SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Boyd Gaming Corporation (and together with its subsidiaries, the “Company,” "Boyd Gaming," “we” or “us”) was incorporated in the state of Nevada in 1988 and has been operating since 1973. The Company's common stock is traded on the New York Stock Exchange under the symbol “BYD”.

We are a diversified operator of 16 wholly-owned gaming entertainment properties and one controlling interest in a limited liability company. Headquartered in Las Vegas, we have gaming operations in Nevada, Illinois, Louisiana, Mississippi, Indiana and New Jersey, which we aggregate in order to present the following four reportable segments:



Las Vegas Locals
Gold Coast Hotel and Casino	Las Vegas, Nevada
The Orleans Hotel and Casino	Las Vegas, Nevada
Sam's Town Hotel and Gambling Hall	Las Vegas, Nevada
Suncoast Hotel and Casino	Las Vegas, Nevada
Eldorado Casino	Henderson, Nevada
Jokers Wild Casino	Henderson, Nevada

Downtown Las Vegas
California Hotel and Casino	Las Vegas, Nevada
Fremont Hotel and Casino	Las Vegas, Nevada
Main Street Station Casino, Brewery and Hotel	Las Vegas, Nevada

Midwest and South
Sam's Town Hotel and Gambling Hall	Tunica, Mississippi
IP Casino Resort Spa	Biloxi, Mississippi
Par-A-Dice Hotel Casino	East Peoria, Illinois
Blue Chip Casino, Hotel & Spa	Michigan City, Indiana
Treasure Chest Casino	Kenner, Louisiana
Delta Downs Racetrack Casino & Hotel	Vinton, Louisiana
Sam's Town Hotel and Casino	Shreveport, Louisiana

Atlantic City
Borgata Hotel Casino & Spa	Atlantic City, New Jersey

Hawaiian Operations

In addition to these properties, we own and operate a travel agency in Hawaii, that operates our Hawaiian charter and a captive insurance company, also in Hawaii, that underwrites travel-related insurance. Results for our travel agency and our captive insurance company are included in our Downtown Las Vegas segment, as our Downtown Las Vegas properties concentrate significant marketing efforts on gaming customers from Hawaii.

Dania Jai-Alai

We also own and operate Dania Jai-Alai, which is a pari-mutuel jai-alai facility with approximately 47 acres of related land located in Dania Beach, Florida. Effective April 1, 2008, we reclassified the reporting of our Midwest and South segment to exclude the results of Dania Jai-Alai, our pari-mutuel jai-alai facility, since it does not share similar economic characteristics with our other Midwest and South operations; therefore, the results of Dania Jai-Alai are included as part of the “Other” category in our segment information.

Echelon Development

Additionally, we own 87 acres of land on the Las Vegas Strip, where our multibillion dollar Echelon development project (“Echelon”) is located. On August 1, 2008, due to the difficult environment in the capital markets, as well as weak economic conditions, we announced the delay of Echelon. As we do not believe that a significant level of economic recovery has occurred along the Las Vegas Strip, or that financing for a development project like Echelon is currently available on terms satisfactory to us, we do not expect to resume construction of Echelon for another three to five years.

Pending Acquisition of Peninsula Gaming, LLC

On May 16, 2012, Boyd Gaming Corporation (“Boyd”) announced it has entered into an agreement to acquire Peninsula Gaming,LLC ("Peninsula Gaming" or “PGL”), a direct wholly-owned subsidiary of Peninsula Gaming Partners, LLC (“PGP”). PGL owns and operates Diamond Jo casino in Dubuque, Iowa, Evangeline Downs Racetrack and Casino, in St. Landry Parish, Louisiana, various off track betting facilities in Louisiana, Diamond Jo casino in Worth County, Iowa, Amelia Belle casino in Amelia, Louisiana, and the Kansas Star Casino, Hotel and Event Center (“Kansas Star”) near Wichita, Kansas. Boyd will acquire PGL pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), entered into on May 16, 2012, by and among, Boyd, Boyd Acquisition II, LLC, an indirect wholly-owned subsidiary of Boyd (“Holdco”), Boyd Acquisition Sub, LLC, an indirect wholly-owned subsidiary of Boyd (“Merger Sub”), PGP and PGL. The Merger Agreement provides that, pursuant to the terms and subject to the conditions set forth therein, Merger Sub will merge (the “Merger”) with and into PGL, and PGL will be the surviving entity in the Merger. Following the Merger, PGL will be an indirect, wholly-owned subsidiary of Boyd.

