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 SEPTEMBER 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 October 31, 2002, there were 111,787,909 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)

Continued on next page.

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
SEPTEMBER 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; Topeka, Kansas and San
Diego, California.

Subsequent to the end of third quarter, we announced that we have entered
into a definitive agreement to sell Harveys Wagon Wheel Hotel & Casino in
Central City, Colorado. Since acquiring Harveys, we have evaluated the Colorado
property and concluded that it is a non-strategic asset for us. Closing of the
transaction is subject to customary regulatory approvals and is expected to
close in the first half of 2003. This sale will not have a material impact on
our financial results.

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 were recorded in first quarter
2002 and 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.

8

HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 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 September 30, 2002:

The aggregate amortization expense for the quarter and nine months ended
September 30, 2002, for those assets that will continue to be amortized under
the provisions of SFAS No. 142 was $1.2 million and $3.0 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)
SEPTEMBER 30, 2002
(UNAUDITED)

NOTE 2--ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142
(CONTINUED)
for the quarter and nine months ended September 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 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.

10

HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(UNAUDITED)

NOTE 3--ACQUISITIONS (CONTINUED)
We expect to complete the purchase price allocation arising from our
acquisition of the additional 14% ownership of JCC by the end of the first
quarter of 2003. Any difference between the purchase price of the additional
interest and the fair value of the pro rata net identifiable assets acquired is
expected to be assigned 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 was contingent on the results of a
referendum decided by the voters in Pottawattamie County, Iowa, in
November 2002. The referendum passed, therefore, we will pay an additional
$50 million in acquisition costs during fourth quarter 2002. We financed our
acquisition, and retired Harveys assumed debt, with borrowings under our bank
credit facility (see Note 5).

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 occurred on January 1, 2001. The information
also assumes that SFAS No. 142 was effective for the acquisitions on January 1,
2001.

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HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(UNAUDITED)

NOTE 3--ACQUISITIONS (CONTINUED)
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 nine months of 2002, we purchased 3.1 million shares
at an average price of $44.13 per share, leaving 0.8 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.

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 (the "364-day 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 September 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
September 30, 2002, $1.054 billion in borrowings were outstanding under the Bank
Facility with an additional $92.9 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, $710.1 million of additional
borrowing capacity was available to the Company as of September 30, 2002.

12

HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(UNAUDITED)

NOTE 5--DEBT (CONTINUED)
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 September 30, 2002, $116.9 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 September 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, 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:

13

HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(UNAUDITED)

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 have agreed with
JCC to extend this guarantee for an additional year to end March 31, 2006. JCC
has until March 31, 2003, to deliver the extended guarantee to the State of
Louisiana. 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 September 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. Intercompany accounts and
activities with JCC are eliminated in consolidation of our financial statements.

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. The lease contains three consecutive 10-year
renewal options.

NATIONAL AIRLINES, INC.

National Airlines, Inc. ("NAI") ceased operations on November 6, 2002, after
unsuccessfully attempting to restructure in bankruptcy court. We have provided a
$12.25 million letter of credit on behalf of NAI, which we may be required to
fund in the fourth quarter of 2002. We had an agreement with another investor of
NAI whereby that investor was obligated to reimburse us for approximately 56% of
amounts that we funded under the letter of credit and amounts that we had
previously funded under a second 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. A judgment
was entered in our favor but was appealed by the investor. Subsequent to the end
of third quarter 2002, we reached a settlement with the investor, which also
included the extinguishment of the investor's potential liability on the letter
of credit that was funded in November 2002, as well as the judgment. We will
receive a total of $3.4 million from the investor, $2.4 million of which was
received in October 2002. The remaining amount will be received in two
non-interest-bearing installments of $500,000 each over the next 12 months. As a
result of this settlement with the investor and our anticipated funding of the
letter of credit following NAI's cessation of operations, we expect to record a
charge of $5.5 million to $6.5 million in fourth quarter 2002.

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 September 30, 2002, we had

14

HARRAH'S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(UNAUDITED)

NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
guaranteed third party loans and leases of $228.0 million, which are secured by
certain assets, and had commitments of $339.9 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 September 30, 2002, the
aggregate monthly commitment pursuant to these contracts for the four managed
Indian-owned facilities now open, which extend for periods of up to 64 months
from September 30, 2002, is $1.2 million.

