Part I — Financial Information

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

3

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

4

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

Dover Downs, Inc. is authorized to conduct video lottery, sports wagering and table game operations as one of three “Licensed Agents” under the Delaware State Lottery Code.  Licensing, administration and control of gaming operations in Delaware is under the Delaware State Lottery Office and Delaware’s Department of Safety and Homeland Security, Division of Gaming Enforcement.

Our license from the Delaware Harness Racing Commission (the “Commission”) to hold harness race meetings on our premises and to offer pari-mutuel wagering on live and simulcast horse races must be renewed on an annual basis.  In order to maintain our gaming license, we are required to maintain our harness horse racing license.  We have received an annual license from the Commission for the past 43 consecutive years and management believes that our relationship with the Commission remains good.

Due to the nature of our business activities, we are subject to various federal, state and local regulations.  As part of our license arrangements, we are subject to various taxes and fees which are subject to change by the Delaware legislature.

Additional gaming venues have recently opened in Maryland, Pennsylvania and New Jersey. These new venues — particularly a large casino at Arundel Mills Mall in Maryland which opened in June 2012 — are having a significant adverse effect on our visitation numbers, our revenues and our profitability. Management has estimated that approximately 35% of our total gaming win comes from Maryland patrons and approximately 68% of our Capital Club® member gaming win comes from out of state patrons.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 (the “Act”), under which Delaware’s video lottery agents will be authorized to offer, through their websites, internet versions of their table games (including poker) and video lottery offerings.  All games will remain under the control and operation of the Delaware Lottery.  These internet gaming offerings capitalize on a recent United States Department of Justice ruling clarifying that wagering within a state’s boundaries does not violate the federal Wire Act.

Internet lottery games will, at least initially, be offered solely to persons within the State of Delaware.  This territorial limitation would not apply to gaming pursuant to an interstate compact.  Internet gaming participation will be limited to persons who meet the age requirements for equivalent non-internet games.

Revenues from the internet versions of table games and video lottery games will be distributed generally pursuant to the formula currently applicable to those games, with the exception that internet service provider costs will be deducted first, and the Delaware Lottery will retain the first $3.75 million of state-wide net proceeds.  The Act also eliminates and restructures certain fees currently paid by video lottery agents to incentivize agents to make capital expenditures, spend on marketing and promotions, and make debt service payments.  For the period July 1, 2011 to June 30, 2012, we paid a $1,540,000 gaming license fee which has been eliminated beginning July 1, 2012.  For the period July 1, 2012 to June 30, 2013, we paid a $2,241,000 table game license fee which will be reduced beginning July 1, 2013.  Based on current business levels, we estimate that this fee will be approximately $1,000,000 for the period July 1, 2013 to June 30, 2014.

We anticipate that we will begin offering internet gaming in early 2013 once the Delaware Lottery adopts regulations and secures contracts with internet service providers.

NOTE 3 - Summary of Significant Accounting Policies

Basis of consolidation— The consolidated financial statements include the accounts of Dover Downs Gaming & Entertainment, Inc. and its wholly owned subsidiaries.  Intercompany transactions and balances have been eliminated.

Investments— Investments, which consist of mutual funds, are classified as available-for-sale and reported at fair-value in other assets in our consolidated balance sheets.  Changes in fair value are reported in other comprehensive earnings (loss).  See NOTE 6 — Stockholders’ Equity and NOTE 7 — Financial Instruments for further discussion.

6

Derivative Instruments and Hedging Activities —We are subject to interest rate risk on the variable component of the interest rate under our revolving credit agreement.  Effective January 15, 2009, we entered into a $35,000,000 interest rate swap agreement.  We designated the interest rate swap as a cash flow hedge.  Changes in the fair value of the effective portion of the interest rate swap were recognized in other comprehensive earnings (loss) until the hedged item was recognized in earnings.  The interest rate swap expired in April 2012.  See NOTE 4 — Credit Facility and NOTE 7 — Financial Instruments for further discussion.

Property and equipment— Property and equipment is stated at cost.  Depreciation is provided for financial reporting purposes using the straight-line method.  Accumulated depreciation was $103,969,000 and $97,990,000 as of September 30, 2012 and December 31, 2011, respectively.

