10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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, 2009
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to

Commission file number:  0-24206

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2234473
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

825 Berkshire Blvd., Suite 200
Wyomissing, PA  19610

(Address of principal executive offices) (Zip Code)

610-373-2400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date.

Title	Outstanding as of July 29, 2009
Common Stock, par value $.01 per share	78,551,680 (includes 485,500 shares of restricted stock)

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Actual results may vary materially from expectations.  Although Penn National Gaming, Inc. and its subsidiaries (collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations.  Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; the passage of state, federal or local legislation or referenda that would expand, restrict, further tax, prevent or negatively impact operations (such as a smoking ban at any of our facilities) in or adjacent to the jurisdictions in which we do business; the activities of our competitors and the emergence of new competitors; increases in the effective rate of taxation at any of our properties or at the corporate level; delays or changes to, or cancellations of, planned capital projects at our gaming and pari-mutuel facilities or an inability to achieve the expected returns from such projects; construction factors, including delays and increased cost of labor and materials; the ability to recover proceeds on significant insurance claims (such as claims related to the fire at Empress Casino Hotel); the existence of attractive acquisition candidates and development opportunities, the costs and risks involved in the pursuit of those acquisitions and development opportunities and our ability to integrate those acquisitions; the availability and cost of financing; the maintenance of agreements with our horsemen, pari-mutuel clerks and other organized labor groups; the outcome of legal proceedings instituted against the Company in connection with the termination of the previously announced acquisition of the Company by certain affiliates of Fortress Investment Group LLC and Centerbridge Partners, L.P.; the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; changes in accounting standards; our dependence on key personnel; the impact of terrorism and other international hostilities; the impact of weather on our operations; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as filed with the SEC.  The Company does not intend to update publicly any forward-looking statements except as required by law.

2

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	4
ITEM 1.	FINANCIAL STATEMENTS	4
	Consolidated Balance Sheets — June 30, 2009 and December 31, 2008	4
	Consolidated Statements of Income — Three and Six Months Ended June 30, 2009 and 2008	5
	Consolidated Statements of Changes in Shareholders’ Equity — Six Months Ended June 30, 2009 and 2008	6
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2009 and 2008	7
	Notes to the Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	44
PART II.	OTHER INFORMATION	45
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	49
ITEM 6.	EXHIBITS	49

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Penn National Gaming, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

	June 30,			December 31,
	2009			2008
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	795,117		$	746,278
Receivables, net of allowance for doubtful accounts of $4,014 and $3,797 at June 30, 2009 and December 31, 2008, respectively	45,463			43,574
Insurance receivable	32,545			—
Prepaid expenses and other current assets	94,114			95,386
Deferred income taxes	21,541			21,065
Total current assets	988,780			906,303
Property and equipment, net	1,818,467			1,812,131
Other assets
Investment in and advances to unconsolidated affiliate	13,754			14,419
Goodwill	1,595,875			1,598,571
Other intangible assets	690,443			693,764
Deferred financing costs, net of accumulated amortization of $44,533 and $38,914 at June 30, 2009 and December 31, 2008, respectively	29,291			34,910
Other assets	80,394			129,578
Total other assets	2,409,757			2,471,242
Total assets	$	5,217,004		$	5,189,676
Liabilities
Current liabilities
Current maturities of long-term debt	$	99,106		$	105,281
Accounts payable	49,774			35,540
Accrued expenses	91,200			106,769
Accrued interest	62,050			80,190
Accrued salaries and wages	57,849			55,380
Gaming, pari-mutuel, property, and other taxes	42,211			44,503
Insurance financing	—			8,093
Other current liabilities	36,758			34,730
Total current liabilities	438,948			470,486
Long-term liabilities
Long-term debt, net of current maturities	2,280,253			2,324,899
Deferred income taxes	274,344			265,610
Noncurrent tax liabilities	52,625			68,632
Other noncurrent liabilities	6,568			2,776
Total long-term liabilities	2,613,790			2,661,917
Shareholders’ equity
Preferred stock ($.01 par value, 1,000,000 shares authorized, 12,500 issued and outstanding at June 30, 2009 and December 31, 2008)	—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 78,536,680 and 78,148,488 shares issued at June 30, 2009 and December 31, 2008, respectively)	784			782
Additional paid-in capital	1,463,757			1,442,829
Retained earnings	731,496			662,355
Accumulated other comprehensive loss	(31,771		)	(48,693		)
Total shareholders’ equity	2,164,266			2,057,273
Total liabilities and shareholders’ equity	$	5,217,004		$	5,189,676

See accompanying notes to the consolidated financial statements.

4

Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues
Gaming	$	526,390		$	566,395		$	1,086,293		$	1,127,031
Management service fee	3,674			4,694			6,707			8,679
Food, beverage and other	86,247			81,845			170,869			163,370
Gross revenues	616,311			652,934			1,263,869			1,299,080
Less promotional allowances	(35,494		)	(32,348		)	(70,826		)	(65,000		)
Net revenues	580,817			620,586			1,193,043			1,234,080
Operating expenses
Gaming	286,620			302,112			584,182			601,545
Food, beverage and other	65,529			65,569			130,058			127,890
General and administrative	93,001			94,132			192,471			187,521
Impairment loss for replaced Lawrenceburg vessel	11,689			—			11,689			—
Empress Casino Hotel fire	331			—			5,731			—
Depreciation and amortization	46,942			45,182			91,372			84,974
Total operating expenses	504,112			506,995			1,015,503			1,001,930
Income from operations	76,705			113,591			177,540			232,150
Other income (expenses)
Interest expense	(29,851		)	(44,536		)	(61,089		)	(91,751		)
Interest income	1,603			553			4,694			1,236
Loss from joint venture	(416		)	(152		)	(719		)	(911		)
Other	2,887			(574		)	4,979			884
Total other expenses	(25,777		)	(44,709		)	(52,135		)	(90,542		)
Income from operations before income taxes	50,928			68,882			125,405			141,608
Taxes on income	22,448			31,859			56,264			63,849
Net income	$	28,480		$	37,023		$	69,141		$	77,759
Basic earnings per common share	$	0.29		$	0.43		$	0.72		$	0.90
Diluted earnings per common share	$	0.27		$	0.42		$	0.65		$	0.88

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share data) (unaudited)

	Preferred Stock			Common Stock			Treasury			Additional Paid-In		Retained		Accumulated Other Comprehensive			Total Shareholders’			Comprehensive
	Shares	Amount		Shares	Amount		Stock			Capital		Earnings		(Loss) Income			Equity			Income (loss)
Balance, December 31, 2007	—	$	—	88,579,070	$	887	$	(2,379	)	$	322,760	$	815,678	$	(15,984	)	$	1,120,962
Stock option activity, including tax benefit of $414	—	—		60,250	—		—			9,755		—		—			9,755			$	—
Restricted stock	—	—		—	—		—			980		—		—			980			—
Change in fair value of interest rate swap contracts, net of income taxes of $30	—	—		—	—		—			—		—		53			53			53
Foreign currency translation adjustment	—	—		—	—		—			—		—		(212		)	(212		)	(212		)
Net income	—	—		—	—		—			—		77,759		—			77,759			77,759
Balance, June 30, 2008	—	$	—	88,639,320	$	887	$	(2,379	)	$	333,495	$	893,437	$	(16,143	)	$	1,209,297		$	77,600
Balance, December 31, 2008	12,500	$	—	78,148,488	$	782	$	—		$	1,442,829	$	662,355	$	(48,693	)	$	2,057,273
Stock option activity, including tax benefit of $1,457	—	—		282,692	2		—			19,634		—		—			19,636			$	—
Restricted stock	—	—		105,500	—		—			1,294		—		—			1,294			—
Change in fair value of interest rate swap contracts, net of income taxes of $4,817	—	—		—	—		—			—		—		8,556			8,556			8,556
Change in fair value of corporate debt securities	—	—		—	—		—			—		—		7,945			7,945			7,945
Foreign currency translation adjustment	—	—		—	—		—			—		—		421			421			421
Net income	—	—		—	—		—			—		69,141		—			69,141			69,141
Balance, June 30, 2009	12,500	$	—	78,536,680	$	784	$	—		$	1,463,757	$	731,496	$	(31,771	)	$	2,164,266		$	86,063

See accompanying notes to the consolidated financial statements.

6

Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

Six Months Ended June 30,	2009			2008
Operating activities
Net income	$	69,141		$	77,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	91,372			84,974
Amortization of items charged to interest expense	5,785			6,325
Amortization of items charged to interest income	(1,295		)	—
(Gain) loss on sale of fixed assets	(296		)	357
Loss from joint venture	719			911
Empress Casino Hotel fire	4,854			—
Gain on accelerated payment of other long-term obligations	(1,305		)	—
Gain on sale of investment in corporate debt securities	(6,598		)	—
Deferred income taxes	3,108			5,534
Charge for stock compensation	15,272			9,528
Impairment loss for replaced Lawrenceburg vessel	11,689			—
(Increase) decrease, net of businesses acquired
Accounts receivable	(13,407		)	1,746
Prepaid expenses and other current assets	3,110			(41,147		)
Other assets	(3,303		)	(10,686		)
(Decrease) increase, net of businesses acquired
Accounts payable	(2,697		)	857
Accrued expenses	(14,815		)	(23,270		)
Accrued interest	(4,767		)	(4,648		)
Accrued salaries and wages	2,469			2,742
Gaming, pari-mutuel, property and other taxes	(2,292		)	11,512
Income taxes payable	—			45,404
Other current and noncurrent liabilities	5,820			9,904
Other noncurrent tax liabilities	2,750			1,808
Net cash provided by operating activities	165,314			179,610
Investing activities
Expenditures for property and equipment	(139,021		)	(196,604		)
Proceeds from sale of property and equipment	8,788			581
Proceeds from sale of investment in corporate debt securities	50,603			—
Proceeds from Empress Casino Hotel fire	16,000			—
Acquisition of businesses and licenses, net of cash acquired	—			(351		)
Net cash used in investing activities	(63,630		)	(196,374		)
Financing activities
Proceeds from exercise of options	3,473			794
Proceeds from issuance of long-term debt	122,684			118,000
Principal payments on long-term debt	(172,366		)	(136,420		)
Payments on insurance financing	(8,093		)	(16,025		)
Tax benefit from stock options exercised	1,457			414
Net cash used in financing activities	(52,845		)	(33,237		)
Net increase (decrease) in cash and cash equivalents	48,839			(50,001		)
Cash and cash equivalents at beginning of year	746,278			174,372
Cash and cash equivalents at end of period	$	795,117		$	124,371
Supplemental disclosure
Interest expense paid	$	66,292		$	98,706
Income taxes paid	$	54,550		$	9,934

See accompanying notes to the consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

1.  Basis of Presentation

The accompanying unaudited consolidated financial statements of Penn National Gaming, Inc. (“Penn”) and its subsidiaries (collectively, the “Company”) have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2008 should be read in conjunction with these consolidated financial statements. For purposes of comparability, certain prior year amounts have been reclassified to conform to the current year presentation. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

2.  Merger Announcement and Termination

On June 15, 2007, the Company announced that it had entered into a merger agreement that, at the effective time of the transactions contemplated thereby, would have resulted in the Company’s shareholders receiving $67.00 per share. Specifically, the Company, PNG Acquisition Company Inc. (“Parent”) and PNG Merger Sub Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), announced that they had entered into an Agreement and Plan of Merger, dated as of June 15, 2007 (the “Merger Agreement”), that provided, among other things, for Merger Sub to be merged with and into the Company (the “Merger”), as a result of which the Company would have continued as the surviving corporation and would have become a wholly-owned subsidiary of Parent. Parent is indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and Centerbridge Partners, L.P. (“Centerbridge”).

On July 3, 2008, the Company entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, the Company agreed to receive a total of $1.475 billion, consisting of a nonrefundable $225 million cash termination fee (the “Cash Termination Fee”) and a $1.25 billion, zero coupon, preferred equity investment (the “Investment”). On October 30, 2008, the Company closed the sale of the Investment and issued 12,500 shares of Series B Redeemable Preferred Stock (the “Preferred Stock”).

The Company used a portion of the net proceeds from the Investment and the after-tax proceeds of the Cash Termination Fee for the repayment of some of its existing debt, repurchases of its Common Stock, lobbying expenses for efforts in Ohio and investment in corporate debt securities, with the remainder being invested primarily in short-term securities. The repurchase of up to $200 million of the Company’s Common Stock over the twenty-four month period ending July 2010 was authorized by the Company’s Board of Directors in July 2008. During the year ended December 31, 2008, the Company repurchased 8,934,984 shares of its Common Stock in open market transactions for approximately $152.6 million, at an average price of $17.05. During the six months ended June 30, 2009, the Company did not repurchase any shares of its Common Stock.

On December 26, 2007, the Company entered into a Change in Control Payment Acknowledgement and Agreement (the “Acknowledgement and Agreement”) with certain members of its management team. Pursuant to the Acknowledgement and Agreement, a portion of the payment due on a change in control to such executives was accelerated and paid on or before December 31, 2007. The Acknowledgement and Agreements were entered into as part of actions taken to reduce the amount of “gross-up” payments pertaining to federal excise taxes that may have otherwise been owed to such executives under the terms of their existing employment agreements in connection with the change in control payments due upon the consummation of the Merger. The accelerated change in control payments were subject to a clawback right in the event the Merger was terminated pursuant to the terms of the Merger Agreement or the closing of the Merger otherwise failed to occur or if the executive’s employment with the Company was terminated prior to the effective date of the Merger under circumstances where the executive was not entitled to receive the remainder of his change in control payment under the terms of his employment agreement. In July 2008, the Company exercised its clawback right for the accelerated change in control payments in accordance with the Acknowledgement and Agreement, and advised the affected executives of the amounts to be repaid and the due date. Each executive has repaid to the Company all after-tax cash received by such executive and filed all returns and other instruments necessary to effect the refund of all applicable taxes. Further, each executive has assigned his right to such tax refunds to the Company.

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3.  Summary of Significant Accounting Policies

Revenue Recognition and Promotional Allowances

Gaming revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs, for chips and “ticket-in, ticket-out” coupons in the customers’ possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increase.

Revenue from the management service contract for Casino Rama is based upon contracted terms and is recognized when services are performed.

Food, beverage and other revenue, including racing revenue, is recognized as services are performed. Racing revenue includes the Company’s share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, its share of wagering from import and export simulcasting, and its share of wagering from its off-track wagering facilities (“OTWs”).

Revenues are recognized net of certain sales incentives in accordance with the Emerging Issues Task Force (“EITF”) consensus on Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”). The consensus in EITF 01-9 requires that sales incentives and points earned in point-loyalty programs be recorded as a reduction of revenue. The Company recognizes incentives related to gaming play and points earned in point-loyalty programs as a direct reduction of gaming revenue.

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense. The amounts included in promotional allowances for the three and six months ended June 30, 2009 and 2008 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands)
Rooms	$	5,500	$	4,114	$	10,824	$	8,267
Food and beverage	27,283		24,971		54,568		50,068
Other	2,711		3,263		5,434		6,665
Total promotional allowances	$	35,494	$	32,348	$	70,826	$	65,000

The estimated cost of providing such complimentary services for the three and six months ended June 30, 2009 and 2008 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands)
Rooms	$	2,218	$	1,600	$	4,425	$	3,327
Food and beverage	18,811		17,829		37,384		35,727
Other	1,630		1,386		3,134		2,800
Total cost of complimentary services	$	22,659	$	20,815	$	44,943	$	41,854

Earnings Per Share

The Company calculates earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share” (“SFAS 128”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options.

9

Beginning in the fourth quarter of 2008, in conjunction with the issuance of 12,500 shares of the Company’s Preferred Stock, the Company began to calculate EPS in accordance with SFAS 128, as clarified by EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF 03-6”). This was necessary as the Company determined that the Company’s Preferred Stock qualified as a participating security as defined in EITF 03-6. Under EITF 03-6, a security is considered a participating security if the security may participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not. In accordance with SFAS 128, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s Common Stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period.

