 20%. The Iowa Supreme Court has
denied the State's petition for rehearing and remanded the case to the Iowa
District Court for determination of the appropriate relief. Further review of
the Iowa Supreme Court's ruling on the constitutional issue is unlikely,
however, the nature of the relief to be granted remains subject to both judicial
and legislative determination. Given the uncertainty of this situation, we have
continued to accrue gaming taxes at the 32% rate, and we will continue this
practice until this matter is clarified and our ultimate tax exposure is known.
Depending upon the relief ultimately granted by the Iowa courts and subject to
future changes in the gaming tax rate imposed by the Iowa legislature, an
additional payment based on a multiple of the calculated savings will be due
Iowa West Racing Association ("Iowa West"), the entity holding the pari-mutuel
and gaming license for the Bluffs Run Casino and with whom we have a management
agreement to operate that property. Any additional payment that may be due to
Iowa West would increase the value of certain intangible assets identified in
our acquisition of Harveys.

MANAGED CASINOS AND OTHER

Our managed and other results were higher than in the second quarter and
first six months of 2001 due primarily to management fees from the New Orleans
casino. In first quarter 2001, no management fees were recognized from Harrah's
New Orleans due to the bankruptcy filing by the owners and operators of the New
Orleans casino, JCC. With the implementation of JCC's plan of reorganization, we
resumed recognizing management fees from the New Orleans casino in second
quarter 2001. With the acquisition of the additional ownership interest in JCC
on June 7, 2002, we began consolidating JCC's results in our financial
statements and ceased reporting their results as part of our managed casinos.
Second quarter 2002 management fees from Indian-owned casinos were about even
with second quarter last year as improved results at the casinos offset lower
management fee structures.

Construction was completed in second quarter 2002 on a 252-room hotel and a
30,000 square foot conference center at Harrah's Cherokee Smoky Mountains Casino
in Cherokee, North Carolina.

During first quarter 2001, a temporary casino managed by the Rincon San
Luiseno Band of Mission Indians ("Rincon") in Southern California began
operations near the site where a permanent casino, which we will manage, was
being constructed. The permanent casino opened on August [8], 2002. Rincon has
secured third-party financing, which we have guaranteed, for its permanent
casino.

See Debt and Liquidity for further discussion of Harrah's guarantees of debt
related to Indian projects.

23

OTHER FACTORS AFFECTING NET INCOME

Project opening costs in both years included costs incurred in connection
with expansion and renovation projects at various properties.

Corporate expense decreased 11.8% in second quarter 2002 and 17.2% in the
first six months of 2002 from the prior year periods due to cost savings and
timing of the incurrence of certain expenses.

Equity in losses of nonconsolidated affiliates for second quarter 2002
included our $2.1 million share of an impairment charge taken by a
nonconsolidated subsidiary, partially offset by our share of earnings from JCC
until June 7, 2002, when we began consolidating JCC's results due to our
increased ownership. No equity pick-up from JCC was recorded in first quarter
2001 due to its bankruptcy filing. With the implementation of JCC's
reorganization plan, we resumed recording our share of its results in second
quarter 2001.

Write-downs, reserves and recoveries in second quarter 2002 includes legal
costs incurred related to certain lawsuits and write-downs of non-operating
assets. The six months ended June 30, 2002, also reflects partial recoveries of
previously recorded reserves. Second quarter 2001 Write-downs, reserves and
recoveries reflected costs incurred in connection with the closure of our
reservations center in Memphis, Tennessee. The six months ended June 30, 2001,
also included a true-up to reserves recorded in fourth quarter 2000 in
connection with the approval of JCC's reorganization plan. First quarter 2001
Venture restructuring costs represent fees to bankers and other consultants to
represent our interest in JCC's plan of reorganization.

Amortization of intangible assets is less than in second quarter and the
first six months of 2001 due to the implementation of SFAS No. 142 in first
quarter 2002.

