Edgar Filing: HARRAHS ENTERTAINMENT INC

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, 2006

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 No. 1-10410

HARRAH’S ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware		I.R.S. No. 62-1411755
(State or other jurisdiction		(I.R.S. Employer
or organization)		Identification No.)
One Caesars Palace Drive
Las Vegas, Nevada		89109
(Address of principal executive offices)		(Zip Code)

(702) 407-6000

(Registrant’s telephone number, including area code)

2100 Caesars Palace Drive
Las Vegas, Nevada 89109

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer 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

As of July 31, 2006, there were 185,818,467 shares of the Company’s Common Stock outstanding.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited Consolidated Condensed Financial Statements of Harrah’s Entertainment, Inc., a Delaware corporation, have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles in the United States. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of operating results.

As discussed in Note 4 to these Consolidated Condensed Financial Statements, on June 13, 2005, Harrah’s Entertainment, Inc., completed the acquisition of Caesars Entertainment, Inc. These Consolidated Condensed Financial Statements include the financial results of Caesars Entertainment, Inc., subsequent to the acquisition date.

Results of operations for interim periods are not necessarily indicative of a full year of operations. These Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005, as amended by our Form 10-K/A filed on August 8, 2006, and our Current Report on Form 8-K, filed on August 8, 2006, to present Harrah’s Lake Charles as discontinued operations in our consolidated financial statements and notes thereto for the year ended December 31, 2005.

HARRAH’S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)

(In millions, except share amounts)	June 30, 2006			Dec. 31, 2005
ASSETS
Current assets
Cash and cash equivalents	$	636.9		$	724.4
Insurance receivables for hurricane damage	93.5			87.3
Other receivables, less allowance for doubtful accounts of $114.7 and $111.8	343.6			340.0
Deferred income taxes	228.6			219.8
Income tax receivable	39.5			77.4
Prepayments and other	186.1			120.7
Inventories	62.4			59.5
Total current assets	1,590.6			1,629.1
Land, buildings, riverboats and equipment	15,613.8			14,664.7
Less: accumulated depreciation	(2,453.6		)	(2,151.9		)
	13,160.2			12,512.8
Assets held for sale (Notes 1 and 10)	89.8			443.3
Goodwill (Notes 3 and 4)	3,243.2			3,135.5
Intangible assets (Notes 3 and 4)	2,008.9			2,017.9
Deferred costs and other	628.9			779.0
	$	20,721.6		$	20,517.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	370.1		$	365.2
Accrued expenses	1,241.3			1,226.2
Current portion of long-term debt (Note 6)	175.0			7.0
Total current liabilities	1,786.4			1,598.4
Liabilities held for sale (Notes 1 and 10)	3.7			12.1
Long-term debt (Note 6)	10,662.5			11,038.8
Deferred credits and other	351.4			324.2
Deferred income taxes	1,922.0			1,847.4
	14,726.0			14,820.9
Minority interests	56.5			31.6
Commitments and contingencies (Notes 6, 8 and 9 through 11)
Stockholders’ equity (Notes 2, 4 and 5)
Common stock, $0.10 par value, authorized—720,000,000 shares, outstanding—185,121,711 and 183,833,358 shares (net of 35,663,423 and 35,639,390 shares held in treasury)	18.5			18.4
Capital surplus	5,101.6			5,008.4
Retained earnings	831.2			654.4
Accumulated other comprehensive loss	(4.8		)	(5.3		)
Deferred compensation related to restricted stock	(7.4		)	(10.8		)
	5,939.1			5,665.1
	$	20,721.6		$	20,517.6

See accompanying Notes to Consolidated Condensed Financial Statements.

HARRAH’S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

	Second Quarter Ended								Six Months Ended
(In millions, except per share amounts)	June 30, 2006				June 30, 2005				June 30, 2006				June 30, 2005
Revenues
Casino		$	1,916.2			$	1,256.4			$	3,814.3			$	2,352.7
Food and beverage		386.4				207.0				781.0				377.8
Rooms		312.5				133.0				626.7				233.1
Management fees		21.6				17.4				43.1				32.9
Other		148.2				78.0				286.9				135.5
Less: casino promotional allowances		(411.0		)		(268.4		)		(821.2		)		(489.4		)
Total revenues		2,373.9				1,423.4				4,730.8				2,642.6
Operating expenses
Direct
Casino		955.8				623.9				1,871.0				1,168.7
Food and beverage		162.2				86.6				344.5				154.0
Rooms		60.8				24.3				131.1				40.1
Property general, administrative and other		522.4				293.1				1,021.2				541.1
Depreciation and amortization		161.9				103.9				317.9				191.3
Write-downs, reserves and recoveries		7.2				22.4				10.4				25.1
Project opening costs		4.7				3.6				9.1				5.4
Corporate expense		45.7				21.9				88.2				38.3
Merger and integration costs for Caesars acquisition		6.4				16.7				19.8				20.7
Hurricane expense		—				—				0.1				—
(Income)/losses on interests in nonconsolidated affiliates		(1.0		)		—				(3.1		)		0.2
Amortization of intangible assets		16.1				3.4				35.8				6.9
Total operating expenses		1,942.2				1,199.8				3,846.0				2,191.8
Income from operations		431.7				223.6				884.8				450.8
Interest expense, net of interest capitalized		(162.2		)		(88.9		)		(326.5		)		(167.5		)
Losses on early extinguishments of debt		(61.1		)		—				(61.1		)		(2.2		)
Other income, including interest income		1.6				3.2				1.8				3.1
Income from continuing operations before income taxes and minority interests		210.0				137.9				499.0				284.2
Provision for income taxes		(77.7		)		(53.6		)		(183.3		)		(108.9		)
Minority interests		(3.6		)		(3.0		)		(9.5		)		(5.5		)
Income from continuing operations		128.7				81.3				306.2				169.8
Discontinued operations
(Loss)/income from discontinued operations (including gain on sale of $0, $119.1, $0 and $119.1)		(0.1		)		126.6				7.3				150.4
Provision for income taxes		—				(102.1		)		(2.5		)		(110.6		)
(Loss)/income from discontinued operations, net		(0.1		)		24.5				4.8				39.8
Net income		$	128.6			$	105.8			$	311.0			$	209.6
Earnings per share—basic
Income from continuing operations		$	0.70			$	0.66			$	1.67			$	1.44
Discontinued operations, net		—				0.20				0.02				0.33
Net income		$	0.70			$	0.86			$	1.69			$	1.77
Earnings per share—diluted
Income from continuing operations		$	0.69			$	0.65			$	1.64			$	1.41
Discontinued operations, net		—				0.19				0.02				0.33
Net income		$	0.69			$	0.84			$	1.66			$	1.74
Dividends declared per share		$	0.36			$	0.33			$	0.73			$	0.66
Weighted average common shares outstanding		184.0				122.7				183.6				118.2
Additional shares based on average market price for period applicable to:
Restricted stock		0.3				0.5				0.3				0.5
Stock options and appreciation rights		2.5				1.8				3.0				1.8
Contingent convertible notes		0.3				0.3				0.3				0.3
Weighted average common and common equivalent shares outstanding		187.1				125.3				187.2				120.8

See accompanying Notes to Consolidated Condensed Financial Statements.

