Landrys Restaurants (LNY) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010.

Commission file number: 001-15531

LANDRY’S RESTAURANTS, INC.

(Exact name of the registrant as specified in its charter)

DELAWARE

(State or other jurisdiction of

incorporation of organization)

76-0405386

(I.R.S. Employer

Identification No.)

1510 West Loop South, Houston, TX 77027

(Address of principal executive offices)

(713) 850-1010

(Registrants telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

AS OF AUGUST 2, 2010 THERE WERE

16,237,851 SHARES OF $0.01 PAR VALUE

COMMON STOCK OUTSTANDING

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009	3
	Condensed Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009	4
	Condensed Unaudited Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2010	6
	Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	7
	Notes to Condensed Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	39
Signatures		40

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LANDRY’S RESTAURANTS, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

The accompanying condensed unaudited consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in our opinion, all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of our results of operations, financial position and changes therein for the periods presented have been included.

The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and related notes to financial statements included in our Annual Report on Form 10-K as amended by our Form 10-K/A for the fiscal year ended December 31, 2009. Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2010.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “will,” “plans,” “believes,” “estimates,” “expects,” “intends” and other similar expressions. Our forward-looking statements are subject to risks and uncertainty, including, without limitation, our ability to continue our expansion strategy, our ability to make projected capital expenditures, as well as general market conditions, competition, and pricing.

When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Form 10-Q. Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Our actual results could differ materially from those anticipated in, or implied by, these forward-looking statements as a result of known risks and uncertainties set forth below and elsewhere in this Form 10-Q. These factors include or relate to the following:

• the merger agreement entered into by us and Fertitta Group, Inc. et al on November 3, 2009, as amended on May 23, 2010 and June 20, 2010, and whether it will be consummated;

• our ability to implement our business strategy;

• our ability to expand and grow our business and operations;

• the outcome of legal proceedings that have been, or may be, initiated against us related to the proposed merger with an affiliate in 2008 and its termination and the proposed merger in 2009 with an affiliate:

• risks that the termination of the 2009 merger agreement may disrupt current plans and operations and create employee retention difficulties;

• the impact of future commodity prices;

• the availability of food products, materials and employees;

• consumer perceptions of food safety;

• changes in local, regional and national economic conditions;

• the effects of local and national economic, credit and capital market conditions on the economy in general and our business in particular;

• the effectiveness of our marketing efforts;

• changing demographics surrounding our restaurants, hotels and casinos;

• the effect of changes in tax laws;

• actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions;

• our ability to maintain regulatory approvals for our existing businesses and our ability to receive regulatory approval for our new businesses;

• the effects of the BP plc oil spill;

• our expectations of the continued availability and cost of capital resources;

• our ability to obtain long-term financing and the cost of such financing, if available;

• the seasonality and cyclical nature of our business;

1

• weather and acts of God;

• the ability to maintain existing management;

• the impact of potential acquisitions of other restaurants, gaming operations and lines of businesses in other sectors of the hospitality and entertainment industries;

• the impact of potential divestitures of restaurants, restaurant concepts and other operations or lines of business;

• the effects of “climate change” on our operation;

• food, labor, fuel and utilities costs; and

• the other factors discussed under “Risk Factors,” included in our Form 10-K for the year ended December 31, 2009.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed herein may not occur. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.

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LANDRY’S RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	59,514,451		$	71,584,322
Restricted cash and cash equivalents		73,208,655			73,076,532
Accounts receivable - trade and other, net		26,131,343			28,730,944
Inventories		28,646,274			27,558,494
Deferred taxes		26,791,905			15,658,214
Assets related to discontinued operations		1,960,344			2,960,514
Other current assets		13,898,090			13,364,757
Total current assets		230,151,062			232,933,777
PROPERTY AND EQUIPMENT, net		1,323,866,838			1,334,334,637
GOODWILL		18,527,547			18,527,547
OTHER INTANGIBLE ASSETS, net		45,068,985			38,719,325
OTHER ASSETS, net		65,606,129			75,552,531
Total assets	$	1,683,220,561		$	1,700,067,817
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	52,257,378		$	64,320,097
Accrued liabilities		134,353,699			122,275,958
Current portion of long-term notes and other obligations		29,934,636			30,181,424
Liabilities related to discontinued operations		1,804,942			2,850,225
Total current liabilities		218,350,655			219,627,704
LONG-TERM NOTES, NET OF CURRENT PORTION		1,023,351,341			1,064,758,656
OTHER LIABILITIES		128,024,812			103,808,585
Total liabilities		1,369,726,808			1,388,194,945
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST		10,874,165			10,318,386
EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized, 16,236,025 and 16,237,851 shares issued and outstanding, respectively		162,361			162,379
Additional paid-in capital		228,918,844			227,386,478
Retained earnings		100,180,591			99,998,441
Accumulated other comprehensive loss		(27,642,208	)		(26,992,812	)
Total stockholders’ equity		301,619,588			300,554,486
Noncontrolling interest		1,000,000			1,000,000
Total equity		302,619,588			301,554,486
Total liabilities and equity	$	1,683,220,561		$	1,700,067,817

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
REVENUES:
Restaurant and hospitality	$	236,879,704		$	225,508,163		$	436,124,136		$	425,783,813
Gaming:
Casino		32,710,900			34,427,793			69,528,699			70,396,082
Rooms		14,849,537			12,441,637			28,962,911			24,847,453
Food and beverage		12,184,991			11,718,082			23,285,696			22,204,310
Other		4,225,453			4,109,943			8,142,864			7,722,307
Promotional allowances		(6,243,254	)		(6,200,277	)		(12,706,102	)		(12,658,641	)
Net gaming revenue		57,727,627			56,497,178			117,214,068			112,511,511
Total revenue		294,607,331			282,005,341			553,338,204			538,295,324
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		57,227,209			54,105,878			106,236,276			103,769,403
Labor		66,680,745			64,189,889			125,175,904			122,185,597
Other operating expenses		58,959,433			55,169,808			109,561,456			96,043,477
Gaming:
Casino		17,914,539			17,511,110			36,344,763			37,131,600
Rooms		6,632,953			5,772,122			12,560,247			11,381,837
Food and beverage		6,781,219			6,732,630			13,122,818			12,433,916
Other		15,184,587			14,007,287			29,748,988			26,371,974
General and administrative expense		24,223,556			12,622,404			36,922,443			24,680,554
Depreciation and amortization		19,630,534			17,701,207			38,734,555			35,461,698
Asset impairment expense		3,806,778			—			3,806,778			—
Gain on insurance claims		—			(520,751	)		(1,237,856	)		(4,003,648	)
Gain on disposal of assets		—			(741,016	)		(938,268	)		(1,363,315	)
Pre-opening expenses		353,373			459,398			445,987			715,562
Total operating costs and expenses		277,394,926			247,009,966			510,484,091			464,808,655
OPERATING INCOME		17,212,405			34,995,375			42,854,113			73,486,669
OTHER EXPENSE (INCOME):
Interest expense, net		29,529,545			28,542,043			58,563,243			53,156,617
Other, net		5,855,544			(4,690,409	)		(16,788,648	)		(555,997	)
Total other expense		35,385,089			23,851,634			41,774,595			52,600,620
Income (loss) from continuing operations before income taxes		(18,172,684	)		11,143,741			1,079,518			20,886,049
Provision (benefit) for income taxes		(4,433,725	)		2,546,832			232,489			4,934,413
Income (loss) from continuing operations		(13,738,959	)		8,596,909			847,029			15,951,636
Loss from discontinued operations, net of taxes		(58,019	)		(47,867	)		(96,005	)		(98,770	)
Net income (loss)		(13,796,978	)		8,549,042			751,024			15,852,866
Less: Net income attributable to noncontolling interest		333,972			283,730			555,779			514,308
Net income (loss) attributable to Landry’s		(14,130,950	)		8,265,312			195,245			15,338,558
Less: Accretion of redeemable noncontrolling interest		—			1,660,878			—			2,725,641
Net income (loss) available to Landry’s common stockholders	$	(14,130,950	)	$	6,604,434		$	195,245		$	12,612,917

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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LANDRY’S RESTAURANTS, INC.