Although the Company's average debt balance was higher in second quarter and
first six months of 2002 than in the same periods last year due to the Harveys
acquisition and our share repurchase program, interest expense decreased in
first quarter 2002 from 2001 due to lower interest rates on variable-rate debt.
The average interest rate on our variable-rate debt was 2.9% at June 30, 2002,
compared to 5.5% at June 30, 2001. An increase in interest rates could have a
material effect on our

24

financial results. For example, assuming a constant outstanding balance for our
variable-rate debt for the next twelve months, a hypothetical 1% increase in
interest rates would increase interest expense for the next twelve months by
approximately $13.2 million, or $3.3 million per quarter. Our variable-rate debt
represents approximately 35% of our total debt, while our fixed-rate debt is
approximately 65% of our total debt.

Other (income) expense for second quarter 2002 was unfavorable compared to
second quarter last year due primarily to favorable net investment results in
2001 for company-owned life insurance policies. Second quarter 2002 also
included a loss on the sale of a corporate airplane. The first six months of
2002 also included net proceeds from litigation settlements, while the first six
months of 2001 also included losses from the sale of non-operating assets.

The effective tax rates for both periods are higher than the federal
statutory rate due primarily to state income taxes. The 2001 effective tax rate
was also affected by that portion of our goodwill amortization that is not
deductible for tax purposes. With the cessation of goodwill amortization in
first quarter 2002 as a result of the implementation of SFAS No. 142, our
effective tax rate declined from the rate at first quarter last year. However,
our effective tax rate increased in second quarter 2002 due to increased
exposure to state income taxes in 2002.

Minority interests reflects minority owners' share of income, which
increased in second quarter 2002 from the prior year second quarter due to the
consolidation of JCC and recognition of the minority ownership in that entity.
The first six months of 2002 also reflect higher earnings from a venture due in
part to the accelerated depreciation in 2001 on the riverboats that were removed
from service in September 2001.

CAPITAL SPENDING AND DEVELOPMENT

In addition to the specific development and expansion projects discussed in
the Operating Results and Development Plans section, we perform on-going
refurbishment and maintenance at our casino entertainment facilities to maintain
the Company's quality standards. We also continue to pursue development and
acquisition opportunities for additional casino entertainment facilities that
meet our strategic and return on investment criteria. Prior to the receipt of
necessary regulatory approvals, the costs of pursuing development projects are
expensed as incurred. Construction-related costs incurred after the receipt of
necessary approvals are capitalized and depreciated over the estimated useful
life of the resulting asset. Project opening costs are expensed as incurred.

Our planned development projects, if they go forward, will require,
individually and in the aggregate, significant capital commitments and, if
completed, may result in significant additional revenues. The commitment of
capital, the timing of completion and the commencement of operations of casino
entertainment development projects are contingent upon, among other things,
negotiation of final agreements and receipt of approvals from the appropriate
political and regulatory bodies. Cash needed to finance projects currently under
development as well as additional projects pursued is expected to be made
available from operating cash flows, bank borrowings (see Debt and Liquidity),
joint venture partners, specific project financing, guarantees of third party
debt and, if necessary, additional debt and/or equity offerings. Our capital
spending for the first six months of 2002 totaled approximately $272.2 million.
Estimated total capital expenditures for 2002, including amounts spent to date,
are expected to be between $400 million and $450 million.

25

DEBT AND LIQUIDITY

The majority of our debt is due in the year 2004 and beyond. Payments of
short-term obligations and other commitments are expected to be made from
operating cash flows. Long-term obligations are expected to be paid through
operating cash flows, refinancing of debt, joint venture partners or, if
necessary, additional debt and/or equity.

BANK FACILITY

At January 1, 2002, the Company had revolving credit and letter of credit
facilities (collectively, the "Bank Facility"), which provided us with borrowing
capacity of $1.853 billion. The Bank Facility consisted of a five-year
$1.525 billion revolving credit and letter of credit facility maturing in 2004
and a separate $328 million revolving credit facility, which is renewable
annually at the borrower's and lenders' options. On April 25, 2002, the 364-day
facility was renewed and the available borrowing capacity of that facility was
increased from $328 million to $332 million, providing a total borrowing
capacity of $1.857 billion pursuant to our Bank Facility. As of June 30, 2002,
the Bank Facility bears interest based upon 80 basis points over LIBOR for
current borrowings under the five-year facility and 85 basis points over LIBOR
for the 364-day facility. In addition, there is a facility fee for borrowed and
unborrowed amounts, which is currently 20 basis points on the five-year facility
and 15 basis points on the 364-day facility. The interest rate and facility fee
are based on our current debt ratings and leverage ratio and may change as our
debt ratings or leverage ratio change. There are options on each facility to
borrow based on the prime rate. As of June 30, 2002, $1.175 billion in
borrowings were outstanding under the Bank Facility with an additional
$88.8 million committed to back letters of credit. After consideration of these
borrowings and the impact of the increased capacity available to us under the
364-day facility, $593.2 million of additional borrowing capacity was available
to the Company as of June 30, 2002.