HARRAH’S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Six Months Ended
(In millions)	June 30, 2006			June 30, 2005
Cash flows from operating activities
Net income	$	311.0		$	209.6
Adjustments to reconcile net income to cash flows from operating activities:
Income from discontinued operations, before income taxes	(7.3		)	(150.4		)
Losses on early extinguishments of debt	61.1			2.2
Depreciation and amortization	334.1			207.3
Write-downs, reserves and recoveries	3.5			6.6
Other noncash items	18.9			12.9
Share-based compensation expense	23.3			—
Deferred income taxes	10.8			(35.1		)
Tax benefit from stock equity plans	0.8			23.2
Minority interests’ share of income	9.5			5.5
(Income)/losses on interests in nonconsolidated affiliates	(3.1		)	0.2
Returns on investment in nonconsolidated affiliate	1.0			—
Net gains from asset sales	(1.1		)	(0.7		)
Net change in long-term accounts	(2.6		)	(81.5		)
Net change in working capital accounts	(67.1		)	(110.1		)
Cash flows provided by operating activities	692.8			89.7
Cash flows from investing activities
Land, buildings, riverboats and equipment additions	(1,072.0		)	(475.6		)
Investments in and advances to nonconsolidated affiliates	(0.9		)	—
Payment for businesses acquired, net of cash acquired	—			(1,562.2		)
Proceeds from sales of discontinued operations	388.5			605.7
Insurance proceeds for hurricane losses for discontinued operations	74.0			—
Insurance proceeds for hurricane losses for continuing operations	58.6			—
Proceeds from sale of long-term investments	49.4			2.7
Proceeds from other asset sales	6.2			13.0
Increase in construction payables	17.4			21.8
Other	(20.2		)	3.8
Cash flows used in investing activities	(499.0		)	(1,390.8		)
Cash flows from financing activities
Borrowings under lending agreements, net of deferred financing costs	3,075.2			4,860.2
Proceeds from issuance of senior notes, net of issue costs	739.1			989.0
Repayments under lending agreements	(3,201.6		)	(4,346.7		)
Losses on derivative instrument	(2.6		)	(7.9		)
Scheduled debt retirements	(5.0		)	(8.4		)
Early extinguishments of debt	(795.0		)	(58.3		)
Premiums paid on early extinguishments of debt	(55.7		)	(2.1		)
Dividends paid	(133.9		)	(75.0		)
Minority interests’ distributions, net of contributions	9.4			(3.6		)
Proceeds from exercises of stock options	50.3			90.9
Excess tax benefit from stock equity plans	16.7			—
Other	5.0			(1.3		)
Cash flows (used in)/provided by financing activities	(298.1		)	1,436.8
Cash flows from discontinued operations
Cash flows from operating activities	20.2			20.6
Cash flows from investing activities	(3.4		)	(2.3		)
Cash flows provided by discontinued operations	16.8			18.3
Net (decrease)/increase in cash and cash equivalents	(87.5		)	154.0
Cash and cash equivalents, beginning of period	724.4			489.0
Cash and cash equivalents, end of period	$	636.9		$	643.0

See accompanying Notes to Consolidated Condensed Financial Statements.

HARRAH’S ENTERTAINMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

	Second Quarter Ended							Six Months Ended
(In millions)	June 30, 2006			June 30, 2005				June 30, 2006			June 30, 2005
Net income		$	128.6		$	105.8			$	311.0		$	209.6
Other comprehensive income:
Foreign currency translation adjustments, net of tax provision/(benefit) of $0.1, $0.0, $0.1 and ($0.2)		0.2			1.1				0.2			0.7
Net loss on derivative instruments qualifying as cash flow hedges, net of tax benefit of $0.0, ($6.0), $0.0 and ($3.4)		—			(11.0		)		—			(6.3		)
Reclassification of loss on derivative instrument from other comprehensive income to net income, net of tax benefit of $0.1, $0.0, $0.2 and $0.0		0.1			0.1				0.3			0.1
		0.3			(9.8		)		0.5			(5.5		)
Comprehensive income		$	128.9		$	96.0			$	311.5		$	204.1

See accompanying Notes to Consolidated Condensed Financial Statements.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

Note 1—Basis of Presentation and Organization

Harrah’s Entertainment, Inc. (‘‘Harrah’s Entertainment,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us,’’ and including our subsidiaries where the context requires) is a Delaware corporation. As of June 30, 2006, we own or manage 36 casinos, primarily in 12 states. Our casino entertainment facilities operate primarily under the Harrah’s, Caesars and Horseshoe brand names, and include 19 land-based casinos, 11 riverboat or dockside casinos, four managed casinos on Indian lands, one combination thoroughbred racetrack and casino and one combination greyhound racetrack and casino. In addition, one of our casinos in Mississippi was closed as of June 30, 2006, due to damage suffered from Hurricane Katrina. We view each property as an operating segment and aggregate all operating segments into one reporting segment.

On June 13, 2005, we completed our acquisition of Caesars Entertainment, Inc. (“Caesars”). The results of Caesars properties are included in our operating results subsequent to their acquisition. The purchase price allocation began in June 2005 and was completed in the second quarter of 2006. See Note 4 for further information regarding our acquisition of Caesars.

Certain of our properties were sold during each of the periods presented, and prior to their sales, assets and liabilities of these properties were classified in our Consolidated Condensed Balance Sheets as Assets/Liabilities held for sale, and their operating results through the dates of their sales were presented as discontinued operations. In addition to the completed sales, we have also announced plans to sell certain assets and liabilities of other properties that we have classified as Assets/Liabilities held for sale in our Consolidated Condensed Balance Sheets and have included their results in discontinued operations. See Note 10 for further information regarding discontinued operations.

Note 2—Stock-Based Employee Compensation

In April 2006, our stockholders approved the Harrah’s Entertainment, Inc. Amended and Restated 2004 Equity Incentive Award Plan (the “2004 Plan”), which, among other things, increased the number of shares of common stock that may be issued by 11.5 million. Under the 2004 Plan, non-qualified stock options, restricted stock, stock appreciation rights (“SARs”), performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards may be granted to employees or consultants of the Company and members of our Board of Directors. Currently, only non-qualified stock options, SARs and restricted stock are outstanding under the 2004 Plan.