We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  An impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its fair value.  Generally, fair value will be determined using valuation techniques such as the present value of future cash flows.

Income taxes— Deferred income taxes are provided on all differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements based upon enacted statutory tax rates in effect at the balance sheet date.  Tax years after 2007 remain open to examination for federal and state income tax purposes.

Point loyalty program— We currently have a point loyalty program for our customers which allows them to earn points based on the volume of their gaming activity.  All reward points earned by customers are expensed in the period they are earned.  The estimated amount of points redeemable for cash is recorded as a reduction of gaming revenue and the estimated amount of points redeemable for services and merchandise is recorded as gaming expense.  In determining the amount of the liability, which was $2,073,000 and $2,050,000, respectively, at September 30, 2012 and December 31, 2011, we estimate a redemption rate, a cost of rewards to be offered and the mix of cash, goods and services for which reward points will be redeemed.  We use historical data to estimate those amounts.

Revenue and expense recognition— Gaming revenues represent (i) the net win from slot machine, table games and sports wagering and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount of hotel rooms, food and beverage and other miscellaneous goods and services provided without charge to customers as promotional items of $5,268,000 and $15,699,000, and $5,207,000 and $15,323,000 for the three and nine-month periods ended September 30, 2012 and 2011, respectively.  The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statements of earnings.

For the casino operations, which account for approximately 90% of revenues for all periods presented, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win.  The win is included in the amount recorded in our consolidated financial statements as gaming revenue.  The Delaware State Lottery Office sweeps the win from the casino operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the slot machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to us as our commission for acting as a Licensed Agent.  Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the slot machines and associated computer systems, and (iii) for harness horse racing purses.  We recognize revenues from sports wagering commissions when the event occurs.  We recognize revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

7

Net earnings per common share— Nonvested share-based payment awards that include rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities, and the two-class method of computing basic and diluted net earnings per common share (“EPS”)  is applied for all periods presented.  The following table sets forth the computation of EPS (in thousands, except per share amounts):

For the three and nine-month periods ended September 30, 2011, weighted-average options to purchase 1,000 and 12,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted EPS because they would have been anti-dilutive.  There were no options outstanding during the three or nine-month periods ended September 30, 2012.

Accounting for stock-based compensation— We recorded total stock-based compensation expense for our restricted stock awards of $192,000 and $600,000, and $227,000 and $745,000 as general and administrative expenses for the three and nine-month periods ended September 30, 2012 and 2011, respectively.  We recorded income tax benefit (expense) of $78,000 and ($20,000), and $92,000 and $71,000 for the three and nine-month periods ended September 30, 2012 and 2011, respectively, related to our restricted stock awards.

Use of estimates— The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events.  These estimates and the underlying assumptions affect the reported amounts of assets and liabilities, disclosures about contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates and assumptions are based on our best estimates and judgment.  We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances.  We adjust such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ from these estimates.  Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

8

NOTE 4 — Credit Facility

At September 30, 2012, we had an $85,000,000 credit agreement with a bank group.  The maximum borrowing limit under the facility reduces to $80,000,000 as of March 31, 2013, $75,000,000 as of March 31, 2014 and the facility expires June 17, 2014.  Interest is based upon LIBOR plus a margin that varies between 150 and 225 basis points (200 basis points at September 30, 2012) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the “leverage ratio”).  The credit facility contains certain covenants including minimum interest coverage, maximum funded debt to earnings before interest, taxes, depreciation and amortization and minimum tangible net worth.  Material adverse changes in our results of operations could impact our ability to satisfy these requirements.  In addition, the credit agreement includes a material adverse change clause.  The credit facility provides for seasonal funding needs, capital improvements and other general corporate purposes.  At September 30, 2012, we were in compliance with all terms of the facility and there was $61,500,000 outstanding at a weighted average interest rate of 2.21%.  At September 30, 2012, $23,500,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of September 30, 2012 $17,241,000 could have been borrowed as of that date.