EARNINGS (LOSS) PER SHARE INFORMATION

Amounts available to Landry’s common stockholders:

BASIC
Income (loss) from continuing operations	$	(0.87	)	$	0.42		$	0.02		$	0.79
Loss from discontinued operations		—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)	$	(0.87	)	$	0.41		$	0.01		$	0.78
Weighted average number of common shares outstanding		16,240,000			16,140,000			16,240,000			16,140,000
DILUTED
Income (loss) from continuing operations	$	(0.87	)	$	0.42		$	0.02		$	0.79
Loss from discontinued operations		—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)	$	(0.87	)	$	0.41		$	0.01		$	0.78
Weighted average number of common and common share equivalents outstanding		16,240,000			16,205,000			16,490,000			16,180,000

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Equity
			Stockholders’ Equity
								Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest		Total			Comprehensive Income (Loss)
	Redeemable Noncontrolling Interest		Common Stock
			Shares		Amount
Balance, December 31, 2009	$	10,318,386	16,237,851		$	162,379		$	227,386,478		$	99,998,441		$	(26,992,812	)	$	1,000,000	$	301,554,486		$	—
Net income		555,779	—			—			—			195,245			—			—		195,245			751,024
Ineffective portion of swaps associated with debt repurchase		—	—			—			—			—			5,548,549			—		5,548,549			5,548,549
Loss on interest rate swaps, net of tax benefit of $3,337,355		—	—			—			—			—			(6,197,945	)		—		(6,197,945	)		(6,197,945	)
Purchase of common stock held for treasury		—	(1,826	)		(18	)		(29,771	)		(13,095	)		—			—		(42,884	)		—
Stock based compensation expense		—	—			—			1,562,137			—			—			—		1,562,137			—
Balance, June 30, 2010	$	10,874,165	16,236,025		$	162,361		$	228,918,844		$	100,180,591		$	(27,642,208	)	$	1,000,000	$	302,619,588		$	101,628

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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LANDRY’S RESTAURANTS, INC.

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	751,024		$	15,852,866
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38,734,555			35,461,698
Gain on debt repurchase		(32,998,237	)		—
Gain on disposition of assets		(938,268	)		(1,363,315	)
Gain on insurance claims		(1,237,856	)		(4,003,648	)
Changes in assets and liabilities, net and other		44,277,434			18,611,596
Total adjustments		47,837,628			48,706,331
Net cash provided by operating activities		48,588,652			64,559,197
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions		(28,910,507	)		(97,006,782	)
Proceeds from asset dispositions		3,190,571			10,331,599
Increase in restricted cash and cash equivalents		(132,123	)		—
Business acquisitions, net of cash acquired		(22,043,122	)		—
Net cash used in investing activities		(47,895,181	)		(86,675,183	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock for treasury		(42,884	)		(47,931	)
Proceeds from exercise of stock options		—			30,628
Payments of debt and related expenses		(39,705,467	)		(3,065,026	)
Proceeds from issuance of bonds		49,820,000			390,040,000
Repayment of bonds		(14,000	)		(398,362,000	)
Debt issuance costs		(3,248,158	)		(17,639,190	)
Proceeds from credit facility		140,283,946			223,693,852
Payments on credit facility		(159,856,779	)		(157,816,049	)
Net cash (used in) provided by financing activities		(12,763,342	)		36,834,284
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(12,069,871	)		14,718,298
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		71,584,322			51,066,805
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	59,514,451		$	65,785,103
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest	$	55,246,395		$	36,972,937
Income taxes	$	(12,228,296	)	$	638,958
Non-cash investing activities:
Property and equipment additions in accounts payable	$	4,466,688		$	20,069,062

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are a national, diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants, primarily under the names Landry’s Seafood House, Charley’s Crab, The Chart House, Saltgrass Steak House, Rainforest Café, and The Oceanaire Seafood Room. In addition, we own and operate domestically and license internationally rainforest themed restaurants under the trade name Rainforest Cafe, and we own and operate the Golden Nugget Hotels and Casinos in downtown Las Vegas and Laughlin, Nevada and the Kemah Boardwalk in Kemah, Texas.

Discontinued Operations

During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units (Note 3). Subsequently, several additional locations were added to our disposal plan. The results of operations, assets and liabilities for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.

Principles of Consolidation

The accompanying financial statements include the consolidated accounts of Landry’s Restaurants, Inc., a Delaware holding company, and its wholly and majority owned subsidiaries and partnerships. All significant inter-company accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by us without audit, except for the consolidated balance sheet as of December 31, 2009. The financial statements include all adjustments, consisting of normal, recurring adjustments and accruals, which we consider necessary for fair presentation of our financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. This information is contained in our December 31, 2009, consolidated financial statements filed with the Securities and Exchange Commission on Form 10-K, as amended by our filing on Form 10-K/A.

Restaurant and hospitality revenues are recognized when the goods and services are delivered. Casino revenues are the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs (“casino front money”) and for chips in the customers possession (“outstanding chip liability”). Revenues are recognized net of certain sales incentives as well as accruals for the cost of points earned in point-loyalty programs. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is deducted from revenue as promotional allowances. Proceeds from the sale of gift cards are deferred and recognized as revenue when redeemed by the holder.

Accounts receivable is comprised primarily of amounts due from our credit card processor, receivables from national storage and distribution companies and, casino and hotel receivables. The receivables from national storage and distribution companies arise when certain of our inventory items are conveyed to these companies at cost (including freight and holding charges but without any general overhead costs). These conveyance transactions do not impact the consolidated statements of income as there is no revenue or expense recognized in the financial statements since they are without economic substance other than drayage. We reacquire these items, although not obligated to, when subsequently delivered to our restaurants at cost plus the distribution company’s contractual mark-up. Accounts receivable are reduced to reflect estimated realizable values by an allowance for doubtful accounts based on historical collection experience and specific review of individual accounts. Receivables are written off when they are deemed to be uncollectible.

Our properties are reviewed for impairment on a property by property basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair value, reduced for estimated disposal costs, and are included in assets related to discontinued operations.

Financial Instruments

Generally Accepted Accounting Principles (GAAP) establishes a hierarchy for fair value measurements, such that Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, Level 2

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and Level 3 measurements include those that are unobservable and of a highly subjective measure.

Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2010, consist primarily of interest rate swaps (Note 5), for which the lowest level of input significant to their fair value measurement is Level 2. As of June 30, 2010, the fair value of the interest rate swap liabilities totaled $76.3 million, of which $42.5 million are designated and qualify as hedges and the remaining $33.8 million do not qualify as hedges. As of December 31, 2009, the fair value of the interest rate swap liabilities totaled $60.0 million, of which $41.5 million are designated and qualify as hedges and the remaining $18.5 million do not qualify as hedges. These amounts are recorded as other long term liabilities in our consolidated balance sheets. In connection with a non-qualified deferred compensation plan, we use a Rabbi Trust to fund obligations of the plan. The market value of the trust assets as of June 30, 2010 and December 31, 2009 was $3.8 million and $4.0 million respectively, as determined using Level 1 inputs, is included in other assets, net and the liability to plan participants is included in other long term liabilities in our consolidated balance sheets.