The following table sets forth the allocation of net income for the three and six months ended June 30, 2009 and 2008 under the two-class method:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands)
Net income	$	28,480	$	37,023	$	69,141	$	77,759
Net income applicable to preferred stock	5,497		—		13,361		—
Net income applicable to common stock	$	22,983	$	37,023	$	55,780	$	77,759

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and six months ended June 30, 2009 and 2008:

	Three Months Ended June 30,		Six Months Ended June 30,
	2009	2008	2009	2008
	(in thousands)
Determination of shares:
Weighted-average common shares outstanding	77,996	86,560	77,905	86,541
Assumed conversion of dilutive stock options	1,271	2,059	1,017	2,174
Assumed conversion of preferred stock	27,778	—	27,778	—
Diluted weighted-average common shares outstanding	107,045	88,619	106,700	88,715

Reflecting the issuance of the Company’s Preferred Stock, the Company is required to adjust its diluted weighted-average common shares outstanding for the purpose of calculating diluted EPS as follows: 1) when the price of the Company’s Common Stock is less than $45, the diluted weighted-average common shares outstanding is increased by 27,777,778 shares (regardless of how much the stock price is below $45); 2) when the price of the Company’s Common Stock is between $45 and $67, the diluted weighted-average common shares outstanding is increased by an amount which can be calculated by dividing $1.25 billion by the current price per share of the Company’s Common Stock, which will result in an increase in the diluted weighted-average common shares outstanding of between 18,656,716 shares and 27,777,778 shares; and 3) when the price of the Company’s Common Stock is above $67, the diluted weighted-average common shares outstanding is increased by 18,656,716 shares (regardless of how much the stock price exceeds $67).  At June 30, 2009, the price of the Company’s Common Stock was below $45.

Options to purchase 4,753,164 shares and 8,573,582 shares were outstanding during the three and six months ended June 30, 2009, respectively, but were not included in the computation of diluted EPS because they are antidilutive. Options to purchase 1,461,627 shares and 1,430,521 shares were outstanding during the three and six months ended June 30, 2008, respectively, but were not included in the computation of diluted EPS because they are antidilutive

The following table presents the calculation of basic and diluted EPS for the Company’s Common Stock.

10

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(in thousands, except per share data)
Calculation of basic EPS:
Net income applicable to common stock	$	22,983	$	37,023	$	55,780	$	77,759
Weighted-average common shares outstanding	77,996		86,560		77,905		86,541
Basic EPS	$	0.29	$	0.43	$	0.72	$	0.90
Calculation of diluted EPS:
Net income	$	28,480	$	37,023	$	69,141	$	77,759
Diluted weighted-average common shares outstanding	107,045		88,619		106,700		88,715
Diluted EPS	$	0.27	$	0.42	$	0.65	$	0.88

The repurchase of up to $200 million of the Company’s Common Stock over the twenty-four month period ending July 2010 was authorized by the Company’s Board of Directors in July 2008. During the year ended December 31, 2008, the Company repurchased 8,934,984 shares of its Common Stock in open market transactions for approximately $152.6 million, at an average price of $17.05. During the six months ended June 30, 2009, the Company did not repurchase any shares of its Common Stock.

Stock-Based Compensation

The Company accounts for stock compensation under SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense must be recognized ratably over the requisite service period following the date of grant.

The fair value for stock options was estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a remaining term equal to the expected life assumed at the date of grant. Expected volatility at June 30, 2009 was estimated based on the historical volatility of the Company’s stock price over a period of 5.29 years, in order to match the expected life of the options at the grant date. There is no expected dividend yield since the Company has not paid any cash dividends on its Common Stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees. Forfeitures are estimated at the date of grant based on historical experience. The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at June 30, 2009 and 2008:

Six Months Ended June 30,	2009		2008
Risk-free interest rate	2.63	%	2.73	%
Expected volatility	49.43	%	35.77	%
Dividend yield	—		—
Weighted-average expected life (years)	5.29		4.72
Forfeiture rate	4.00	%	4.00	%

Accounting for Derivatives and Hedging Activities

The Company uses fixed and variable-rate debt to finance its operations. Both funding sources have associated risks and opportunities, such as interest rate exposure, and the Company’s risk management policy permits the use of derivatives to manage this exposure. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Thus, uses of derivatives are strictly limited to hedging and risk management purposes in connection with managing interest rate exposure. Acceptable derivatives for this purpose include interest rate swap contracts, futures, options, caps, and similar instruments.

When using derivatives, the Company’s intent is to apply “special hedge accounting,” which is conditional upon satisfying specific documentation and performance criteria.  In particular, the underlying hedged item must expose the Company to risks associated with market fluctuations and the instrument used as the hedging derivative must generate

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offsetting effects in prescribed magnitudes. If these criteria are not met, a change in the market value of the financial instrument and all associated settlements would be recognized as gains or losses in the period of change.

Currently, the Company has a number of interest rate swap contracts in place. These contracts serve to mitigate income volatility for a portion of its variable-rate funding. Swap contract coverage extends out through 2011. In effect, these swap contracts synthetically convert the portion of variable-rate debt being hedged to the equivalent of fixed-rate funding. Under the terms of the swap contracts, the Company receives cash flows from the swap contract counterparties to offset the benchmark interest rate component of variable interest payments on the hedged financings, in exchange for paying cash flows based on the swap contracts’ fixed rates. These two respective obligations are net-settled, periodically. The Company accounts for these swap contracts as cash flow hedges, which requires determining a division of hedge results deemed effective and deemed ineffective. However, most of the Company’s hedges were designed in such a way so as to perfectly offset specifically-defined interest payments, such that no ineffectiveness has occurred—nor would any ineffectiveness occur, as long as the forecasted cash flows of the designated hedged items and the associated swap contracts remain unchanged.

The fair value of the Company’s interest rate swap contracts is measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation, subject to a credit adjustment to the LIBOR-based yield curve’s implied discount rates. The credit adjustment reflects the Company’s best estimate as to the Company’s credit quality at June 30, 2009.

Under cash flow hedge accounting, effective derivative results are initially recorded in other comprehensive income (“OCI”) and later reclassified to earnings, coinciding with the income recognition relating to the variable interest payments being hedged (i.e., when the interest expense on the variable-rate liability is recorded in earnings). Any hedge ineffectiveness (which represents the amount by which hedge results exceed the variability in the cash flows of the forecasted transaction due to the risk being hedged) is recorded in current period earnings.

Under cash flow hedge accounting, derivatives are included in the consolidated balance sheets as assets or liabilities at fair value. The interest rate swap contract liabilities are included in accrued interest within the consolidated balance sheets at June 30, 2009 and December 31, 2008.

During the three and six months ended June 30, 2009, the Company had certain derivative instruments that were not designated to qualify for hedge accounting. The periodic change in the mark-to-market of these derivative instruments is recorded in current period earnings.

Credit risk relating to derivative counterparties is mitigated by using multiple, highly rated counterparties, and the credit quality of each is monitored on an ongoing basis.

4.  New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “TheFASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). SFAS 168 establishes the FASB Accounting Standards CodificationTMas the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 is effective for most financial statements issued for interim and annual periods ending after September 15, 2009. The Company is currently determining the impact of SFAS 168 on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). The objective of SFAS 167 is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is currently determining the impact of SFAS 167 on its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, under SFAS 165, an entity is required to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS 165 does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent

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events or transactions. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted SFAS 165 as of June 30, 2009, as required. The adoption of SFAS 165 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 as of June 30, 2009, as required. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS 115-2 and FAS 124-2 as of June 30, 2009, as required. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted FSP FAS 157-4 as of June 30, 2009, as required. The adoption of FSP FAS 157-4 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which amends and clarifies SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141(R)-1 is effective for all assets acquired or liabilities assumed arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company expects that the adoption of FSP FAS 141(R)-1 will have an impact on its consolidated financial statements, once the Company acquires companies in the future.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the assets under SFAS 141(R), and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption of the standard is prohibited. The Company adopted FSP FAS 142-3 as of January 1, 2009, as required. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities. Specifically, entities are required to provide enhanced disclosures about: a) how and why an entity uses derivative instruments; b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and its related interpretations; and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted SFAS 161 as of January 1, 2009, as required. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial statements.

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In December 2007, the FASB issued SFAS 141(R), which is intended to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. SFAS 141(R) requires that the acquiring entity in a business combination recognize all (and only) the assets and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information that they need to evaluate and understand the nature and financial effect of the business combination. In addition, SFAS 141(R) modifies the accounting for transaction and restructuring costs. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS 141(R) as of January 1, 2009, as required. The Company expects that the adoption of SFAS 141(R) will have an impact on its consolidated financial statements, once the Company acquires companies in the future.

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value, and expands the disclosure requirements about fair value measurements. In February 2008, the FASB amended SFAS 157 through the issuance of FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”) and FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-1, which was effective upon the initial adoption of SFAS 157, amends SFAS 157 to exclude from its scope certain accounting pronouncements that address fair value measurements associated with leases. FSP FAS 157-2, which was effective upon issuance, delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which was effective upon issuance. FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Company adopted SFAS 157, as amended, and on a prospective basis, as of January 1, 2008. The January 1, 2008 adoption did not have a material impact on the Company’s consolidated financial statements. The Company adopted SFAS 157, as amended, and on a prospective basis, as of January 1, 2009 to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The January 1, 2009 adoption did not have a material impact on the Company’s consolidated financial statements.

5.  Property and Equipment

Property and equipment, net, consists of the following:

	June 30,			December 31,
	2009			2008
	(in thousands)
Land and improvements	$	226,609		$	216,834
Building and improvements	1,431,807			1,298,513
Furniture, fixtures, and equipment	756,471			692,851
Leasehold improvements	17,151			17,128
Construction in progress	44,242			183,056
Total property and equipment	2,476,280			2,408,382
Less accumulated depreciation and amortization	(657,813		)	(596,251		)
Property and equipment, net	$	1,818,467		$	1,812,131

Depreciation and amortization expense, for property and equipment, totaled $45.4 million and $88.1 million for the three and six months ended June 30, 2009, respectively, as compared to $43.3 million and $81.1 million for the three and six months ended June 30, 2008, respectively. Interest capitalized in connection with major construction projects was $3.5 million and $6.4 million for the three and six months ended June 30, 2009, respectively, as compared to $3.8 million and $8.9 million for the three and six months ended June 30, 2008, respectively.

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Included in the depreciation and amortization expense for the three and six months ended June 30, 2009 was $4.8 million in depreciation expense that was recorded following the finalization of cost segregation studies for the casino projects at Hollywood Casino at Penn National Race Course and Hollywood Slots Hotel and Raceway. The charge was a result of the depreciation estimate previously recorded by the Company for these projects being less than the depreciation calculated by the cost segregation studies, due to differences in the determination of useful lives for certain of the assets included in the projects and the allocation of certain costs that were incurred as part of the projects. For the three and six months ended June 30, 2009, the impact of the charge to net income, Basic EPS, and Diluted EPS was $2.8 million, $0.04 and $0.03, respectively.

In conjunction with the opening of the new casino riverboat at Hollywood Casino Lawrenceburg, the Company recorded an impairment loss for the replaced Lawrenceburg vessel of $11.7 million during the three and six months ended June 30, 2009.

6.  Goodwill and Other Intangible Assets

The Company’s goodwill and intangible assets had a gross carrying value of $2.3 billion at June 30, 2009 and December 31, 2008, and accumulated amortization of $38.0 million and $34.7 million at June 30, 2009 and December 31, 2008, respectively. The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of goodwill and intangible asset at June 30, 2009 and December 31, 2008:

	June 30, 2009						December 31, 2008
	(in thousands)
	Gross Carrying Value		Accumulated Amortization		NetBookValue		Gross Carrying Value		Accumulated Amortization		NetBookValue
Goodwill	$	1,595,875	$	—	$	1,595,875	$	1,598,571	$	—	$	1,598,571
Indefinite-life intangible assets	679,054		—		679,054		679,054		—		679,054
Other intangible assets	49,396		38,007		11,389		49,396		34,686		14,710
Total	$	2,324,325	$	38,007	$	2,286,318	$	2,327,021	$	34,686	$	2,292,335

The Company’s intangible asset amortization expense was $1.6 million and $3.3 million for the three and six months ended June 30, 2009, respectively, as compared to $1.9 million and $3.9 million for the three and six months ended June 30, 2008, respectively.

The following table presents expected intangible asset amortization expense based on existing intangible assets at June 30, 2009 (in thousands):

2009 (6 months)	$	3,321
2010	5,773
2011	2,096
2012	199
2013	—
Thereafter	—
Total	$	11,389

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7.  Long-term Debt

Long-term debt, net of current maturities, is as follows:

	June 30,			December 31,
	2009			2008
	(in thousands)
Senior secured credit facility	$	1,923,868		$	1,959,784
$200 million 6 7/8% senior subordinated notes	200,000			200,000
$250 million 6 ¾% senior subordinated notes	250,000			250,000
Other long-term obligations	—			14,201
Capital leases	5,491			6,195
	2,379,359			2,430,180
Less current maturities of long-term debt	(99,106		)	(105,281		)
	$	2,280,253		$	2,324,899

The following is a schedule of future minimum repayments of long-term debt as of June 30, 2009 (in thousands):

Within one year	$	99,106
1-3 years	1,640,544
3-5 years	387,915
Over 5 years	251,794
Total minimum payments	$	2,379,359

At June 30, 2009, the Company was contingently obligated under letters of credit issued pursuant to the $2.725 billion senior secured credit facility with face amounts aggregating $26.9 million.

Senior Secured Credit Facility

The $2.725 billion senior secured credit facility consists of three credit facilities comprised of a $750 million revolving credit facility (of which $136.7 million was drawn at June 30, 2009), a $325 million Term Loan A Facility and a $1.65 billion Term Loan B Facility.

Interest Rate Swap Contracts

In accordance with the terms of its $2.725 billion senior secured credit facility, the Company was required to enter into fixed-rate debt or interest rate swap agreements in an amount equal to 50% of the Company’s consolidated indebtedness, excluding the revolving credit facility, within 100 days of the closing date of the $2.725 billion senior secured credit facility.

The effect of derivative instruments on the consolidated statement of income for the three months ended June 30, 2009 was as follows (in thousands):

	Gain (Loss)		Location of Gain (Loss)	Gain (Loss)
	Recognized in		Reclassified from	Reclassified from			Location of Gain (Loss)	Gain (Loss)
Derivatives in SFAS 133	OCI on Derivative		AOCI into Income	AOCI into Income			Recognized in Income on	Recognized in Income on
Cash Flow Hedging Relationship	(Effective Portion)		(Effective Portion)	(Effective Portion)			Derivative (Ineffective Portion)	Derivative (Ineffective Portion)
Interest rate swap contracts	$	2,302	Interest expense	$	(7,614	)	None	$	—
Total	$	2,302		$	(7,614	)		$	—

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	Location of Gain (Loss)
Derivatives Not Designated as Hedging	Recognized in Income	Gain (Loss) Recognized
Instruments under SFAS 133	on Derivative	in Income on Derivative
Interest rate swap contracts	Interest expense	$	541
Total		$	541

The effect of derivative instruments on the consolidated statement of income for the six months ended June 30, 2009 was as follows (in thousands):

	Gain (Loss)		Location of Gain (Loss)	Gain (Loss)
	Recognized in		Reclassified from	Reclassified from			Location of Gain (Loss)	Gain (Loss)
Derivatives in SFAS 133	OCI on Derivative		AOCI into Income	AOCI into Income			Recognized in Income on	Recognized in Income on
Cash Flow Hedging Relationship	(Effective Portion)		(Effective Portion)	(Effective Portion)			Derivative (Ineffective Portion)	Derivative (Ineffective Portion)
Interest rate swap contracts	$	8,099	Interest expense	$	(17,130	)	None	$	—
Total	$	8,099		$	(17,130	)		$	—

	Location of Gain (Loss)
Derivatives Not Designated as Hedging	Recognized in Income	Gain (Loss) Recognized
Instruments under SFAS 133	on Derivative	in Income on Derivative
Interest rate swap contracts	Interest expense	$	541
Total		$	541

In addition, during the three and six months ended June 30, 2009, the Company amortized $4.3 million in OCI related to the derivatives not designated as hedging instruments under SFAS 133.

In the coming twelve months, the Company anticipates that approximately a $39.8 million loss will be reclassified from OCI to earnings, as part of interest expense. As this amount represents effective hedge results, a comparable offsetting amount of incrementally lower interest expense will be realized in connection with the variable funding being hedged.