As discussed in NOTE 2 — Business Operations, new venues — particularly a large casino at Arundel Mills Mall in Maryland which opened in June 2012 — are having a significant adverse effect on our visitation numbers, our revenues and our profitability.  In addition, we closed the casino for two days on October 29 th  and 30 th  due to Hurricane Sandy which will adversely affect our operating results for the quarter ended December 31, 2012.  We are reevaluating our projections due to the adverse effects from the new competition and Hurricane Sandy, and to the extent we have underestimated these and are not able to address our cost structure on a timely basis, there is some uncertainty about our ability to comply with the leverage ratio covenant in our revolving credit facility in the second quarter of 2013.  While we believe that, if necessary, our lenders would work with us to amend our credit agreement in order for us to be able to maintain compliance with our financial covenants for at least the next twelve months, there can be no assurance that we would be able to negotiate an acceptable amendment and there can be no assurance that a financial covenant violation will not result in the acceleration of all of our outstanding debt.  Such an acceleration would have a material adverse effect on our liquidity and financial position.

Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converted $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense.  The agreement terminated on April 17, 2012.  Pursuant to this agreement, we paid a fixed interest rate of 1.74%, plus a margin that varied between 150 and 225 basis points depending on our leverage ratio.  In return, the issuing lender refunded to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin.

NOTE 5 — Pension Plans

We maintain a non-contributory, tax qualified defined benefit pension plan that has been frozen since July 2011.  All of our full time employees were eligible to participate in this qualified pension plan.  Benefits provided by our qualified pension plan were based on years of service and employees’ remuneration over their term of employment.  We also maintain a non-qualified, non-contributory defined benefit pension plan for certain employees that has been frozen since July 2011.  This excess plan provided benefits that would otherwise be provided under the qualified pension plan but for maximum benefit and compensation limits applicable under federal tax law.  The cost associated with the excess plan is determined using the same actuarial methods and assumptions as those used for our qualified pension plan.

On June 15, 2011, we decided to freeze participation and benefit accruals under our pension plans, primarily to reduce some of the impact on earnings and volatility in cash flows that can accompany the maintenance of a defined benefit plan.  The freeze was effective July 31, 2011.  Compensation earned by employees up to July 31, 2011 is used for purposes of calculating benefits under our pension plan with no future benefit accruals after this date.  Participants as of July 31, 2011 continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work.

9

We previously disclosed our intention to create a new non-elective, non-qualified supplemental executive retirement plan (“SERP”) in connection with the freezing of our pension plan.  The SERP has now been created but it has not been funded.  Its purpose is to provide deferred compensation to certain highly compensated employees that roughly approximate the value of benefits being lost by the freezing of the pension plan which are not offset by our enhanced 401(k) savings plan.  The SERP is a discretionary defined contribution plan and contributions made to the SERP in any given year are not guaranteed and will be at the sole discretion of our Compensation and Stock Incentive Committee.

For the first nine months of 2011, we assumed a long-term rate of return on plan assets of 8.5%.  For the first nine months of 2012, we lowered the long-term rate of return on plan assets to 8.0%.

The components of net periodic pension cost are as follows:

We contributed $125,000 and $425,000, and $676,000 and $1,475,000 to our pension plans during the three and nine-month periods ended September 30, 2012 and 2011, respectively.  We do not expect to make any further contributions to our pension plans in 2012.

10

As of September 30, 2012 and December 31, 2011, accumulated other comprehensive loss consists of the following:

On October 24, 2012, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $.02 per share.  The dividend is payable on December 10, 2012 to stockholders of record at the close of business on November 9, 2012.

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time.  No purchases of our equity securities were made pursuant to this authorization during the nine months ended September 30, 2012 or 2011.  At September 30, 2012, we had remaining repurchase authority of 1,653,333 shares.

In April 2012, the Board of Directors and stockholders approved the 2012 Stock Incentive Plan to replace our 2002 Stock Incentive Plan which has expired.  An aggregate of 2,000,000 shares of Common Stock have been reserved for issuance under the 2012 Stock Incentive Plan.