Upon the terms and subject to the conditions of the Merger Agreement, which was unanimously approved by the board of directors of Boyd and the board of managers of PGP, Boyd Gaming will acquire PGL for approximately $1.45 billion, net of certain expenses and adjustments, in the form of cash, debt financing and a promissory note issued by HoldCo, as described below. Of the $1.45 billion, $200.0 million was funded in cash from Boyd Gaming to Boyd Acquisition I, LLC, an indirect wholly-owned subsidiary of Boyd Gaming and the parent of HoldCo. At the closing of the Merger, HoldCo will issue the HoldCo Note in the approximate amount of $144.0 million to PGP, which amount is subject to adjustment pursuant to the Merger Agreement based on PGL's outstanding debt, cash, working capital, certain assets, liabilities and costs, and transaction expenses at the closing of the Merger. The HoldCo Note is also subject to adjustment after the closing of the Merger in connection with any indemnification claims or, at HoldCo's option, with respect to any Earnout Payment as described below, in each case, in accordance with the terms of the Merger Agreement. Boyd Gaming intends to finance the remaining approximately $1.1 billion with the proceeds of:

•

an anticipated new credit facility at PGL, which will consist of an $825.0 million term loan, which will be funded in full on the closing date of the Merger, and a $50.0 million revolver facility. Based on current estimates, we anticipate that upon the consummation of the Merger, there will be no loans outstanding under the revolver, and that approximately $8.9 million of letters of credit will be outstanding, with approximately $41.1 million available to be drawn under the revolver; and


•	$350.0 million aggregate principal amount of senior notes to be issued by Merger Sub (and a finance subsidiary, "Finance Sub") and assumed by Peninsula Gaming in connection with the Merger.

The new credit facility and senior notes are discussed in greater detail below.

In addition, HoldCo is obligated to make an Earnout Payment in 2016 if Kansas Star's EBITDA for 2015 exceeds $105.0 million. The Earnout Payment would be in an amount equal to 7.5 times any Kansas Star 2015 EBITDA over $105.0 million. If HoldCo is obligated to make the Earnout Payment, it may make such payment in cash, or increase the principal amount of the HoldCo Note by the amount of the Earnout Payment, as determined by HoldCo in its sole discretion. Under the Merger Agreement, the definition of “EBITDA” is specific for purposes of determining the Earnout Payment, and differs from the definition of EBITDA that we use in the presentation of our financial statements.

Subject to the satisfaction of various closing conditions and receipt of required regulatory approvals, we expect the transaction to close in the second half of the fourth quarter.

The following discussion summarizes the progress of the financing activities required to consummate the Merger.

New Credit Facility

In connection with the acquisition of Peninsula Gaming, we expect that Merger Sub will enter into a New Credit Facility (the “New Credit Facility”). Below is a summary of the expected terms of the New Credit Facility among Merger Sub (the “Initial Borrower”), various lenders, and Bank of America, N.A., as administrative agent, collateral agent, swing line lender, and L/C issuer. Upon consummation of the acquisition of Peninsula Gaming, Peninsula Gaming will assume all assets and liabilities of the Initial Borrower and become the borrower under the New Credit Facility.

Amount and Maturity

Prior to the consummation of the acquisition, we intend that Merger Sub will enter into a new $875.0 million senior secured credit facility, which will consist of (a) an $825.0 million Term Loan (the “Term Loan”), and (b) a $50 million Revolver (the “Revolver”). The Term Loan will be funded concurrently with the closing of the acquisition. Based on current estimates, we anticipate that upon the consummation of the acquisition, there will be no loans outstanding under the revolver, and that approximately $8.9 million of letters of credit will be outstanding, with approximately $41.1 million available to be drawn under the Revolver. We expect that the New Credit Facility will have a maturity date of five years after the initial funding thereunder.

Guarantees and Collateral

We anticipate that following the consummation of the acquisition, Peninsula Gaming's obligations under the New Credit Facility, subject to certain exceptions, will be guaranteed by its subsidiaries and will be secured by the capital stock of its subsidiaries. In addition, subject to certain exceptions, we expect that Peninsula Gaming and each of the guarantors will grant the collateral agent first priority liens and security interests on substantially all of its real and personal property (other than gaming licenses and subject to certain other exceptions) as additional security for the performance of the obligations under the New Credit Facility. The obligations under the Revolver will rank senior in right of payment to the obligations under the Term Loan.