The following table sets forth the fair value of the interest rate swap contract liabilities included in accrued interest within the consolidated balance sheets at June 30, 2009 and December 31, 2008:

	June 30, 2009			December 31, 2008
	(in thousands)
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
Derivatives designated as hedging instruments under SFAS 133
Interest rate swap contracts	Accrued interest	$	21,170	Accrued interest	$	63,185
Total derivatives designated as hedging instruments under SFAS 133		$	21,170		$	63,185
Derivatives not designated as hedging instruments under SFAS 133
Interest rate swap contracts	Accrued interest	$	33,062	Accrued interest	$	—
Total derivatives not designated as hedging instruments under SFAS 133		$	33,062		$	—
Total derivatives		$	54,232		$	63,185

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Other Long-Term Obligations

On October 15, 2004, the Company announced the sale of The Downs Racing, Inc. and its subsidiaries to the Mohegan Tribal Gaming Authority (“MTGA”). Under the terms of the agreement, the MTGA acquired The Downs Racing, Inc. and its subsidiaries, including Pocono Downs (a standardbred horse racing facility located on 400 acres in Wilkes-Barre, Pennsylvania) and five Pennsylvania OTWs located in Carbondale, East Stroudsburg, Erie, Hazelton and the Lehigh Valley (Allentown). The sale agreement also provided the MTGA with certain post-closing termination rights in the event of certain materially adverse legislative or regulatory events. In January 2005, the Company received $280 million from the MTGA, and transferred the operations of The Downs Racing, Inc. and its subsidiaries to the MTGA. The sale was not considered final for accounting purposes until the third quarter of 2006, as the MTGA had certain post-closing termination rights that remained outstanding. On August 7, 2006, the Company entered into the Second Amendment to the Purchase Agreement and Release of Claims with the MTGA pertaining to the October 14, 2004 Purchase Agreement (the “Purchase Agreement”), and agreed to pay the MTGA an aggregate of $30 million over five years, beginning on the first anniversary of the commencement of slot operations at Mohegan Sun at Pocono Downs, in exchange for the MTGA’s agreement to release various claims it raised against the Company under the Purchase Agreement and the MTGA’s surrender of all post-closing termination rights it might have had under the Purchase Agreement. The Company recorded the present value of the $30 million liability within debt, as the amount due to the MTGA was payable over five years. In March 2009, the Company entered into the Third Amendment to the Purchase Agreement, in which the remaining payments due under the Purchase Agreement were accelerated and reduced.  Under the Third Amendment to the Purchase Agreement, in exchange for the accelerated payment, which was paid to the MTGA in March 2009, all remaining obligations under the Purchase Agreement were deemed to be satisfied. In addition, during the six months ended June 30, 2009, the Company recorded a $1.3 million gain which is included in other income within the consolidated statements of income.

Covenants

At June 30, 2009, the Company was in compliance with all required financial covenants.

8.  Commitments and Contingencies

Litigation

The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

The following proceedings could result in costs, settlements, damages, or rulings that materially impact the Company’s consolidated financial condition or operating results. In each instance, the Company believes that it has meritorious defenses, claims and/or counter-claims, and intends to vigorously defend itself or pursue its claim.

In conjunction with the Company’s acquisition of Argosy Gaming Company (“Argosy”) in 2005, and subsequent disposition of the Argosy Casino Baton Rouge property, the Company became responsible for litigation initiated in 1997 related to the Baton Rouge casino license formerly owned by Argosy. On November 26, 1997, Capitol House filed an amended petition in the Nineteenth Judicial District Court for East Baton Rouge Parish, State of Louisiana, amending its previously filed but unserved suit against Richard Perryman, the person selected by the Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming license for East Baton Rouge Parish, and adding state law claims against Jazz Enterprises, Inc., the former Jazz Enterprises, Inc. shareholders, Argosy, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit alleged that these parties violated the Louisiana Unfair Trade Practices Act in connection with obtaining the gaming license that was issued to Jazz Enterprises, Inc./Catfish Queen Partnership in Commendam. The plaintiff, an applicant for a gaming license whose application was denied by the Louisiana Gaming Division, sought to prove that the gaming license was invalidly issued and to recover lost profits that the plaintiff contended it could have earned if the gaming license had been issued to the plaintiff. On October 2, 2006, the Company prevailed on a partial summary judgment motion which limited plaintiff’s damages to its out-of-pocket costs in seeking its gaming license, thereby eliminating any recovery for potential lost gaming profits. On February 6, 2007, the jury returned a verdict of $3.8 million (exclusive of statutory interest and attorneys’ fees) against Jazz Enterprises, Inc. and

18

Argosy. After ruling on post-trial motions, on September 27, 2007, the trial court entered a judgment in the amount of $1.4 million, plus attorneys’ fees, costs and interest. The Company has established an appropriate reserve and has bonded the judgment pending its appeal. Both the plaintiff and the Company have appealed the judgment to the First Circuit Court of Appeals in Louisiana and oral arguments took place on August 28, 2008. The Company has the right to seek indemnification from two of the former Jazz Enterprises, Inc. shareholders for any liability suffered as a result of such cause of action, however, there can be no assurance that the former Jazz Enterprises, Inc. shareholders will have assets sufficient to satisfy any claim in excess of Argosy’s recoupment rights.

The Illinois Legislature passed into law House Bill 1918, effective May 26, 2006, which singled out four of the nine Illinois casinos, including the Company’s Empress Casino Hotel and Hollywood Casino Aurora, for a 3% tax surcharge to subsidize local horse racing interests. On May 30, 2006, Empress Casino Hotel and Hollywood Casino Aurora joined with the two other riverboats affected by the law, Harrah’s Joliet and the Grand Victoria Casino in Elgin, and filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois (the “Court”), asking the Court to declare the law unconstitutional. Empress Casino Hotel and Hollywood Casino Aurora began paying the 3% tax surcharge into a protest fund which accrues interest during the pendency of the lawsuit. In two orders dated March 29, 2007 and April 20, 2007, the Court declared the law unconstitutional under the Uniformity Clause of the Illinois Constitution and enjoined the collection of this tax surcharge. The State of Illinois requested, and was granted, a stay of this ruling. As a result, Empress Casino Hotel and Hollywood Casino Aurora continued paying the 3% tax surcharge into the protest fund until May 25, 2008, when the 3% tax surcharge expired. The State of Illinois appealed the ruling to the Illinois Supreme Court. On June 5, 2008, the Illinois Supreme Court reversed the trial court’s ruling and issued a decision upholding the constitutionality of the 3% tax surcharge. On January 21, 2009, the four casino plaintiffs filed a petition for certiorari, requesting the U.S. Supreme Court to hear the case. Seven amicus curiae briefs supporting the plaintiffs’ request were also filed. On June 8, 2009, the U.S. Supreme Court decided not to hear the case.  On June 10, 2009, the four casinos filed a petition with the court to open the judgment based on new evidence that came to light during the investigation of former Illinois Governor Rod Blagojevich that the 2006 law was procured by corruption.  The casinos have also requested the court to keep the protest funds from being distributed until the case is concluded.  A decision on the petition to reopen is expected in August 2009.

On December 15, 2008, former Illinois Governor Rod Blagojevich signed Public Act No. 95-1008 requiring the same four casinos to continue paying the 3% tax surcharge to subsidize Illinois horse racing interests. On January 8, 2009, the four casinos filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois, asking the Court to declare the law unconstitutional. The 3% tax surcharge being paid pursuant to Public Act No. 95-1008 is paid into a protest fund where it accrues interest. The accumulated funds will be returned to Empress Casino Hotel and Hollywood Casino Aurora if they ultimately prevail in the lawsuit.

On June 12, 2009, the four casinos filed a lawsuit in Illinois Federal Court naming former Illinois Governor Rod Blagojevich, his campaign fund and racetrack owner, John Johnston, and his two racetracks as defendants alleging a civil conspiracy in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.§1962(c),(d) (“RICO”), based on an illegal scheme to secure the enactment of the 3% tax surcharge legislation in exchange for the payment of money by Johnston.  The casinos also seek to impose a constructive trust over all funds paid under the tax surcharge, and therefore all of the Illinois racetracks are named as parties to the lawsuit.  The casinos have continued to pay the tax surcharge under protest and on June 26, 2009, the casinos requested a Cook County court to enter an injunction to keep the protest funds from being distributed until after there is a final disposition of the federal RICO litigation.  A decision from the Cook County court is expected in September 2009.

In August 2007, a complaint was filed on behalf of a putative class of public shareholders of the Company, and derivatively on behalf of the Company, in the Court of Common Pleas of Berks County, Pennsylvania (the “Complaint”). The Complaint names the Company’s Board of Directors as defendants and the Company as a nominal defendant. The Complaint alleges, among other things, that the Board of Directors breached their fiduciary duties by agreeing to the proposed transaction with Fortress and Centerbridge for inadequate consideration, that certain members of the Board of Directors have conflicts with regard to the Merger, and that the Company and its Board of Directors have failed to disclose certain material information with regard to the Merger. The Complaint seeks, among other things, a court order determining that the action is properly maintained as a class action and a derivative action enjoining the Company and its Board of Directors from consummating the proposed Merger, and awarding the payment of attorneys’ fees and expenses. The Company and the plaintiff had reached a tentative settlement in which the Company agreed to pay certain attorneys’ fees and to make certain disclosures regarding the events leading up to the transaction with Fortress and Centerbridge in the proxy statement sent to shareholders in November 2007. Final settlement was contingent upon court approval and consummation of the transaction with Fortress and Centerbridge. Because the transaction with Fortress and Centerbridge was terminated, the Company expects the action will be dismissed.

19

On July 16, 2008, the Company was served with a purported class action lawsuit brought by plaintiffs seeking to represent a class of shareholders who purchased shares of the Company’s Common Stock between March 20, 2008 and July 2, 2008. The lawsuit alleges that the Company’s disclosure practices relative to the proposed transaction with Fortress and Centerbridge and the eventual termination of that transaction were misleading and deficient in violation of the Securities Exchange Act of 1934. The complaint, which seeks class certification and unspecified damages, was filed in federal court in Maryland. The complaint has been amended, among other things, to add three new named plaintiffs and to name Peter M. Carlino, Chairman and Chief Executive Officer, and William J. Clifford, Senior Vice President and Chief Financial Officer, as additional defendants. The Company filed a motion to dismiss the complaint in November 2008, and oral arguments for the motion were heard by the court on February 23, 2009. Following oral arguments, the court granted the Company’s motion and dismissed the complaint with prejudice. The plaintiffs have filed a motion for reconsideration and to amend their complaint.

On September 11, 2008, the Board of County Commissioners of Cherokee County, Kansas (the “County”) filed suit against Kansas Penn Gaming, LLC (“KPG,” a wholly-owned subsidiary of Penn created to pursue a development project in Cherokee County, Kansas) and the Company in the District Court of Shawnee County, Kansas. The petition alleges that KPG breached its pre-development agreement with the County when KPG withdrew its application to manage a lottery gaming facility in Cherokee County and seeks in excess of $50 million in damages. In connection with their petition, the County obtained an ex-parte order attaching the $25 million privilege fee paid to the Kansas Lottery Commission in conjunction with the gaming application for the Cherokee County zone. The defendants have filed motions to dissolve and reduce the attachment. Those motions were denied, and the defendants have  appealed those decisions to the appellate court.  The Kansas appellate court declined to hear the appeal on jurisdictional grounds and the defendants have requested that the Kansas Supreme Court review that decision.

On September 23, 2008, KPG filed an action against HV Properties of Kansas, LLC (“HV”) in the U.S. District Court for the District of Kansas seeking a declaratory judgment from the U.S. District Court finding that KPG has no further obligations to HV under a Real Estate Sale Contract (the “Contract”) that KPG and HV entered into on September 6, 2007, and that KPG properly terminated this Contract under the terms of the Repurchase Agreement entered into between the parties effective September 28, 2007. HV filed a counterclaim claiming KPG breached the Contract, and seeks $37.5 million in damages. On October 7, 2008, HV filed suit against the Company claiming the Company is liable to HV for KPG’s alleged breach based on a Guaranty Agreement signed by the Company. Both cases were consolidated. The Company filed a motion to dismiss HV’s claims, which was denied on May 6, 2009. The parties are currently engaged in discovery.

Operating Lease Commitments

The Company is liable under numerous operating leases for airplanes, automobiles, the property on which some of its casinos operate, other equipment and buildings, which expire at various dates through 2093. Total rental expense under these agreements was $7.8 million and $15.8 million for the three and six months ended June 30, 2009, respectively, as compared to $8.1 million and $14.9 million for the three and six months ended June 30, 2008, respectively.

The leases for land consist of annual base lease rent payments plus, in some instances, a percentage rent based on a percent of adjusted gaming wins, as described in the respective leases.

The Company has an operating lease with the City of Bangor which covers the temporary facility and the permanent facility, which opened on July 1, 2008. Under the lease agreement, there is a fixed rent provision, as well as a revenue-sharing provision which is equal to 3% of gross slot revenue. The final term of the lease, which commenced with the opening of the permanent facility, is for an initial term of fifteen years, with three ten-year renewal options.

On March 23, 2007, BTN, Inc. (“BTN”), one of the Company’s wholly-owned subsidiaries, entered into an amended and restated ground lease (the “Amended Lease”) with Skrmetta MS, LLC. The lease amends the prior ground lease, dated October 19, 1993. The Amended Lease requires BTN to maintain a minimum gaming operation on the leased premises and to pay rent equal to 5% of adjusted gaming win after gaming taxes have been deducted. The term of the Amended Lease expires on January 1, 2093.

The future minimum lease commitments relating to the base lease rent portion of noncancelable operating leases at June 30, 2009 are as follows (in thousands):

20

Within one year	$	6,205
1-3 years	9,887
3-5 years	6,667
Over 5 years	37,631
Total	$	60,390

9.   Shareholders’ Equity

Shareholder Rights Plan

On May 20, 1998, the Board of Directors of the Company authorized and declared a dividend distribution of one preferred stock purchase right (the “Right” or “Rights”) for each outstanding share of the Company’s Common Stock, par value $.01 per share, payable to shareholders of record at the close of business on March 19, 1999. In addition, a Right was issued for each share of the Company’s Common Stock issued after March 19, 1999 and prior to the Rights’ expiration. Each Right entitled the registered holder to purchase from the Company one one-hundredth of a share (a “Preferred Stock Fraction”) of the Company’s Series A Preferred Stock (or another series of preferred stock with substantially similar terms), or a combination of securities and assets of equivalent value, at a purchase price of $10.00 per Preferred Stock Fraction, subject to adjustment. The description and terms of the Rights were set forth in a Rights Agreement (the “Rights Agreement”) dated March 2, 1999, and amended on June 15, 2007, between the Company and Continental Stock Transfer and Trust Company as Rights Agent. The Rights Agreement and the associated Rights expired on March 18, 2009.

Issuance of Preferred Stock

On October 30, 2008, in connection with the termination of the Merger Agreement, the Company closed the sale of the Investment and issued 12,500 shares of Preferred Stock.

10.  Subsidiary Guarantors

Under the terms of the $2.725 billion senior secured credit facility, most of Penn’s subsidiaries are guarantors under the agreement. Each of the subsidiary guarantors is 100% owned by Penn. In addition, the guarantees provided by such subsidiaries under the terms of the $2.725 billion senior secured credit facility are full and unconditional, joint and several. There are no significant restrictions within the $2.725 billion senior secured credit facility on the Company’s ability to obtain funds from its subsidiaries by dividend or loan. However, in certain jurisdictions, the gaming authorities may impose restrictions pursuant to the authority granted to them with regard to Penn’s ability to obtain funds from its subsidiaries.

With regard to the $2.725 billion senior secured credit facility, the Company has not presented condensed consolidating balance sheets, condensed consolidating statements of income and condensed consolidating statements of cash flows at, and for the three and six months ended, June 30, 2008, as Penn had no significant independent assets and no independent operations at, and for the three and six months ended, June 30, 2008. However, during the year ended December 31, 2008, the Company placed some of the funds received from the issuance of its Preferred Stock into two unrestricted subsidiaries, in order to allow for maximum flexibility in the deployment of the funds and this resulted in significant independent assets. Summarized financial information for the three and six months ended June 30, 2009 for Penn, the subsidiary guarantors of the $2.725 billion senior secured credit facility and the subsidiary non-guarantors is presented below.

Under the terms of the $200 million 67/8% senior subordinated notes, most of Penn’s subsidiaries are guarantors under the agreement. Each of the subsidiary guarantors is 100% owned by Penn. In addition, the guarantees provided by such subsidiaries under the terms of the $200 million 67/8% senior subordinated notes are full and unconditional, joint and several. There are no significant restrictions within the $200 million 67/8% senior subordinated notes on the Company’s ability to obtain funds from its subsidiaries by dividend or loan. However, in certain jurisdictions, the gaming authorities may impose restrictions pursuant to the authority granted to them with regard to Penn’s ability to obtain funds from its subsidiaries.

With regard to the $200 million 67/8% senior subordinated notes, the Company has not presented condensed consolidating balance sheets, condensed consolidating statements of income and condensed consolidating statements of cash flows at, and for the three and six months ended, June 30, 2008, as Penn had no significant independent assets and no independent operations at, and for the three and six months ended, June 30, 2008. However, during the year ended

21

December 31, 2008, the Company placed some of the funds received from the issuance of its Preferred Stock into two unrestricted subsidiaries, in order to allow for maximum flexibility in the deployment of the funds and this resulted in significant independent assets. Summarized financial information for the three and six months ended June 30, 2009 for Penn, the subsidiary guarantors of the $200 million 67/8% senior subordinated notes and the subsidiary non-guarantors is presented below.