During the nine months ended September 30, 2012 and 2011, we purchased and retired 49,590 and 43,427 shares of our outstanding common stock for $107,000 and $150,000, respectively.  No purchases were made during the three months ended September 30, 2012 or 2011.  These purchases were made from employees in connection with the vesting of restricted stock awards under our stock incentive plan and were not pursuant to the aforementioned repurchase authorization.  Since the vesting of a restricted stock award is a taxable event to our employees for which income tax withholding is required, the plan allows employees to surrender to us some of the shares that would otherwise have vested in satisfaction of their tax liability.  The surrender of these shares is treated by us as a purchase of the shares.

NOTE 7 — Financial Instruments

Our financial instruments are classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

11

The following table summarizes the valuation of our financial instrument pricing levels as of September 30, 2012 and December 31, 2011:

Our investments in available-for-sale securities consist of mutual funds.  These investments are included in other non-current assets on our consolidated balance sheets.

At September 30, 2012 and December 31, 2011, there was $61,500,000 and $69,000,000, respectively, outstanding under our revolving credit agreement.  The borrowings under our revolving credit agreement bear interest at the variable rate described in NOTE 4 — Credit Facility and therefore we believe approximate fair value.  We are subject to interest rate risk on the variable component of the interest rate. As described in NOTE 4 — Credit Facility, we entered into an interest rate swap agreement effectively converting a portion of the outstanding borrowings under the revolving credit agreement to a fixed-rate, thereby hedging against the impact of potential interest rate changes on future interest expense.  The interest rate swap expired in April 2012.  At December 31, 2011, the interest rate swap had a negative fair value of $147,000 which is recorded in other liabilities.  The fair value of the interest rate swap was based on quotes from the issuer of the swap and represents the estimated amounts that we would expect to pay to terminate the swap.  We recognized $0 and $83,000, and $81,000 and $194,000, net of income taxes, in unrealized gains on our interest rate swap during the three and nine-month periods ended September 30, 2012 and 2011, respectively.

The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximates their fair values because of the short maturity of these instruments.

NOTE 8 - Related Party Transactions

During the three and nine-month periods ended September 30, 2012 and 2011, we allocated costs of $491,000 and $1,424,000, and $476,000 and $1,473,000, respectively to DVD, a company related through common ownership, for certain administrative and operating services, including leased space.  DVD allocated certain administrative and operating service costs of $29,000 and $158,000, and $66,000 and $267,000, respectively, to us for the three and nine-month periods ended September 30, 2012 and 2011.  The allocations were based on an analysis of each company’s share of the costs.  In connection with DVD’s NASCAR event weekends at Dover International Speedway, we provided certain services, primarily catering, for which DVD was invoiced $396,000 and $772,000, and $0 and $416,000, respectively.  Additionally, DVD invoiced us $143,000 and $382,000, and $0 and $246,000 in the three and nine-month periods ended September 30, 2012 and 2011, respectively, for our rental of a skybox suite, tickets, display space and other services at DVD’s 2012 and 2011 NASCAR event weekends at Dover International Speedway.  As of September 30, 2012, there was no amount due to or from DVD.  As of December 31, 2011, our consolidated balance sheet included an $11,000 payable to DVD for the aforementioned items.  We settled this item in January 2012.  The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been unrelated entities and/or had otherwise independently managed these functions; however, management believes that these costs are reasonable.

Prior to our spin-off from DVD in 2002, both companies shared certain real property in Dover, Delaware.  At the time of the spin-off, some of this real property was transferred to us to ensure that the real property holdings of each company was aligned with its past uses and future business needs.  During our harness racing season, we have historically used the 5/8-mile harness racing track that is located on DVD’s property and is on the inside of its one-mile motorsports superspeedway.  In order to continue this historic use, DVD granted a perpetual easement to the harness track to us at the time of the spin-off.  This perpetual easement allows us to have exclusive use of the harness track during the period beginning November 1 of each year and ending April 30 of the following year,

12

together with set up and tear down rights for the two weeks before and after such period.  The easement requires that we maintain the harness track but does not require the payment of any rent.

Various easements and agreements relative to access, utilities and parking have also been entered into between us and DVD relative to our respective Dover, Delaware facilities.  DVD pays rent to us for the lease of its principal executive office space.  We also allow DVD to use our indoor grandstands in connection with DVD’s two annual motorsports weekends.  We do not assess rent for this nominal use and may discontinue the use at our discretion.