The fair values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate the carrying amounts due to their short maturities. The fair value of our long-term debt instruments are estimated based on quoted market prices, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for comparable debt instruments. The estimated fair values of our significant long-term debt, including the current portions, are as follows:

	June 30, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
Libor + 3.0% (1.0% PIK) Revolving credit facility due June 2013	$	42,012,206	$	34,029,887	$	44,755,040	$	30,964,893
Libor + 6.0% (2.0% floor) Revolving credit facility due November 2013		6,000,000		6,000,000		24,000,000		24,270,000
Libor + 6.0% (2.0% floor) Term Loan due November 2013		145,511,222		145,511,222		153,014,556		154,735,970
Libor + 3.0% (1.0% PIK) First Lien Term Loan due June 2014		325,024,845		263,270,124		325,495,365		225,202,106
Libor + 3.25% Second Lien Term Loan due November 2014		68,987,232		33,803,744		131,817,628		53,386,139
7.0% Seller note due November 2014		4,000,000		3,166,400		4,000,000		4,033,937
7.5% Senior Notes due December 2014		783,000		747,021		783,000		588,973
9.5% Senior Notes due December 2014		721,000		610,597		735,000		665,175
11 5/8% Senior Notes due December 2015		450,308,577		464,943,606		400,168,809		424,178,938
11.39% non-recourse note payable due May 2025		9,937,895		14,170,578		10,170,682		10,471,319
	$	1,053,285,977	$	966,253,179	$	1,094,940,080	$	928,497,450

Recently Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on accounting for transfers of financial assets which removes the concept of a qualifying special-purpose entity (QSPE) and clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. We adopted the new accounting guidance beginning January 1, 2010. This new accounting guidance did not impact our financial position, cash flows or results of operations.

In June 2009, the FASB issued new accounting guidance which revises the approach to determining the primary beneficiary of a variable interest entity (“VIE”) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. We adopted the new accounting guidance beginning January 1, 2010. This new accounting guidance did not impact our financial position, cash flows or results of operations.

In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. We adopted the new accounting guidance beginning January 1, 2010. This update had no impact on our financial position, cash flows or results of operations.

Other Matters

        Our Chairman and Chief Executive Officer controls over 50% of our voting common stock and he is generally able to control the election of directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of

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LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. Notwithstanding the foregoing, he will not control or determine the outcome of the pending merger between us and Fertitta Group, Inc., which will require a majority vote of the shares not owned by him and voted.

2. ACQUISITION OF OCEANAIRE, INC.

On April 30, 2010, we completed the acquisition of all the capital stock of The Oceanaire, Inc. (“Oceanaire”), and all of its subsidiary companies, a seafood restaurant company with 12 locations, in accordance with a plan of reorganization submitted by the unsecured creditors of Oceanaire in a U.S. Bankruptcy court for $23.4 million in cash, plus the assumption of certain additional working capital liabilities. The acquisition of Oceanaire provides additional growth within our high end seafood line, as well as a known brand with several excellent locations.

The acquisition was accounted for in accordance with ASC Topic 805,Business Combinations (“ASC 805”). Accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. These allocations reflect various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are finalized. In particular, the tax attributes associated with the transaction and certain lease hold improvements require additional evaluation. The results of operations of Oceanaire have been included in our consolidated financial statements since the date of acquisition.

Under ASC 805, acquisition related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. As of June 30, 2010, we have incurred approximately $0.9 million in acquisition related costs. These amounts are included in general and administrative expense in our consolidated financial statements. No pro forma disclosure for this acquisition is provided as it is not significant to our consolidated financial results.

A summary of assets acquired and liabilities assumed in the acquisition is set forth below:

Preliminary estimated fair value of assets acquired
Current assets	$	3,685,607
Property and equipment		21,364,695
Other long term assets		8,502,463
Total assets acquired		33,552,765
Preliminary estimated fair value of liabilities assumed
Current liabilities		(5,917,222	)
Other long term liabilities		(4,223,370	)
Total liabilites assumed		(10,140,592	)
Allocated purchase price		23,412,173
Less: Cash acquired		(1,369,051	)
Net cash paid	$	22,043,122

3. DISCONTINUED OPERATIONS AND IMPAIRMENT OF LONG LIVED ASSETS

During the third quarter of 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants including 136 Joe’s Crab Shack (“Joe’s”) units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all stores included in our disposal plan have been classified as discontinued operations in our statements of income, balance sheets and segment information for all periods presented. We expect to sell the land and improvements belonging to the remaining restaurants in the disposal plan, or abandon those locations, during the next twelve months.

The results of discontinued operations for the three and six months ended June 30, 2010 and 2009 were not material.

Our properties are reviewed for impairment on a property by property basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value using Level 3 measurements. Properties to be disposed of are reported at the lower of their carrying amount or fair value determined by management’s estimates of expected proceeds supplemented by third party offers or sales contracts, reduced for estimated disposal costs

During the three and six months ended June 30, 2010, we recorded impairment charges of $3.8 million to impair the fixed assets of two underperforming restaurants. No impairment charges were recorded for the three and six months ended

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2009. Non-recurring fair value measurements related to impaired property and equipment consisted of the following:

Description	June 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Impairments
Long-lived assets held and used	$	620,413	$	—	$	—	$	620,413	$	(3,806,778	)
									$	(3,806,778	)

4. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

	June 30, 2010		December 31, 2009
Payroll and related costs	$	27,183,341	$	22,120,315
Rent and insurance		31,133,915		28,605,202
Taxes, other than payroll and income taxes		17,014,967		19,717,328
Deferred revenue (gift cards and certificates)		16,638,433		17,537,349
Accrued interest		6,331,112		7,268,622
Casino deposits, outstanding chips and other gaming		9,605,254		10,120,470
Other		26,446,677		16,906,672
	$	134,353,699	$	122,275,958

5. DEBT

On April 28, 2010, we announced the completion of an offering of an additional $47.0 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Additional Notes”) unconditionally guaranteed on a senior secured basis by all of our current and future domestic restricted subsidiaries (the “Guarantors”). The Additional Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons in accordance with Regulation S under the Securities Act. The Additional Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration under the Securities Act. Gross proceeds from the Additional Notes of approximately $49.8 million were used to pay for the acquisition of The Oceanaire, Inc. (“Oceanaire”), to reduce outstanding revolver balances and for general corporate purposes.

The Additional Notes will have the same terms and will be part of the same series as the $406.5 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Initial Notes” and together with the Additional Notes, the “Notes”) which were issued in a private placement which closed on November 30, 2009. The gross proceeds from the offering and sale of the Initial Notes were $400.1 million.

The Notes will mature on December 1, 2015. Interest on the Notes will accrue from November 30, 2009, the date of original issuance of the Initial Notes, at a fixed interest rate of 11 5/8% and we will pay interest twice a year, on each December 1 and June 1, beginning June 1, 2010. The Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by the Guarantors and are secured by a second lien position on substantially all assets of Landry’s and the Guarantors. At any time prior to December 1, 2012, we may redeem up to 35% of the Notes at a redemption price of 111.625% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings. Additionally, on or after December 1, 2012, we may redeem all or a part of the Notes at a premium that will decrease over time as described in the Indenture dated November 30, 2009, as amended (the “Indenture”), among us, the guarantors, Deutsche Bank Trust Company Americas, as collateral agent, and Wilmington Trust FSB, as successor trustee to Deutsche Bank Trust Company Americas. We are required to offer to purchase the Notes at 101% of their aggregate principal amount, plus accrued interest, if it experiences a change in control as defined in the Indenture.

