The following discussion is based upon and should be read together with the consolidated financial statements and notes thereto included elsewhere in this document.

Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots - a 165,000-square foot video lottery casino complex featuring the latest in slot machine offerings, multi-player electronic table games and a new Race & Sports Book; the Dover Downs Hotel and Conference Center - a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and Dover Downs Raceway - a harness racing track with pari-mutuel wagering on live and simulcast horse races. The casino facility includes the Dover Downs' Fire & Ice Lounge, Doc Magrogan's Oyster House, Frankie's Italian restaurant, as well as several bars, restaurants and four retail outlets.

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

†          Proximity to major population bases,

†          Competition in the market,

†          The quantity and types of slot machines available,

†          The quality of the physical property,

†          Other amenities offered on site,

†          Customer service levels,

†          Marketing programs, and

†          General economic conditions.

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 2000 United States Census, approximately 32.8 million people live within 150 miles of our complex. There are significant barriers to entry related to the gaming business in Delaware. By law, only three existing horse racing facilities in the State are allowed to have a gaming license. Our property is similar to properties found in the country's largest gaming markets. Our recently expanded 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 the most efficient marketing programs and the highest levels of customer service.

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 video lottery (slot) machine wins and losses 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 video lottery 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 video lottery operations, collects the State's share of the win and the amount due to the vendors under contract with the State who provide the video lottery (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 video lottery (slot) machines and associated computer systems, and (iii) for harness horse racing purses. 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.

Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008

Gaming revenues decreased by $3,404,000, or 5.8%, to $55,172,000 in the third quarter of 2009 primarily as a result of decreased play in our casino. We believe that the decrease in casino play can be attributed to the general downturn in economic conditions and the related impact on consumer spending. We believe that the decrease would have been more significant but for the opening of our Phase VI casino expansion in the third quarter of 2008, the opening of our hotel expansion during the latter part of 2007, targeted marketing efforts using our player database and our efforts to provide our customers with enhanced casino products and other amenities. Our average number of machines was 3,027 in the third quarter of 2009 as compared to 3,115 in the third quarter of 2008.

Other operating revenues were $4,642,000 in the third quarter of 2009 as compared to $5,353,000 in the third quarter of 2008. Net food and beverage revenues decreased $246,000 to $2,957,000 from $3,203,000 in the third quarter of 2008 due primarily to lower banquet sales. These decreases were partially offset by the opening of our Race & Sports Book restaurant and Frankie's Italian restaurant in September 2009. Cash rooms revenue decreased $226,000 in the third quarter of 2009 mainly due to us providing more rooms free of charge to our customers as well as lower convention and transient sales. All other operating revenues decreased $239,000 primarily as a result of a decrease in revenues from our hotel retail shop since we no longer operate this outlet ourselves and have rented the space to a third party. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $5,251,000 and $4,965,000 in the third quarter of 2009 and 2008, respectively.

Gaming expenses increased by $1,082,000, or 2.4%, primarily as a result of increased gaming taxes and slot machine fees that resulted from legislation passed in May of 2009 that became effective on May 28, 2009. The impact of this legislation resulted in an increase in our gaming taxes and slot machine fees of approximately $3,600,000 in the third quarter of 2009. Partially offsetting these increases were decreases in our gaming taxes due to the lower gaming revenues.

Other operating expenses decreased by $668,000, or 15.6%. Expenses related to our food and beverage operations were lower primarily from the lower revenues. Additionally, we experienced lower expenses as a result of promoting fewer concerts in 2009.

General and administrative expenses increased to $1,679,000 in the third quarter of 2009 as compared to $1,572,000 in the third quarter of 2008, primarily due to increased pension costs.

Impairment charges during the third quarter of 2009 related to the write off of $2,177,000 of capitalized costs that were for future expansion projects that we will no longer pursue.

Depreciation expense remained consistent between the third quarter of 2009 and the third quarter of 2008 at $2,898,000 and $2,885,000, respectively.

Interest expense decreased to $569,000 in the third quarter of 2009 as compared to $975,000 in the third quarter of 2008. Our interest expense decreased due to a lower average interest rate on our credit facility as well as lower average outstanding borrowings on our credit facility.

Our effective income tax rate was 40.3% and 41.1% for the three months ended September 30, 2009 and 2008, respectively.

Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008

Gaming revenues decreased by $5,834,000, or 3.4%, to $163,385,000 in the first nine months of 2009 primarily as a result of decreased play in our casino. We believe that the decrease in casino play can be attributed to the general downturn in economic conditions and the related impact on consumer spending. We believe that the decrease would have been more significant but for the opening of our Phase VI casino expansion in the third quarter of 2008, the opening of our hotel expansion during the latter part of 2007, targeted marketing efforts using our player database and our efforts to provide our customers with enhanced casino products and other amenities. Our average number of machines increased to 3,045 in the first nine months of 2009 from 2,813 in the first nine months of 2008 due to our Phase VI casino expansion. As a result of our hotel expansion, our average number of available rooms increased 6.6% compared with the first nine months of 2008.