Our employees may also be granted restricted stock or options to purchase shares of common stock under the Harrah’s Entertainment, Inc. 2001 Broad-based Stock Incentive Plan (the “2001 Plan”) and certain types of equity awards under the Caesars Entertainment, Inc. 2004 Long Term Incentive Plan (“Caesars 2004 Plan”). Two hundred thousand shares were authorized for issuance under the 2001 Plan, which is an equity compensation plan not approved by stockholders. No additional shares will be authorized under the 2001 Plan. Due to the increase in shares available for issuance under the 2004 Plan approved by our stockholders in April 2006, we have agreed to not grant any additional awards under the Caesars 2004 Plan.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, using the modified prospective application, and, therefore, results for prior period have not been restated.

As a result of adopting SFAS No. 123(R), we recognized $11.8 million for stock option and stock appreciation rights expense for second quarter 2006 and $23.3 million for stock option and stock appreciation rights expense for the six months ended June 30, 2006. This expense is included in Corporate expense in our 2006 Consolidated Condensed Statement of Income. The total income tax benefit recognized for the quarter and six months ended June 30, 2006, was approximately $4.4 million and $8.7 million, respectively. The incremental expense for stock options impacted diluted earnings per share by $0.04 and $0.08 for the quarter and six months ended June 30, 2006, respectively.

Prior to the adoption of SFAS No. 123(R), we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation expense was recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had adopted SFAS No. 123(R) in the prior period.

	Second Quarter Ended				Six Months Ended
(In millions, except per share amounts)	June 30, 2005				June 30, 2005
Net income, as reported		$	105.8			$	209.6
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(5.3		)		(10.8		)
Pro forma net income		$	100.5			$	198.8
Earnings per share:
Basic—as reported		$	0.86			$	1.77
Basic—pro forma		0.82				1.68
Diluted—as reported		0.84				1.74
Diluted—pro forma		0.80				1.63

Stock Options

Stock option awards typically vest in equal installments on January 1 following the grant date and on January 1 in each of the two subsequent years and allow the option holder to purchase stock over specified periods of time, generally seven years from the date of grant, at a fixed price equal to the market value at the date of grant.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is a rate based upon the historical volatility of our stock. The expected term is based upon observation of actual time elapsed between the date of grant and exercise of options for all employees. No stock options were awarded in the first six months of 2006. The assumptions and resulting

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

fair values of options granted in second quarter 2005 and the six months ended June 30, 2005 are as follows:

	Second Quarter Ended				Six Months Ended
	June 30, 2005				June 30, 2005
Expected volatility		32.6		%		32.6		%
Expected dividend yield		2.0		%		2.0		%
Expected term (in years)		4.6				4.6
Risk-free interest rate		3.8		%		3.8		%
Weighted average fair value per share of options granted		$	20.82			$	20.81

The following table presents our stock options granted, exercised and forfeited/expired during the first six months of 2006 and includes exercised and forfeited/expired shares from our acquired companies’ stock plans.

	Weighted Avg. Exercise Price			Number of Options Outstanding		Weighted Avg. Remaining Contractual Term		Aggregate Intrinsic Value
	(Per Share)							(in millions)
Balance—January 1, 2006		$	53.84	12,925,170
Granted		N/A		—
Exercised		37.03		(780,902	)
Forfeited/expired		59.21		(121,552	)
Balance—March 31, 2006		54.87		12,022,716			5.0		$	285.1
Granted		N/A		—
Exercised		45.23		(479,215	)
Forfeited/expired		65.63		(78,796	)
Balance—June 30, 2006		55.20		11,464,705			4.8		$	190.9
Exercisable at June 30, 2006		$	47.61	6,643,513			4.3		$	157.5

The total intrinsic value of options exercised was $17.1 million and $46.0 million, respectively, during the quarter and six months ended June 30, 2006 and $33.7 million and $64.2 million, respectively, during the quarter and six months ended June 30, 2005. The total fair value of shares vested during the second quarter and first six months of 2006 was $0.2 million and $58.7 million, respectively. The total fair value of shares vested during the second quarter and first six months of 2005 was $0.1 million and $47.0 million, respectively. As of June 30, 2006, there was $62.7 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted average period of 1.1 years.

Cash received from option exercises was $21.7 million during the second quarter of 2006 and $50.6 million during the first six months of 2006. The tax benefit realized for the tax deduction from option exercises totaled $6.0 million and $16.1 million in the quarter and six months ended June 30, 2006, respectively. In the second quarter and six months ended June 30, 2005, cash received from option

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

exercises was $41.7 million and $91.2 million, respectively, and the tax benefit realized for the tax deduction from option exercises totaled $11.9 million and $22.7 million, respectively.

Stock Appreciation Rights

SARs typically vest in equal installments on January 1 following the grant date and on January 1 in each of the two subsequent years. However, awards issued in July 2006 will vest in equal installments on June 30 following the grant date and on June 30 in each of the two subsequent years. SARs allow the holder to receive a payment, in cash or stock, equal to the excess of the fair market value of a specified number of shares of stock on the date the SARs are exercised over an exercise price per share, which typically is the fair market value on the date the SARs were granted.

The fair value of SARs at the date of grant was estimated using the Black-Scholes pricing model. The expected volatility is a rate based upon the historical volatility of our stock over a time period commensurate with the expected term of the SARs. The expected term is based upon past experience of actual time elapsed between the date of grant and exercise of options for employee groups with similar exercise behaviors. No SARs were awarded prior to first quarter 2006. The assumptions and resulting fair values of SARs granted in second quarter 2006 and the six months ended June 30, 2006 are as follows:

	Second Quarter Ended				Six Months Ended
	June 30, 2006				June 30, 2006
Expected volatility		28.1		%		32.5		%
Expected dividend yield		1.8		%		2.0		%
Expected term (in years)		4.6				5.8
Risk-free interest rate		4.3		%		4.6		%
Weighted average fair value per share of options granted		$	20.36			$	23.59

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

The following table presents our SARs granted, exercised and forfeited/expired during the first six months of 2006.

	Weighted Avg. Exercise Price			Number of SARs Outstanding		Weighted Avg. Remaining Contractual Term		Aggregate Intrinsic Value
	(Per Share)							(in millions)
Balance—January 1, 2006		$	—		—
Granted		71.23			98,059
Exercised		—			—
Forfeited/expired		—			—
Balance—March 31, 2006		71.23			98,059		6.9
Granted		80.39			6,362
Exercised		—			—
Forfeited/expired		—			—
Balance—June 30, 2006		71.78			104,421		6.6		$	—
Exercisable at June 30, 2006		$	—		—		—		$	—

SARs were first issued in first quarter 2006, and no SARs were exercised in the six months ended June 30, 2006. No SARs vested during the first six months of 2006. As of June 30, 2006, there was $2.0 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested SARs, which is expected to be recognized over a weighted average period of 1.4 years.