COMMERCIAL PAPER

To provide the Company with cost-effective borrowing flexibility, we have a
$200 million Commercial Paper program that is used to borrow funds for general
corporate purposes. Although the debt instruments are short-term in tenor, they
are classified as long-term debt because the Commercial Paper is backed by our
Bank Facility and we have committed to keep available capacity under our Bank
Facility in an amount equal to or greater than amounts borrowed under this
program. At June 30, 2002, $80 million was outstanding under this program.

SHORT-TERM BORROWINGS

In a program designed for short-term borrowings at lower interest rates than
the rates paid under our Bank Facility, we have an uncommitted line of credit
agreement with a lender pursuant to which we can borrow up to $31 million for
periods of ninety days or less. Borrowings bear interest at current market
rates. At June 30, 2002, we had borrowed $31 million under this agreement. This
agreement does not decrease our borrowing capacity under our Bank Facility.

JCC DEBT

With the increase of our ownership interest in JCC to 63% and the subsequent
consolidation of JCC into our financial statements, our long-term debt now
includes $24.7 million, net of discounts, of JCC's Senior Notes due 2008 (the
"JCC Notes"). The JCC Notes bear interest at LIBOR plus 2.75% per annum payable
quarterly. Principal payments of 50% of JCC's free cash flow, as defined in
JCC's Senior Note agreement, are due for the fiscal years ending March 31, 2003,
through March 31, 2005, and payments of $6 million annually are due for the
fiscal years ending March 31, 2006, through March 31, 2008. JCC is subject to
debt covenants under its Senior Note agreement, which restrict,

26

among other things, certain payments, transactions with affiliates, dividend
payments, liens, incurrence of additional indebtedness, asset sales, mergers and
consolidations, payment of certain indebtedness, capital expenditures and
investments or loans.

EQUITY REPURCHASE PROGRAM

In July 2001, our Board of Directors authorized the purchase of up to
6 million shares of the Company's stock in the open market. These repurchases
are funded through available cash and borrowings from our Bank Facility. During
the first six months of 2002, we purchased 2.3 million shares at an average
price of $45.09 per share, leaving 1.6 million shares available for purchase
pursuant to the authorization, which expires December 31, 2002. During
July 2002, our Board of Directors authorized the purchase of up to 2 million
additional shares pursuant to a program to expire on December 31, 2002.

GUARANTEES OF THIRD PARTY DEBT AND OTHER COMMITMENTS

The Company has guaranteed an annual payment obligation of JCC owed to the
State of Louisiana of $50 million in the first year, which expired March 31,
2002, and $60 million for three subsequent years. During the first year of the
guarantee, JCC made its annual payment to the State; therefore, the Company did
not make any payments under this guarantee. We are also providing a $35 million
revolving credit facility to JCC at market terms. At June 30, 2002, no funds
were outstanding from JCC under the revolving credit facility; however, the
amount available under the credit facility was reduced by $0.7 million, which
was committed to back letters of credit on behalf of JCC.

JCC leases the site on which Harrah's New Orleans is located under the
provisions of a long-term lease expiring in 2024. The lease agreement provides
for a minimum lease payment of $12.5 million per year. Additional rents based on
various percentages of gross gaming and non-gaming revenues are also payable
under the terms of the lease lease. The lease contains three consecutive 10-year
renewal options.