Interest

We anticipate that the interest rate that will be charged on the outstanding balance from time to time under the New Credit Facility will be based upon, at the borrower's option, either: (i) the Eurodollar rate plus an applicable margin, or (ii) the base rate plus an applicable margin. We anticipate that the “base rate” under the New Credit Facility will be the highest of (x) Bank of America's publicly-announced prime rate, (y) the federal funds rate plus 0.50%, or (z) the Eurodollar Rate plus 1.00%. We anticipate that the applicable margin on the outstanding balance on the Revolver will be 3.00% with respect to base rate loans and 4.00% with respect to Eurodollar rate loans. We anticipate that the applicable margin on the outstanding balance of Term Loans will be 3.50% with respect to base rate loans and 4.50% with respect to Eurodollar rate loans, with a minimum Eurodollar rate for any interest period of 1.25%. We anticipate that the New Credit Facility will require us to pay commitment fees equal to 0.50% of the unused portion of the revolving facility.

Optional and Mandatory Prepayments

We expect that the New Credit Facility will require the borrower to prepay the loans with proceeds of any significant asset sale or event of loss. In addition, we expect that that the New Credit Facility will require the borrower to use a portion of its excess cash flow to prepay the loans as well as fixed quarterly amortization. We expect that the borrower will be able to terminate the Revolver without premium or penalty, upon payment of the outstanding amounts owed with respect thereto.

Certain Covenants

We anticipate that the New Credit Facility will contain customary affirmative and negative covenants (subject to customary exceptions) for financings of its type. We expect that the borrower will be required to maintain (i) a maximum consolidated leverage ratio over each twelve month period ending on the last day of each fiscal quarter, (ii) a minimum consolidated interest coverage ratio as of the end of each calendar quarter, and (iii) a maximum amount of capital expenditures for each fiscal year. We expect that other covenants will, among other things, limit the borrower's ability to do the following (in each case, subject to certain exceptions):


•	incur additional debt;


•	pay dividends and make other distributions;


•	make certain investments;


•	make certain restricted payments;


•	create liens;


•	enter into transactions with affiliates;


•	make certain dispositions;


•	merge or consolidate; and


•	engage in unrelated business activities.

In addition, we anticipate that the New Credit Facility will require that the borrower take certain actions, including maintaining adequate insurance, and will require that the borrower cause its subsidiaries to take certain actions.

Events of Default

We anticipate that the New Credit Facility will contain customary events of default, including but not limited to:


•	non-payment of principal, interest or fees;


•	violations of certain covenants;


•	certain bankruptcy-related events;


•	unsatisfied judgments against us in excess of a specified threshold;


•	inaccuracy of representations and warranties in any material respect; and


•	cross defaults with certain other indebtedness.

We anticipate that the closing of the New Credit Facility will be conditioned upon the satisfaction of conditions precedent typical for a senior secured credit facility. Additionally, we anticipate that the initial funding under the New Credit Facility will be conditioned upon the consummation of the acquisition of Peninsula Gaming.

Senior Notes

On August 2, 2012, through our Merger Sub and Finance Sub, we priced the offering of the senior notes. The aggregate principal amount of notes to be issued in the offering is $350 million. The notes will bear interest at a rate of 8.375% per annum, payable semi-annually on February 15 and August 15 of each year, commencing February 15, 2013. The senior notes will mature on February 15, 2018. The closing of the offering is expected to occur on August 16, 2012, subject to the satisfaction of customary closing conditions. Pending the consummation of the Acquisition, an amount equal to 100% of the issue price of the notes plus an amount that equals the amount of interest that will accrue on the notes from the issue date to, but not including, February 1, 2013 (the “Outside Date”) will be deposited into an escrow account. If the acquisition is not consummated by the Outside Date, or upon the occurrence of certain other events, the notes will be subject to a special mandatory redemption. The special mandatory redemption price will be a price equal to 100% of the initial issue price of the notes, plus accrued and unpaid interest from the issue date of the notes up to, but not including, the payment date of such mandatory redemption. From and after the release of the escrow funds from the escrow account, the notes will be unsecured.