Restricted Stock

Restricted shares granted have restrictions that may include, but not be limited to, the right to vote, receive dividends on or transfer the restricted stock. Restricted shares may be subject to forfeiture during a specified period or periods prior to vesting. The shares issued under the 2004 Plan generally vest in equal installments on January 1 following the grant date and on January 1 in each of the two subsequent years. However, awards issued in July 2006 will vest in equal installments on June 30 following the grant date and on June 30 in each of the two subsequent years. The compensation arising from a restricted stock grant is based upon the market price at the grant date. Such expense is deferred and amortized to expense over the vesting period.

Members of the Board of Directors can receive either 50% or 100% of his or her director fees in restricted shares. Shares issued to Board members as director fees cannot be disposed of until at least six months after the date of grant.

Pursuant to a Time Accelerated Restricted Stock Award Plan (“TARSAP”), certain key executives were granted restricted stock awards. A portion of these awards were eligible, but did not qualify, for earlier annual vesting beginning in 2003 based on the Company’s financial performance in each year. With one exception, the remaining unvested shares will vest on January 1, 2007, if the executive continues in active employment until that date. One executive need not be employed on January 1, 2007, to vest. The expense arising from TARSAP awards is being amortized over the periods in which the restrictions lapse.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

The following table presents the number and weighted average grant-date fair values of restricted shares granted, vested and forfeited during the six months ended June 30, 2006, including the TARSAP awards and issues to our Board of Directors.

	Grant Date Fair Value			Number of Shares
	(Per Share)
Unvested shares—January 1, 2006		$	36.69	983,231
Granted		71.25		35,945
Vested		56.82		(61,002	)
Forfeited		66.34		(11,945	)
Unvested shares—March 31, 2006		36.33		946,229
Granted		79.38		8,321
Vested		71.18		(8,360	)
Forfeited		71.61		(6,702	)
Unvested shares—June 30, 2006		36.15		939,488

For the quarter and six months ended June 30, 2006, we recognized $2.3 million and $4.7 million, respectively, of compensation expense related to restricted stock. The total tax benefit recognized for the quarter and six months ended June 30, 2006, was $0.1 million and $0.6 million, respectively. For the quarter and six months ended June 30, 2005, we recognized $1.9 million and $3.4 million, respectively, of compensation expense related to restricted stock. The total tax benefit recognized for the quarter and six months ended June 30, 2005, was none and $0.5 million, respectively. As of June 30, 2006, there was $10.8 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock, which is expected to be recognized over a weighted average period of 1.2 years.

Note 3—Goodwill and Other Intangible Assets

The following table sets forth changes in our goodwill for the period ended June 30, 2006.

(In millions)
Balance at December 31, 2005	$	3,135.5
Additions or adjustments	107.7
Impairment losses	—
Balance at June 30, 2006	$	3,243.2

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets.

	June 30, 2006								December 31, 2005
(In millions)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Trademarks		$	31.0		$	6.5	$	24.5		$	29.0		$	3.1	$	25.9
Gaming rights		36.6			1.4		35.2			20.0			0.5		19.5
Contract rights		131.7			29.7		102.0			130.9			21.8		109.1
Customer relationships		654.2			68.8		585.4			739.2			44.9		694.3
		$	853.5		$	106.4	747.1			$	919.1		$	70.3	848.8
Nonamortizing intangible assets:
Trademarks							570.2								491.1
Gaming rights							691.6								678.0
							1,261.8								1,169.1
Total							$	2,008.9							$	2,017.9

The aggregate amortization expense for the quarter and six months ended June 30, 2006, for those assets that are amortized under the provisions of SFAS No. 142 was $16.1 million and $35.8 million, respectively. Estimated annual amortization expense for those assets for the years ending December 31, 2006, 2007, 2008, 2009 and 2010 is $72.1 million, $72.1 million, $70.6 million, $68.2 million and $60.4 million, respectively.

Note 4—Acquisitions

Caesars Entertainment

On June 13, 2005, we completed our acquisition of 100% of the outstanding shares of Caesars, pursuant to an Agreement and Plan of Merger. The aggregate purchase price was approximately $9.3 billion, which consisted of $1.9 billion of cash, $3.3 billion of Harrah’s Entertainment’s common stock, assumption of Caesars debt with a fair value of approximately $4.0 billion (including value assigned to conversion rights of contingent convertible notes), assumption of employee stock grants valued at $98 million and acquisition costs of approximately $59 million. We issued approximately 67.9 million shares of our common stock, the fair value of which was based on a five-day average of the closing price two days before and two days after the terms of the acquisition were agreed to and announced.

The results of the Caesars properties are included with our operating results subsequent to their acquisition on June 13, 2005. Until the purchase price allocation was finalized in second quarter 2006, depreciation and amortization related to the Caesars acquisition was estimated based on our preliminary purchase price allocation and was adjusted according to the final purchase price allocation.

See Note 10 for a discussion of certain operations of Caesars which have been classified as held for sale.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

In connection with the Caesars acquisition, we engaged consultants and dedicated internal resources to plan for and execute the merger and integration of Caesars into Harrah’s Entertainment. These costs are reflected in Merger and integration costs for Caesars acquisition in our Consolidated Condensed Statements of Income.

The purchase price allocation for the Caesars acquisition was completed in second quarter 2006. We finalized our review and consideration of the relevant information, including additional support for the valuation of land in the Las Vegas market and for the values assigned to acquired customer relationships, finalized assessments of the exposures we assumed for certain contingent liabilities and determined proper deferred tax assets and liabilities. The following table summarizes the fair values of the assets and liabilities assumed at the date of the acquisition.

(In millions)	At June 13, 2005
Current assets		$	820.9
Land, buildings, riverboats and equipment		7,549.1
Long-term assets		232.8
Intangible assets		1,230.7
Goodwill		2,065.3
Total assets acquired		11,898.8
Current liabilities		(978.3		)
Deferred income taxes		(1,630.6		)
Long-term debt		(3,842.2		)
Total liabilities assumed		(6,451.1		)
Net assets acquired		$	5,447.7

Of the $1,230.7 million of acquired intangible assets, $200.0 million has been assigned to gaming rights that are not subject to amortization and $297.0 million has been assigned to trademarks that are not subject to amortization. The remaining intangible assets include customer relationships estimated at $625.4 million (14-year weighted-average useful life), contract rights of $57.3 million (7-year estimated life), gaming rights of $20.0 million (20-year estimated useful life) and trademarks of $31.0 million (5-year estimated useful life). The weighted average useful life of all amortizing intangible assets related to the Caesars acquisition is approximately 13 years.

The following unaudited pro forma consolidated financial information has been prepared assuming that the following transactions had occurred at the beginning of 2005:

· Our acquisition of Caesars;

· Caesars’ sales of Atlantic City Hilton, Bally’s Tunica, Bally’s Casino New Orleans, Caesars Tahoe, Casino Nova Scotia-Hallifax, Casino Nova Scotia-Sydney and its ownership and management interests in Caesars Gauteng; and

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

· Our sale of Harrah’s East Chicago and Harrah’s Tunica.