We are exposed to up to $12.25 million of liability under a letter of credit
issued on behalf of National Airlines, Inc. ("NAI"), which expires on
August 30, 2002. We have an agreement with another investor of NAI whereby that
investor is obligated to reimburse us for approximately 56% of amounts that we
may pay under the letter of credit and amounts that we funded under another
letter of credit. During second quarter 2001, a subsidiary of the Company filed
a lawsuit against the other investor for breach of contract due to the
investor's failure to reimburse the Company for his share of the $8.6 million we
have paid against the second letter of credit. As contractually permitted, the
guarantor elected to submit the issue to arbitration and the arbitrator has
tentatively ruled in our favor. We expect this ruling to be finalized during
third quarter 2002. If we are required to fund under the remaining letter of
credit and are unsuccessful in collecting from the other investor, we would
record additional losses of up to $10.8 million for NAI.

In addition to guarantees and commitments related to JCC and NAI, the
agreements pursuant to which we manage casinos on Indian lands contain
provisions required by law that provide for a minimum monthly payment to be made
to the tribe. That obligation has priority over scheduled repayments of
borrowings for development costs. In the event that insufficient cash flow is
generated by the operations to fund this payment, we must pay the shortfall to
the tribe. Such advances, if any, would be repaid to us in future periods in
which operations generate cash flow in excess of the required minimum payment.
These commitments will terminate upon the occurrence of certain defined events,
including termination of the management contract. As of June 30, 2002, the
aggregate monthly commitment pursuant to these contracts for the three managed
Indian-owned facilities now open, which extend for periods of up to 67 months
from June 30, 2002, is $1.1 million.

27

We may guarantee all or part of the debt incurred by Indian tribes with
which we have entered a management contract to fund development of casinos on
the Indian lands. For all existing guarantees of Indian debt, we have obtained a
first lien on certain personal property (tangible and intangible) of the casino
enterprise. There can be no assurance, however, that the value of such property
would satisfy our obligations in the event these guarantees were enforced.
Additionally, we have received limited waivers from the Indian tribes of their
sovereign immunity to allow us to pursue our rights under the contracts between
the parties and to enforce collection efforts as to any assets in which a
security interest is taken. The aggregate outstanding balance of such debt as of
June 30, 2002, was $191.3 million.

With the Harveys acquisition in July 2001, we assumed a $50 million
contingent liability that may become due as part of the consideration paid for
the net assets of Harveys. The contingent payment depends on the results of a
referendum to be decided by the voters of Pottawattamie County, Iowa, in
November 2002. (See the discussion in our Operating Results and Development
Plans--Central Region--Iowa.)

EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS

COMPETITIVE PRESSURES

Due to the limited number of new markets opening for development, many
casino operators are reinvesting in existing markets in an effort to attract new
customers, thereby increasing competition in those markets. As companies have
completed expansion projects, supply has typically grown at a faster pace than
demand in some markets and competition has increased significantly. Furthermore,
several operators, including Harrah's, have announced plans for additional
developments or expansions in some markets.

The Louisiana legislature has authorized the use of slot machines at horse
racing tracks in three parishes in Louisiana. We operate riverboat casinos in
two of these parishes. The voters in these two parishes have approved the use of
slot machines at racetracks located in those parishes, and the fees and taxes to
be imposed on the slot machines have received legislative approval. We
anticipate the installation of slot machines at a horse racing facility near our
Shreveport property in the near future. We cannot predict the effect that this
new competition in the Shreveport area would have on our operations there.

In first quarter 2002, approval was given to a horse racing facility near
our property in Lake Charles, Louisiana, to install slot machines and that
facility opened in mid-February with approximately 1,500 machines. The horse
racing facility is approximately 25 miles closer to the Texas border and one of
our major feeder markets in Texas than our property. As discussed above,
revenues and operating profit at our Lake Charles property have been negatively
impacted by the addition of this new competitor.

In the third quarter of 2001, the State of Louisiana selected a competitor
to receive the fifteenth and final riverboat gaming license to be issued by the
State, under the legislation legalizing riverboat gaming in that State. The
competitor's project is for a riverboat casino in Lake Charles. Construction of
that facility has not yet begun. We cannot predict the effect that the new
riverboat competition in the Lake Charles area will have on our operations
there.

In Atlantic City, a competitor is constructing a 2,000-room hotel and casino
that is expected to open in the summer of 2003. A competitor in Missouri is
expected to complete a large casino expansion later this year. The impacts of
increased competition in these markets on our Company are uncertain.