On April 26, 2010 and July 23, 2010, we and the Guarantors commenced an offer to exchange the Initial Notes and Additional Notes, respectively, for notes registered under the Securities Act, having substantially identical terms as the Initial Notes. The offer to exchange the Initial Notes was completed on May 28, 2010 and all $406.5 million of the Initial Notes Series A were exchanged for registered Initial Notes Series B. The exchange offer for the Additional Notes has not yet been completed.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Indenture under which the Notes have been issued contains covenants that will limit our ability of the Company and the ability of the Guarantors to, among other things: incur or guarantee additional indebtedness or issue disqualified capital stock; transfer or sell assets; pay dividends or distributions, redeem subordinated indebtedness, make certain types of investments or make other restricted payments; create or incur liens; incur dividend or other payment restrictions affecting certain subsidiaries; consummate a merger, consolidate or sell of all or substantially all of our assets; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; engage in business other than a business that is the same or similar to the current business and reasonably related businesses; take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes.

On November 30, 2009, we also amended and restated our Credit Agreement to allow us to borrow $235.6 million (the Amended Credit Facility). The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors. On April 27, 2010, we also amended the Amended Credit Facility to allow for the issuance of the Additional Notes and the acquisition of Oceanaire.

Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus .50% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate but no less than 2.0%, plus a credit spread of 6.0%, and matures on November 30, 2013.

The Amended Credit Facility contains covenants that limit our ability and the ability of the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.

Proceeds from the Initial Notes and the Amended Credit Facility were used to repay all of our outstanding 14.0% Senior Secured Notes due 2011, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete a proposed merger of an affiliate of Tilman Fertitta and us. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million in interest expense during the fourth quarter of 2009, primarily associated with early recognition of unamortized discount and deferred loan costs.

During 2008, there was a fully funded financing commitment which included up to $250.0 million in term loans. On December 19, 2008, we entered into an $81.0 million interim senior secured credit facility to fund a portion of the commitment. The interim senior secured credit facility provided for a $31.0 million senior secured term loan facility and a $50.0 million senior secured revolving credit facility, the proceeds of which were used to refinance the remaining outstanding indebtedness under our previously issued and outstanding senior credit facility and to pay related transaction fees and expenses.

We subsequently funded an additional $135.0 million under the commitment by entering into a $215.6 million Amended and Restated Credit Agreement dated as of February 13, 2009 (the “Credit Agreement”) which included the $81.0 million interim senior secured credit facility. The Credit Agreement provided for a term loan of $165.6 million, which included the $31.0 million term loan, and the revolving credit line of $50.0 million that was previously funded. The obligations under the Credit Agreement were unconditionally guaranteed by the Guarantors and were secured by a first lien position on substantially all of our assets.

On February 13, 2009, we completed an offering of $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series A Notes”). The gross proceeds from the offering and sale of the Series A Notes were $260.0 million. The Series A Notes were unconditionally guaranteed on a senior secured basis as to principal, premium by the Guarantors and were secured by a second lien position on substantially all of our and the Guarantors’ assets. The Series A Notes were issued pursuant to an indenture, dated as of February 13, 2009 among us, the Guarantors and Deutsche Bank Trust Company America, as Trustee and as Collateral Agent. On July 10, 2009, we and the Guarantors filed a registration statement with respect to an offer to exchange the Series A Notes for notes registered under the Securities Act, having substantially identical terms as the Series A Notes.

On August 14, 2009, we completed our offer to exchange $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series B Notes”), that have been registered under the Securities Act, for the Series A Notes. An aggregated principal amount of $260.5 million of Series A Notes were exchanged for Series B Notes pursuant to the offer and an aggregate principal amount of $27.0 million Series A Notes were exchanged for Series B Notes pursuant to private exchange. The total principal amount of notes exchanged was $287.5 million.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We used the proceeds from the 2009 Notes offering, together with borrowings under the Credit Agreement to refinance our previous $395.7 million aggregate principal amount of 9.5% senior notes due 2014 (the “9.5% Notes”) and $4.3 million aggregate principal amount of 7.5% senior notes due 2014 (the “7.5% Notes” and, together with the 9.5% Notes, the “Previous Notes”). As of March 31, 2010, $0.8 million of our 7.5% Notes and $0.7 million of our 9.5% Notes remained outstanding. In addition, we paid a redemption premium of approximately $4.0 million in connection with the repurchase of the Previous Notes.

In connection with the refinancing of our Previous Notes, on December 23, 2008, we commenced separate cash tender offers (each a “tender offer” and together, the “tender offers”) to purchase any and all of our outstanding 9.5% Notes and 7.5% Notes for a purchase price of 101% of the principal amount thereof. In conjunction with the tender offers, we solicited consents of at least a majority of the aggregate principal amount of each of the outstanding 9.5% Notes and 7.5% Notes to certain proposed amendments to each of the indentures governing Previous Notes to eliminate most of the restrictive covenants and certain events of default and to amend certain other provisions contained in the indentures and related notes. We executed supplemental indentures with U.S. Bank National Association, as trustee, to effectuate the amendments to the indentures governing the Previous Notes, which became operative upon the consummation of the tender offers.

With respect to any Previous Notes that were not tendered, we may, at our option, either (i) pay such Previous Notes in accordance with their terms through maturity, (ii) repurchase any 9.5% Notes if the holders exercise their option to require us to do so, at 101% of the principal amount plus accrued but unpaid interest, if any, through the payment date or (iii) defease any or all of the remaining Previous Notes.

On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.

The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting first lien lenders received a consent fee of 0.5% and all first lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First lien lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.

Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on our existing $4.0 million seller note was extended to November 2, 2014 from November 2, 2010.

In connection with these amendments, affiliates of the Golden Nugget agreed to provide $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired at 40% of face value and accordingly, a $33.0 million gain was recognized in other income, net during the three months ended March 31, 2010. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt was immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.

On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized in other income, net during the three months ended September 30, 2009.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Previously, in June 2007, Golden Nugget, Inc. had completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The $330.0 million first lien term loan includes a $120.0 million delayed draw component to finance the expansion at the Golden Nugget Hotel and Casino in Las Vegas, Nevada. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a financing spread of 2.0% and 0.75%, respectively, at June 30, 2010. In addition, the credit facility requires a commitment fee on the unfunded portion for the $50.0 million revolving credit facility. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at June 30, 2010. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.

The proceeds from the $545.0 million credit facility were used to repay all of the Golden Nugget’s outstanding debt, including its 8.75% Senior Secured Notes due 2011 totaling $155.0 million, plus the outstanding balance of approximately $10.0 million on its former $43.0 million revolving credit facility with Wells Fargo Foothill, Inc. In addition, the proceeds were used to pay associated tender premiums of approximately $8.8 million due to the early redemption of the Senior Secured Notes, plus accrued interest and related transaction fees and expenses. In 2008, the revolver commitment was reduced to $47.0 million and the delayed draw term loan commitment was reduced to $117.5 million as a result of the failure of one of the lending banks.

Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fixed the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedges. The swaps mirror the terms of the underlying debt and reset using the same index and terms. As of June 30, 2010, an aggregate $96.0 million in second lien term loan debt has been repurchased and retired, and as such a proportional share of the second lien swaps are no longer an effective cash flow hedge. Accordingly, a $2.6 million and $11.5 million non-cash expense associated with this portion of the swaps was recorded as other expense for the three and six months ended June 30, 2010, respectively. At June 30, 2010, the remaining portion of these swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in accumulated other comprehensive loss at June 30, 2010 and December 31, 2009 are unrealized losses, net of income taxes, totaling $27.6 million and $27.0 million, respectively, related to these hedges. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. A non-cash expense of approximately $2.7 million was recorded related to these interest rate swaps for the three months ended June 30, 2010, while a non-cash gain of approximately $4.5 million was recorded for the three months ended June 30, 2009. For the six months ended June 30, 2010, we recorded a non-cash expense of approximately $3.8 million and a non-cash gain of $4.9 million for the six months ended June 30, 2009. The impact of these interest rate swaps was an increase to interest expense of $6.4 million and $5.5 million during the three months ended June 30, 2010 and 2009, respectively, and $12.8 million and $11.0 million during the six months ended June 30, 2010 and 2009, respectively.