22

	Penn			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
	(in thousands)
$2.725 Senior Secured Credit Facility
At June 30, 2009
Condensed Consolidating Balance Sheet
Total current assets	$	63,459		$	239,972		$	662,864		$	22,485		$	988,780
Property and equipment, net	40,871			1,766,371			11,225			—			1,818,467
Total other assets	4,448,176			5,249,563			177,505			(7,465,487		)	2,409,757
Total assets	$	4,552,506		$	7,255,906		$	851,594		$	(7,443,002	)	$	5,217,004
Total current liabilities	$	164,410		$	238,319		$	13,663		$	22,556		$	438,948
Total long-term liabilities	2,223,836			3,374,791			69,631			(3,054,468		)	2,613,790
Total shareholders’ equity	2,164,260			3,642,796			768,300			(4,411,090		)	2,164,266
Total liabilities and shareholders’ equity	$	4,552,506		$	7,255,906		$	851,594		$	(7,443,002	)	$	5,217,004
Three Months Ended June 30, 2009
Condensed Consolidating Statement of Income
Net revenues	$	—		$	573,122		$	7,695		$	—		$	580,817
Total operating expenses	21,088			474,217			8,807			—			504,112
(Loss) income from operations	(21,088		)	98,905			(1,112		)	—			76,705
Other income (expenses)	5,988			(39,481		)	7,716			—			(25,777		)
(Loss) income from operations before income taxes	(15,100		)	59,424			6,604			—			50,928
Taxes on income	(8,511		)	28,035			2,924			—			22,448
Net (loss) income	$	(6,589	)	$	31,389		$	3,680		$	—		$	28,480
Six Months Ended June 30, 2009
Condensed Consolidating Statement of Income
Net revenues	$	—		$	1,178,145		$	14,898		$	—		$	1,193,043
Total operating expenses	43,995			955,160			16,348			—			1,015,503
(Loss) income from operations	(43,995		)	222,985			(1,450		)	—			177,540
Other income (expenses)	25,639			(88,925		)	11,151			—			(52,135		)
(Loss) income from operations before income taxes	(18,356		)	134,060			9,701			—			125,405
Taxes on income	(15,978		)	67,492			4,750			—			56,264
Net (loss) income	$	(2,378	)	$	66,568		$	4,951		$	—		$	69,141
Six Months Ended June 30, 2009
Condensed Consolidating Statement of Cash Flows
Net cash provided by operating activities	$	43,525		$	111,717		$	10,072		$	—		$	165,314
Net cash (used in) provided by investing activities	(665		)	(113,519		)	50,554			—			(63,630		)
Net cash used in financing activities	(39,079		)	(704		)	(13,062		)	—			(52,845		)
Net increase (decrease) in cash and cash equivalents	3,781			(2,506		)	47,564			—			48,839
Cash and cash equivalents at beginning of year	2,460			142,104			601,714			—			746,278
Cash and cash equivalents at end of period	$	6,241		$	139,598		$	649,278		$	—		$	795,117
$200 million 6 7/8% Senior Subordinated Notes
At June 30, 2009
Condensed Consolidating Balance Sheet
Total current assets	$	63,459		$	240,863		$	661,973		$	22,485		$	988,780
Property and equipment, net	40,871			1,777,596			—			—			1,818,467
Total other assets	4,448,176			5,353,655			73,413			(7,465,487		)	2,409,757
Total assets	$	4,552,506		$	7,372,114		$	735,386		$	(7,443,002	)	$	5,217,004
Total current liabilities	$	164,410		$	240,165		$	11,817		$	22,556		$	438,948
Total long-term liabilities	2,223,836			3,386,812			57,610			(3,054,468		)	2,613,790
Total shareholders’ equity	2,164,260			3,745,137			665,959			(4,411,090		)	2,164,266
Total liabilities and shareholders’ equity	$	4,552,506		$	7,372,114		$	735,386		$	(7,443,002	)	$	5,217,004
Three Months Ended June 30, 2009
Condensed Consolidating Statement of Income
Net revenues	$	—		$	577,143		$	3,674		$	—		$	580,817
Total operating expenses	21,088			478,033			4,991			—			504,112
(Loss) income from operations	(21,088		)	99,110			(1,317		)	—			76,705
Other income (expenses)	5,988			(39,687		)	7,922			—			(25,777		)
(Loss) income from operations before income taxes	(15,100		)	59,423			6,605			—			50,928
Taxes on income	(8,511		)	28,157			2,802			—			22,448
Net (loss) income	$	(6,589	)	$	31,266		$	3,803		$	—		$	28,480
Six Months Ended June 30, 2009
Condensed Consolidating Statement of Income
Net revenues	$	—		$	1,186,335		$	6,708		$	—		$	1,193,043
Total operating expenses	43,995			962,681			8,827			—			1,015,503
(Loss) income from operations	(43,995		)	223,654			(2,119		)	—			177,540
Other income (expenses)	25,639			(88,203		)	10,429			—			(52,135		)
(Loss) income from operations before income taxes	(18,356		)	135,451			8,310			—			125,405
Taxes on income	(15,978		)	68,338			3,904			—			56,264
Net (loss) income	$	(2,378	)	$	67,113		$	4,406		$	—		$	69,141
Six Months Ended June 30, 2009
Condensed Consolidating Statement of Cash Flows
Net cash provided by (used in) operating activities	$	43,525		$	125,183		$	(3,394	)	$	—		$	165,314
Net cash (used in) provided by investing activities	(665		)	(113,568		)	50,603			—			(63,630		)
Net cash used in financing activities	(39,079		)	(13,766		)	—			—			(52,845		)
Net increase (decrease) in cash and cash equivalents	3,781			(2,151		)	47,209			—			48,839
Cash and cash equivalents at beginning of year	2,460			142,434			601,384			—			746,278
Cash and cash equivalents at end of period	$	6,241		$	140,283		$	648,593		$	—		$	795,117

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11.  Investment in Corporate Securities

In 2008, the Company made a $47.3 million investment in the corporate debt securities of other gaming companies. The investment, which the Company is treating as available-for-sale securities, is included in other assets within the consolidated balance sheets at June 30, 2009 and December 31, 2008. During the six months ended June 30, 2009, and for the year ended December 31, 2008, the Company recorded a $7.9 million unrealized gain and an $8.0 million unrealized loss, respectively, in OCI for this investment.  The change in the fair value also reflects the original issue discount amortization, which was $1.3 million and $0.9 million for the six months ended June 30, 2009 and for the year ended December 31, 2008, respectively.

During the six months ended June 30, 2009, the Company sold $42.2 million of this investment and recorded a $6.6 million gain, which is included in other income within the consolidated statements of income.

The following is a schedule of the contractual maturities of the Company’s investment in corporate securities at June 30, 2009 (in thousands):

Within one year	$	—
1-3 years	—
3-5 years	5,425
Over 5 years	—
Total	$	5,425

12.  Fair Value of Financial Instruments

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:

Cash and Cash Equivalents

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.

Investment in Corporate Debt Securities

The fair value of the investment in corporate debt securities is estimated based on quoted prices in active markets for identical investments. The investment in corporate debt securities is measured at fair value on a recurring basis.

Long-term Debt

The fair value of the Company’s $2.725 billion senior secured credit facility approximates its carrying value, as it is variable-rate debt. The fair value of the Company’s senior subordinated notes is estimated based on quoted prices in active markets for identical instruments. The fair value of the Company’s other long-term obligations and capital leases approximates its carrying value.

Interest Rate Swap Contracts

The fair value of the Company’s interest rate swap contracts is measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation, subject to a credit adjustment to the LIBOR-based yield curve’s implied discount rates. The credit adjustment reflects the Company’s best estimate as to the Company’s credit quality at June 30, 2009.

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

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	June 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	795,117	$	795,117	$	746,278	$	746,278
Investment in corporate debt securities	5,425		5,425		40,190		40,190
Financial liabilities:
Long-term debt
Senior secured credit facility	1,923,868		1,923,868		1,959,784		1,959,784
Senior subordinated notes and other long-term obligations	450,000		423,500		464,201		389,201
Capital leases	5,491		5,491		6,195		6,195
Interest rate swap contracts	54,232		54,232		63,185		63,185

13.  Fair Value Measurements

SFAS 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:

·Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

·Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.

The following tables set forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheet at June 30, 2009 and December 31, 2008 (in thousands):

	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		June 30, 2009 Total
Assets:
Investment in corporate debt securities	$	5,425	$	—	$	—	$	5,425
Liabilities:
Interest rate swap contracts	—		54,232		—		54,232

	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2008 Total
Assets:
Investment in corporate debt securities	$	40,190	$	—	$	—	$	40,190
Liabilities:
Interest rate swap contracts	—		63,185		—		63,185

The valuation technique used to measure the fair value of the investment in corporate debt securities and interest rate swap contracts was the market approach. The investment in corporate debt securities is included in other assets and the interest rate swap contract liabilities are included in accrued interest within the consolidated balance sheets at June 30, 2009 and December 31, 2008.

25

In conjunction with the opening of the new casino riverboat at Hollywood Casino Lawrenceburg, the Company recorded an impairment loss for the replaced Lawrenceburg vessel of $11.7 million during the three and six months ended June 30, 2009. The fair value of the replaced Lawrenceburg vessel at June 30, 2009, which was measured using the market approach, was $6.8 million. This amount is included in other assets within the consolidated balance sheet at June 30, 2009.

	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		June 30, 2009 Total
Assets:
Other assets	$	—	$	6,759	$	—	$	6,759

14.  Empress Casino Hotel Fire

On March 20, 2009, the Company’s Empress Casino Hotel, which was undergoing a $55 million renovation, was closed following a fire that started in the land-based pavilion at the facility. All customers and employees were successfully evacuated, and the fire was contained on the land-side of the property before it could spread to the adjacent casino barge. On June 25, 2009, the casino barge was reopened with temporary land-based facilities, and plans are presently being developed for the permanent land-based pavilion.

The Company carries a builders’ risk insurance policy for the on-going renovations with a policy limit of $57 million, inclusive of $14 million for delay in completion and $43 million for property damage. The builders’ risk insurance policy includes a $50,000 property damage deductible and a 30-day delay in completion deductible for the peril of fire. In addition, the Company carries comprehensive business interruption and property damage insurance for the operational components of the Empress Casino Hotel with an overall limit of $228 million. The operational insurance policy includes a $2.5 million property damage deductible and a 48-hour business interruption deductible for the peril of fire.

During the three and six months ended June 30, 2009, the Company recorded a $0.3 million and $5.7 million pre-tax loss, respectively, for the insurance deductibles for property damage, business interruption and employee lost wages, as well as a write-off of construction fees related to the renovation that are not recoverable under the Company’s insurance policies.

The $32.5 million insurance receivable recorded at June 30, 2009 was limited to the net book value of assets believed to be damaged, destroyed or abandoned and other costs incurred during the six months ended June 30, 2009 as a result of the fire at Empress Casino Hotel that are expected to be recovered via the insurance claim. During the six months ended June 30, 2009, the Company received $16.0 million in insurance proceeds related to the fire at Empress Casino Hotel.

15.  Income Taxes

At December 31, 2008, the Company included in its $68.6 million liability for unrecognized tax benefits $31.7 million of tax positions that were indemnified by a third party. The indemnification stemmed from a transaction that the Company completed in 2001 with The Continental Companies and CHC International, Inc. (the “Seller”), whereby the Company acquired Hollywood Casino Baton Rouge and the management contract for Casino Rama. As part of the acquisition, Continental and the Company entered into an Indemnification Agreement, whereby Continental indemnified the Company for any tax liabilities to arise subsequent to the acquisition for taxation years in which Continental was the owner. The Canada Revenue Agency (“CRA”) issued reassessments of CHC Canada’s 1996 through 2000 taxation years. The Company and the Seller disagreed with CRA’s position, and the matter had been in Competent Authority since 2004. The Indemnification Agreement provided that the Company did not receive payment until “final determination” by a taxing authority.

At December 31, 2008, the Company believed that it was more likely than not that the matter in Competent Authority would be effectively settled within the next twelve months. Upon settlement, the Company planned on relieving its liability and reversing the indemnification receivable. For years after April 2001 where the Company has no indemnification, it included an appropriate amount of tax reserves in the liability for unrecognized tax benefits, including accrued interest and penalties.

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During the six months ended June 30, 2009, the Company reversed $23.8 million of the indemnified tax position, as it received a settlement proposal from Competent Authority relating to the matter. The remaining liability and indemnification receivable will be reversed as paid and received.

16. Subsequent Events

The Company evaluated all subsequent events through August 7, 2009, which is the date that the consolidated financial statements were issued. No material subsequent events have occurred since June 30, 2009 that required recognition or disclosure in the consolidated financial statements, except for those disclosed below.

On August 6, 2009, the Company announced that it was commencing a cash tender offer for any and all of the $200 million aggregate outstanding principal amount of its 67/8% senior subordinated notes due 2011 (the “Notes”) and a related consent solicitation to effect certain amendments and waivers to the indenture governing the Notes.  The Company is conducting the tender offer and consent solicitation in order to refinance a portion of its existing debt. The Company’s obligations to accept for payment and to pay for the Notes and consents in the tender offer and consent solicitation are subject to customary conditions, including, among other things, receipt of consents and tenders from holders of a majority in aggregate principal amount of the outstanding Notes and the Company having received net cash proceeds from its proposed financing for the tender offer and consent solicitation in an amount sufficient to fund the tender offer and consent solicitation.

On August 6, 2009, the Company announced that Charles Town Entertainment Complex in Jefferson County, West Virginia, notified the Jefferson County Commissioners that it intends to pursue a December 5, 2009 special election to seek voter approval for table games.

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

Our Operations

We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. We currently own or operate nineteen facilities in fifteen jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. We believe that our portfolio of assets provides us with a diversified cash flow from operations.

We have made significant acquisitions in the past, and expect to continue to pursue additional acquisition and development opportunities in the future. In 1997, we began our transition from a pari-mutuel company to a diversified gaming company with the acquisition of the Charles Town property and the introduction of video lottery terminals in West Virginia. Since 1997, we have continued to expand our gaming operations through strategic acquisitions (including the acquisitions of Hollywood Casino Bay St. Louis and Boomtown Biloxi, CRC Holdings, Inc., the Bullwhackers properties, Hollywood Casino Corporation, Argosy Gaming Company, Black Gold Casino at Zia Park, and Sanford-Orlando Kennel Club) and property expansions (such as at Charles Town and Lawrenceburg).

The vast majority of our revenues is gaming revenue, derived primarily from gaming on slot machines and, to a lesser extent, table games. Other revenues are derived from our management service fee from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities (“OTWs”).

We intend to continue to expand our gaming operations through the implementation of a disciplined capital expenditure program at our existing properties and the continued pursuit of strategic acquisitions of gaming properties, particularly in attractive regional markets.

Key performance indicators related to gaming revenue are slot handle (volume indicator), table game drop (volume indicator) and “win” or “hold” percentages. Our typical property slot win percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 15% to 25% of table game drop.

Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.

Merger Announcement and Termination

On June 15, 2007, we announced that we had entered into a merger agreement that, at the effective time of the transactions contemplated thereby, would have resulted in our shareholders receiving $67.00 per share. Specifically, we, PNG Acquisition Company Inc. (“Parent”) and PNG Merger Sub Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), announced that we had entered into an Agreement and Plan of Merger, dated as of June 15, 2007 (the “Merger Agreement”), that provided, among other things, for Merger Sub to be merged with and into us, as a result of which we would have continued as the surviving corporation and would have become a wholly-owned subsidiary of Parent. Parent is indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and Centerbridge Partners, L.P. (“Centerbridge”).

On July 3, 2008, we entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, we agreed to receive a total of $1.475 billion, consisting of a nonrefundable $225 million cash termination fee (the “Cash Termination Fee”) and a $1.25 billion, zero coupon, preferred equity investment (the “Investment”). On October 30, 2008, we closed the sale of the Investment and issued 12,500 shares of Series B Redeemable Preferred Stock (the “Preferred Stock”).

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Executive Summary

Factors affecting our results for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, included the transition at Lawrenceburg to the new casino riverboat, the fire at Empress Casino Hotel, decreases in consumer spending on gaming activities caused by current economic conditions, competitive pressures at some of our properties, the impairment loss for the replaced Lawrenceburg vessel, the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course, increased depreciation expense, decreased interest expense, and the opening of the permanent facility at Hollywood Slots Hotel and Raceway on July 1, 2008.