In October 2001, the legislature of the State of New York approved a bill
authorizing six new tribal casinos in that state and video lottery terminals at
tracks. The measure allows the governor of New

28

York to negotiate gaming compacts with American Indian tribes to operate three
casinos in the Catskills and three casinos in western New York.

In September 1999, the State of California and approximately 60 Indian
tribes executed Class III Gaming Compacts, which other California tribes can
join. The Compacts, when effective, will allow each tribe to operate, on tribal
trust lands, two casinos with up to 2,000 slot machines per tribe and unlimited
house-banked card games. Our agreements with the Rincon Tribe are a result of
these events (see Operating Results and Development Plans, Managed Casinos and
Other).

At this time, the ultimate impacts that the New York Compacts or the
California Compacts may have on the industry or on our Company are uncertain.
Other states are also considering legislation enabling the development and
operation of casinos or casino-like operations.

Although, historically, the short-term effect of such competitive
developments on our Company has been both positive and negative, we are not able
to determine the long-term impact, whether favorable or unfavorable, that these
trends and events will have on current or future markets. We believe that the
geographic diversity of our operations; our focus on multi-market customer
relationships; our service training, measurements and rewards programs; and our
continuing efforts to establish our brands as premier brands upon which we have
built strong customer loyalty have well-positioned us to face the challenges
present within our industry. We utilize the unique capabilities of WINet, a
sophisticated nationwide customer database, and Total Rewards, a nationwide
reward and recognition program. Total Rewards provides our customers with a
simple understanding of how to earn cash, comps and other benefits for playing
at Harrah's Entertainment casinos. We believe both of these marketing tools
provide us with competitive advantages, particularly with players who visit more
than one market. All of our properties, with the exception of the Colorado
property acquired in the Harveys acquisition, are integrated into both WINet and
Total Rewards.

POLITICAL UNCERTAINTIES

The casino entertainment industry is subject to political and regulatory
uncertainty. From time to time, individual jurisdictions have also considered
legislation or referendums that could adversely impact our operations. The
likelihood or outcome of similar legislation and referendums in the future is
difficult to predict.

The casino entertainment industry represents a significant source of tax
revenues to the various jurisdictions in which casinos operate. From time to
time, and as was the case in second quarter 2002 in Illinois and Indiana,
various state and federal legislators and officials have proposed changes in tax
laws, or in the administration of such laws that would affect the industry. It
is not possible to determine with certainty the scope or likelihood of possible
future changes in tax laws or in the administration of such laws. If adopted,
such changes could have a material adverse effect on our financial results.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

We prepare our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States. Certain of our
accounting policies, including the estimated lives assigned to our assets, the
determination of bad debt, asset impairment and self insurance reserves, the
purchase price allocations made in connection with our acquisitions and the
calculation of our income tax liabilities, require that we apply significant
judgment in defining the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. Our judgments are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. There can be no assurance that actual results will not differ
from our estimates. To provide an understanding of the methodology we apply,

29

our significant accounting policies are discussed where appropriate in this
discussion and analysis and in the Notes to Consolidated Condensed Financial
Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

During first quarter 2001, the Emerging Issues Task Force reached a
consensus on the portion of Issue 00-22, "Accounting for 'Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future," which addresses the income
statement classification of the value of the points redeemable for cash awarded
under point programs such as our Total Rewards program. Per the consensus, which
for our Company was effective retroactively to January 1, 2001, with
reclassification of prior year costs also required, the cost of these programs
should be reported as a contra-revenue, rather than as an expense. Debate
continues on a number of other facets of Issue 00-22 that could have an impact
on our financial statements. We historically reported the costs of such points
as an expense, so we have reclassified these costs to be contra-revenues in our
Consolidated Condensed Statements of Income to comply with the consensus. The
amounts of expense reclassified for the second quarter and the first six months
of 2001 were $40.6 million and $73.0 million, respectively. These
reclassifications had no impact on our Income from operations, Net income or
Earnings per share.

During second quarter 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations".
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. For our Company,
SFAS No. 143 will be effective in 2003. We are currently evaluating the
provisions of this recently issued accounting pronouncement and have not yet
determined the impact that its adoption will have on our results of operations
or financial position.