The notes will be fully and unconditionally guaranteed, on a joint and several basis, by the current and future domestic restricted subsidiaries of the issuer, and upon consummation of the Acquisition, the current domestic subsidiaries of Peninsula. The indenture governing the notes will contain certain restrictive covenants regarding, among other things, incurrence of debt and liens, investments, sales of assets, mergers and consolidations and dividends and distributions by the issuer and its restricted subsidiaries.

The senior notes have not been, and will not be, registered under the Securities Act of 1933, as amended, (the “Securities Act”) and will be offered only to: (i) qualified institutional buyers as defined in Rule 144A under the Securities Act; and (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act.

Basis of Presentation

Interim Condensed Consolidated Financial Statements

As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, ("GAAP") have been condensed or omitted, although we believe that the disclosures made are adequate to make the information reliable. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments of normal recurring nature necessary to fairly present our financial position as of June 30, 2012, the results of our operations for the three and six months ended June 30, 2012 and 2011, and our cash flows for the six months ended June 30, 2012 and 2011. The condensed consolidated balance sheet as of June 30, 2012 is unaudited; however the condensed consolidated balance sheet presented as of December 31, 2011 has been derived from our audited financial statements as of such date. Our operating results for the three and six months ended June 30, 2012 and 2011, and our cash flows for the six months ended June 30, 2012 and 2011, are unaudited, and are not necessarily indicative of the results that would be achieved for the full year or future periods.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Boyd Gaming Corporation and its subsidiaries.

Acquisition of IP

On October 4, 2011, we consummated the acquisition of IP Casino Resort Spa ("IP") in Biloxi, Mississippi pursuant to an Agreement for Purchase and Sale, under which the seller agreed to sell and transfer, and the Company agreed to purchase and assume, certain assets and liabilities, respectively, related to the IP, on an as-is basis. The net purchase price, after adjustment for working capital and other items, was approximately $280.6 million. Our condensed consolidated financial statements include the financial position of IP as of June 30, 2012 and December 31, 2011, the results of its operations for the three and six months ended June 30, 2012 and its cash flows for the six months ended June 30, 2012. At June 30, 2012 and December 31, 2011, approximately$303.9 million and $309.5 million, respectively, of our consolidated total assets are related to IP.

Consolidation of Borgata

Our condensed consolidated financial statements include the financial position of Borgata as of June 30, 2012 and December 31, 2011; its results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011. At June 30, 2012 and December 31, 2011, approximately $1.43 billion and $1.44 billion, respectively, of our consolidated total assets are related to Borgata.

Consolidation of LVE

Additionally, our condensed consolidated financial statements include the financial position of LVE as of June 30, 2012 and December 31, 2011, its results of operations for the three and six months ended June 30, 2012 and 2011 and its cash flows for the six months ended June 30, 2012 and 2011. At June 30, 2012, and December 31, 2011, approximately $189.5 million and $189.9 million, respectively, of our consolidated total assets related to LVE, however, certain of these assets, approximating $163.8 million at both respective dates are pledged as security on LVE's outstanding construction loan advances, and an additional $21.4 million at both respective dates of such assets are held in restricted escrow funds in accordance with the underlying terms of LVE's tax-exempt bond financing.

We presently believe that substantially all activities of our variable interest in an energy and sales agreement ("ESA") with Las Vegas Energy Partners, LLC ("LVE") are presently performed for our benefit. Pursuant to the terms of the ESA, we are obligated to purchase substantially all of its thermal output at a fixed and variable pricing arrangement that protects LVE from commodity risk. This agreement is long-term in duration, terming for 25 years from the commencement of the commercial operations of Echelon. Additionally, during the period of suspension, we are obligated to pay fees to LVE to subsidize the holding costs of the facility. We have a fixed price purchase option to purchase the assets of LVE, subject to certain possible adjustments, but have no future obligation to absorb any operating losses or otherwise provide financial support, except as contractually provided as described above. We do not hold any equity interest in LVE and have not guaranteed any of its outstanding debt obligations, nor would such debt have recourse to any of our lenders, note holders or general creditors. However, accounting guidance requires us to consolidate LVE for financial statement purposes.

All material intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated affiliates, which are less than 50% owned and do not meet the consolidation criteria of the authoritative accounting guidance for voting interest, controlling interest or variable interest entities, are accounted for under the equity method.

Property and Equipment, Net

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, over the shorter of the asset's useful life or term of the lease.