Other operating revenues were $14,039,000 in the first nine months of 2009 as compared to $14,470,000 in the first nine months of 2008. Net food and beverage revenues decreased $452,000 to $8,925,000 from $9,377,000 in the first nine months of 2008 due primarily to lower banquet sales, and lower revenues in our fine dining restaurant and our deli, partially offset by the opening of the Dover Downs' Fire & Ice Lounge and our Sweet Perks Too coffee shop in July 2008, and to a lesser extent by the opening of our Race & Sports Book restaurant and Frankie's Italian restaurant in September 2009. Cash rooms revenue increased $112,000 in the first nine months of 2009 primarily due to the hotel expansion. All other operating revenues decreased $91,000. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $14,018,000 and $13,787,000 in the first nine months of 2009 and 2008, respectively.

Gaming expenses increased by $2,844,000, or 2.2%, primarily as a result of increased gaming taxes and slot machine fees that resulted from legislation passed in June of 2008 that became effective on July 1, 2008, and from legislation passed in May of 2009 that became effective on May 28, 2009. The impact of this legislation resulted in an increase in our gaming taxes and slot machine fees of approximately $6,400,000 for the first nine months of 2009. Partially offsetting these increases were decreases in our gaming taxes due to the lower gaming revenues.

Other operating expenses decreased by $898,000, or 7.6%. Expenses related to our food and beverage operations were lower primarily from the lower revenues. Additionally, we instituted cost cutting measures that allowed us to improve our profit margin on our other operations. These decreased expenses were partially offset by expenses related to our new Race & Sports Book restaurant and Frankie's Italian restaurant in September 2009. Additionally, we experienced lower expenses as a result of promoting fewer concerts in 2009.

General and administrative expenses increased to $5,187,000 in the first nine months of 2009 as compared to $4,932,000 in the first nine months of 2008, primarily due to increased pension costs and the expensing of a $100,000 loan to UG Entertainment LLC related to the Underground Atlanta project.

Impairment charges during the first nine months of 2009 related to the write off of $2,177,000 of capitalized costs that were for future expansion projects that we will no longer pursue.

Depreciation expense was $8,919,000 in the first nine months of 2009 as compared to $7,745,000 in the first nine months of 2008. The increase resulted primarily from the opening of our Phase VI casino expansion during the third quarter of 2008.

Interest expense decreased by $707,000 due to a lower average interest rate on our credit facility as well as lower average outstanding borrowings on our credit facility. We capitalized interest of $567,000 in the first nine months of 2008 related to our hotel and casino expansions. No interest was capitalized in the first nine months of 2009.

Our effective income tax rate was 40.9% and 41.0% for the nine months ended September 30, 2009 and 2008, respectively.

Liquidity and Capital Resources

Net cash provided by operating activities was $18,882,000 for the nine months ended September 30, 2009 compared to $22,529,000 for the nine months ended September 30, 2008. The decrease was primarily due to lower earnings excluding the non-cash impairment charge.

Net cash used in investing activities was $4,125,000 for the nine months ended September 30, 2009 compared to $36,477,000 for the nine months ended September 30, 2008 and was related to capital improvements. Capital expenditures for the first nine months of 2009 related primarily to final payments made for our Phase VI casino expansion and our new Race & Sports Book operation. Capital expenditures for the first nine months of 2008 also related primarily to the Phase VI casino expansion, as well as the completion of our hotel expansion.

Net cash used in financing activities was $15,120,000 for the nine months ended September 30, 2009 compared to net cash provided by financing activities of $10,232,000 for the nine months ended September 30, 2008. During the first nine months of 2009, we repaid $10,250,000 of our credit facility. During the first nine months of 2008, we borrowed an additional $15,650,000 under our credit facility. We repurchased and retired $59,000 of our outstanding common stock during the first nine months of 2009 compared to $1,040,000 during the first nine months of 2008. We paid $4,811,000 and $4,769,000 in cash dividends during the first nine months of 2009 and 2008, respectively.

On October 28, 2009, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.05 per share. The dividend is payable on December 10, 2009 to shareholders of record at the close of business on November 10, 2009.

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, 2009. During the nine months ended September 30, 2008, we purchased and retired 98,500 shares of our outstanding common stock pursuant to this plan at an average purchase price of $9.09 per share, not including nominal brokerage commissions. At September 30, 2009, we had remaining repurchase authority of 1,653,333 shares.

Based on current business conditions, we expect to make additional capital expenditures of approximately $600,000 during 2009, primarily for renovations to our existing casino facility, casino equipment and improvements in our food and beverage departments, and final payments for our new race and sports book operation. Additionally, we expect to contribute approximately $1,300,000 to our pension plans in 2009, of which $1,000,000 was contributed in the first nine months of 2009.