Our debt agreements contain various restrictive covenants including minimum EBITDA, fixed charge, net worth, and financial leverage ratios as well as limitations on dividend payments, capital expenditures and other restricted payments as defined in the agreements. As of June 30, 2010, we were in compliance with all such covenants. As of June 30, 2010, we had approximately $17.5 million in letters of credit outstanding, and our available borrowing capacity was approximately $54.4 million.

As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as funding the hotel tower at the Golden Nugget, will result in substantially higher interest expense over at least the next few years.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Long-term debt is comprised of the following:

	June 30, 2010			December 31, 2009
$75.0 million revolving credit facility, Libor + 6.0% (floor 2.0%), due November 2013	$	6,000,000		$	24,000,000
$160.6 million Term loan, Libor + 6.0% (floor 2.0%) $4.0 million principal paid quarterly beginning June 30, 2009, due November 2013		145,511,222			153,014,556
Senior Notes, 9.5% interest only, due December 2014		721,000			735,000
Senior Notes, 7.5% interest only, due December 2014		783,000			783,000
$453.5 million Senior Notes, 11 5/8% interest only, due December 2015		450,308,577			400,168,809
$47.0 million revolving credit facility, Libor + 3.0%, (1.0% PIK) due June 2013		42,012,206			44,755,040
$327.0 million First Lien Term Loan, Libor + 3.0%, (1.0% PIK) 1.0% of principal paid quarterly beginning September 30, 2009, due June 2014		325,024,845			325,495,365
$165.0 million Second Lien Term Loan, Libor + 3.25%, interest only, due November 2014		68,987,232			131,817,628
Non-recourse note payable, 11.39% interest, principal and interest aggregate $101,762 monthly, due May 2025		9,937,895			10,170,682
$4.0 million seller note, 7.0%, interest paid monthly, due November 2014		4,000,000			4,000,000
Total debt		1,053,285,977			1,094,940,080
Less current portion		(29,934,636	)		(30,181,424	)
Long-term portion	$	1,023,351,341		$	1,064,758,656

6. EARNINGS PER SHARE

A reconciliation of the amounts used to compute earnings (loss) per share is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Amounts available to Landry’s common stockholders:
Income (loss) from continuing operations	$	(14,072,931	)	$	6,652,301		$	291,250		$	12,711,687
Loss from discontinued operations, net of taxes		(58,019	)		(47,867	)		(96,005	)		(98,770	)
Net income (loss)	$	(14,130,950	)	$	6,604,434		$	195,245		$	12,612,917
Weighted average common shares outstanding—basic		16,240,000			16,140,000			16,240,000			16,140,000
Dilutive common stock equivalents:
Stock options		—			65,000			250,000			40,000
Weighted average common and common share equivalents outstanding—diluted		16,240,000			16,205,000			16,490,000			16,180,000
Earnings per share—basic
Income (loss) from continuing operations	($	0.87	)	$	0.42		$	0.02		$	0.79
Loss from discontinued operations		—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)	($	0.87	)	$	0.41		$	0.01		$	0.78
Earnings per share—diluted
Income (loss) from continuing operations	($	0.87	)	$	0.42		$	0.02		$	0.79
Loss from discontinued operations		—			(0.01	)		(0.01	)		(0.01	)
Net income (loss)	($	0.87	)	$	0.41		$	0.01		$	0.78

7. STOCK-BASED COMPENSATION

GAAP requires the recognition of the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. We have several stock-based employee compensation plans, which are more fully described in our 2009 Annual Report on Form 10-K, as amended.

For the three months ended June 30, 2010 and 2009, total stock-based compensation expense, which includes both stock options and restricted stock, totaled $0.7 million and $0.9 million, respectively. For the six months ended June 30, 2010 and 2009, total stock-based compensation expense totaled $1.6 million and $1.8 million, respectively.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-based compensation expense is not reported at the segment level as these amounts are not included in internal measurements of segment operating performance.

No restricted stock or stock options were granted during the six months ended June 30, 2010.

8. INCOME TAXES

As of January 1, 2010, we had approximately $15.1 million of unrecognized tax benefits, including $2.4 million of interest and penalties, which represents the amount of unrecognized tax benefits that, if recognized, would favorably impact our effective income tax rate in future periods. There were no material changes in unrecognized benefits for the six months ended June 30, 2010. It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the future impact, if any, to recorded uncertain tax positions at June 30, 2010. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal income tax matters for years through 2005. Substantially all material state and local income tax matters have been concluded for years through 2004.

9. COMMITMENTS AND CONTINGENCIES

Building Commitments

As of June 30, 2010, we had future development, land purchases and construction commitments anticipated to be expended within the next twelve months of approximately $3.1 million, including completion of construction of certain new restaurants. We estimate aggregate capital expenditures for the remainder of the year to be approximately $11.4 million.

In 2003, we purchased the Flagship Hotel and Pier from the City of Galveston, Texas, subject to an existing lease. Under this agreement, we have committed to spend $15.0 million to transform the hotel and pier into a 19^th century style inn and entertainment complex complete with rides, games and food and beverage. The property was significantly damaged by Hurricane Ike in 2008. We are currently in litigation with the former tenant due to its failure to purchase adequate insurance and are evaluating our options concerning the property.

Other Commitments

On February 24, 2006, we acquired 80% of T-Rex Cafe, Inc. from Schussler Creative, Inc. (SCI). The agreement with SCI provides that we can acquire SCI’s 20% interest for up to $35.0 million or that SCI can put its interest to us at a calculated amount as determined in the agreement no earlier than January 2010. During the first quarter of 2009, we determined the redemption was probable and began accreting to the expected redemption value on the expected redemption date as an increase to non-controlling interest in temporary equity and a decrease to retained earnings in our consolidated balance sheets. As of December 31, 2009, the total expected redemption value had been fully accreted.

Certain of our casino employees at the Golden Nugget in Las Vegas, Nevada are members of various unions and are covered by union-sponsored, collective bargained, multi-employer health and welfare and defined benefit pension plans. Under such plans, we recorded expenses of $3.2 million and $3.3 million for the three months ended June 30, 2010 and 2009, respectively, and $6.2 million and $6.8 million for the six months ended June 30, 2010 and 2009, respectively. The plans’ sponsors have not provided sufficient information to permit us to determine its share of unfunded vested benefits, if any. However, based on available information, we do not believe that unfunded amounts attributable to our casino operations are material.

We are self-insured for most health care benefits for our non-union casino employees. The liability for claims filed and estimates of claims incurred but not reported is included in “accrued liabilities” in the accompanying consolidated balance sheets.

In connection with certain of our discontinued operations, we remain the guarantor or assignor of a number of leased locations. In the event of future default under any of such leased locations, we may be responsible for significant damages to existing landlords which may materially affect our financial condition, operating results and/or cash flows. We estimate that lessee rental payment obligations during the remaining terms of the assignments and subleases approximate $56.4 million at June 30, 2010. We have recorded a liability of $1.6 million with respect to these obligations where it is probable that we will make future cash payments.