The estimated useful lives of our major components of property and equipment are:



Building and improvements	10 through 40 years
Riverboats and barges	10 through 40 years
Furniture and equipment	3 through 10 years

Gains or losses on disposals of assets are recognized as incurred, using the specific identification method. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred.

We test certain of these property and equipment assets for recoverability if a recent operating or cash flow loss, combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses, is associated with the use of a long-lived asset. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

Assets Held for Development

The costs incurred relative to projects under development are carried at cost. Development costs clearly associated with the acquisition, development, and construction of a project are capitalized as a cost of that project, during the periods in which activities necessary to get the property ready for its intended use are in progress. Certain pre-acquisition costs, not qualifying for capitalization, are charged to preopening or other operating expense as incurred.

We evaluate our investment in assets held for development in accordance with the authoritative accounting guidance on impairment or disposal of long lived assets. For a long-lived asset to be held and used, such as these assets under development, we review the asset for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We then compare the estimated undiscounted future cash flows of the asset to the carrying value of the asset. The asset is not impaired if the undiscounted future cash flows exceed its carrying value. If the carrying value exceeds the undiscounted future cash flows, then an impairment charge is recorded, typically measured using an undiscounted cash flow model, which is based on the estimated future results of the relevant reporting unit discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. For these assets under development, future cash flows include remaining construction costs.

Capitalized Interest

Interest costs associated with major construction projects are capitalized as part of the cost of the constructed assets. When no debt is incurred specifically for a project, interest is capitalized on amounts expended for the project using our weighted-average cost of borrowing. Capitalization of interest ceases when the project (or discernible portions of the project) is substantially complete. If substantially all of the construction activities of a project are suspended, capitalization of interest will cease until such activities are resumed. Interest capitalized during the three and six months ended June 30, 2012 was $0.3 million and $0.7 million, respectively.

Debt Financing Costs

Debt financing costs, which include legal, and other direct costs related to the issuance of our outstanding debt, are deferred and amortized to interest expense over the contractual term of the underlying long-term debt using the effective interest method. In the event that our debt is modified, repurchased or otherwise reduced prior to its original maturity date, we ratably reduce the unamortized debt financing costs.

Restricted Investments

In accordance with the terms of the tax-exempt loan agreements, which are the obligations of LVE, unused proceeds are required to be held in escrow pending approval of construction expenditures. These investments are held in an interest-bearing account.

Intangible Assets

Intangible assets include customer relationships, favorable lease rates, development agreements, gaming license rights and trademarks.

Amortizing Intangible Assets

Customer relationships represent the value of repeat business associated with our customer loyalty programs. These intangible assets are being amortized on an accelerated method over their approximate useful life. Favorable lease rates represent the amount by which acquired lease rental rates are favorable to market terms. These favorable lease values are amortized over the remaining lease term, primarily on leasehold land interests, originally ranging in duration from 41 to 52 years. Development agreements are contracts between two parties establishing an agreement for development of a product or service. These agreements are amortized over the respective cash flow period of the related agreement.

Indefinite-Lived Intangible Assets

Trademarks are based on the value of our brand, which reflects the level of service and quality we provide and from which we generate repeat business. Gaming license rights represent the value of the license to conduct gaming in certain jurisdictions, which is subject to highly extensive regulatory oversight, and a limitation on the number of licenses available for issuance with these certain jurisdictions. These assets, considered indefinite-lived intangible assets, are not subject to amortization, but instead are subject to an annual impairment test, performed in the second quarter of each year, and between annual test dates in certain circumstances. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, an impairment loss is recognized equal to the difference. License rights are tested for impairment using a discounted cash flow approach, and trademarks are tested for impairment using the relief-from-royalty method.

Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets in a business combination that are not individually identified and separately recognized. Goodwill is not subject to amortization, but it is subject to an annual impairment test in the second quarter of each year and between annual test dates in certain circumstances.

Goodwill for relevant reporting units is tested for impairment using a weighted discounted cash flow analysis and an earnings multiple valuation technique based on the estimated future results of our reporting units discounted using our weighted-average cost of capital and market indicators of terminal year capitalization rates. The implied fair value of a reporting unit's goodwill is compared to the carrying value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to its assets and liabilities and the amount remaining, if any, is the implied fair value of goodwill. If the implied fair value of the goodwill is less than its carrying value then it must be written down to its implied fair value.