	Second Quarter Ended			Six Months Ended
(In millions, except per share amounts)	June 30, 2005			June 30, 2005
Net revenues		$	2,216.6		$	4,406.6
Income from operations		$	239.8		$	514.0
Income from continuing operations		$	54.0		$	135.5
Net income		$	55.5		$	142.0
Earnings per share—diluted
From continuing operations		$	0.29		$	0.74
Net income		$	0.30		$	0.77

Pro forma results for the six months ended June 30, 2005, include non-recurring charges of $154.8 million recorded by Caesars related to the change in control of the company, which, for Caesars’ stock incentive plan, became effective on March 11, 2005, when Caesars’ stockholders approved the merger with Harrah’s Entertainment.

These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the acquisition and sale been completed as of the beginning of 2005, or of future results.

Imperial Palace Hotel & Casino

On December 23, 2005, we acquired the assets of the Imperial Palace Hotel & Casino (“Imperial Palace”) in Las Vegas, Nevada, for approximately $373.3 million, including acquisition costs of $3.3 million. No debt was assumed in the transaction. The Imperial Palace occupies an 18.5 acre site on the Las Vegas Strip that is situated between Harrah’s Las Vegas and the Flamingo and is across the Strip from Caesars Palace. This acquisition is one of a number of moves designed to strategically position our Company for development in Las Vegas. The results of Imperial Palace are included in our operating results subsequent to its acquisition on December 23, 2005.

For purposes of these financial statements, we have assumed that the excess of the purchase price over the net book value of the assets acquired is land cost. Values assigned to assets, including land, may be revised after we have reviewed and considered additional information. The purchase price allocation will be completed within one year of the acquisition.

Note 5—Stockholders’ Equity

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

Preferred stock, $100 par value, 150,000 shares authorized

Special stock, $1.125 par value, 5,000,000 shares authorized—

Series A Special Stock, 4,000,000 shares designated

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Subsequent to the end of second quarter 2006, our Board of Directors determined to allow Harrah’s Entertainment’s stockholder rights plan to expire, by its terms, without renewal on October 5, 2006. The rights issued under the stockholders rights plan are exercisable only if a person or group acquires 15% or more of Harrah’s Entertainment common stock or announces a tender offer for 15% or more of the common stock.

In February 2006, our Board of Directors authorized the purchase of 3.5 million shares of common stock in the open market and negotiated purchases through the end of 2006. As of June 30, 2006, no shares have been repurchased under this authorization.

In April 2006, the Company declared a regular cash dividend of 36.25 cents per share, which was paid on May 24, 2006, to stockholders of record as of the close of business on May 10, 2006. The Company has paid quarterly cash dividends since third quarter 2003. Subsequent to the end of second quarter 2006, we declared a quarterly cash dividend of 40 cents per share, an increase of 10.3% over previous dividends, payable on August 23, 2006, to stockholders of record as of the close of business on August 9, 2006.

Note 6—Debt

At June 30, 2006, $1.2 billion, face amount, of our senior notes that are due within one year are classified as long-term in our Consolidated Condensed Balance Sheet because the Company has both the intent and the ability to refinance these notes.

Credit Agreement

As of June 30, 2006, our credit facilities (the “Credit Agreement”) provides for up to $4.0 billion in borrowings, maturing on April 25, 2011. The Credit Agreement contains a provision that would allow an increase in the borrowing capacity to $5.0 billion, if mutually acceptable to the Company and the lenders. Interest on the Credit Agreement is based on our debt ratings and leverage ratio and is subject to change. As of June 30, 2006, the Credit Agreement bore interest based upon 47.5 basis points over LIBOR and bore a facility fee for borrowed and unborrowed amounts of 15 basis points, a combined 62.5 basis points. At our option, we may borrow at the prime rate under the Credit Agreement. As of June 30, 2006, $2.6 billion in borrowings was outstanding under the Credit Agreement with an additional $73.0 million committed to back letters of credit. After consideration of these borrowings, but before consideration of amounts borrowed under our commercial paper program, $1.4 billion of additional borrowing capacity was available to the Company as of June 30, 2006.

Contingent Convertible Senior Notes

Included in the debt assumed in the Caesars acquisition is $375 million Floating Rate Contingent Convertible Senior Notes due 2024. The notes bear interest at an annual rate equal to the three month LIBOR, adjusted quarterly. The interest rate on these notes was 5.1% at June 30, 2006. The notes are convertible into cash and shares of common stock in the following circumstances:

· during any fiscal quarter, if the closing sale price of the Company’s common stock for 20 out of the last 30 consecutive trading days during the previous quarter is more than 120% of the Conversion Price of the notes;

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

· the Company has called the notes for redemption and the redemption has not yet occurred;

· during the five trading day period immediately after any five consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Company’s common stock on such day multiplied by the number of shares issuable upon conversion; provided that, if on such date, the common stock price is between the Conversion Price and 120% of the Conversion Price, as defined, then the holders will receive the principal amount of the notes surrendered plus accrued but unpaid interest; or

· upon the occurrence of specified corporate transactions as defined in the indenture covering these notes.

Holders may convert any outstanding notes into cash and shares of the Company’s common stock at a conversion price per share of $67.28 (the “Conversion Price”) at June 30, 2006. This represents a conversion rate of approximately 14.8633 shares of common stock per $1,000 principal amount of notes (the “Conversion Rate”). Subject to certain exceptions described in the indenture covering these notes, at the time the notes are tendered for conversion the value (the “Conversion Value”) of the cash and shares of the Company’s common stock, if any, to be received by a holder converting $1,000 principal amount of the notes will be determined by multiplying the Conversion Rate by the “Ten Day Average Closing Stock Price,” which equals the average of the closing per share prices of the Company’s common stock on the New York Stock Exchange on the ten consecutive trading days beginning on the second trading day following the day the notes are submitted for conversion. The Conversion Value will be delivered to holders as follows: (1) an amount in cash (the “Principal Return”) equal to the lesser of (a) the aggregate Conversion Value of the notes to be converted and (b) the aggregate principal amount of the notes to be converted, and (2) if the aggregate Conversion Value of the notes to be converted is greater than the Principal Return, any amount in shares (the “Net Shares”) equal to the aggregate Conversion Value less the Principal Return (the “Net Share Amount”). The Company will pay the Principal Return and deliver the Net Shares, if any, as promptly as practicable after determination of the Net Share Amount. The number of Net Shares to be paid will be determined by dividing the Net Share Amount by the Ten Day Average Closing Stock Price.

The Conversion Price decreases when cash dividends are declared so that the Conversion Price equals the price determined by multiplying the Conversion Price in effect immediately prior to the record date for such dividend by a fraction, (i) the numerator of which is the average of the pre-dividend sale price, as defined in the agreement, minus the amount of the cash dividend, and (ii) the denominator of which is the pre-dividend sale price. As a result of the 2006 quarterly cash dividends, the Conversion Price was adjusted from $67.92 at December 31, 2005, to $67.28 at June 30, 2006.