We have a credit facility with Wilmington Trust Company that expires on April 17, 2012. At September 30, 2009, the maximum borrowing limit under the facility was $125,000,000 which reduces to $100,000,000 on January 1, 2010, to $85,000,000 on January 1, 2011 and to $75,000,000 on January 1, 2012. Interest is based, at our option, upon LIBOR plus a margin that varies between 75 and 125 basis points (125 basis points at September 30, 2009) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the "leverage ratio") or the base rate (the greater of the prime rate or the federal funds rate plus 0.5%) less a margin that varies between 50 and 100 basis points (50 basis points at September 30, 2009) depending on the leverage ratio. The credit facility has minimum net worth, interest coverage and maximum leverage requirements. Material adverse changes in our results of operations could impact our ability to satisfy these requirements. In addition, the credit agreement also includes a material adverse change clause. The facility is for seasonal funding needs, capital improvements and other general corporate purposes. At September 30, 2009, we were in compliance with all terms of the facility and there was $98,075,000 outstanding at a weighted average interest rate of 1.59%. At September 30, 2009, $26,925,000 was available pursuant to the facility.

Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converts $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes. The agreement terminates on April 17, 2012. Pursuant to this agreement, we pay a fixed interest rate of 1.74%, plus a margin that varies between 75 and 125 basis points depending on our leverage ratio (125 basis points at September 30, 2009). In return, the issuing lender refunds 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.

Effective July 1, 2008, the State enacted legislation that (1) increases the existing surcharge on the portion of slot win that we retain,
(2) requires that we pay the costs of all franchise games which were previously shared with the State, and (3) requires that we pay an additional annual amount to a certain horse racing industry organization previously funded by the State. That legislation also allows us to operate all day on Sundays and eliminates the prior legislatively imposed limit on our use of free promotional slot play. In May of 2009, the State enacted legislation, which became effective May 28, 2009, that further increases the gaming taxes paid to the State on the portion of slot win that we retain. The impact of these changes and the additional machine fees were approximately $6,400,000 for the nine months ended September 30, 2009. Additionally, in connection with the latest tax increases, Delaware has reintroduced sports betting and established a task force to make recommendations for table games. "Head to head" sports wagering (or wagering on the outcome of a single sporting event), such as is offered in Las Vegas, is the most popular form of sports wagering - but it is not presently permitted in Delaware. A recent decision by the United States Court of Appeals for the Third Circuit ruled that under federal law sports betting operations in Delaware must be limited to parlay bets on NFL games. The State of Delaware may still appeal this decision to the United States Supreme Court but has not indicated that it intends to do so. Further legislation relative to table games will be required in order to establish licensing fees and the allocation of table game proceeds. The Delaware legislature is out of session for the remainder of this calendar year. We are unable to predict whether increased revenues from additional gaming opportunities (and associated incremental slot play) will offset the recent tax increases.

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.

Contractual Obligations


At September 30, 2009, we had the following contractual obligations:



                                                             Payments Due by Period
                             Total           2009       2010 - 2011     2012 - 2013       Thereafter
Revolving line of
credit                   $  98,075,000    $        -    $ 13,075,000    $ 85,000,000    $            -
Estimated interest
payments on revolving
line of credit(a)            4,971,000       521,000       3,953,000         497,000                 -
Pension
contributions(b)               300,000       300,000               -               -                 -
                         $ 103,346,000    $  821,000    $ 17,028,000    $ 85,497,000    $            -

(b) We expect to contribute approximately $1,300,000 to our pension plans for 2009, of which $1,000,000 was contributed in the first nine months of 2009. For years subsequent to 2009, we are unable to estimate what our pension contributions will be.

Related Party Transactions

See NOTE 9 - 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 5 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 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

The benefits provided by our defined-benefit pension plans are based on years of service and employee's remuneration over their employment with us. Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate, assumed rate of compensation increase, 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

See NOTE 3-Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this document for a description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations, financial condition and cash flows.

Factors That May Affect Operating Results; Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, proposed acquisitions, market forces, corporate strategies, consumer preferences, contractual commitments, legal matters, capital requirements and other matters. Documents incorporated by reference into this Annual Report may also contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ substantially from the anticipated results or other expectations expressed in our forward-looking statements. When words and expressions such as: "believes," "expects," "anticipates," "estimates," "plans," "intends," "objectives," "goals," "aims," "projects," "forecasts," "possible," "seeks," "may," "could," "should," "might," "likely," "enable" or similar words or expressions are used in this document, as well as statements containing phrases such as "in our view," "there can be no assurance," "although no assurance can be given" or "there is no way to anticipate with certainty," forward-looking statements are being made.

Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to differ materially from those set forth in our forward-looking statements, including the following factors:

† general market and economic conditions, including consumer and corporate spending sentiment;

† success of any expansion to or renovation of our existing facilities or changes in our growth strategies;

† expansion of gaming in Delaware and neighboring jurisdictions;

† trends and uncertainties in the gaming industry;

† patron demographics;

† our ability to finance future business requirements;

† our ability to effectively compete in the marketplace;

† the availability of adequate levels of insurance;

†          our development and potential acquisition of new facilities;



†          our ability to successfully integrate acquired companies and
businesses;

† management retention and development;

† changes in Federal, state, and local laws and regulations, including environmental, gaming license and tax legislation;

† the effect of weather conditions or travel on attendance at our facilities;

† military or other government actions; and

† national or local catastrophic events.

The above risks and uncertainties and the cautionary statements below should be considered in connection with any future forward-looking statements we make. We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our

. . .