SEVERANCE AGREEMENTS

As of September 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
September 30, 2002, that would be payable under the agreements to these
executives for their compensations payments and the cashout of their stock
options, exclusive of any tax related payments, aggregated approximately
$144.9 million.

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 third
quarter and the first nine 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
by the end of the first quarter of 2003. We expect to assign any difference
between the purchase price of the additional interest and the fair value of the
pro rata net identifiable assets acquired 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.

16

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.

OPERATING RESULTS AND DEVELOPMENT PLANS

OVERALL

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(a) Reflects the impact of adoption of SFAS No. 142. See Note 2 to our
Consolidated Condensed Financial Statements.

Third quarter 2002 revenues increased 12.5% over third quarter 2001, and net
income increased 63.2% 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. Also contributing to the year-over-year
increase were charges taken in third quarter 2001 to refocus operations of our
Rio property and for increased health care costs.

For the nine months ended September 30, 2002, revenues were up 14.5% and
income before extraordinary items and the cumulative effect of a change in
accounting principle increased 76.9% 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 nine months were driven by the same
factors that drove our third quarter increases.

Although the Harveys acquisition and the consolidation of New Orleans were
the primary reasons for the increase in our third quarter revenues in 2002 over
2001, gaming revenues at our other owned

17

properties continued to grow, reaffirming the success of our strategy to grow
same store sales through customer loyalty programs. The following table compares
third quarter 2002 gaming revenues to third quarter 2001 gaming revenues for our
Company-owned properties, including those acquired over the past four 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

18

The increases in Western Region revenues for the third quarter and first
nine 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 $54.8 million and
$136.7 million in combined revenues in third quarter and the first nine months,
respectively, of 2002. Revenues at our Las Vegas properties increased over the
third quarter 2001 levels, when revenues reflected 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. Harrah's Laughlin reported third quarter and first
nine months revenues for 2002 that were 10.4% and 5.0% higher, respectively,
than in the third quarter and first nine months of last year. Revenues for the
third quarter and first nine months of 2002 from our Reno properties declined
from third quarter and the first nine months of 2001 due to weak market
conditions in the Reno area caused, in part, by heightened levels of competition
from Indian casinos in the Northern California area.

Third quarter 2002 operating profit more than doubled third 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, when the Rio recorded $13 million of
nonrecurring charges, and by the addition of the Harveys casinos. Those same
factors drove the increase in operating profit of 63.9% for the first nine
months of 2002 over the prior year period.

Subsequent to the end of third quarter, we announced that we have entered
into a definitive agreement to sell Harveys Wagon Wheel Hotel & Casino in
Central City, Colorado. Since acquiring Harveys, we have evaluated the Colorado
property and concluded that it is a non-strategic asset for us. Closing of the
transaction is subject to customary regulatory approvals and is expected to
close in the first half of 2003. This sale will not have a material impact on
our financial results.

EASTERN REGION

Our Eastern Region properties reported record revenues for the third quarter
and the first nine months of 2002. Harrah's Atlantic City revenues increased by
16.3% in the third quarter and by 9.2% in the first nine months over the
comparable periods in 2001. These increases were driven by the opening of the
new hotel tower and the addition of approximately 500 slot machines at this
property in second quarter 2002. Showboat Atlantic City revenues increased 5.2%
in the third quarter and 4.6% in the first nine 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 third quarter
and the first nine months of 2002, with increases of 26.0% and 17.6%,
respectively, over the third quarter and the first nine months of 2001. Showboat
Atlantic City's operating profit increased 31.6% over third quarter last year
and increased 22.5% over the comparable nine-month period in 2001. Property
enhancements and more cost-effective marketing 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

19

$193 million, $168 million of which had been spent at September 30, 2002.
Subsequent to the end of third quarter, Harrah's Atlantic City received approval
from the New Jersey Casino Control Commission to add an additional 500 slot
machines in a portion of the recent expanded casino floor space that was not
being utilized. Plans are to install the slots machines by the end of 2002.

Construction is underway on a $90 million, 544-room hotel tower at Showboat
Atlantic City, which is expected to open in the second quarter of 2003. As of
September 30, 2002, $30.0 million had been spent on this project.