Financial Highlights:

·Income from operations decreased by $36.9 million, or 32.5%, for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to the transition at Lawrenceburg to the new casino riverboat, the fire at Empress Casino Hotel, decreases in consumer spending on gaming activities caused by current economic conditions, competitive pressures at some of our properties, the impairment loss for the replaced Lawrenceburg vessel, and increased depreciation expense at Hollywood Casino at Penn National Race Course.

·Net income decreased by $8.5 million, or 23.1%, for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to the variances explained above, which were partially offset by a decrease in interest expense and income taxes and an increase in interest and other income.

Other Developments:

·On June 29, 2009, the new casino riverboat at Hollywood Casino Lawrenceburg officially opened, replacing the vessel at Argosy Casino Lawrenceburg. The new Hollywood-themed casino riverboat offers 3,200 slot machines, 88 live table games, and new food and beverage offerings, as well as expanded parking and infrastructure improvements, which will make the facility more accessible.

·We are moving forward with the process to be considered as a Lottery Gaming Facility Manager in Wyandotte County, Kansas. We are one of two applicants in Wyandotte County. We proposed a Phase 1 budget of $410 million (inclusive of the $25 million privilege fee and a $65 million post-opening expansion) and a $154 million Phase 2 expansion, for a total investment of $564 million. On June 11, 2009, we received an endorsement from the Unified Government of Wyandotte County, the host community, for the proposed development and we subsequently executed a development agreement with Wyandotte County. On April 1, 2009, we announced that we had filed a license application with the Kansas Lottery Commission to be considered as a Lottery Gaming Facility Manager in Wyandotte County. We anticipate that the state selection process will conclude in late 2009. We can give no assurance that we will be selected or that we may not modify our proposed application.

·On March 20, 2009, Empress Casino Hotel, which was undergoing a $55 million renovation, was closed following a fire that started in the land-based pavilion at the facility. All customers and employees were successfully evacuated, and the fire was contained on the land-side of the property before it could spread to the adjacent casino barge. On June 25, 2009, the casino barge was reopened with temporary land-based facilities, and plans are presently being developed for the permanent land-based pavilion, with construction being estimated to be completed by the first quarter of 2010 on the parking garage and by the fourth quarter of 2010 on the pavilion. We carry a builders’ risk insurance policy for the on-going renovations with a policy limit of $57 million, inclusive of $14 million for delay in completion and $43 million for property damage. The builders’ risk insurance policy includes a $50,000 property damage deductible and a 30-day delay in completion deductible for the peril of fire. In addition, we carry comprehensive business interruption and property damage insurance for the operational components of the Empress Casino Hotel with an overall limit of $228 million. The operational insurance policy includes a $2.5 million property damage deductible and a 48-hour business interruption deductible for the peril of fire. During the three and six months ended June 30, 2009, we recorded a $0.3 million and $5.7 million pre-tax loss, respectively, for the insurance deductibles for property damage, business interruption and employee lost wages, as well as a write-off of construction fees related to the renovation that are not recoverable under our insurance policies. During the six months ended June 30, 2009, we received $16.0 million in insurance proceeds related to the fire at Empress Casino Hotel.

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·On March 18, 2009, the Rights Agreement providing for the dividend distribution of one preferred stock purchase right for each outstanding share of our Common Stock that our Board of Directors authorized and declared on May 20, 1998 expired.

·On March 11, 2009, we announced that we are supporting the “Ohio Jobs and Growth Plan,” a casino ballot proposal calling for an amendment to Ohio’s Constitution to authorize casinos in the state’s four largest cities, Cincinnati, Cleveland, Columbus and Toledo. We have proposed an investment of approximately $600 million to become licensed, build and operate the facilities in Columbus and Toledo. The “Ohio Jobs and Growth Plan” committee filed more than 850,000 signatures with Ohio’s Secretary of State on June 25, 2009 in order to qualify the amendment for inclusion on this November’s statewide ballot. On July 21, 2009, Ohio’s Secretary of State officially certified the issue for the ballot. In addition, in July 2009, the Governor of Ohio issued an executive order authorizing up to 2,500 video lottery terminals at the state’s seven existing racetracks, and the Legislature acknowledged the Lottery Commission’s authority to regulate these machines through a provision in the state budget. As the owner of Raceway Park in Toledo, with an option on a racetrack in the Columbus area, we expect to be a beneficiary of this plan with respect to our Ohio operations. However, expanded gaming in Ohio could have a negative impact on our operations in neighboring states, such as our Lawrenceburg facility. As is the case in most jurisdictions where gaming legislation is being introduced, both the Ohio Jobs and Growth Plan and the placement of video lottery terminals at Ohio racetracks are subject to regulatory refinement, implementation and litigation risks, all of which are difficult to assess at this juncture.

·In March 2009, we entered into the Third Amendment to the October 14, 2004 Purchase Agreement, that had been entered into with the Mohegan Tribal Gaming Authority (“MTGA”) for the sale of The Downs Racing, Inc. and its subsidiaries (the “Purchase Agreement”).  In August 2006, we had entered into the Second Amendment to the Purchase Agreement and Release of Claims, in which we agreed to pay the MTGA an aggregate of $30 million over five years, in exchange for the MTGA’s agreement to release various claims it raised against us under the Purchase Agreement and the MTGA’s surrender of all post-closing termination rights it might have had under the Purchase Agreement. The Third Amendment to the Purchase Agreement accelerated and reduced the remaining payments due by us under the Purchase Agreement.  In exchange for the accelerated payment, which was paid to the MTGA in March 2009, all remaining obligations under the Purchase Agreement were deemed to be satisfied.  In addition, during the six months ended June 30, 2009, we recorded a $1.3 million gain which is included in other income within the consolidated statements of income.

·In February 2009, we filed a license application with the Maryland Video Lottery Facility Location Commission to be considered for a Video Lottery Operation License for the Cecil County Zone in Cecil County, Maryland. Our proposed $84 million facility in Cecil County would include a 150-seat buffet, a coffee shop and parking for over 1,600 vehicles and be readily scaleable to accommodate 1,500 gaming devices. We can give no assurance that we will be licensed or that we may not modify our proposed application.

·The Illinois Legislature passed into law House Bill 1918, effective May 26, 2006, which singled out four of the nine Illinois casinos, including our Empress Casino Hotel and Hollywood Casino Aurora, for a 3% tax surcharge to subsidize local horse racing interests. On May 30, 2006, Empress Casino Hotel and Hollywood Casino Aurora joined with the two other riverboats affected by the law, Harrah’s Joliet and the Grand Victoria Casino in Elgin, and filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois (the “Court”), asking the Court to declare the law unconstitutional. Empress Casino Hotel and Hollywood Casino Aurora began paying the 3% tax surcharge into a protest fund which accrues interest during the pendency of the lawsuit. In two orders dated March 29, 2007 and April 20, 2007, the Court declared the law unconstitutional under the Uniformity Clause of the Illinois Constitution and enjoined the collection of this tax surcharge. The State of Illinois requested, and was granted, a stay of this ruling. As a result, Empress Casino Hotel and Hollywood Casino Aurora continued paying the 3% tax surcharge into the protest fund until May 25, 2008, when the 3% tax surcharge expired. The State of Illinois appealed the ruling to the Illinois Supreme Court. On June 5, 2008, the Illinois Supreme Court reversed the trial court’s ruling and issued a decision upholding the constitutionality of the 3% tax surcharge. On January 21, 2009, the four casino plaintiffs filed a petition for certiorari, requesting the U.S. Supreme Court to hear the case. Seven amicus curiae briefs supporting the plaintiffs’ request were also filed. On June 8, 2009, the U.S. Supreme Court decided not to hear the case.  On June 10, 2009, the four casinos filed a petition with the court to open the judgment based on new evidence that came to light during the investigation of former Illinois Governor Rod Blagojevich that the 2006 law was procured by corruption.  The casinos have also requested the court to keep the protest funds from being distributed until the case is concluded.  A decision on the petition to reopen is expected in August 2009. On December 15, 2008, former Illinois Governor Rod Blagojevich signed Public Act No. 95-1008 requiring the

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same four casinos to continue paying the 3% tax surcharge to subsidize Illinois horse racing interests. On January 8, 2009, the four casinos filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois, asking the Court to declare the law unconstitutional. The 3% tax surcharge being paid pursuant to Public Act No. 95-1008 is paid into a protest fund where it accrues interest. The accumulated funds will be returned to Empress Casino Hotel and Hollywood Casino Aurora if they ultimately prevail in the lawsuit. On June 12, 2009, the four casinos filed a lawsuit in Illinois Federal Court naming former Illinois Governor Rod Blagojevich, his campaign fund and racetrack owner, John Johnston, and his two racetracks as defendants alleging a civil conspiracy in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.§1962(c),(d) (“RICO”), based on an illegal scheme to secure the enactment of the 3% tax surcharge legislation in exchange for the payment of money by Johnston.  The casinos also seek to impose a constructive trust over all funds paid under the tax surcharge, and therefore all of the Illinois racetracks are named as parties to the lawsuit.  The casinos have continued to pay the tax surcharge under protest and on June 26, 2009, the casinos requested a Cook County court to enter an injunction to keep the protest funds from being distributed until after there is a final disposition of the federal RICO litigation.  A decision from the Cook County court is expected in September 2009. Since the passing of House Bill 1918 into law, Empress Casino Hotel and Hollywood Casino Aurora have expensed approximately $34.8 million in incremental tax as a result of the 3% tax surcharge, including $1.8 million and $4.5 million during the three and six months ended June 30, 2009, respectively.

·We are continuing to build and develop several of our properties, including Empress Casino Hotel. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.

Critical Accounting Policies

We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the policies related to the accounting for long-lived assets, goodwill and other intangible assets, income taxes and litigation, claims and assessments as critical accounting policies, which require us to make significant judgments, estimates and assumptions.

We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our financial condition.

The development and selection of the critical accounting policies, and the related disclosures, have been reviewed with the Audit Committee of our Board of Directors.

Long-lived assets

At June 30, 2009, we had a net property and equipment balance of $1,818.5 million within our consolidated balance sheet, representing 34.9% of total assets. We depreciate property and equipment on a straight-line basis over their estimated useful lives. The estimated useful lives are determined based on the nature of the assets as well as our current operating strategy. We review the carrying value of our property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated future cash flows expected to result from its use and eventual disposition. The factors considered by us in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the individual property level. In assessing the recoverability of the carrying value of property and equipment, we must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, we may be required to record an impairment loss for these assets. Such an impairment loss would be recognized as a non-cash component of operating income.

In conjunction with the opening of the new casino riverboat at Hollywood Casino Lawrenceburg, we recorded an impairment loss for the replaced Lawrenceburg vessel of $11.7 million during the three and six months ended June 30, 2009.

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Included in the depreciation and amortization expense for the three and six months ended June 30, 2009 was $4.8 million in depreciation expense that was recorded following the finalization of cost segregation studies for the casino projects at Hollywood Casino at Penn National Race Course and Hollywood Slots Hotel and Raceway. The charge was a result of the depreciation estimate previously recorded by us for these projects being less than the depreciation calculated by the cost segregation studies, due to differences in the determination of useful lives for certain of the assets included in the projects and the allocation of certain costs that were incurred as part of the projects. For the three and six months ended June 30, 2009, the impact of the charge to net income, Basic EPS, and Diluted EPS was $2.8 million, $0.04 and $0.03, respectively.

Goodwill and other intangible assets

At June 30, 2009, we had $1,595.9 million in goodwill and $690.4 million in other intangible assets within our consolidated balance sheet, representing 30.6% and 13.2% of total assets, respectively, resulting from our acquisition of other businesses and payment for gaming licenses and racing permits. Two issues arise with respect to these assets that require significant management estimates and judgment: (i) the valuation in connection with the initial purchase price allocation; and (ii) the ongoing evaluation for impairment.

In connection with our acquisitions, valuations are completed to determine the allocation of the purchase prices. The factors considered in the valuations include data gathered as a result of our due diligence in connection with the acquisitions, projections for future operations, and data obtained from third-party valuation specialists as deemed appropriate. Goodwill is tested annually, or more frequently if indicators of impairment exist, for impairment by comparing the fair value of the reporting units to their carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment test is performed to determine the implied value of goodwill for that reporting unit. If the implied value is less than the carrying amount for that reporting unit, an impairment loss is recognized for that reporting unit. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” issued by the Financial Accounting Standards Board (“FASB”), we consider our gaming license, racing permit and trademark intangible assets as indefinite-life intangible assets that do not require amortization. Rather, these intangible assets are tested annually, or more frequently if indicators of impairment exist, for impairment by comparing the fair value of the recorded assets to their carrying amount. If the carrying amounts of the gaming license, racing permit and trademark intangible assets exceed their fair value, an impairment loss is recognized. The evaluation of goodwill and indefinite-life intangible assets requires the use of estimates about future operating results of each reporting unit to determine their estimated fair value. We use a market approach model, with EBITDA (earnings before interest, taxes, charges for stock compensation, depreciation and amortization, gain or loss on disposal of assets, and certain other income and expenses, and inclusive of loss from joint venture) multiples, as we believe that EBITDA is a widely-used measure of performance in the gaming industry and as we use EBITDA as the primary measurement of the operating performance of our properties (including the evaluation of operating personnel). In addition, we believe that an EBITDA multiple is the principal basis for the valuation of gaming companies. Changes in the estimated EBITDA multiple or forecasted operations can materially affect these estimates. Once an impairment of goodwill or other indefinite-life intangible assets has been recorded, it cannot be reversed. Because our goodwill and indefinite-life intangible assets are not amortized, there may be volatility in reported income because impairment losses, if any, are likely to occur irregularly and in varying amounts. Intangible assets that have a definite-life, including the management service contract for Casino Rama, are amortized on a straight-line basis over their estimated useful lives or related service contract. We review the carrying value of our intangible assets that have a definite-life for possible impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount of the intangible assets that have a definite-life exceed their fair value, an impairment loss is recognized.

Income taxes

At June 30, 2009, we had a net deferred tax liability balance of $252.8 million within our consolidated balance sheet. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The realizability of the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The factors used to assess the likelihood of realization are the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS 109, on January 1, 2007. FIN 48 creates a single model to address uncertainty in tax positions, and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 by prescribing the minimum recognition threshold a tax position is required to meet before

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being recognized in an enterprise’s financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At June 30, 2009, we had a liability relating to FIN 48 of $52.6 million, which is included in noncurrent tax liabilities within the consolidated balance sheet at June 30, 2009. We operate within multiple taxing jurisdictions and are subject to audit in each jurisdiction. These audits can involve complex issues that may require an extended period of time to resolve. In our opinion, adequate provisions for income taxes have been made for all periods.

Litigation, claims and assessments

We utilize estimates for litigation, claims and assessments. These estimates are based on our knowledge and experience regarding current and past events, as well as assumptions about future events. If our assessment of such a matter should change, we may have to change the estimate, which may have an adverse effect on our results of operations. Actual results could differ from these estimates.

Results of Operations

The following are the most important factors and trends that contribute to our operating performance:

·The fact that most of our properties operate in mature competitive markets. As a result, we expect a majority of our future growth to come from prudent acquisitions of gaming properties, jurisdictional expansions (such as the recent openings in Pennsylvania and Maine) and property expansions.

·The actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as through the Illinois, Colorado and Pennsylvania smoking bans that became effective on January 1, 2008).

·The fact that a number of states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for instance, in Kansas, Ohio and Maryland) and potential competitive threats to business at our existing properties (such as the introduction of commercial casinos in Kansas, Maryland, Ohio, and Kentucky, an additional gaming license in Illinois, and the introduction of tavern licenses in several states). We also face uncertainty regarding anticipated gaming expansion by one of our competitors in Baton Rouge, Louisiana. Legalized gaming from casinos located on Native American lands can also have a significant competitive effect.

·The continued demand for, and our emphasis on, slot wagering entertainment at our properties.

·The closing of Empress Casino Hotel from March 20, 2009 until June 25, 2009 due to a fire, and the timing of the recognition of insurance proceeds relating to the insurance claim.

·The risks related to economic conditions and the effect of such conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to access financing.