The notes are redeemable by the Company at any time on or after April 20, 2009, at 100% of the principal amount of the notes plus accrued and unpaid interest. Holders may require the Company to purchase all or a portion of these notes on April 15, 2009, 2014, or 2019 at 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are unsecured obligations, rank equal with our other senior indebtedness and are senior to all of our subordinated indebtedness.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Derivative Instruments

We account for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and all amendments thereto. SFAS No. 133 requires that all derivative instruments be recognized in the financial statements at fair value. Any changes in fair value are recorded in the income statement or in other comprehensive income, depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction and the effectiveness of the hedge. The estimated fair values of our derivative instruments are based on market prices obtained from dealer quotes. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts.

Our derivative instruments contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties.

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of December 31, 2005, we were a party to five interest rate swaps, including four assumed in the Caesars acquisition, for a total notional amount of $500 million. In February 2006, we paid approximately $3.4 million to terminate $300 million of the interest rate swaps, which represented the fair value of the swaps on the date of termination. Because these swaps no longer qualified for hedge accounting, a $3.6 million charge was recorded to interest expense in first quarter 2006 to record the change in fair value of these instruments through their termination. We also continue to amortize the fair value adjustments to the hedged item related to these swaps as a credit to interest expense over the life of the debt.

As of June 30, 2006, we have one interest rate swap agreement for a notional amount of $200 million. The difference to be paid or received under the terms of the interest rate swap agreement is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreement will have a corresponding effect on future cash flows. The major terms of the interest rate swap are as follows:

Effective Date

Type of
Hedge

Fixed Rate
Received

Variable
Rate Paid
as of
June 30, 2006

Notional
Amount

Maturity
Date

(In millions)

Jan. 30, 2004

Fair Value

7.125

9.549

200

June 1, 2007

The net income statement impact of the interest rate swaps in the second quarter and the first six months of 2006 was a charge of approximately $0.4 million and $4.9 million, respectively.

The Company’s remaining interest rate swap qualifies for the “shortcut” method allowed under SFAS No. 133, which allows for an assumption of no ineffectiveness. As such, there is no income statement impact from changes in the fair value of the hedging instruments.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Commercial Paper

To provide the Company with cost-effective borrowing flexibility, we have a $200 million commercial paper program that is used to borrow funds for general corporate purposes. At June 30, 2006, $134.2 million was outstanding under this program.

Shelf Registration

To provide for additional financing flexibility, Harrah’s Entertainment, in connection with its wholly-owned subsidiary, Harrah’s Operating Company, Inc. (“HOC”), filed a shelf registration statement with the Securities and Exchange Commission in April 2006 for a variety of securities, including Harrah’s Entertainment’s common stock or HOC debt securities. The issue price of Harrah’s common stock or the terms and conditions of HOC debt securities, which may be guaranteed by Harrah’s Entertainment, will be determined by market conditions at the time of issuance. The shelf registration statement is available until April 2009.

Pursuant to our shelf registration, in June 2006, we issued $750 million 6.5% Senior Notes due 2016. Net proceeds of $739.1 million were used to reduce outstanding indebtedness, to consummate the debt tender offers for our 7.5% and 8.0% Senior Notes due in 2009 and 2011, respectively, and for general working capital purposes.

Retirement of Debt

In June 2006, we completed tender offers for a portion of our 7.5% Senior Notes due in 2009 and our 8.0% Senior Notes due in February 2011. $363.7 million, face amount, of the 7.5% notes were retired, leaving $136.3 million outstanding, and $428.0 million, face amount, of the 8.0% notes were retired, leaving $72.0 million outstanding. In connection with these retirements of debt, we recorded charges in second quarter of $61.1 million representing premiums paid and the write-off of unamortized deferred financing costs.

Debt Repurchase Program

In July 2003, our Board of Directors authorized the Company to retire, from time to time through cash purchases, portions of our outstanding debt in open market purchases, privately negotiated transactions or otherwise. These repurchases will be funded through available cash from operations and borrowings from our established debt programs. Such repurchases will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Note 7—Supplemental Cash Flow Disclosures

Cash Paid for Interest and Taxes

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

	Six Months Ended
(In millions)	June 30, 2006				June 30, 2005
Interest expense, net of interest capitalized		$	326.5			$	167.5
Adjustments to reconcile to cash paid for interest:
Net change in accruals		14.2				(77.0		)
Amortization of deferred finance charges		(4.4		)		(4.7		)
Net amortization of discounts and premiums		35.7				3.4
Cash paid for interest, net of amount capitalized		$	372.0			$	89.2
Cash payments for income taxes, net of refunds		$	120.0			$	327.8

Note 8—Commitments and Contingent Liabilities

Contractual Commitments

We continue to pursue additional casino development opportunities that may require, individually and in the aggregate, significant commitments of capital, up-front payments to third parties, guarantees by the Company of third-party debt and development completion guarantees.

The agreements under which we manage casinos on Indian lands contain provisions required by law that provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled payments of borrowings for development costs and over the management fee earned and paid to the manager. In the event that insufficient cash flow is generated by the operations of the Indian-owned properties to fund this payment, we must pay the shortfall to the tribe. Subject to certain limitations as to time, such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. As of June 30, 2006, our aggregate monthly commitment for the minimum guaranteed payment pursuant to these contracts for the four managed Indian-owned facilities now open, which extend for periods of up to 65 months from June 30, 2006, is $1.2 million. The maximum exposure for the minimum guaranteed payments to the tribes is unlikely to exceed $74.5 million.

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

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

interest is taken. The aggregate outstanding balance as of June 30, 2006, of Indian debt that we have guaranteed was $198.3 million. Our maximum obligation under all of our debt guarantees, including Indian debt guarantees, is $222.8 million. Our obligations under these debt guarantees extend through April 2009.

Some of our guarantees of the debt for casinos on Indian lands were modified during 2003, resulting in the requirement under FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to recognize a liability for the estimated fair value of those guarantees. Liabilities, representing the fair value of our guarantees, and corresponding assets, representing the portion of our management fee receivable attributable to our agreements to provide the related guarantees, were recorded and are being amortized over the lives of the related agreements. We estimate the fair value of the obligations by considering what premium would have been required by us or by an unrelated party. The amounts recognized represent the present value of the premium in interest rates and fees that would have been charged to the tribes if we had not provided the guarantees. The unamortized balances of the liability for the guarantees and of the related assets at June 30, 2006, were $3.4 million.

In February 2005, we entered into an agreement with the State of Louisiana whereby we extended our guarantee of an annual payment obligation of JCC, our wholly-owned subsidiary, of $60 million owed to the State of Louisiana. The guarantee was extended for one year to end March 31, 2009.

We are also obligated to pay the State of Illinois annual minimum payments totaling $159 million for gaming taxes. This obligation terminates on July 1, 2007, or earlier if certain gaming license changes occur in Illinois.