In January 2012, the Company adopted accounting guidance simplifying how entities test goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the second step of the goodwill impairment test. If it is determined the fair value of a reporting unit is less than its carrying amount, then the entity must perform the test to measure the amount of the impairment loss, if any. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

Long-Term Debt, Net

Long-term debt is reported at amortized cost. Any discount and underwriting or other transaction costs paid to the initial purchasers or lenders upon issuance of our debt instruments are recorded as an adjustment to the face amount of our outstanding debt. This resulting difference between the net proceeds upon issuance and the face amount of the underlying debt is accreted to interest expense using the effective interest method over the term of the underlying debt.

Noncontrolling Interest

At June 30, 2012 and December 31, 2011, noncontrolling interests are comprised of: (i) the 50% interest in Borgata, held in trust for the economic benefit of another 50% interest holder; and (ii) all 100% of the members' equity interest in LVE, the variable interest entity, which is consolidated in our condensed financial statements, but in which we hold no equity interest. Noncontrolling interests includes the portion of the ownership in Borgata not directly attributable to Boyd Gaming Corporation, as well as the ownership of LVE, none of which is attributable to Boyd Gaming Corporation, which are reported as a separate component of our stockholders' equity in our condensed consolidated balance sheet. Our consolidated net income is reported at amounts that include the amounts attributable to both us and the noncontrolling interest.

Revenue Recognition

Gaming revenue represents the net win from gaming activities, which is the aggregate difference between gaming wins and losses. The majority of our gaming revenue is counted in the form of cash and chips and therefore is not subject to any significant or complex estimation procedures. Cash discounts, commissions and other cash incentives to customers related to gaming play are recorded as a reduction of gross gaming revenues.

Race revenue recognition criteria are met at the time the results of the event are official.

Room revenue recognition criteria are met at the time of occupancy.

Food and beverage revenue recognition criteria are met at the time of service.

Promotional Allowances

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 a promotional allowance. Promotional allowances also include incentives such as cash, goods and services (such as complimentary rooms and food and beverages) earned in our slot bonus point program. We reward customers, through the use of bonus programs, with points based on amounts wagered that can be redeemed for a specified period of time, principally for cash play, and to a lesser extent for goods or services, depending upon the property. We record the estimated retail value of these goods and services as revenue and then deduct them as a promotional allowance.

The amounts included in promotional allowances for the three and six months ended June 30, 2012 and 2011 are as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(In thousands)
Rooms	$	35,991	$	30,718	$	70,673	$	60,822
Food and beverage	46,821		41,070		95,119		83,564
Other	27,741		28,686		55,387		54,776
Total promotional allowances	$	110,553	$	100,474	$	221,179	$	199,162

The estimated costs of providing such promotional allowances for the three and six months ended June 30, 2012 and 2011 are as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(In thousands)
Rooms	$	15,352	$	13,044	$	29,099	$	26,117
Food and beverage	45,279		37,752		85,507		76,237
Other	6,462		4,189		11,886		7,986
Total cost of promotional allowances	$	67,093	$	54,985	$	126,492	$	110,340

Gaming Taxes

We are subject to taxes based on gross gaming revenues in the jurisdictions in which we operate. These gaming taxes are assessed based on our gaming revenues and are recorded as a gaming expense in the condensed consolidated statements of operations. These taxes totaled approximately $67.8 million and $63.5 million for the three months ended June 30, 2012 and 2011, respectively, and $139.1 million and $127.3 million for the six months ended June 30, 2012 and 2011, respectively.

Income Taxes

Income taxes are recorded under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. We reduce the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with the usability of operating loss and tax credit carryforwards before expiration, and tax planning alternatives.

For the six months ended June 30, 2012, in accordance with GAAP, we have computed our provision for income taxes by applying the actual effective tax rate to year-to-date income. The effective income tax rate for the current fiscal year will likely be different from the tax rate in effect for the three and six months ended June 30, 2012, largely due to the volatility in our quarterly operating results, variations in permanent differences and the geographic mix of our income (loss) for the year. As such, we believe this method provides the most reliable estimate of year-to-date income tax expense.