Henry B. Tippie, Chairman of our Board of Directors, controls in excess of fifty percent of our voting power.  Mr. Tippie’s voting control emanates from his direct and indirect holdings of common stock and Class A common stock, from his status as trustee of the RMT Trust, our largest stockholder, and from certain shares as to which he has voting rights pursuant to a voting agreement with R. Randall Rollins, one of our directors.  This means that Mr. Tippie has the ability to determine the outcome of our election of directors and to determine the outcome of many significant corporate transactions, many of which only require the approval of a majority of our voting power.

Patrick J. Bagley, Kenneth K. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W. Rollins, Jr., R. Randall Rollins, Richard K. Struthers and Henry B. Tippie are all Directors of ours and DVD.  Denis McGlynn is the President and Chief Executive Officer of both companies, Klaus M. Belohoubek is the Senior Vice President — General Counsel and Secretary of both companies and Timothy R. Horne is the Senior Vice President — Finance and Chief Financial Officer of both companies.  Mr. Tippie controls in excess of fifty percent of the voting power of DVD.

NOTE 9 — Commitments and Contingencies

We are a party to ordinary routine litigation incidental to our business.  Management does not believe that the resolution of any of these matters is likely to have a material adverse effect on our results of operations, financial position or cash flows.

Approximately 90% of our revenue is derived from gaming win.  Several factors contribute to the win for any gaming company, including, but not limited to:

We believe that we hold a strong position in each of these areas.  Our entertainment complex is located in Dover, the capital of the State of Delaware.  We draw patrons from several major metropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all within a two hour drive.  According to the 2010 United States Census, approximately 36.8 million people live within 150 miles of our complex.  There are significant barriers to entry related to the gaming business in Delaware.  By law, currently only the three existing horse racing facilities in the State are allowed to have a video lottery gaming license.  Our property is similar to properties found in the country’s largest gaming markets.  Our luxury hotel is the only casino-hotel in Delaware, providing a strong marketing tool, especially to higher-end players.  We also utilize our slot marketing system to allow for more efficient marketing programs and the highest levels of customer service.  Our facility offers the most conference space of any hotel in Delaware and was expanded in the first quarter of 2012 to add 6,500 square feet of meeting space.

Because all of our operations are located at one facility, we face the risk of increased competition from the legalization of new or additional gaming venues.  We have therefore focused on creating the region’s premier gaming destination and building and rewarding customer loyalty through innovative marketing efforts, unparalleled customer service and a variety of amenities.

Results of Operations

Gaming revenues represent (i) the net win from slot machine, table games and sports wagering and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount of hotel rooms, food and beverage and other miscellaneous goods and services provided without charge to customers as promotional items.  The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statement of earnings.

For the casino operations, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win.  The win is included in the amount recorded in our consolidated financial statements as gaming revenue.  The Delaware State Lottery Office sweeps the win from the casino operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the slot machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to us as our commission for acting as a Licensed Agent.  Gaming expenses include the amounts collected by the State (i) for the State’s share of the win, (ii) for remittance to the providers of the slot machines and associated computer systems, and (iii) for harness horse racing purses.  We recognize revenues from sports wagering commissions when the event occurs.  We recognize revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs.  Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

14

Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011

Gaming revenues decreased by $5,934,000, or 10.8%, to $49,001,000 in the third quarter of 2012 as a result of lower win from slot machine play.  Revenue from our table game operations increased slightly in the third quarter of 2012.  We believe that the decrease in slot win was primarily due to lower attendance at our facility from the opening of a large casino at Arundel Mills Mall in Maryland in June 2012 and their subsequent expansion in September 2012.

Other operating revenues were $5,913,000 in the third quarter of 2012 as compared to $5,167,000 in the third quarter of 2011.  Rooms revenue increased $230,000 in the third quarter of 2012 mainly due to an increase in convention sales and race weekend sales.  Food and beverage revenues increased to $3,446,000 in the third quarter of 2012 from $3,065,000 in the third quarter of 2011 primarily due to race weekend catering services revenues.  These increases in race weekend room sales and catering services revenues were the result of changes in the timing of the race schedule at Dover International Speedway.  Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $5,268,000 and $5,207,000 in the third quarter of 2012 and 2011, respectively.