16

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We manage and operate the Galveston Island Convention Center in Galveston, Texas. In connection with the Galveston Island Convention Center Management Contract (“Contract”), we agreed to fund operating losses, if any, subject to certain rights of reimbursement. Under the Contract, we have the right to one-half of any profits generated by the operation of the Convention Center.

Litigation and Claims

On February 5, 2009, a purported class action and derivative lawsuit entitledLouisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. (“Delaware Litigation”) was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit originally alleged, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock.

On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims asserted in the amended complaint are also without merit and intend to vigorously contest them as well. On May 21, 2010, plaintiff again amended its complaint substantively reasserting the same allegations.

On May 23, 2010, the parties reached a partial settlement in the above litigation and delivered a Memorandum of Understanding for Partial Settlement to the Vice Chancellor of the Delaware Chancery Count.

On June 22, 2010, following negotiations, the parties to the Delaware Litigation memorialized the terms of the May 23, 2010 Memorandum of Understanding for Partial Settlement of the Delaware Litigation (“May Settlement”). The May Settlement will settle and release certain claims that were asserted and/or could have been asserted against defendants in connection with Counts IV through VIII of the amended complaint. On the same day, the parties submitted the May Settlement to the Delaware Chancery Court. Plaintiff’s counsel will request an award of $8.0 million in attorneys fees, and costs, if approved by the Delaware Chancery Court, as part of the settlement of the Delaware Litigation. If approved, the attorneys fees and cost award will be paid by us and have all been accrued as of June 30, 2010.

The parties to the Delaware Litigation agreed to mediate the claims remaining in the Delaware Litigation and not resolved by the May Settlement. On July 7, 2010, the parties to the Delaware Litigation and their respective counsel engaged in a mediation conducted by a retired federal judge, which resulted in the parties reaching an agreement in principle to settle the remaining claims asserted against defendants in the complaint. The parties executed a term sheet on July 14, 2010 agreeing to settle the remaining claims for $14.5 million, to be paid primarily by defendants insurance carriers.

On July 23, 2010, the parties memorialized the term sheet and executed a Stipulation of Settlement (“July Settlement”) which would settle and release all remaining claims asserted or that could have been asserted against defendants in the amended complaint that will not be settled and released pursuant to the May Settlement, including the claims asserted against defendants in Counts I, II, III and IX of the amended complaint. On July 23, 2010, the parties submitted the July Settlement to the Delaware Chancery Court and requested that the Delaware Chancery Court enter a scheduling order for notice and hearing for final approval of the May and July Settlements.

On July 26, 2010 the Delaware Chancery Court entered a scheduling order setting the May and July Settlements for a hearing to consider final approval on October 6, 2010.

        The defendants in the Delaware Litigation have denied and continued to deny any wrongdoing or liability with respect to all claims, events and transactions complained of in the Delaware Litigation. The defendants have settled the Delaware Litigation to eliminate the uncertainty, burden, risk, expense and distraction of further litigation. The foregoing descriptions of the May and July Settlements do not purport to be complete, and a more detailed description of the May and July

17

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Settlements will be provided to current stockholders and certain of our former stockholders prior to the Delaware Chancery Court’s final approval of the May and July Settlements.

Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styledFrederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s restaurants, Inc., et al. was filed in the District Court of Harris County, 164^thJudicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165^thJudicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.

On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125^thJudicial District. The lawsuit is styledRobert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

On January 15, 2010, the Goldfein, Biancalana and Caryer actions were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter. In June 2010, the consolidated action was dismissed for lack of prosecution.

General Litigation

We are subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on our financial position, results of operations or cash flows.

10. INSURANCE RECOVERIES

In connection with flooding damage sustained at our Nashville, Tennessee locations, we recorded asset impairments totaling $5.9 million during the three and six months ended June 30, 2010, which were offset entirely by an insurance receivable. We also maintain business interruption insurance coverage and recorded approximately $1.1 million during the three and six months ended June 30, 2010, for amounts to be received related to lost profits. This amount was recorded as revenue in our consolidated financial statements.

On September 13, 2008, Hurricane Ike struck the Gulf Coast of the United States. The difference between impairments of book value arising from Hurricane Ike damage and the associated insurance proceeds resulted in the recognition of a $0.5 million gain during the three months ended June 30, 2009. No gain was recorded for the three months ended June 30, 2010. For the six months ended June 30, 2010 and 2009, a $1.2 million and $4.0 million gain was recognized, respectively.

        We also recorded approximately $0.2 million in business interruption insurance recoveries during the six months ended June 30, 2009 related to lost profits at our affected locations in Galveston and the Kemah Boardwalk. This amount was recorded as revenue in our consolidated financial statements.

18

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. SEGMENT INFORMATION

The following table presents certain financial information for continuing operations with respect to our reportable segments:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue:
Restaurant and hospitality	$	236,879,704		$	225,508,163		$	436,124,136		$	425,783,813
Gaming		57,727,627			56,497,178			117,214,068			112,511,511
Total	$	294,607,331		$	282,005,341		$	553,338,204		$	538,295,324
Unit level profit:
Restaurant and hospitality	$	54,012,317		$	52,042,588		$	95,150,500		$	103,785,336
Gaming		11,214,329			12,474,029			25,437,252			25,192,184
Total	$	65,226,646		$	64,516,617		$	120,587,752		$	128,977,520
Depreciation, amortization and impairment:
Restaurant and hospitality	$	16,271,235		$	12,358,543		$	28,238,923		$	24,783,404
Gaming		7,166,077			5,342,664			14,302,410			10,678,294
Total	$	23,437,312		$	17,701,207		$	42,541,333		$	35,461,698
Income before taxes:
Unit level profit	$	65,226,646		$	64,516,617		$	120,587,752		$	128,977,520
Depreciation, amortization and impairment		23,437,312			17,701,207			42,541,333			35,461,698
General and administrative		24,223,556			12,622,404			36,922,443			24,680,554
Gain on insurance claims		—			(520,751	)		(1,237,856	)		(4,003,648	)
Loss (gain) on disposal of assets		—			(741,016	)		(938,268	)		(1,363,315	)
Pre-opening		353,373			459,398			445,987			715,562
Interest expense, net		29,529,545			28,542,043			58,563,243			53,156,617
Other expense (income)		5,855,544			(4,690,409	)		(16,788,648	)		(555,997	)
Consolidated income from continuing operations before taxes	$	(18,172,684	)	$	11,143,741		$	1,079,518		$	20,886,049
							June 30, 2010			December 31, 2009
Segment assets:
Restaurant and hospitality							$	802,432,055		$	805,375,785
Gaming								689,727,415			703,718,596
Corporate and other (1)								191,061,091			190,973,436
							$	1,683,220,561		$	1,700,067,817

(1) Includes intersegment eliminations and assets and liabilities related to discontinued operations

12. SUPPLEMENTAL GUARANTOR INFORMATION

In November 2009, we issued, in a private offering, $406.5 million of 11⁵/8% Senior Secured Notes due in 2015 (see Note 5). In April 2010, we issued an additional $47.0 million of the 11 5/8% Senior Secured Notes. These notes are fully and unconditionally and joint and severally guaranteed by us and certain of our 100% owned subsidiaries, “Guarantor Subsidiaries”.

The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of our Guarantor Subsidiaries and Non-guarantor Subsidiaries on a combined basis with eliminating entries.