CENTRAL REGION

Illinois/Indiana--Combined third quarter 2002 revenues at Harrah's Joliet,
Harrah's East Chicago and Harrah's Metropolis set new third quarter records,
increasing 10.0% over combined revenues in third 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 third quarter 2002
operating profit for these properties increased 4.7% over the prior year period
when accelerated depreciation on boats that were to be taken out of service at
Joliet negatively impacted operating profit. Third quarter 2002 operating profit
for these properties was also affected by higher gaming taxes. 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%.

The Indiana legislation also included 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 converted our Harrah's
East Chicago operation from cruising to dockside during third quarter 2002.

For the first nine months of 2002, combined revenues increased 11.2% over
the same period last year. Operating profit increased 11.0% 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 and despite
approximately $21.0 million in net charges against profit in 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.

Louisiana--Combined third quarter 2002 revenues from our Shreveport and Lake
Charles properties declined 10.0% from third quarter 2001 and operating profit
was 24.9% lower than in third quarter last year. Our Lake Charles property has
been affected by increased competition, including the addition of slot machines
at a race track located closer to one of our Texas feeder markets than our

20

property and additional Indian casino offerings. Shreveport's operating profit
was affected by higher gaming taxes.

For the nine months ended September 30, 2002, combined Shreveport and Lake
Charles revenues and operating profit were even with combined revenues and
operating profit in the first nine months of 2001. Shreveport's year-over-year
improvements, which were primarily attributable to the 514-room hotel and player
amenities that opened in first quarter 2001, were offset by declines at Lake
Charles due to the increased competition in that market. 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.

Also contributing to results in Louisiana was the consolidation of JCC into
our financial results effective June 7, 2002. JCC contributed $66.6 million in
revenues and $6.5 million in operating profit to our third quarter 2002 results.
Subsequent to its consolidation, JCC contributed $85.2 million in revenues and
$9.2 million in operating profit to nine months results.

We have signed an agreement to acquire a controlling interest in Louisiana
Downs, a thoroughbred racetrack in Bossier City, Louisiana. We plan to install
slot machines at the racetrack following completion of the acquisition. We
announced plans to spend approximately $157 million for the acquisition, slot
installation and other renovations; however, we are reviewing renovation plans
and may increase our anticipated spending for this project. Assuming the
acquisition is completed, the expanded entertainment complex, which would be the
only land-based gaming facility in northern Louisiana, would begin operations in
the summer of 2003. The acquisition, which is subject to applicable regulatory
approvals, is expected to close by the end of 2002.

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 third quarter 2002 revenues at our Mississippi
properties were level with revenues in the year-ago third quarter, but operating
profit increased 40.4% over third quarter 2001.

For the nine months ended September 30, 2002, combined revenues increased
6.2% and operating profit more than doubled the nine month period in 2001,
increasing to $11.5 million in 2002 from $5.3 million in 2001. The improved
results are primarily due to cost containment measures implemented at both of
our Mississippi properties.

Missouri--Combined third quarter 2002 revenues at our Missouri properties
decreased 6.3% and operating profit was down 13.4% from second quarter last
year, primarily due to increased competition in the St. Louis market.

For the first nine months, revenues at our Missouri properties decreased
2.6% due to increased competition, but operating profit, aided by cost
containment measures, was 1.1% higher than in the first nine months of 2001.

Subsequent to the end of third quarter, we announced plans for a
$75 million expansion of Harrah's St. Louis. The expansion project will include
a 16-story, 309-room hotel tower with 21 suites, a redesign of the hotel lobby,
new valet parking areas, the addition of parking garage express ramps and the
expansion of two restaurants. Formal groundbreaking is planned for first quarter
2003, with the entire project expected to be complete in mid-to-late 2004.

Iowa--On a combined basis, our two properties in Iowa, which were acquired
in July 2001, contributed $60.3 million in total revenues and $10.3 million in
operating profit to our third quarter

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2002 results and $179.9 million in total revenues and $32.0 million in operating
profit for the nine months ended September 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 Iowa
operations are located, voted to allow gaming to continue in that county;
therefore, we will pay an additional $50 million in acquisition costs in fourth
quarter 2002 related to our acquisition of Harveys in 2001.