Gaming expenses decreased by $3,710,000, or 7.7%, primarily from lower gaming taxes as a result of the lower gaming revenues.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 which among other things eliminates and restructures certain fees currently paid by video lottery agents.  For the period July 1, 2011 to June 30, 2012, we paid a $1,540,000 gaming license fee which has been eliminated beginning July 1, 2012.  For the period July 1, 2012 to June 30, 2013, we paid a $2,241,000 table game license fee which will be reduced beginning July 1, 2013.  Based on current business levels, we estimate that this fee will be approximately $1,000,000 for the period July 1, 2013 to June 30, 2014.

Other operating expenses increased to $4,111,000 in the third quarter of 2012 as compared to $3,676,000 in the third quarter of 2011 primarily due to the higher other operating revenues.

General and administrative expenses remained consistent at $1,464,000 in the third quarter of 2012 as compared to $1,461,000 in the third quarter of 2011.

Depreciation expense decreased to $2,523,000 in the third quarter of 2012 from $2,823,000 in the third quarter of 2011 primarily as a result of certain assets becoming fully depreciated.

Interest expense decreased by $241,000 due to lower outstanding borrowings and lower interest rates during the third quarter of 2012.

Our effective income tax rate was 39.7% in the third quarter of 2012 as compared to 37.8% in the third quarter of 2011.

Nine Months Ended September 30, 2012 vs. Nine Months Ended September 30, 2011

Gaming revenues decreased by $2,590,000, or 1.6%, to $159,806,000 in the first nine months of 2012 as a result of lower win from slot machine play partially offset by an increase in table game revenue.  We believe that the decrease in slot win was primarily due to lower attendance at our facility from the opening of a large casino at Arundel Mills Mall in Maryland in June 2012 and their subsequent expansion in September 2012.

Other operating revenues were $17,547,000 in the first nine months of 2012 as compared to $15,927,000 in the first nine months of 2011.  Rooms revenue increased $718,000 in the first nine months of 2012 mainly due to an increase in convention, race weekend and transient sales.  Food and beverage revenues increased $661,000 to $10,792,000 from $10,131,000 in the first nine months of 2011 due primarily to higher banquet sales, race weekend catering services revenue and higher revenues in our Garden Café restaurant.  These increases in race weekend room sales and catering services revenue were the result of changes in the timing of the race schedule at Dover International Speedway.  Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $15,699,000 and $15,323,000 in the first nine months of 2012 and 2011, respectively.

15

Gaming expenses decreased by $2,973,000 primarily from lower gaming taxes as a result of the lower gaming revenues and lower marketing and other operating expenses in the first nine months of 2012.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 which among other things eliminates and restructures certain fees currently paid by video lottery agents.  For the period July 1, 2011 to June 30, 2012, we paid a $1,540,000 gaming license fee which has been eliminated beginning July 1, 2012.  For the period July 1, 2012 to June 30, 2013, we paid a $2,241,000 table game license fee which will be reduced beginning July 1, 2013.  Based on current business levels, we estimate that this fee will be approximately $1,000,000 for the period July 1, 2013 to June 30, 2014.

Other operating expenses increased to $12,350,000 in the first nine months of 2012 from $11,725,000 in the first nine months of 2011 primarily due to the higher other operating revenues.

General and administrative expenses were $4,528,000 in the first nine months of 2012 as compared to $4,854,000 in the first nine months of 2011.  The decrease was primarily due to lower employee benefit costs during the first nine months of 2012, primarily from freezing our pension plan effective July 31, 2011 and lower stock based compensation costs.

Depreciation expense decreased to $7,769,000 in the first nine months of 2012 as compared to $8,868,000 in the first nine months of 2011 primarily as a result of certain assets becoming fully depreciated.

Interest expense decreased by $830,000 due to lower outstanding borrowings during the first nine months of 2012 and lower interest rates as a result of entering into a new credit facility on June 17, 2011.