19

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Balance Sheet

June 30, 2010

	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	3,971,083	$	56,260,601		$	(717,233	)	$	59,514,451
Restricted cash and cash equivalents		73,208,655		—		—			—			73,208,655
Accounts receivable—trade and other, net		14,843,466		6,339,686		4,948,191			—			26,131,343
Inventories		12,054,712		13,572,167		3,019,395			—			28,646,274
Deferred taxes		21,689,730		1,231,293		3,870,882			—			26,791,905
Assets related to discontinued operations		1,500,000		460,344		—			—			1,960,344
Other current assets		5,538,388		2,998,880		5,360,822			—			13,898,090
Total current assets		128,834,951		28,573,453		73,459,891			(717,233	)		230,151,062
PROPERTY AND EQUIPMENT, net		8,659,483		651,320,349		663,887,006			—			1,323,866,838
GOODWILL		—		18,527,547		—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		2,145,582		14,922,181		28,001,222			—			45,068,985
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		842,624,544		44,446,820		(209,651,247	)		(677,420,117	)		—
OTHER ASSETS, net		35,804,057		3,964,174		25,837,898			—			65,606,129
Total assets	$	1,018,068,617	$	761,754,524	$	581,534,770		$	(678,137,350	)	$	1,683,220,561
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	22,097,911	$	21,145,586	$	9,731,114		$	(717,233	)	$	52,257,378
Accrued liabilities		51,239,440		46,709,625		36,404,634			—			134,353,699
Income taxes payable		—		2,074,161		—			(2,074,161	)		—
Current portion of long-term debt and other obligations		16,721,000		—		13,213,636			—			29,934,636
Liabilities related to discontinued operations		—		1,804,942		—			—			1,804,942
Total current liabilities		90,058,351		71,734,314		59,349,384			(2,791,394	)		218,350,655
LONG-TERM NOTES, NET OF CURRENT PORTION		586,602,799		—		436,748,542			—			1,023,351,341
DEFERRED TAXES		—		1,527,214		—			(1,527,214	)		—
OTHER LIABILITIES		27,913,714		22,403,719		77,707,379			—			128,024,812
Total liabilities		704,574,864		95,665,247		573,805,305			(4,318,608	)		1,369,726,808
COMMITMENTS AND
CONTINGENCIES
Redeemable noncontrolling interest		10,874,165		—		—			—			10,874,165
TOTAL EQUITY		302,619,588		666,089,277		7,729,465			(673,818,742	)		302,619,588
Total liabilities and equity	$	1,018,068,617	$	761,754,524	$	581,534,770		$	(678,137,350	)	$	1,683,220,561

20

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Financial Statements

Balance Sheet

December 31, 2009

	Parent		Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	4,074,225		$	68,574,641		$	(1,064,544	)	$	71,584,322
Restricted cash and cash equivalents		73,076,532		—			—			—			73,076,532
Accounts receivable—trade and other, net		17,268,549		8,097,176			3,365,219			—			28,730,944
Inventories		10,918,326		13,524,572			3,115,596			—			27,558,494
Deferred taxes		11,310,384		980,806			3,367,024			—			15,658,214
Assets related to discontinued operations		2,500,000		460,514			—			—			2,960,514
Other current assets		6,314,582		2,632,425			4,417,750			—			13,364,757
Total current assets		121,388,373		29,769,718			82,840,230			(1,064,544	)		232,933,777
PROPERTY AND EQUIPMENT, net		8,471,808		646,800,684			679,062,145			—			1,334,334,637
GOODWILL		—		18,527,547			—			—			18,527,547
OTHER INTANGIBLE ASSETS, net		2,079,922		8,468,181			28,171,222			—			38,719,325
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		800,537,567		(12,976,475	)		(179,551,749	)		(608,009,343	)		—
OTHER ASSETS, net		45,907,510		1,951,878			27,693,143			—			75,552,531
Total assets	$	978,385,180	$	692,541,533		$	638,214,991		$	(609,073,887	)	$	1,700,067,817
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	21,055,261	$	19,845,357		$	24,484,023		$	(1,064,544	)	$	64,320,097
Accrued liabilities		43,341,610		45,191,555			33,742,793			—			122,275,958
Income taxes payable		—		740,874			—			(740,874	)		—
Current portion of long-term debt and other obligations		16,735,000		—			13,446,424			—			30,181,424
Liabilities related to discontinued operations		—		2,850,225			—			—			2,850,225
Total current liabilities		81,131,871		68,628,011			71,673,240			(1,805,418	)		219,627,704
LONG-TERM NOTES, NET OF CURRENT PORTION		561,966,365		—			502,792,291			—			1,064,758,656
DEFERRED TAXES		—		1,862,190			—			(1,862,190	)		—
OTHER LIABILITIES		23,414,072		19,140,020			61,254,493			—			103,808,585
Total liabilities		666,512,308		89,630,221			635,720,024			(3,667,608	)		1,388,194,945
COMMITMENTS AND
CONTINGENCIES
Redeemable noncontrolling interest		10,318,386		—			—			—			10,318,386
TOTAL EQUITY		301,554,486		602,911,312			2,494,967			(605,406,279	)		301,554,486
Total liabilities and equity	$	978,385,180	$	692,541,533		$	638,214,991		$	(609,073,887	)	$	1,700,067,817

21

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended June 30, 2010

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	642,596		$	233,616,282		$	3,454,927		$	(834,101	)	$	236,879,704
Gaming:
Casino		—			—			32,710,900			—			32,710,900
Rooms		—			—			14,849,537			—			14,849,537
Food and beverage		—			—			12,184,991			—			12,184,991
Other		—			—			4,225,453			—			4,225,453
Promotional allowances		—			—			(6,243,254	)		—			(6,243,254	)
Net gaming revenue		—			—			57,727,627			—			57,727,627
Total revenue		642,596			233,616,282			61,182,554			(834,101	)		294,607,331
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			56,795,666			431,543			—			57,227,209
Labor		—			65,838,518			842,227			—			66,680,745
Other operating expenses		319,608			58,132,855			1,341,071			(834,101	)		58,959,433
Gaming:
Casino		—			—			17,914,539			—			17,914,539
Rooms		—			—			6,632,953			—			6,632,953
Food and beverage		—			—			6,781,219			—			6,781,219
Other		—			—			15,184,587			—			15,184,587
General and administrative expense		24,033,970			189,586			—			—			24,223,556
Depreciation and amortization		852,422			11,211,064			7,567,048			—			19,630,534
Asset impairment expense		—			3,806,778			—			—			3,806,778
Gain on insurance claims		—			—			—			—			—
Loss (gain) on disposal of assets		—			—			—			—			—
Pre-opening expenses		—			353,373			—			—			353,373
Total operating costs and expenses		25,206,000			196,327,840			56,695,187			(834,101	)		277,394,926
OPERATING INCOME		(24,563,404	)		37,288,442			4,487,367			—			17,212,405
OTHER EXPENSES (INCOME):
Interest expense, net		18,085,640			(48	)		11,443,953			—			29,529,545
Other, net		336,399			5,421			5,513,724			—			5,855,544
Total other expense		18,422,039			5,373			16,957,677			—			35,385,089
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(42,985,443	)		37,283,069			(12,470,310	)		—			(18,172,684	)
PROVISION (BENEFIT) FOR INCOME TAXES		2,742,375			(3,034,254	)		(4,141,846	)		—			(4,433,725	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(45,727,818	)		40,317,323			(8,328,464	)		—			(13,738,959	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(58,019	)		—			—			(58,019	)
EQUITY IN EARNINGS OF SUBSIDIARIES		31,930,840			—			—			(31,930,840	)		—
NET INCOME (LOSS)		(13,796,978	)		40,259,304			(8,328,464	)		(31,930,840	)		(13,796,978	)
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		333,972			—			—			—			333,972
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		(14,130,950	)		40,259,304			(8,328,464	)		(31,930,840	)		(14,130,950	)
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		—			—			—			—			—
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	(14,130,950	)	$	40,259,304		$	(8,328,464	)	$	(31,930,840	)	$	(14,130,950	)