The Iowa Supreme Court issued an opinion in June 2002 that has the effect of
reducing 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
were taxed at a higher rate than the riverboat casinos operating in Iowa. The
Court ruled this disparity as unconstitutional and opined that the casinos at
dog tracks should be taxed at the same rate as the riverboat casinos. The
riverboat tax rate is 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, which may include the possible refund
of taxes paid in prior periods. The State has appealed the Iowa Supreme Court's
decision to the United States Supreme Court. We have followed the instructions
of the Iowa Racing and Gaming Commission to pay taxes at the 20% rate for Bluffs
Run. However, 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
future changes in the gaming tax rate imposed by the Iowa legislature,
anticipated to be in early-to-mid 2003, an additional payment based on a
multiple of the calculated savings may 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 lower than in the third quarter of 2001
due to lower management fee structures that became effective in 2001. For the
nine months ended September 30, 2001, management fees were higher 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.

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.

In August 2002, Harrah's Rincon Casino and Resort, owned by the Rincon San
Luiseno Band of Mission Indians ("Rincon") in Southern California began
operations. Rincon has secured third-party financing, which we have guaranteed,
for its casino.

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

22

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 increased 32.3% in third quarter 2002 due to increased
incentive compensation expense accruals but decreased 1.8% in the first nine
months of 2002 from the prior year periods due to cost savings and timing of the
incurrence of certain expenses.

Equity in losses (income) of nonconsolidated affiliates for the nine months
ended September 30, 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 third quarter 2002 includes the
write-off of development costs of abandoned projects and a reserve for tokens to
be taken out of service. The nine months ended September 30, 2002, also reflects
partial recoveries of previously recorded reserves, legal costs incurred related
to certain lawsuits and write-downs of non-operating assets. Third quarter 2001
Write-downs, reserves and recoveries reflected charges to write off the costs of
abandoned assets, including $5.7 million at the Rio, and costs incurred to
terminate an unfavorable marine services contract. The nine months ended
September 30, 2001, also included a true-up to reserves recorded in fourth
quarter 2000 in connection with the approval of JCC's reorganization plan and
costs incurred in connection with the closure of our reservations center in
Memphis, Tennessee. 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 third quarter and the
first nine months of 2001 due to the implementation of SFAS No. 142 in first
quarter 2002.

23

Although the Company's average debt balance was higher in third quarter and
first nine months of 2002 than in the same periods last year due to the Harveys
acquisition and our share repurchase program, interest expense decreased in
third quarter 2002 from 2001 due to lower interest rates on variable-rate debt.
The average interest rate on our variable-rate debt was 2.7% at September 30,
2002, compared to 4.4% at September 30, 2001. An increase in interest rates
could have a material effect on our 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 $12.3 million, or
$3.1 million per quarter. Our variable-rate debt represents approximately 34% of
our total debt, while our fixed-rate debt is approximately 66% of our total
debt.

Other expense (income) for third quarter 2002 was unfavorable compared to
third quarter last year due primarily to a gain in 2001 from the resolution of a
contingency related to a former affiliate. The first nine months of 2002 also
included net proceeds from litigation settlements, favorable net investment
results for company-owned life insurance policies and a loss on the sale of a
corporate airplane.

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 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 third quarter and the first nine months of 2002 from the prior year
third quarter and nine months due to the consolidation of JCC and recognition of
the minority ownership in that entity and 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 nine months of 2002 totaled approximately
$354.9 million. Estimated total capital expenditures for 2002, including amounts
spent to date, are expected to be between $400 million and $450 million.

24

DEBT AND LIQUIDITY

The majority of our debt is due in the year 2004 and beyond. Payments of
short-term debt 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 offering.

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 (the "364-day 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 September 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
September 30, 2002, $1.054 billion in borrowings were outstanding under the Bank
Facility with an additional $92.9 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, $710.1 million of additional
borrowing capacity was available to the Company as of September 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 September 30, 2002, $116.9 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 September 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,

25

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 nine months of 2002, we purchased 3.1 million shares at an average
price of $44.13 per share, leaving 0.8 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. We have agreed with JCC to
extend this guarantee for an additional year to end March 31, 2006. JCC has
until March 31, 2003, to deliver the extended guarantee to the State of
Louisiana. 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 September 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. The lease contains three consecutive 10-year
renewal options.