In addition to the guarantees discussed above, as of June 30, 2006, we had commitments and contingencies of $894.8 million, including construction-related commitments.

Severance Agreements

As of June 30, 2006, we have severance agreements with 35 of our senior executives, which provide for payments to the executives in the event of their termination after a change in control, as defined. These agreements provide, among other things, for a compensation payment of 1.5 to 3.0 times the executive’s average annual compensation, as defined, as well as for accelerated payment or accelerated vesting of any compensation or awards payable to the executive under any of our incentive plans. The estimated amount, computed as of June 30, 2006, that would be payable under the agreements to these executives based on the compensation payments and stock awards aggregated approximately $187.4 million. The estimated amount that would be payable to these executives does not include an estimate for the tax gross-up payment, provided for in the agreements, that would be payable to the executive if the executive becomes entitled to severance payments which are subject to federal excise tax imposed on the executive.

Self-Insurance

We are self-insured for various levels of general liability, workers’ compensation and employee medical coverage. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Note 9—Litigation

Certain of our legal proceedings are reported in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2005, with material developments since that report described below. We are involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, we believe that the final outcome of these matters will not have a material adverse effect upon our consolidated financial position or our results of operations.

On November 13, 2000, Catskill Development, LLC, Mohawk Management, LLC and Monticello Raceway Development Company, LLC (collectively, “Catskill Development”) filed an action captioned Catskill Development LLC, et al. vs. Park Place Entertainment Corporation, et al., against Caesars in the United States District Court for the Southern District of New York. Catskill Development alleges tortious interference with contract and prospective business relationships, unfair competition and state anti-trust violations pertaining to a proposed gaming facility to be developed by Catskill Development and the Tribe, and seeks over $2 billion in compensatory damages and over $2 billion in punitive damages. The District Court granted summary judgment to Caesars and dismissed the complaint in its entirety. The plaintiffs appealed the District Court’s decision to the United States Court of Appeals for the Second Circuit. The Court of Appeals referred the matter back to the District Court to resolve jurisdictional issues. The Company believes this matter to be without merit and will continue to vigorously contest the case.

On October 15, 2001, Scutti Enterprises, LLC (“Scutti”) filed an action against Caesars in the Supreme Court of the State of New York, County of Monroe (subsequently removed to United States District Court for the Western District of New York). The action arises out of Scutti’s efforts to redevelop and manage the Saint Regis Mohawk Bingo Palace. Scutti alleges tortious interference with contract and prospective business relationships, unfair competition and state anti-trust violations and seeks over $500 million in compensatory damages and unspecified punitive damages. The District Court entered summary judgment, in Caesars favor, on all of the claims. The United States Court of Appeals for the Second Circuit affirmed the District Court on the claim for tortious interference with prospective business relations, the only claim appealed. Scutti filed a motion for reconsideration, which was denied. The Company believes this matter to be without merit and will continue to vigorously contest this matter.

Note 10—Discontinued Operations

In first quarter 2006, we determined that Harrah’s Lake Charles should be classified as discontinued operations. In May 2006, we signed a definitive agreement to sell the two subsidiaries that own the Harrah’s Lake Charles business. These assets are classified in Assets held for sale in our Consolidated Condensed Balance Sheets, and we have ceased depreciating these assets. 2006 results for Harrah’s Lake Charles are presented as discontinued operations and 2005 results have been reclassified to conform to the 2006 presentation. No gain or loss is expected on this sale.

In December 2005, we reached an agreement to sell the Grand Casino Gulfport assets in their “as is” condition, and those assets were included in Assets held for sale in our Consolidated Condensed Balance Sheets. The sale was completed in March 2006. No gain or loss was recorded on the sale.

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Included in the Caesars acquisition were Reno Hilton, Flamingo Laughlin Casino and a hotel in Halifax, Nova Scotia, that we determined to classify as Assets/Liabilities held for sale in our Consolidated Condensed Balance Sheets, and their operating results are presented as part of our discontinued operations through the dates of their sales. We sold the Halifax hotel in November 2005, Flamingo Laughlin in May 2006, and Reno Hilton in June 2006. No gains or losses were recorded on these sales.

On April 26, 2005, we sold the assets and certain related liabilities of Harrah’s East Chicago and Harrah’s Tunica to an unrelated third party. Until their sale, Harrah’s East Chicago and Harrah’s Tunica were classified in Assets/Liabilities held for sale in our Consolidated Condensed Balance Sheets, and their results, including the related gain of the sale, were presented as discontinued operations. We reported a pre-tax gain of approximately $119.6 million on the sale of these two properties in the second quarter of 2005.

Summary operating results for the discontinued operations for 2006 reflect the operating results of Harrah’s Lake Charles and of Grand Casino Gulfport, Reno Hilton and Flamingo Laughlin through the dates of their sales in March 2006, June 2006 and May 2006, respectively. Discontinued operations for 2005 include results of Harrah’s East Chicago and Harrah’s Tunica through the date of their sale in April 2005 (including the gain on the sale), Harrah’s Lake Charles and Grand Casino Gulfport, Reno Hilton, Flamingo Laughlin and the Halifax hotel since their acquisition on June 13, 2005.

	Second Quarter Ended							Six Months Ended
(In millions)	June 30, 2006				June 30, 2005			June 30, 2006			June 30, 2005
Net revenues		$	44.3			$	79.4		$	106.2		$	213.3
Pretax income from discontinued operations		$	(0.1	)		$	126.6		$	7.3		$	150.4
Discontinued operations, net of tax		$	(0.1	)		$	24.5		$	4.8		$	39.8

Assets held for sale and liabilities related to assets held for sale of Harrah’s Lake Charles at June 30, 2006, and Reno Hilton, Flamingo Laughlin, Grand Casino Gulfport and Harrah’s Lake Charles at December 31, 2005, are as follows:

(In millions)	June 30, 2006			December 31, 2005
Cash and cash equivalents		$	—		$	20.9
Receivables, net		—			2.3
Inventories		—			2.3
Prepayments and other		—			1.6
Property and equipment, net		59.7			405.7
Deferred costs and other		—			1.4
Total assets held for sale		$	59.7		$	434.2
Accounts payable		$	—		$	1.2
Accrued expenses		0.6			10.3
Deferred credits and other		2.4			0.1
Total liabilities related to assets held for sale		$	3.0		$	11.6

HARRAH’S ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2006
(UNAUDITED)

Note 11—Hurricane Damaged Properties

Hurricanes Katrina and Rita hit the Gulf Coast in third quarter 2005 and caused significant damage to our assets in Biloxi and Gulfport, Mississippi, and New Orleans and Lake Charles, Louisiana. The current status of the impacted operations is as follows:

· We expect to re-open Grand Casino Biloxi in August 2006 in a smaller facility and to unveil plans later for a destination resort in Biloxi.