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The results of operations for the three and six months ended June 30, 2009 and 2008 are summarized below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)
Revenues:
Gaming	$	526,390		$	566,395		$	1,086,293		$	1,127,031
Management service fee	3,674			4,694			6,707			8,679
Food, beverage and other	86,247			81,845			170,869			163,370
Gross revenues	616,311			652,934			1,263,869			1,299,080
Less promotional allowances	(35,494		)	(32,348		)	(70,826		)	(65,000		)
Net revenues	580,817			620,586			1,193,043			1,234,080
Operating expenses:
Gaming	286,620			302,112			584,182			601,545
Food, beverage and other	65,529			65,569			130,058			127,890
General and administrative	93,001			94,132			192,471			187,521
Impairment loss for replaced Lawrenceburg vessel	11,689			—			11,689			—
Empress Casino Hotel fire	331			—			5,731			—
Depreciation and amortization	46,942			45,182			91,372			84,974
Total operating expenses	504,112			506,995			1,015,503			1,001,930
Income from operations	$	76,705		$	113,591		$	177,540		$	232,150

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The results of operations by property for the three and six months ended June 30, 2009 and 2008 are summarized below:

	Net Revenues				Income (loss) from Operations
Three Months Ended June 30,	2009		2008		2009			2008
	(in thousands)
Charles Town Entertainment Complex	$	121,435	$	122,073	$	28,004		$	29,314
Hollywood Casino Lawrenceburg	95,370		111,404		11,351			31,244
Hollywood Casino at Penn National Race Course	77,149		61,628		1,148			3,596
Hollywood Casino Aurora	52,346		50,497		15,048			12,367
Empress Casino Hotel	3,640		44,659		(1,239		)	9,826
Argosy Casino Riverside	48,470		46,146		13,660			11,817
Hollywood Casino Baton Rouge	31,343		33,110		10,586			11,661
Argosy Casino Alton	20,500		21,731		3,343			4,147
Hollywood Casino Tunica	23,711		22,109		3,993			3,640
Hollywood Casino Bay St. Louis	25,422		25,851		2,473			982
Argosy Casino Sioux City	13,322		14,050		3,558			3,938
Boomtown Biloxi	18,919		18,958		1,838			2,276
Hollywood Slots Hotel and Raceway	17,226		12,078		(462		)	1,239
Bullwhackers	4,720		5,759		(26		)	(392		)
Black Gold Casino at Zia Park	19,779		21,491		5,697			6,925
Casino Rama management service contract	3,674		4,694		3,234			4,272
Raceway Park	2,112		2,343		(276		)	(341		)
Sanford-Orlando Kennel Club	1,679		2,005		(76		)	(225		)
Earnings from Pennwood Racing, Inc.	—		—		—			—
Corporate overhead	—		—		(25,149		)	(22,695		)
Total	$	580,817	$	620,586	$	76,705		$	113,591

	Net Revenues				Income (loss) from Operations
Six Months Ended June 30,	2009		2008		2009			2008
	(in thousands)
Charles Town Entertainment Complex	$	239,339	$	244,585	$	55,825		$	58,959
Hollywood Casino Lawrenceburg	196,871		229,648		37,799			66,133
Hollywood Casino at Penn National Race Course (1)	150,104		101,077		7,774			2,217
Hollywood Casino Aurora	101,100		104,123		28,496			26,439
Empress Casino Hotel	36,509		89,303		(2,097		)	16,206
Argosy Casino Riverside	98,765		92,947		28,186			24,170
Hollywood Casino Baton Rouge	66,432		67,876		23,094			23,647
Argosy Casino Alton	41,099		44,428		6,910			7,754
Hollywood Casino Tunica	48,121		46,671		8,669			8,196
Hollywood Casino Bay St. Louis	51,411		51,292		5,054			3,143
Argosy Casino Sioux City	27,239		28,321		7,437			7,674
Boomtown Biloxi	38,862		39,606		5,689			6,366
Hollywood Slots Hotel and Raceway	31,591		22,778		(1,315		)	3,013
Bullwhackers	9,572		11,503		(494		)	(851		)
Black Gold Casino at Zia Park	42,125		43,406		12,814			14,054
Casino Rama management service contract	6,707		8,679		5,968			7,867
Raceway Park	3,601		3,930		(542		)	(644		)
Sanford-Orlando Kennel Club	3,595		3,907		80			(134		)
Earnings from Pennwood Racing, Inc.	—		—		—			—
Corporate overhead	—		—		(51,807		)	(42,059		)
Total	$	1,193,043	$	1,234,080	$	177,540		$	232,150

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(1)Hollywood Casino at Penn National Race Course includes the results of our Pennsylvania casino that opened on February 12, 2008, as well as the Penn National Race Course and four OTWs.

Revenues

Revenues for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):

										Percentage
Three Months Ended June 30,	2009			2008			Variance			Variance
Gaming	$	526,390		$	566,395		$	(40,005	)	(7.1	)%
Management service fee	3,674			4,694			(1,020		)	(21.7	)%
Food, beverage and other	86,247			81,845			4,402			5.4	%
Gross revenues	616,311			652,934			(36,623		)	(5.6	)%
Less promotional allowances	(35,494		)	(32,348		)	(3,146		)	9.7	%
Net revenues	$	580,817		$	620,586		$	(39,769	)	(6.4	)%

										Percentage
Six Months Ended June 30,	2009			2008			Variance			Variance
Gaming	$	1,086,293		$	1,127,031		$	(40,738	)	(3.6	)%
Management service fee	6,707			8,679			(1,972		)	(22.7	)%
Food, beverage and other	170,869			163,370			7,499			4.6	%
Gross revenues	1,263,869			1,299,080			(35,211		)	(2.7	)%
Less promotional allowances	(70,826		)	(65,000		)	(5,826		)	9.0	%
Net revenues	$	1,193,043		$	1,234,080		$	(41,037	)	(3.3	)%

Gaming revenue

Gaming revenue decreased by $40.0 million, or 7.1%, and $40.7 million, or 3.6%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the fire at Empress Casino Hotel and decreases at several of our properties, which were partially offset by increases due to the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course on February 12, 2008, and the opening of the permanent facility at Hollywood Slots Hotel and Raceway on July 1, 2008, and an increase at Argosy Casino Riverside.

Gaming revenue at Empress Casino Hotel decreased by $39.4 million, or 92.0%, and $50.4 million, or 58.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Gaming revenue at Hollywood Casino Lawrenceburg decreased by $15.8 million, or 14.8%, and $31.7 million, or 14.4%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the reduced capacity of, and subsequent temporary closure of, the casino as part of the transition to the new casino riverboat, decreases in consumer spending on gaming activities caused by current economic conditions, and new competitive pressures.

Gaming revenue at Charles Town Entertainment Complex decreased by $1.3 million, or 1.1%, and $6.1 million, or 2.7%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to decreases in consumer spending on gaming activities caused by current economic conditions as well as competitive pressures.

Gaming revenue at Argosy Casino Alton decreased by $1.2 million, or 5.8%, and $3.2 million, or 7.5%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to decreases in consumer spending on gaming activities caused by current economic conditions as well as competitive pressures, including the repeal of the $500 loss limit in Missouri in November 2008.

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Gaming revenue at Hollywood Casino Aurora decreased by $3.3 million, or 3.3%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to decreases in consumer spending on gaming activities caused by current economic conditions and new competitive pressures, partially offset by increased patronage as a result of the fire at Empress Casino Hotel.

Gaming revenue at Hollywood Casino at Penn National Race Course increased by $12.8 million, or 25.8%, and $44.6 million, or 58.7%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino on February 12, 2008.

Gaming revenue at Hollywood Slots Hotel and Raceway increased by $3.9 million, or 35.6%, and $6.7 million, or 31.8%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

Gaming revenue at Argosy Casino Riverside increased by $2.7 million, or 6.5%, and $6.0 million, or 7.1%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the repeal of the $500 loss limit in Missouri in November 2008 and continued successful marketing efforts.

Food, beverage and other revenue

Food, beverage and other revenue increased by $4.4 million, or 5.4%, and $7.5 million, or 4.6%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course on February 12, 2008, the opening of the permanent facility at Hollywood Slots Hotel and Raceway on July 1, 2008 and increases at Charles Town Entertainment Complex and Hollywood Casino Tunica, all of which were partially offset by a decrease at Empress Casino Hotel.

Food, beverage and other revenue at Hollywood Casino at Penn National Race Course increased by $3.3 million, or 25.1%, and $4.7 million, or 17.1%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino on February 12, 2008.

Food, beverage and other revenue at Hollywood Slots Hotel and Raceway increased by $2.0 million, or 194.6%, and $3.4 million, or 205.1%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

Food, beverage and other revenue at Charles Town Entertainment Complex increased by $1.9 million, or 17.4%, and $2.8 million, or 12.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of its hotel to the public in September 2008.

Food, beverage and other revenue at Hollywood Casino Tunica increased by $1.3 million, or 23.7%, and $2.2 million, or 19.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to new food and beverage promotions.

Food, beverage and other revenue at Empress Casino Hotel decreased by $3.7 million, or 91.6%, and $5.1 million, or 60.7%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Promotional allowances

Promotional allowances increased by $3.1 million, or 9.7%, and $5.8 million, or 9.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to increases at several of our properties, all of which were partially offset by a decrease at Empress Casino Hotel.

Promotional allowances at Hollywood Casino Tunica increased by $1.4 million, or 38.3%, and $2.4 million, or 32.1%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to new food and beverage promotions.

Promotional allowances at Charles Town Entertainment Complex increased by $1.3 million, or 63.7%, and $1.9 million, or 50.8%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months

37

ended June 30, 2008, primarily due to increased marketing efforts and the opening of its hotel to the public in September 2008.

Promotional allowances at Hollywood Slots Hotel and Raceway increased by $0.8 million, or 100.0%, and $1.3 million, or 100.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

Promotional allowances at Boomtown Biloxi increased by $0.7 million, or 36.0%, and $1.1 million, or 29.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to expanded marketing efforts.

Promotional allowances at Hollywood Casino Lawrenceburg increased by $0.6 million, or 8.8%, and $1.7 million, or 13.2%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to increased promotional efforts.

Promotional allowances at Empress Casino Hotel decreased by $2.1 million, or 94.0%, and $2.7 million, or 57.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Operating Expenses

Operating expenses for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):

								Percentage
Three Months Ended June 30,	2009		2008		Variance			Variance
Gaming	$	286,620	$	302,112	$	(15,492	)	(5.1	)%
Food, beverage and other	65,529		65,569		(40		)	(0.1	)%
General and administrative	93,001		94,132		(1,131		)	(1.2	)%
Impairment loss for replaced Lawrenceburg vessel	11,689		—		11,689			100.0	%
Empress Casino Hotel fire	331		—		331			100.0	%
Depreciation and amortization	46,942		45,182		1,760			3.9	%
Total operating expenses	$	504,112	$	506,995	$	(2,883	)	(0.6	)%

								Percentage
Six Months Ended June 30,	2009		2008		Variance			Variance
Gaming	$	584,182	$	601,545	$	(17,363	)	(2.9	)%
Food, beverage and other	130,058		127,890		2,168			1.7	%
General and administrative	192,471		187,521		4,950			2.6	%
Impairment loss for replaced Lawrenceburg vessel	11,689		—		11,689			100.0	%
Empress Casino Hotel fire	5,731		—		5,731			100.0	%
Depreciation and amortization	91,372		84,974		6,398			7.5	%
Total operating expenses	$	1,015,503	$	1,001,930	$	13,573		1.4	%

Gaming expense

Gaming expense decreased by $15.5 million, or 5.1%, and $17.4 million, or 2.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the fire at Empress Casino Hotel and decreases at several of our properties, which were partially offset by the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course on February 12, 2008, the opening of the permanent facility at Hollywood Slots Hotel and Raceway on July 1, 2008 and an increase at Argosy Casino Riverside.

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Gaming expense at Empress Casino Hotel decreased by $21.0 million, or 89.2%, and $29.8 million, or 60.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Gaming expense at Hollywood Casino Lawrenceburg decreased by $7.8 million, or 13.0%, and $16.4 million, or 13.3%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to a decrease in gaming taxes resulting from lower gaming revenue and lower payroll costs.

Gaming expense at Argosy Casino Alton decreased by $0.6 million, or 5.4%, and $2.1 million, or 9.6%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to a decrease in gaming taxes resulting from lower gaming revenue.

Gaming expense at Hollywood Casino Aurora decreased by $4.4 million, or 7.8%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to a decrease in gaming taxes resulting from lower gaming revenue.

Gaming expense at Charles Town Entertainment Complex decreased by $2.7 million, or 1.9%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to a decrease in gaming taxes resulting from lower gaming revenue.

Gaming expense at Hollywood Casino at Penn National Race Course increased by $12.0 million, or 38.0%, and $32.6 million, or 65.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino on February 12, 2008.

Gaming expense at Hollywood Slots Hotel and Raceway increased by $2.5 million, or 40.9%, and $4.3 million, or 36.3%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

Gaming expense at Argosy Casino Riverside increased by $1.1 million, or 5.7%, and $3.0 million, or 7.8%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to an increase in gaming taxes resulting from higher gaming revenue due to the repeal of the $500 loss limit in Missouri in November 2008.

Food, beverage and other expense

Food, beverage and other expense increased by $2.2 million, or 1.7%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course on February 12, 2008 and increases at several of our properties, all of which were partially offset by a decrease at Empress Casino Hotel.

Food, beverage and other expense at Hollywood Casino at Penn National Race Course increased by $2.0 million, or 8.2%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino on February 12, 2008.

Food, beverage and other expense at Hollywood Casino Tunica increased by $1.1 million, or 13.3%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to an increase in cost of food and beverages resulting from higher food and beverage revenue.

Food, beverage and other expense at Hollywood Slots Hotel and Raceway increased by $0.8 million, or 25.5%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

Food, beverage and other expense at Argosy Casino Riverside increased by $0.7 million, or 6.2%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to increased benefit costs.

Food, beverage and other expense at Empress Casino Hotel decreased by $3.4 million, or 48.8%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

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General and administrative expense

General and administrative expense at the properties includes expenses such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and certain housekeeping, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit.

General and administrative expense decreased by $1.1 million, or 1.2%, for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to a decrease at Empress Casino Hotel, which was partially offset by an increase in corporate overhead expense.

General and administrative expense increased by $5.0 million, or 2.6%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, primarily due to an increase in corporate overhead expense, which was partially offset by a decrease at Empress Casino Hotel.

General and administrative expense at Empress Casino Hotel decreased by $4.2 million, or 78.3%, and $4.3 million, or 40.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Corporate overhead expense increased by $2.4 million, or 11.8%, and $9.8 million, or 25.8%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to increased lobbying expenses for efforts primarily in Ohio, the expensing of equity-based compensation awards as required under SFAS No. 123 (revised 2004), “Share-Based Payment” having increased by $1.4 million and $5.7 million for the three and six months ended June 30, 2009, respectively, primarily due to the timing of the 2008 stock option grant and the extension of the expiration date for previous stock option grants by up to three years in December 2008, and increased payroll and benefit costs.

Impairment loss for replaced Lawrenceburg vessel

In conjunction with the opening of the new casino riverboat at Hollywood Casino Lawrenceburg, we recorded an impairment loss for the replaced Lawrenceburg vessel of $11.7 million during the three and six months ended June 30, 2009.

Empress Casino Hotel fire

As a result of the Empress Casino Hotel fire, during the three and six months ended June 30, 2009, we recorded a $0.3 million and $5.7 million pre-tax loss, respectively, for the insurance deductibles for property damage, business interruption and employee lost wages, as well as a write-off of construction fees related to the renovation that are not recoverable under our insurance policies.

Depreciation and amortization expense

Depreciation and amortization expense increased by $1.8 million, or 3.9%, and $6.4 million, or 7.5%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the continued impact of the opening of the casino at Hollywood Casino at Penn National Race Course on February 12, 2008 and the opening of the permanent facility at Hollywood Slots Hotel and Raceway on July 1, 2008, both of which were partially offset by decreases at several of our properties.

Depreciation and amortization expense at Hollywood Casino at Penn National Race Course increased by $4.5 million, or 63.1%, and $8.1 million, or 80.2%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to incremental depreciation expense being recorded during the three months ended June 30, 2009, following the finalization of the cost segregation study for the casino project at Hollywood Casino at Penn National Race Course. In addition, depreciation and amortization expense at Hollywood Casino at Penn National Race Course increased for the six months ended June 30, 2009, due to the continued impact of the opening of the casino on February 12, 2008.

Depreciation and amortization expense at Hollywood Slots Hotel and Raceway increased by $3.1 million, or 355.7%, and $5.0 million, or 247.9%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the opening of the permanent facility on July 1, 2008.

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Depreciation and amortization expense at Empress Casino Hotel decreased by $2.4 million, or 90.5%, and $2.8 million, or 48.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, as the property was closed from March 20, 2009 until June 25, 2009 due to a fire.

Depreciation and amortization expense at Hollywood Casino Bay St. Louis decreased by $1.3 million, or 27.4%, and $1.0 million, or 13.0%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to incremental depreciation expense being recorded during the three months ended June 30, 2008, following the finalization of the cost segregation study for the Hurricane Katrina rebuild assets at Hollywood Casino Bay St. Louis.