Other Long Term Tax Liabilities

The Company's income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes, which prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

Uncertain tax position accounting standards apply to all tax positions related to income taxes. These accounting standards utilize a two-step approach for evaluating tax positions. Recognition occurs when the Company concludes that a tax position, based on its technical merits, is more likely than not to be sustained upon examination. Measurement is only addressed if the position is deemed to be more likely than not to be sustained. The tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon settlement. Use of the term “more likely than not” indicates the likelihood of occurrence is greater than 50%.

Tax positions, failing to qualify for initial recognition, are recognized in the first subsequent interim period that they meet the “more likely than not” standard. If it is subsequently determined that a previously recognized tax position no longer meets the “more likely than not” standard, it is required that the tax position is derecognized. Accounting standards for uncertain tax positions specifically prohibit the use of a valuation allowance as a substitute for derecognition of tax positions. As applicable, the Company will recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes.

Unrecognized tax benefits at June 30, 2012 and December 31, 2011 are $21.9 million and $42.3 million, respectively. Included in the $21.9 million balance of unrecognized tax benefits at June 30, 2012, are $6.8 million of federally tax effected benefits that, if recognized, would impact the effective tax rate. We recognize accrued interest related to unrecognized tax benefits in our income tax provision. We have accrued $8.2 million and $12.6 million of interest and penalties in our consolidated balance sheets as of June 30, 2012 and December 31, 2011.

During the six months ended June 30, 2012, we reached an agreement with the Appeals Division in our Internal Revenue Service examination for tax years ended 2001 through 2004. We reduced our federal unrecognized tax benefits, primarily related to the settlement, by approximately $20.8 million on a net basis, of which $0.1 million impacted our effective tax rate. Additionally, we reduced the interest accrued on our federal unrecognized tax benefits by approximately $5.1 million and recorded a $3.4 million benefit to our tax provision.

The Internal Revenue Service is currently examining our federal income tax returns for the tax years 2005 through 2009. It is difficult to determine when this examination will be closed but we do not currently believe that we will reach resolution within the next twelve-month period. Furthermore, we do not anticipate any material changes to our June 30, 2012 balance of unrecognized tax benefits over the next twelve-month period.

Earnings per Share

Basic earnings per share is computed by dividing net income applicable to Boyd Gaming Corporation stockholders, by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the additional dilution for all potentially-dilutive securities, such as stock options.

The weighted average number of common and common share equivalent shares used in the calculations of basic and diluted earnings per share calculations for the three and six months ended June 30, 2012 and 2011, consisted of the following amounts:



	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
	(In thousands)
Weighted average shares outstanding:
Basic	87,588	87,204	87,559	87,181
Potential dilutive effect	241	—	419	—
Diluted	87,829	87,204	87,978	87,181

Anti-dilutive options totaling 9.4 million and 8.1 million have been excluded from the computation of diluted earnings per share during the three and six months ended June 30, 2012, respectively, as these shares were out of the money. Due to the net losses for the three and six months ended June 30, 2011, the effect of all potential common share equivalents was anti-dilutive, and therefore all such shares were excluded from the computation of diluted weighted average shares outstanding. Such exclusion included anti-dilutive options totaling 7.8 million that have been excluded from the computation of dilutive earnings per share during each of the three and six months ended June 30, 2011, as these shares were out of the money.

Comprehensive Income

In January 2012, the Company adopted guidance requiring the presentation of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Comprehensive income includes net income and all other non-stockholder changes in equity, or other comprehensive income. Components of the Company's comprehensive income are reported in the accompanying condensed consolidated statements of comprehensive income. The cumulative balance of other comprehensive income consists solely of fair value adjustments related to hedged derivative instruments held by the variable interest entity.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates incorporated into our condensed consolidated financial statements include the estimated allowance for doubtful accounts receivable, the estimated useful lives for depreciable and amortizable assets, recoverability of assets held for development, measurement of the fair value of our controlling interest and the noncontrolling interest in Borgata, fair valuations of acquired assets and assumed liabilities, estimated cash flows in assessing the recoverability of long-lived assets and assumptions relative to the valuation and impairment of goodwill and intangible assets, estimated valuation allowances for deferred tax assets, accruals for slot bonus point programs, estimates of certain tax liabilities and uncertain tax positions, determination of self-insured liability reserves, computation of share-based payment valuation assumptions, estimates of fair values of assets and liabilities measured at fair value, estimates of fair values of assets and liabilities disclosed at fair value, fair values of derivative instruments and assessments of contingencies and litigation and claims. Actual results could differ from these estimates.