· We sold the Gulfport assets in their “as is” condition during first quarter 2006. No gain or loss was recognized as a result of this disposition. We will retain all insurance proceeds related to the Gulfport property.

· Our New Orleans property re-opened on February 17, 2006.

· We have signed a definitive agreement to sell the two subsidiaries that own our Lake Charles operations to another casino company. We will retain all insurance proceeds related to the Lake Charles operations.

Insurance covers the repair or replacement of our assets that suffered loss or damage in the hurricanes. We are working closely with our insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to us as a result of the damages and losses. Based on current estimates, insurance proceeds are expected to equal or exceed the net book value of the impacted assets; therefore, we do not expect to record a loss after insurance recoveries. Our insurance policies also provide coverage for interruption to our business, including lost profits, and reimbursement for other expenses and costs we have incurred relating to the damages and losses suffered. Due to our expectation that the costs incurred in the aftermath of the storm will be less than the anticipated business interruption insurance proceeds, post-storm costs are being offset by the expected recovery, and there is no current income statement impact. To the extent that business interruption proceeds ultimately exceed the costs incurred, the excess is expected to be recorded as income in the line item, “Write-downs, reserves and recoveries.”

We have written off property and inventories that were destroyed by the hurricanes and recorded receivables in anticipation of insurance proceeds that will reimburse us for those losses and for expenses that we expect to recover under our insurance programs. As of June 30, 2006, we had received approximately $277.2 million in advances from our insurance carriers related to the hurricane damaged properties and had net receivables of $205.5 million for which we believe collection is probable. The receivable balance is segregated between current and long-term in our Consolidated Condensed Balance Sheet in relation to the nature and classification of the item to be recovered. Our insurance claims and recovery amounts are based on replacement costs and business interruption, including lost profits, and are unrelated to, and likely to be substantially larger than, the receivable recorded.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial position and operating results of Harrah’s Entertainment, Inc. (referred to in this discussion, together with its consolidated subsidiaries where appropriate, as ‘‘Harrah’s Entertainment,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ and ‘‘us’’) for the second quarter and the first six months of 2006 and 2005, updates, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our 2005 Annual Report on Form 10-K, as amended by our Form 10-K/A filed on August 8, 2006, and our Current Report on Form 8-K, filed on August 8, 2006, to present Harrah’s Lake Charles as discontinued operations in our consolidated financial statements and notes thereto for the year ended December 31, 2005.

OVERVIEW

Results for the second quarter and the first six months of 2006 set records for the Company with revenues 66.8% and 79.0% higher, respectively, than in the second quarter and first six months of 2005 and income from operations 93.1% and 96.3% higher, respectively, than in the same periods last year. Increases were driven by our acquisition of Caesars Entertainment, Inc. (“Caesars”) on June 13, 2005, and higher results at most of our properties. Net income, which was 21.6% higher in second quarter and 48.4% higher in the first six months of 2006 than in the same periods last year, was impacted by losses on early retirements of debt of $61.1 million and higher interest expense. Diluted earnings per share were lower than in the corresponding periods last year due to the additional shares issued in connection with the Caesars acquisition.

Significant events that occurred during the first six months of 2006 are listed below. These items are discussed in greater detail elsewhere in our discussion of operating results.

· In June, we retired $363.7 million, face value, of our 7.5% Senior Notes due in 2009 and $428.0 million, face value, of our 8.0% Senior Notes due in 2011

· In June, we issued $750 million of 6.5% Senior Notes due 2016

· In June, the sale of Reno Hilton, which was acquired from Caesars, was consummated

· In May, the sale of Flamingo Laughlin, which was acquired from Caesars, was consummated

· In May, we signed a definitive agreement to acquire the remaining assets of Casino Magic Biloxi in their “as is” condition

· In May, we signed a definitive agreement to sell two of our subsidiaries that own businesses in Lake Charles, Louisiana

· In April, the terms of our credit facility were amended to lower the interest rate and extend the maturity

· In March, we sold the remaining assets of Grand Casino Gulfport in their “as is” condition

· Horseshoe Council Bluffs opened March 15, 2006, and is the first property to be re-branded under the Horseshoe brand

· Harrah’s New Orleans re-opened on February 17, 2006, after being closed for almost six months due to Hurricane Katrina

· We began expensing stock options and stock appreciation rights in 2006

· We announced plans to re-open Grand Casino Biloxi in August of 2006

OPERATING RESULTS AND DEVELOPMENT PLANS

Overall

	Second Quarter						Percentage Increase/			First Six Months						Percentage Increase/
(In millions, except earnings per share)	2006			2005			(Decrease)			2006			2005			(Decrease)
Casino revenues	$	1,916.2		$	1,256.4			52.5	%	$	3,814.3		$	2,352.7			62.1	%
Total revenues	2,373.9			1,423.4				66.8	%	4,730.8			2,642.6				79.0	%
Income from operations	431.7			223.6				93.1	%	884.8			450.8				96.3	%
Income from continuing operations	128.7			81.3				58.3	%	306.2			169.8				80.3	%
Net income	128.6			105.8				21.6	%	311.0			209.6				48.4	%
Earnings per share—diluted
From continuing operations	0.69			0.65				6.2	%	1.64			1.41				16.3	%
Net income	0.69			0.84				(17.9	)%	1.66			1.74				(4.6	)%
Operating margin	18.2		%	15.7		%		2.5	pts	18.7		%	17.1		%		1.6	pts

The executive officers of our Company review operating results, assess performance and make decisions related to the allocation of resources on a property-by-property basis. We, therefore, believe that each property is an operating segment and that it is appropriate to aggregate and present the operations of our Company as one reportable segment. In order to provide more detail than would be possible on a consolidated basis, our properties have been grouped as follows to facilitate discussion of our operating results:

Las Vegas	Atlantic City	Louisiana/Mississippi	Iowa/Missouri
Caesars Palace	Harrah’s Atlantic City	Harrah’s New Orleans	Harrah’s St. Louis
Bally’s Las Vegas	Showboat Atlantic City	Harrah’s Louisiana Downs	Harrah’s North Kansas City
Flamingo Las Vegas	Bally’s Atlantic City	Horseshoe Bossier City	Harrah’s Council Bluffs
Harrah’s Las Vegas	Caesars Atlantic City	Grand Biloxi	Horseshoe Council Bluffs/
Paris Las Vegas		Grand Tunica	Bluffs Run
Rio		Horseshoe Tunica
Imperial Palace		Sheraton Tunica

Illinois/Indiana	Other Nevada	Managed/International/Other
Caesars Indiana	Harrah’s Reno	Harrah’s Ak-Chin
Harrah’s Joliet	Harrah’s Lake Tahoe	Harrah’s Cherokee
Harrah’s Metropolis	Harveys Lake Tahoe	Harrah’s Prairie Band
Horseshoe Hammond	Bill’s Lake Tahoe	Harrah’s Rincon
	Harrah’s Laughlin