Our effective income tax rate was 42.9% in the first nine months of 2012 as compared to 42.8% in the first nine months of 2011.

Liquidity and Capital Resources

Net cash provided by operating activities was $9,884,000 for the nine months ended September 30, 2012 compared to $9,139,000 for the nine months ended September 30, 2011.  The increase was primarily due to the timing of annual license fee payments on our table game operations, partially offset by the timing of payments to the Delaware State Lottery Office for its portion of the slot win.  We paid two annual license fees on our table game operations in the first nine months of 2011, which related to the 12 months ended June 30, 2011 and the 12 months ended June 30, 2012.  In the first nine months of 2012, we paid one table game license fee for the 12 months ending June 30, 2013.

Net cash used in investing activities was $2,158,000 for the nine months ended September 30, 2012 compared to $1,513,000 for the nine months ended September 30, 2011 and was primarily related to capital improvements.  Capital expenditures for the first nine months of 2012 related primarily to the renovation of our Festival Buffet, the construction of additional meeting space, upgrading our computer systems and equipment purchases.  Capital expenditures for the first nine months of 2011 related primarily to upgrading our computer systems, replacing our casino carpet and other facility improvements.

Net cash used in financing activities was $10,532,000 for the nine months ended September 30, 2012 compared to $10,419,000 for the nine months ended September 30, 2011.  During the first nine months of 2012, we had net repayments of $7,500,000 on our credit facility compared to $7,085,000 during the first nine months of 2011.  We paid $2,925,000 and $2,916,000 in cash dividends during the first nine months of 2012 and 2011, respectively.  We repurchased and retired $107,000 of our outstanding common stock during the first nine months of 2012 compared to $150,000 during the first nine months of 2011.

On October 24, 2012, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.02 per share.  The dividend is payable on December 10, 2012 to shareholders of record at the close of business on November 9, 2012.

16

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time.  No purchases of our equity securities were made pursuant to this authorization during the nine months ended September 30, 2012 or 2011.  At September 30, 2012, we had remaining repurchase authority of 1,653,333 shares.

Based on current business conditions, we expect to make capital expenditures of approximately $500,000 — $750,000 during the remainder of 2012.  Additionally, we contributed $425,000 to our pension plans through the first nine months of 2012.  We do not expect to make any further contributions to our pension plans in 2012.

At September 30, 2012, we had an $85,000,000 credit agreement with a bank group.  The maximum borrowing limit under the facility reduces to $80,000,000 as of March 31, 2013, $75,000,000 as of March 31, 2014 and the facility expires June 17, 2014.  Interest is based upon LIBOR plus a margin that varies between 150 and 225 basis points (200 basis points at September 30, 2012) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the “leverage ratio”).  The credit facility contains certain covenants including minimum interest coverage, maximum funded debt to earnings before interest, taxes, depreciation and amortization and minimum tangible net worth.  Material adverse changes in our results of operations could impact our ability to satisfy these requirements.  In addition, the credit agreement includes a material adverse change clause.  The credit facility provides for seasonal funding needs, capital improvements and other general corporate purposes.  At September 30, 2012, we were in compliance with all terms of the facility and there was $61,500,000 outstanding at a weighted average interest rate of 2.21%.  At September 30, 2012, $23,500,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of September 30, 2012 $17,241,000 could have been borrowed as of that date.

Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converted $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense.  The agreement terminated on April 17, 2012.  Pursuant to this agreement, we paid a fixed interest rate of 1.74%, plus a margin that varied between 150 and 225 basis points depending on our leverage ratio.  In return, the issuing lender refunded to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin.

We expect that our net cash flows from operating activities and funds available from our credit facility will be sufficient to provide for our working capital needs and capital spending requirements at least through the next twelve months, as well as any cash dividends our Board of Directors may declare.  We expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity.