Depreciation and amortization expense at Argosy Casino Riverside decreased by $0.9 million, or 24.0%, and $1.9 million, or 24.4%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to a large volume of equipment related to the casino expansion completed in December 2003 now being fully depreciated.

Other income (expenses)

Other income (expenses) for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):

										Percentage
Three Months Ended June 30,	2009			2008			Variance			Variance
Interest expense	$	(29,851	)	$	(44,536	)	$	14,685		33.0	%
Interest income	1,603			553			1,050			189.9	%
Loss from joint venture	(416		)	(152		)	(264		)	(173.7	)%
Other	2,887			(574		)	3,461			603.0	%
Total other expenses	$	(25,777	)	$	(44,709	)	$	18,932		42.3	%

									Percentage
Six Months Ended June 30,	2009			2008			Variance		Variance
Interest expense	$	(61,089	)	$	(91,751	)	$	30,662	33.4	%
Interest income	4,694			1,236			3,458		279.8	%
Loss from joint venture	(719		)	(911		)	192		21.1	%
Other	4,979			884			4,095		463.2	%
Total other expenses	$	(52,135	)	$	(90,542	)	$	38,407	42.4	%

Interest expense

Interest expense decreased by $14.7 million, or 33.0%, and $30.7 million, or 33.4%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to lower outstanding balances and lower interest rates on our $2.725 billion senior secured credit facility, which was partially offset by increased interest expense resulting from hedge ineffectiveness and payments related to interest rate swaps due to the drop in variable rates and lower capitalized interest during the six months ended June 30, 2009.

Interest income

Interest income increased by $1.1 million, or 189.9%, and $3.5 million, or 279.8%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to interest earned on the investment in corporate debt securities, as well as the original issue discount amortization.

Other

Other increased by $3.5 million, or 603.0%, and $4.1 million, or 463.2%, for the three and six months ended June 30, 2009, respectively, as compared to the three and six months ended June 30, 2008, primarily due to the gain on the sale of the investment in corporate debt securities, partially offset by foreign currency losses.

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Liquidity and Capital Resources

Historically, our primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.

Net cash provided by operating activities totaled $165.3 million and $179.6 million for the six months ended June 30, 2009 and 2008, respectively. Net cash provided by operating activities for the six months ended June 30, 2009 included net income of $69.1 million, non-cash reconciling items, such as depreciation, amortization, the charge for stock compensation, the Empress Casino Hotel fire insurance loss, the gain on sale of investment in corporate debt securities and the impairment loss for replaced Lawrenceburg vessel, of $123.3 million, all of which were partially offset by net changes in asset and liability accounts of $27.1 million.

Net cash used in investing activities totaled $63.6 million and $196.4 million for the six months ended June 30, 2009 and 2008, respectively. Net cash used in investing activities for the six months ended June 30, 2009 included expenditures for property and equipment totaling $139.0 million, which was partially offset by proceeds from the sale of property and equipment, the sale of investment in corporate debt securities and insurance proceeds received as a result of the Empress Casino Hotel fire totaling $8.8 million, $50.6 million and $16.0 million, respectively.

Net cash used in financing activities totaled $52.8 million and $33.2 million for the six months ended June 30, 2009 and 2008, respectively. Net cash used in financing activities for the six months ended June 30, 2009 included principal payments on long-term debt totaling $172.4 million and $8.1 million in payments on insurance financing, both of which were partially offset by proceeds from the exercise of stock options totaling $3.5 million, the tax benefit from stock options exercised totaling $1.5 million, and proceeds from the issuance of long-term debt of $122.7 million.

On July 3, 2008, we entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, we agreed to receive a total of $1.475 billion, consisting of the Cash Termination Fee and the Investment. On October 30, 2008, we closed the sale of the Investment and issued 12,500 shares of our Preferred Stock.

We used a portion of the net proceeds from the Investment and the after-tax proceeds of the Cash Termination Fee for the repayment of some of our existing debt, repurchases of our Common Stock, lobbying expenses for efforts in Ohio and investment in corporate debt securities, with the remainder being invested primarily in short-term securities. The repurchase of up to $200 million of our Common Stock over the twenty-four month period ending July 2010 was authorized by our Board of Directors in July 2008. During the year ended December 31, 2008, we repurchased 8,934,984 shares of our Common Stock in open market transactions for approximately $152.6 million, at an average price of $17.05. During the six months ended June 30, 2009, we did not repurchase any shares of our Common Stock.

Capital Expenditures

Capital expenditures are accounted for as either capital project or capital maintenance (replacement) expenditures. Capital project expenditures are for fixed asset additions that expand an existing facility. Capital maintenance expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.

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The following table summarizes our expected capital project expenditures by property for the fiscal year ending December 31, 2009, and actual expenditures for the six months ended June 30, 2009:

Property	Expected for Year Ending December 31, 2009		Expenditures for Six Months Ended June 30, 2009		Balance to Expend in 2009
	(in millions)
Hollywood Casino Lawrenceburg	$	134.5	$	75.9	$	58.6
Empress Casino Hotel	52.9		25.5		27.4
Black Gold Casino at Zia Park	3.5		0.4		3.1
Hollywood Casino at Penn National Race Course	4.7		3.4		1.3
Hollywood Slots Hotel and Raceway	0.7		0.4		0.3
Other	22.0		1.8		20.2
Total	$	218.3	$	107.4	$	110.9

The Hollywood-themed expansion at Lawrenceburg includes the addition of 1,500 parking spaces and 1,168 gaming positions, as well as enhanced amenities and a floor layout that will better facilitate customer flow. The garage and pedestrian walkway opened in May 2008 and the gaming facility opened in June 2009.

At Empress Casino Hotel, we started the facility enhancements in late 2008. On March 20, 2009, Empress Casino Hotel was closed following a fire that started in the land-based pavilion at the facility. All customers and employees were successfully evacuated, and the fire was contained on the land-side of the property before it could spread to the adjacent casino barge. On June 25, 2009, the casino barge was reopened with temporary land-based facilities, and plans are presently being developed for the permanent land-based pavilion, with construction being estimated to be completed by the first quarter of 2010 on the parking garage and by the fourth quarter of 2010 on the pavilion.

During the six months ended June 30, 2009, we spent approximately $31.6 million for capital maintenance expenditures at our properties. The majority of the capital maintenance expenditures was for slot machines and slot machine equipment.

Cash generated from operations and cash available under the revolver portion of our $2.725 billion senior secured credit facility have funded our capital project and capital maintenance expenditures in 2009 to date.

Debt

Senior Secured Credit Facility

During the six months ended June 30, 2009, our $2.725 billion senior secured credit facility amount outstanding decreased by $35.9 million, primarily due to scheduled principal payments on the Term Loan A Facility and Term Loan B Facility, partially offset by the issuance of long-term debt for items such as payment for capital expenditures.

Other Long-Term Obligations

On October 15, 2004, we announced the sale of The Downs Racing, Inc. and its subsidiaries to the MTGA. Under the terms of the agreement, the MTGA acquired The Downs Racing, Inc. and its subsidiaries, including Pocono Downs (a standardbred horse racing facility located on 400 acres in Wilkes-Barre, Pennsylvania) and five Pennsylvania OTWs located in Carbondale, East Stroudsburg, Erie, Hazelton and the Lehigh Valley (Allentown). The sale agreement also provided the MTGA with certain post-closing termination rights in the event of certain materially adverse legislative or regulatory events. In January 2005, we received $280 million from the MTGA, and transferred the operations of The Downs Racing, Inc. and its subsidiaries to the MTGA. The sale was not considered final for accounting purposes until the third quarter of 2006, as the MTGA had certain post-closing termination rights that remained outstanding. On August 7, 2006, we entered into the Second Amendment to the Purchase Agreement and Release of Claims with the MTGA pertaining to the Purchase Agreement, and agreed to pay the MTGA an aggregate of $30 million over five years, beginning on the first anniversary of the commencement of slot operations at Mohegan Sun at Pocono Downs, in exchange for the MTGA’s agreement to release various claims it raised against us under the Purchase Agreement and the MTGA’s surrender of all post-closing termination rights it might have had under the Purchase Agreement. We recorded the present value of the $30 million liability within

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debt, as the amount due to the MTGA was payable over five years. In March 2009, we entered into the Third Amendment to the Purchase Agreement, in which the remaining payments due under the Purchase Agreement were accelerated and reduced.  Under the Third Amendment to the Purchase Agreement, in exchange for the accelerated payment, which was paid to the MTGA in March 2009, all remaining obligations under the Purchase Agreement were deemed to be satisfied.  In addition, during the six months ended June 30, 2009, we recorded a $1.3 million gain which is included in other income within the consolidated statements of income.

Covenants

At June 30, 2009, we were in compliance with all required financial covenants.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information at June 30, 2009 about our financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations, the table presents notional amounts maturing during the period and the related weighted-average interest rates at period-end. For interest rate swaps, the table presents notional amounts and weighted-average interest rates outstanding at each period-end. Notional amounts are used to calculate the contractual payments to be exchanged under the contract and the weighted-average variable rates are based on implied forward rates in the yield curve at June 30, 2009.

	7/1/09 - 6/30/10			7/1/10 - 6/30/11			7/1/11 - 6/30/12			7/1/12 - 6/30/13			7/1/13 - 6/30/14			Thereafter			Total		Fair Value 6/30/09
	(in thousands)
Long-term debt:
Fixed rate	$	—		$	—		$	200,000		$	—		$	—		$	250,000		$	450,000	$	423,500
Average interest rate	—			—			6.88		%	—			—			6.75		%
Variable rate	$	97,750		$	246,618		$	1,191,750		$	387,750		$	—		$	—		$	1,923,868	$	1,923,868
Average interest rate (1)	3.47		%	4.06		%	4.95		%	5.27		%	—			—
Leases	$	1,356		$	1,052		$	1,124		$	79		$	86		$	1,794		$	5,491	$	5,491
Average interest rate	6.08		%	5.69		%	5.66		%	7.72		%	7.72		%	7.72		%
Interest rate derivatives:
Interest rate swaps
Variable to fixed (2)	$	2,262,000		$	540,000		$	—		$	—		$	—		$	—		N/A		$	(54,232	)
Average pay rate	2.59		%	2.30		%													N/A
Average receive rate (3)	2.13		%	2.78		%													N/A

(1)Estimated rate, reflective of forward LIBOR plus the spread over LIBOR applicable to variable-rate borrowing.

(2)Notional amounts outstanding at each period-end.

(3)Estimated rate, reflective of forward LIBOR.

In accordance with the terms of our $2.725 billion senior secured credit facility, we were required to enter into fixed-rate debt or interest rate swap agreements in an amount equal to 50% of our consolidated indebtedness, excluding the revolving credit facility, within 100 days of the closing date of the $2.725 billion senior secured credit facility.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009, which is the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well-designed and operated, can

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provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these disclosure controls and procedures are effective in providing that (a) material information relating to us, including our consolidated subsidiaries, is made known to these officers by other employees of us and our consolidated subsidiaries, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information in response to this Item is incorporated by reference to the information set forth in “Note 8: Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

We make reference to the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the SEC on March 2, 2009.  The risk factors remain the same except for those as set forth below:

Risks Related to Our Business

A substantial portion of our revenues is derived from our Charles Town, West Virginia and Lawrenceburg, Indiana facilities.

For the fiscal year ended December 31, 2008, approximately 37.5% of our net revenues were collectively derived from our Charles Town and Lawrenceburg operations. Our ability to meet our operating and debt service requirements is substantially dependent upon the continued success of these facilities. The operations at these facilities and any of our other facilities could be adversely affected by numerous factors, including:

·      risks related to local and regional economic and competitive conditions, such as a decline in the number of visitors to a facility, a downturn in the overall economy in the market, a decrease in consumer spending on gaming activities in the market or an increase in competition within and outside the state in which each property is located (for example, the effect on Charles Town of the new gaming venues now possible in Maryland and the impact on Lawrenceburg of Indianapolis Downs and Hoosier Downs and the introduction of commercial casinos in Ohio and an additional gaming license in Illinois);

·      changes in local and state governmental laws and regulations (including changes in laws and regulations affecting gaming operations and taxes) applicable to a facility;

·      impeded access to a facility due to weather, road construction or closures of primary access routes; and

·      the occurrence of casualty events, floods and other natural disasters and mechanical failure or extended or extraordinary maintenance.

If any of these events occur, our operating revenues and cash flow could decline significantly.

We may face disruption in integrating and managing facilities we may acquire in the future.

We expect to continue pursuing expansion opportunities, and we regularly evaluate opportunities for joint ventures as well as acquisition of other properties, which evaluations may include discussions and the review of confidential information after the execution of nondisclosure agreements with potential joint venture partners and acquisition candidates, some of which may be potentially significant in relation to our size.

We could face significant challenges in managing and integrating our expanded or combined operations and any other properties we may acquire. The integration of any other properties we may acquire will require the dedication of management resources that may temporarily divert attention from our day-to-day business. The process of integrating properties that we may acquire also could interrupt the activities of those businesses, which could have a material adverse effect on our business, financial condition and results of operations.

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Management of new properties, especially in new geographic areas, may require that we increase our managerial resources. We cannot assure you that we will be able to manage the combined operations effectively or realize any of the anticipated benefits of our acquisitions. We also cannot assure you that if acquisitions are completed, that the acquired businesses will generate sufficient revenue to offset the associated costs.

Our ability to achieve our objectives in connection with any acquisition we may consummate may be highly dependent on, among other things, our ability to retain the senior level property management teams of such acquisition candidates. If, for any reason, we are unable to retain these management teams following such acquisitions or if we fail to attract new capable executives, our operations after consummation of such acquisitions could be materially adversely affected.

The occurrence of some or all of the above described events could have a material adverse effect on our business, results of operations and financial condition.

We face significant competition from other gaming operations and other forms of entertainment.

The gaming industry is characterized by a high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery and poker machines not located in casinos, Native American gaming, Internet gaming and other forms of gambling in the U.S. In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including shopping, high school, collegiate and professional athletic events, television and movies, concerts and travel. Legalized gaming is currently permitted in various forms throughout the U.S., in several Canadian provinces and on various lands taken into trust for the benefit of certain Native Americans in the U.S. and Canada. Other jurisdictions, including states adjacent to states in which we currently have facilities (such as proposed sites in Kansas and Maryland), may legalize and implement gaming in the near future. In addition, established gaming jurisdictions could award additional gaming licenses or permit the expansion or relocation of existing gaming operations. New, relocated or expanded operations by other persons will increase competition for our gaming operations and could have a material adverse impact on us.

Gaming competition is intense in most of the markets where we operate. As competing properties and new markets are opened (for instance, the introduction of commercial casinos in Kansas, Maryland, Ohio and Kentucky, an additional gaming license in Illinois, the introduction of tavern licenses in several states, the potential competition in Baton Rouge and the new properties in St. Louis and Indianapolis), our operating results may be negatively affected. In addition, some of our direct competitors in certain markets may have superior facilities and/or operating conditions. There could be further competition in our markets as a result of the upgrading or expansion of facilities by existing market participants, the entrance of new gaming participants into a market or legislative changes.

We expect each existing or future market in which we participate to be highly competitive. The competitive position of each of our casino properties is discussed in detail in the subsection entitled “Gaming Operations” in the “The Company—Competition” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

We face extensive regulation from gaming and other regulatory authorities.

Licensing requirements. As owners and managers of gaming and pari-mutuel wagering facilities, we are subject to extensive state, local and, in Canada, provincial regulation. State, local and provincial authorities require us and our subsidiaries to demonstrate suitability to obtain and retain various licenses and require that we have registrations, permits and approvals to conduct gaming operations. Various regulatory authorities, including the Colorado Limited Gaming Control Commission, the Florida Department of Business and Professional Regulation-

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Division of Pari-Mutuel Wagering, the Illinois Gaming Board, the Indiana Gaming Commission, the Iowa Gaming and Racing Commission, the Louisiana Gaming Control Board, the Maine Gambling Control Board, the Maine Harness Racing Commission, the Mississippi State Tax Commission, the Mississippi Gaming Commission, the Missouri Gaming Commission, the New Jersey Racing Commission, the New Mexico Gaming Control Board, the New Mexico Racing Commission, the Ohio State Racing Commission, the Pennsylvania Gaming Control Board, the Pennsylvania State Horse Racing Commission, the West Virginia Racing Commission, the West Virginia Lottery Commission, and the Alcohol and Gaming Commission of Ontario, have broad discretion, and may, for any reason set forth in the applicable legislation, rules and regulations, limit, condition, suspend, fail to renew or revoke a license or registration to conduct gaming operations or prevent us from owning the securities of any of our gaming subsidiaries or prevent another person from owning an equity interest in us. Like all gaming operators in the jurisdictions in which we operate, we must periodically apply to renew our gaming licenses or registrations and have the suitability of certain of our directors, officers and employees approved. We cannot assure you that we will be able to obtain such renewals or approvals. Regulatory authorities have input into our operations, for instance, hours of operation, location or relocation of a facility, numbers and types of machines and loss limits. Regulators may also levy substantial fines against or seize our assets or the assets of our subsidiaries or the people involved in violating gaming laws or regulations. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

We have demonstrated suitability to obtain and have obtained all governmental licenses, registrations, permits and approvals necessary for us to operate our existing gaming and pari-mutuel facilities. We cannot assure you that we will be able to retain them or demonstrate suitability to obtain any new licenses, registrations, permits or approvals. In addition, the loss of a license in one jurisdiction could trigger the loss of a license or affect our eligibility for a license in another jurisdiction. As we expand our gaming operations in our existing jurisdictions or to new areas, we may have to meet additional suitability requirements and obtain additional licenses, registrations, permits and approvals from gaming authorities in these jurisdictions. The approval process can be time-consuming and costly and we cannot be sure that we will be successful.