National Airlines, Inc. ("NAI") ceased operations on November 6, 2002, after
unsuccessfully attempting to restructure in bankruptcy court. We have provided a
$12.25 million letter of credit on behalf of NAI, which we may be required to
fund in the fourth quarter of 2002. We had an agreement with another investor of
NAI whereby that investor was obligated to reimburse us for approximately 56% of
amounts that we funded under the letter of credit and amounts that we had
previously funded under a second 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. A judgment
was entered in our favor but was appealed by the investor. Subsequent to the end
of third quarter 2002, we reached a settlement with the investor, which also
included the extinguishment of the investor's potential liability on the letter
of credit that was funded in November 2002, as well as the judgment. We will
receive a total of $3.4 million from the investor, $2.4 million of which was
received in October 2002. The remaining amount will be received in two
non-interest-bearing installments of $500,000 each over the next 12 months. As a
result of this settlement with the investor and our anticipated funding of the
letter of credit following NAI's cessation of operations, we expect to record a
charge of $5.5 million to $6.5 million in fourth quarter 2002.

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,

26

would, subject to certain restrictions, 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 September 30, 2002, the
aggregate monthly commitment pursuant to these contracts for the four managed
Indian-owned facilities now open, which extend for periods of up to 64 months
from September 30, 2002, is $1.2 million.

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
September 30, 2002, was $215.9 million.

With the Harveys acquisition in July 2001, we assumed a $50 million
contingent liability that, subsequent to the end of third quarter 2002, became
due as part of the consideration paid for the net assets of Harveys. The
contingent payment was dependent on the results of a referendum 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.

In third quarter 2002, we signed a letter of intent to acquire a controlling
interest in Louisiana Downs, a thoroughbred racetrack in Bossier City,
Louisiana, which is in one of the parishes where the use of slot machines has
been authorized and is located near our Shreveport property. (See further
discussion in OPERATING RESULTS AND DEVELOPMENT PLANS--Central
Region--Louisiana.)

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

27

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
completed a large casino expansion in third quarter of 2002. 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 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.

28

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, 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 third quarter and the first nine months
of 2001 were $44.2 million and $117.1 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 generally 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.

29

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 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.

30

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 $3.6 billion total debt at September 30, 2002,
$1.2 billion is subject to variable interest rates, which averaged 2.7% at
September 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 $12.3 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.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.

CHANGES IN INTERNAL CONTROLS

There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore no corrective actions were taken.

31

PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EX-2.1 Agreement and Plan of Merger dated July 30, 2002 by and
among Harrah's Operating Company, Inc., Satchmo Acquisition,
Inc. and JCC Holding Company. (Incorporated by reference
from the Schedule 13D/A filed by the Company on August 2,
2002, File No. 5-54911.)

*EX-10.1 Employment Agreement dated as of September 4, 2002, between
Harrah's Entertainment, Inc. and Philip G. Satre.

*EX-10.2 Employment Agreement dated as of September 4, 2002, between
Harrah's Entertainment, Inc. and Gary W. Loveman

*EX-11 Computation of per share earnings.

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

* Filed herewith.

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

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

(ii) Form 8-K filed July 31, 2002, regarding the Company's acquisition
of remaining ownership interest in JCC Holding Company.

(iii) Form 8-K filed August 13, 2002, regarding the filing of Statements
Under Oath Regarding Facts and Circumstances Relating to Exchange
Act Filings by the CEO and CFO.

(iv) Form 8-K filed August 13, 2002, regarding the filing of a
Certification as to the compliance with law of the Company's
Form 10-Q for the quarter ended June 30, 2002.

(v) Form 8-K filed August 29, 2002, regarding signing of Letter of
Intent and negotiations in connection with acquisition of Louisiana
Downs, a thoroughbred racetrack in Bossier City, Louisiana.

(vi) Form 8-K filed September 5, 2002 regarding transition of CEO
position from Philip G. Satre to Gary W. Loveman and transition of
COO position from Gary W. Loveman to Timothy J. Wilmott.

32

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.

November 12, 2002 By: /s/ ANTHONY D. MCDUFFIE
------------------------------------------------
Anthony D. McDuffie
VICE PRESIDENT, CONTROLLER AND
CHIEF ACCOUNTING OFFICER

33

I, Philip G. Satre, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harrah's
Entertainment, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 12, 2002

By: /s/ PHILIP G. SATRE
------------------------------------------------
Philip G. Satre
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

34

I, Charles L. Atwood, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harrah's
Entertainment, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 12, 2002

By: /s/ CHARLES L. ATWOOD
------------------------------------------------
Charles L. Atwood
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER

35

EXHIBIT INDEX