Additional gaming venues have recently opened in Maryland, Pennsylvania and New Jersey. These new venues — particularly a large casino at Arundel Mills Mall in Maryland which opened in June 2012 — are having a significant adverse effect on our visitation numbers, our revenues and our profitability. Management has estimated that approximately 35% of our total gaming win comes from Maryland patrons and approximately 68% of our Capital Club® member gaming win comes from out-of-state patrons.  In addition, we closed the casino for two days on October 29 th  and 30 th  due to Hurricane Sandy which will adversely affect our operating results for the quarter ended December 31, 2012.  We are reevaluating our projections due to the adverse effects from the new competition and Hurricane Sandy, and to the extent we have underestimated these and are not able to address our cost structure on a timely basis, there is some uncertainty about our ability to comply with the leverage ratio covenant in our revolving credit facility in the second quarter of 2013.  As of September 30, 2012, we have $61,500,000 outstanding under our revolving credit facility which expires on June 17, 2014.  While we believe that, if necessary, our lenders would work with us to amend our credit agreement in order for us to be able to maintain compliance with our financial covenants for at least the next twelve months, there can be no assurance that we would be able to negotiate an acceptable amendment and there can be no assurance that a financial covenant violation will not result in the acceleration of all of our outstanding debt.  Such an acceleration would have a material adverse effect on our liquidity and financial position.

17

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 (the “Act”), under which Delaware’s video lottery agents will be authorized to offer, through their websites, internet versions of their table games (including poker) and video lottery offerings.  All games will remain under the control and operation of the Delaware Lottery.  These internet gaming offerings capitalize on a recent United States Department of Justice ruling clarifying that wagering within a state’s boundaries does not violate the federal Wire Act.

Internet lottery games will, at least initially, be offered solely to persons within the State of Delaware.  This territorial limitation would not apply to gaming pursuant to an interstate compact.  Internet gaming participation will be limited to persons who meet the age requirements for equivalent non-internet games.

Revenues from the internet versions of table games and video lottery games will be distributed generally pursuant to the formula currently applicable to those games, with the exception that internet service provider costs will be deducted first, and the Lottery will retain the first $3.75 million of state-wide net proceeds.  The Act also eliminates and restructures certain fees currently paid by video lottery agents to incentivize agents to make capital expenditures, spend on marketing and promotions, and make debt service payments.  For the period July 1, 2011 to June 30, 2012, we paid a $1,540,000 gaming license fee which has been eliminated beginning July 1, 2012.  For the period July 1, 2012 to June 30, 2013, we paid a $2,241,000 table game license fee which will be reduced beginning July 1, 2013.  Based on current business levels, we estimate that this fee will be approximately $1,000,000 for the period July 1, 2013 to June 30, 2014.

We anticipate that we will begin offering internet gaming in early 2013 once the Delaware Lottery adopts regulations and secures contracts with internet service providers.

(a) Our current credit facility expires on June 17, 2014.

(b) The future interest payments on our revolving credit agreement were estimated using the current outstanding principal as of September 30, 2012 and current interest rates.

Related Party Transactions

See NOTE 8 — Related Party Transactions to our consolidated financial statements included elsewhere in this document for a full description of related party transactions.

Critical Accounting Policies

The accounting policies described below are those considered critical by us in preparing our consolidated financial statements and/or include significant estimates made by management using information available at the time the estimates are made.  As described below, these estimates could change materially if different information or assumptions were used.

Property and Equipment

Property and equipment are recorded at cost.  Depreciation is provided for financial reporting purposes using the straight-line method over estimated useful lives ranging from 3 to 10 years for furniture, fixtures and equipment and up to 40 years for facilities.  These estimates require assumptions that are believed to be reasonable.  We

18

perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  An impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its fair value.  Generally, fair value will be determined using valuation techniques such as the present value of future cash flows.

Accrued Pension Cost

On June 15, 2011, we decided to freeze participation and benefit accruals under our pension plans.  The freeze was effective July 31, 2011.  The benefits provided by our defined-benefit pension plans are based on years of service and employee’s remuneration through July 31, 2011.  Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate and expected long-term rate of return on assets.  Changes in these estimates would impact the amounts that we record in our consolidated financial statements and our funding contributions to the plans.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2012 that are of significance, or potential significance, to us.

Factors That May Affect Operating Results; Forward-Looking Statements

This report and the documents incorporated by reference may contain forward-looking statements.  In Item 1A of this report, we disclose the important factors that could cause our actual results to differ from our expectations.