Gaming authorities in the U.S. generally can require that any beneficial owner of our securities file an application for a finding of suitability. If a gaming authority requires a record or beneficial owner of our securities to file a suitability application, the owner must generally apply for a finding of suitability within 30 days or at an earlier time prescribed by the gaming authority. The gaming authority has the power to investigate such an owner’s suitability and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of our securities.

Potential changes in legislation and regulation of our operations. Regulations governing the conduct of gaming activities and the obligations of gaming companies in any jurisdiction in which we have or in the future may have gaming operations are subject to change and could impose additional operating, financial or other burdens on the way we conduct our business.

Moreover, legislation to prohibit or limit gaming may be introduced in the future in states where gaming has been legalized. In addition, from time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations or which may otherwise adversely impact our operations in the jurisdictions in which we operate. Any expansion of gaming or restriction on or prohibition of our gaming operations or enactment of other adverse regulatory changes could have a material adverse effect on our operating results. For example, in October 2005, the Illinois House of Representatives voted to approve proposed legislation that would eliminate riverboat gambling. If the Illinois Senate had passed a bill eliminating riverboat gambling, our business would have been materially impacted. In addition, legislation banning smoking appears to be gaining momentum in a number of jurisdictions where we operate or may operate in the future (including passage in Illinois, Colorado and Pennsylvania in 2008 and proposed legislation in Kansas and Maryland). If these bans continue to be enacted, our business could be adversely affected.

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Taxation and fees. We believe that the prospect of significant revenue is one of the primary reasons that jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees in addition to normal federal, state, local and provincial income taxes, and such taxes and fees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations. From time to time, federal, state, local and provincial legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, worsening economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes. It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration of such laws. Such changes, if adopted, could have a material adverse effect on our business, financial condition and results of operations. The large number of state and local governments with significant current or projected budget deficits makes it more likely that those governments that currently permit gaming will seek to fund such deficits with new or increased gaming taxes, and worsening economic conditions could intensify those efforts. Any material increase, or the adoption of additional taxes or fees, could have a material adverse effect on our future financial results.

Compliance with other laws. We are also subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws and regulations governing the serving of alcoholic beverages. If we are not in compliance with these laws, it could have a material adverse effect on our business, financial condition and results of operations.

Inclement weather, casualty events and other conditions could seriously disrupt our business and have a material adverse effect on our financial condition and results of operations.

The operations of our facilities are subject to disruptions or reduced patronage as a result of severe weather conditions, natural disasters and other casualties. Because many of our gaming operations are located on or adjacent to bodies of water, these facilities are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, forces of nature, mechanical failure, extended or extraordinary maintenance, road construction or closures of primary access routes, flood, hurricane or other severe weather conditions. For example, in late August 2005, we closed Hollywood Casino Bay St. Louis in Bay St. Louis, Mississippi, Boomtown Biloxi in Biloxi, Mississippi and Hollywood Casino Baton Rouge in Baton Rouge, Louisiana in anticipation of Hurricane Katrina. Hollywood Casino Baton Rouge subsequently reopened on August 30, 2005. However, due to the extensive damage sustained, operations at Boomtown Biloxi and Hollywood Casino Bay St. Louis did not resume until June 29, 2006 and August 31, 2006, respectively. Additionally, on March 20, 2009, Empress Casino Hotel was closed following a fire that started in the land-based pavilion at the facility. On June 25, 2009, the casino barge was reopened with temporary land-based facilities. In addition, several of our casinos are subject to risks generally associated with the movement of vessels on inland waterways, including risks of collision or casualty due to river turbulence and traffic. Many of our casinos operate in areas which are subject to periodic flooding that has caused us to experience decreased attendance and increased operating expenses. Any flood or other severe weather condition could lead to the loss of use of a casino facility for an extended period.

The extent to which we can recover under our insurance policies for damages sustained at our properties in the event of future inclement weather, casualty events and other conditions, as well as changes in the local gaming market as a result of future inclement weather, casualty events and other conditions could adversely affect our business.

On August 28, 2005, we closed Hollywood Casino Bay St. Louis in Bay St. Louis, Mississippi and Boomtown Biloxi casino in Biloxi, Mississippi in anticipation of Hurricane Katrina. Due to the extensive damage sustained, operations at Boomtown Biloxi and Hollywood Casino Bay St. Louis did not resume until June 29, 2006 and August 31, 2006, respectively. In addition, on March 20, 2009, Empress Casino Hotel was closed following a fire that started in the land-based pavilion at the facility. On June 25, 2009, the casino barge was reopened with temporary land-based facilities.  We maintain significant property insurance, including business interruption coverage, for Hollywood Casino Bay St. Louis, Boomtown Biloxi and Empress Casino Hotel. However, there can be no assurances that we will be fully or promptly compensated for losses relating to future inclement weather, casualty events and other conditions at any of our facilities. Our experience also demonstrates that the infrastructure

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damage caused by inclement weather, such as hurricanes, to the surrounding communities can adversely affect the local gaming markets by making travel and staffing more difficult.

We depend on agreements with our horsemen and pari-mutuel clerks.

The Federal Interstate Horseracing Act of 1978, as amended, the West Virginia Racing Act and the Pennsylvania Racing Act require that, in order to simulcast races, we have written agreements with the horse owners and trainers at our West Virginia and Pennsylvania race tracks. In addition, in order to operate gaming machines in West Virginia, we are required to enter into written agreements regarding the proceeds of the gaming machines with a representative of a majority of the horse owners and trainers, a representative of a majority of the pari-mutuel clerks and a representative of a majority of the horse breeders.

Effective October 1, 2004, we signed an agreement with the Pennsylvania Thoroughbred Horsemen at Penn National Race Course that expires on September 30, 2011. At the Charles Town Entertainment Complex, we have an agreement with the Charles Town Horsemen with an initial term expiring on December 31, 2011, and an agreement with the breeders that expires on June 30, 2010. The pari-mutuel clerks at Charles Town are represented under a collective bargaining agreement with the West Virginia Division of Mutuel Clerks which expires on December 31, 2010. Our agreement with the Maine Harness Horsemen Association at Bangor Raceway expires at the end of the 2011 racing season. Our agreement with the horsemen at Freehold Raceway expired in May 2009.  The parties are currently working cooperatively on a three-year extension, which is expected to be executed in due course.

If we fail to maintain operative agreements with the horsemen at a track, we will not be permitted to conduct live racing and export and import simulcasting at that track and OTWs and, in West Virginia, we will not be permitted to operate our gaming machines. In addition, our simulcasting agreements are subject to the horsemen’s approval. If we fail to renew or modify existing agreements on satisfactory terms, this failure could have a material adverse effect on our business, financial condition and results of operations.

The recent downturn in the national economy, volatility and disruption of the capital and credit markets and adverse changes in the global economy may negatively impact our revenues and our ability to access financing.

The recent economic downturn and adverse conditions in the local, regional, national and global markets have negatively affected our operations, and may continue to negatively affect our operations in the future.  The gaming and other leisure activities we offer represent discretionary expenditures and participation in such activities may decline during economic downturns, during which consumers generally have less disposable income.  As a result, our revenues from our operations attributable to consumer spending levels may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings.

Furthermore, while we intend to finance expansion and renovation projects with existing cash, cash flow from operations and borrowing under our senior secured credit facility, we may require additional financing to support our continued growth. However, due to the existing uncertainty in the capital and credit markets, our access to capital may not be available on terms acceptable to us or at all. Further, if adverse regional and national economic conditions persist or worsen, we could experience decreased revenues from our operations and could fail to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)An Annual Meeting of Shareholders was held on June 3, 2009.

(b)Certain matters voted upon at the Annual Meeting and the votes cast with respect to such matters are as follows:

(i)Election of Directors:

Name	Votes For	Votes Withheld
David A. Handler	52,614,239	22,904,102
John M. Jacquemin	68,950,820	6,567,520

(ii)           Ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for 2009:

Votes For	Votes Against	Abstentions	Broker Non-Votes
75,407,152	91,232	19,956	0

ITEM 6. EXHIBITS

Exhibit	Description of Exhibit
10.1*	Form of Restricted Stock Award for the Penn National Gaming, Inc. 2008 Long Term Incentive Compensation Plan
31.1*	CEO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
31.2*	CFO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
32.1*	CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*  Filed herewith

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SIGNATURES

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.

	PENN NATIONAL GAMING, INC.
August 7, 2009	By:	/s/ William J. Clifford
		William J. Clifford
		Senior Vice President Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit	Description of Exhibit
10.1*	Form of Restricted Stock Award for the Penn National Gaming, Inc. 2008 Long Term Incentive Compensation Plan
31.1*	CEO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
31.2*	CFO Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
32.1*	CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

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EX-10.1

Exhibit 10.1

PENN NATIONAL GAMING, INC.

NOTICE OF GRANT OF RESTRICTED STOCK

This is to notify you that an award of restricted shares of Common Stock of Penn National Gaming, Inc. (the “Company”) has been granted pursuant to the Penn National Gaming, Inc. 2008 Long Term Incentive Compensation Plan, as follows:

Name and Address of Grantee:
Date of Grant:	, 20
Type of Grant:	Restricted Stock Award
Number of shares:
Fair market value per share:	$                          (as of the close of business on                           )
Total fair market value of award:	$                          (as of the close of business on                           )
Vesting Date(s)/Lapse of Restrictions:	shares on                        [1st anniversary of Date of Grant]                shares on                        [2nd anniversary of Date of Grant]                shares on                        [3rd anniversary of Date of Grant]                shares on                        [4th anniversary of Date of Grant] OR                shares on                        [4th anniversary of Date of Grant]                shares on                        [5th anniversary of Date of Grant]

The grant is subject to all the terms and conditions of the Penn National Gaming, Inc. 2008 Long Term Incentive Compensation Plan, a copy of which is available upon request.

	GRANTEE
Date:
	PENN NATIONAL GAMING, INC.
Date:
	By:	Robert S. Ippolito
	Title:	Vice President, Secretary and Treasurer

PENN NATIONAL GAMING, INC.

RESTRICTED STOCK AWARD AGREEMENT

All Restricted Stock is subject to the provisions of the 2008 Long Term Incentive Compensation Plan (the “Plan”) and any rules and regulations established by the Compensation Committee of the Board of Directors of Penn National Gaming, Inc.  A copy of the Plan is available upon request.  Unless specifically defined herein, words used herein with initial capitalized letters are defined in the attached Notice or the Plan.

The terms provided herein are applicable to the Restricted Stock specified in the attached Notice.  Different terms may apply to any prior or future awards under the Plan.

I.              PAYMENT FOR SHARES

No payment is required for the Restricted Stock you receive.

II.            VESTING/LAPSE OF RESTRICTIONS

Vesting of Restricted Stock means that the Restricted Stock may no longer be forfeited in the event you have a termination of employment (see the discussion of Forfeiture below).  The lapse of restrictions means that the stock is fully transferable by you.  Any stock for which the lapse of restrictions has not occurred may not be sold, transferred, pledged or otherwise disposed of by you.

The Restricted Stock vests and the restrictions on transfer lapse in [25% installments on each of the first, second, third and fourth anniversaries of the Date of Grant] OR [50% installments on each of the fourth and fifth anniversaries of the Date of Grant].  If you cease to be employed by the Company and all Subsidiaries or serve as a Director of the Company, as the case may be, then all of the Restricted Stock that remains subject to restriction or vesting at such time shall be cancelled and forfeited except as otherwise provided for in the Plan or this Award Agreement.

In addition, the Restricted Stock vests and the restrictions on transfer lapse as of the occurrence of any of the following events:

A.            Your service as an Employee or Director of the Company, as the case may be, terminates because of death or Disability; or

B.            The Company is subject to a Change of Control (as defined in the Plan).

No additional shares of Restricted Stock vest after your service as an Employee or a Director of the Company, as the case may be, has terminated for any other reason.

III.           FORFEITURE

If your service as an Employee or Director of the Company, as the case may be, terminates for any reason (except as otherwise provided for in the Plan or this Award Agreement), then your shares of Restricted Stock will be forfeited to the extent that they have not vested before the termination date and do not vest as a result of the termination.  This means that the Restricted

Stock will immediately revert to the Company.  You will receive no payment for shares of Restricted Stock that are forfeited.

IV.           LEAVES OF ABSENCE

For purposes of this grant, your service does not terminate when you go on a leave of absence recognized under the Plan.  Your service will terminate when the leave of absence ends, however, unless you immediately return to active work.

V.            STOCK CERTIFICATES

The Restricted Stock, or any part thereof, may be represented by certificates or may be represented in the form of uncertificated shares.  The rights and obligations of the holder of shares represented by a certificate and the rights and obligations of the holder of uncertificated shares of the same class and series shall be identical.  During the Restricted Period the shares underlying your Restricted Stock award will be held for you by the Company.  After those shares have vested, those shares will be released to you in the form of a stock certificate or uncertificated shares at your option.

VI.           VOTING AND DIVIDEND RIGHTS

You may vote your Restricted Stock and you will receive any dividends paid with respect to your Restricted Stock even before they vest.  Dividends with respect to your Restricted Stock will be paid in a lump sum on the dates that dividends are payable on Common Stock of the Company to Company shareholders generally.

VII.         WITHHOLDING TAXES

No stock certificates will be released or issued to you unless you have made acceptable arrangements to pay any withholding taxes that may be due as a result of this grant or the vesting of the shares.  Those arrangements may include withholding shares of Company Common Stock that otherwise would be released to you when they vest.  These arrangements may also include surrendering shares of Company Common Stock that you already own.  The fair market value of the shares you surrender, determined as of the date when taxes otherwise would have been withheld in cash, will be applied as a credit against the withholding taxes.

VIII.        RESTRICTIONS ON RESALE

By signing this Agreement, you agree not to sell any shares at a time when applicable laws or Company policies prohibit a sale.  This restriction will apply as long as you are an Employee or Director of the Company, as the case may be.

IX.           NO RIGHT TO CONTINUED SERVICE

A grant of Restricted Stock does not give you the right to continue in service with the Company in any capacity.  The Company reserves the right to terminate your services at any time, with or without cause, subject to any employment agreement or other contract.

X.            ADJUSTMENTS

In the event of a stock split, a stock dividend or a similar change in Company Common Stock, the number of Restricted Shares that remain subject to forfeiture will be adjusted accordingly.

XI.           APPLICABLE LAW

This Agreement will be interpreted and enforced under the laws of the Commonwealth of Pennsylvania, without regard to its choice of law provisions.

XII.         THE PLAN AND OTHER AGREEMENTS

The text of the Penn National Gaming, Inc. 2008 Long Term Incentive Compensation Plan is incorporated in this Agreement by reference.

This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant.  Any prior agreements, commitments or negotiations concerning this grant are superseded.  This Agreement may be amended only by another written agreement, signed by both parties.

BY SIGNING THE ATTACHED NOTICE,

YOU AGREE TO ALL OF THE TERMS AND CONDITIONS

DESCRIBED ABOVE AND IN THE PLAN.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934

I, Peter M. Carlino, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Penn National Gaming, Inc.;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009	/s/ Peter M. Carlino
	Peter M. Carlino
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934

I, William J. Clifford, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Penn National Gaming, Inc.;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009	/s/ William J. Clifford
	William J. Clifford Senior Vice President Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Penn National Gaming, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter M. Carlino, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that, to my knowledge:

1.             The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.             The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Peter M. Carlino

Peter M. Carlino
Chairman and Chief Executive Officer
August 7, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Penn National Gaming, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Clifford, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that, to my knowledge:

1.             The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.             The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ William J. Clifford

William J. Clifford
Senior Vice President Finance and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
August 7, 2009