During third quarter 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which we implemented on
January 1, 2002. SFAS No. 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.
SFAS No. 144 had no impact on our financial statements.

In second quarter 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical
Corrections," which all but eliminates the presentation in income statements of
debt extinguishments as extraordinary items. Statement No. 145 is effective for
fiscal years beginning after May 15, 2002. We plan to implement Statement
No. 145 upon the earlier of a 2002 debt extinguishment giving rise to a gain or
loss or in our 2002 Form 10-K.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to exit or disposal plan. Statement No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002.

PRIVATE SECURITIES LITIGATION REFORM ACT

This quarterly report on Form 10-Q contains "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. These statements contain words such as "may," "will," "project," "might,"
"expect," "believe," "anticipate," "intend," "could," "would," "estimate,"
"continue" or "pursue," or the negative or other variations thereof or
comparable terminology. In particular, they include statements relating to,
among other things, future actions, new projects, strategies, future
performance, the outcome of contingencies

30

such as legal proceedings and future financial results. We have based these
forward-looking statements on our current expectations and projections about
future events.

We caution the reader that forward-looking statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors as well as other factors described from time
to time in our reports filed with the Securities and Exchange Commission:

- the effect of economic, credit and capital market conditions on the
economy in general, and on gaming and hotel companies in particular;

- construction factors, including delays, zoning issues, environmental
restrictions, soil and water conditions, weather and other hazards, site
access matters and building permit issues;

- our ability to timely and cost effectively integrate into our operations
the companies that we acquire;

- access to available and feasible financing;

- changes in laws (including increased tax rates), regulations or accounting
standards, third party relations and approvals, and decisions of courts,
regulators and governmental bodies;

- litigation outcomes and judicial actions, including gaming legislative
action, referenda and taxation;

- ability of our customer tracking/monitoring and yield management programs
to continue to increase customer loyalty;

- our ability to recoup costs of capital investments through higher
revenues;

- acts of war or terrorist incidents;

- abnormal gaming holds; and

- the effects of competition, including locations of competitors and
operating and market competition.

Any forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our debt. We attempt to limit our exposure to interest rate risk
by managing the mix of our debt between fixed rate and variable rate
obligations. Of our approximately $3.7 billion total debt at June 30, 2002,
$1.3 billion is subject to variable interest rates, which averaged 2.9% at
June 30, 2002. Assuming a constant outstanding balance for our variable rate
debt for the next twelve months, a hypothetical 1% increase in interest rates
would increase interest expense for the next twelve months by approximately
$13.2 million.

We do not currently utilize derivative transactions to hedge our exposure to
interest rate changes. We do not hold or issue derivative financial instruments
for trading purposes and do not enter into derivative transactions that would be
considered speculative positions.

We hold investments in various available-for-sale equity securities;
however, our exposure to price risk arising from the ownership of these
investments is not material to our consolidated financial position, results of
operations or cash flows.

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PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

*EX-10.1 Second Amended and Restated 364-Day Loan Agreement dated
April 25, 2002 among Harrah's Entertainment, Inc. as
Guarantor, Harrah's Operating Company, Inc. as initial
Borrower, The Lenders, Syndication Agent, Documentation
Agents and Co-Documentation Agents and Bank of America, N.A.
as Administrative Agent.

*EX-11 Computation of per share earnings.

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

* Filed herewith.

(b) The following reports on Form 8-K were filed by the Company during
second quarter 2002.

(i) Form 8-K filed April 17, 2002, regarding earnings for first quarter
2002.

(ii) Form 8-K filed May 3, 2002, regarding the dismissal of Arthur
Andersen LLP and the engagement of Deloitte & Touche LLP as
independent auditors.

(iii) Form 8-K filed May 3, 2002, regarding the election of Frank J.
Biondi, Jr. to the Company's Board of Directors.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HARRAH'S ENTERTAINMENT, INC.

August 13, 2002 By: /s/ ANTHONY D. MCDUFFIE
-----------------------------------------
Anthony D. McDuffie
VICE PRESIDENT, CONTROLLER AND
CHIEF ACCOUNTING OFFICER

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EXHIBIT INDEX