22

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Three Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	511,813		$	222,346,836		$	3,406,034		$	(756,520	)	$	225,508,163
Gaming:
Casino		—			—			34,427,793			—			34,427,793
Rooms		—			—			12,441,637			—			12,441,637
Food and beverage		—			—			11,718,082			—			11,718,082
Other		—			—			4,109,943			—			4,109,943
Promotional allowances		—			—			(6,200,277	)		—			(6,200,277	)
Net gaming revenue		—			—			56,497,178			—			56,497,178
Total revenue		511,813			222,346,836			59,903,212			(756,520	)		282,005,341
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			53,610,512			495,366			—			54,105,878
Labor		—			63,308,614			881,275			—			64,189,889
Other operating expenses		(75,322	)		54,725,971			1,275,679			(756,520	)		55,169,808
Gaming:
Casino		—			—			17,511,110			—			17,511,110
Rooms		—			—			5,772,122			—			5,772,122
Food and beverage		—			—			6,732,630			—			6,732,630
Other		—			—			14,007,287			—			14,007,287
General and administrative expense		12,622,404			—			—			—			12,622,404
Depreciation and amortization		935,411			10,913,275			5,852,521			—			17,701,207
Gain on insurance claims		(158,788	)		—			(361,963	)		—			(520,751	)
Loss (gain) on disposal of assets		—			—			(741,016	)		—			(741,016	)
Pre-opening expenses		—			459,398			—			—			459,398
Total operating costs and expenses		13,323,705			183,017,770			51,425,011			(756,520	)		247,009,966
OPERATING INCOME		(12,811,892	)		39,329,066			8,478,201			—			34,995,375
OTHER EXPENSES (INCOME):
Interest expense, net		20,417,036			(69	)		8,125,076			—			28,542,043
Other, net		(411,144	)		—			(4,279,265	)		—			(4,690,409	)
Total other expense		20,005,892			(69	)		3,845,811			—			23,851,634
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(32,817,784	)		39,329,135			4,632,390			—			11,143,741
PROVISION (BENEFIT) FOR INCOME TAXES		(7,710,625	)		9,150,063			1,107,394			—			2,546,832
INCOME (LOSS) FROM CONTINUING OPERATIONS		(25,107,159	)		30,179,072			3,524,996			—			8,596,909
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(47,867	)					—			(47,867	)
EQUITY IN EARNINGS OF SUBSIDIARIES		33,656,201			—			—			(33,656,201	)		—
NET INCOME (LOSS)		8,549,042			30,131,205			3,524,996			(33,656,201	)		8,549,042
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		283,730			—			—			—			283,730
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		8,265,312			30,131,205			3,524,996			(33,656,201	)		8,265,312
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		1,660,878			—			—			—			1,660,878
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	6,604,434		$	30,131,205		$	3,524,996		$	(33,656,201	)	$	6,604,434

23

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Six Months Ended June 30, 2010

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	1,181,778		$	430,684,493		$	6,056,265		$	(1,798,400	)	$	436,124,136
Gaming:
Casino		—			—			69,528,699			—			69,528,699
Rooms		—			—			28,962,911			—			28,962,911
Food and beverage		—			—			23,285,696			—			23,285,696
Other		—			—			8,142,864			—			8,142,864
Promotional allowances		—			—			(12,706,102	)		—			(12,706,102	)
Net gaming revenue		—			—			117,214,068			—			117,214,068
Total revenue		1,181,778			430,684,493			123,270,333			(1,798,400	)		553,338,204
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			105,404,898			831,378			—			106,236,276
Labor		—			123,587,209			1,588,695			—			125,175,904
Other operating expenses		505,862			108,331,679			2,522,315			(1,798,400	)		109,561,456
Gaming:
Casino		—			—			36,344,763			—			36,344,763
Rooms		—			—			12,560,247			—			12,560,247
Food and beverage		—			—			13,122,818			—			13,122,818
Other		—			—			29,748,988			—			29,748,988
General and administrative expense		36,732,857			189,586			—			—			36,922,443
Depreciation and amortization		1,728,907			21,905,399			15,100,249			—			38,734,555
Asset impairment expense		—			3,806,778			—			—			3,806,778
Gain on insurance claims		—			(669,826	)		(568,030	)		—			(1,237,856	)
Loss (gain) on disposal of assets		(938,268	)		—			—			—			(938,268	)
Pre-opening expenses		��			445,987			—			—			445,987
Total operating costs and expenses		38,029,358			363,001,710			111,251,423			(1,798,400	)		510,484,091
OPERATING INCOME		(36,847,580	)		67,682,783			12,018,910			—			42,854,113
OTHER EXPENSES (INCOME):
Interest expense, net		35,697,120			(80	)		22,866,203			—			58,563,243
Other, net		234,929			103,219			(17,126,796	)		—			(16,788,648	)
Total other expense		35,932,049			103,139			5,739,407			—			41,774,595
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(72,779,629	)		67,579,644			6,279,503			—			1,079,518
PROVISION (BENEFIT) FOR INCOME TAXES		(4,468,794	)		4,305,674			395,609			—			232,489
INCOME (LOSS) FROM CONTINUING OPERATIONS		(68,310,835	)		63,273,970			5,883,894			—			847,029
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(96,005	)		—			—			(96,005	)
EQUITY IN EARNINGS OF SUBSIDIARIES		69,061,859			—			—			(69,061,859	)		—
NET INCOME (LOSS)		751,024			63,177,965			5,883,894			(69,061,859	)		751,024
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		555,779			—			—			—			555,779
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		195,245			63,177,965			5,883,894			(69,061,859	)		195,245
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		—			—			—			—			—
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	195,245		$	63,177,965		$	5,883,894		$	(69,061,859	)	$	195,245

24

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Income

Six Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
REVENUES
Restaurant and hospitality	$	988,278		$	418,589,258		$	7,876,972		$	(1,670,695	)	$	425,783,813
Gaming:
Casino		—			—			70,396,082			—			70,396,082
Rooms		—			—			24,847,453			—			24,847,453
Food and beverage		—			—			22,204,310			—			22,204,310
Other		—			—			7,722,307			—			7,722,307
Promotional allowances		—			—			(12,658,641	)		—			(12,658,641	)
Net gaming revenue		—			—			112,511,511			—			112,511,511
Total revenue		988,278			418,589,258			120,388,483			(1,670,695	)		538,295,324
OPERATING COSTS AND EXPENSES:
Restaurant and hospitality:
Cost of revenues		—			102,755,506			1,013,897			—			103,769,403
Labor		—			120,486,977			1,698,620			—			122,185,597
Other operating expenses		(469,551	)		95,638,122			2,545,601			(1,670,695	)		96,043,477
Gaming:
Casino		—			—			37,131,600			—			37,131,600
Rooms		—			—			11,381,837			—			11,381,837
Food and beverage		—			—			12,433,916			—			12,433,916
Other		—			—			26,371,974			—			26,371,974
General and administrative expense		24,680,554			—			—			—			24,680,554
Depreciation and amortization		1,958,626			21,958,711			11,544,361			—			35,461,698
Gain on insurance claims		(3,641,685	)		—			(361,963	)		—			(4,003,648	)
Loss (gain) on disposal of assets		(4,931	)		—			(1,358,384	)		—			(1,363,315	)
Pre-opening expenses		—			715,562			—			—			715,562
Total operating costs and expenses		22,523,013			341,554,878			102,401,459			(1,670,695	)		464,808,655
OPERATING INCOME		(21,534,735	)		77,034,380			17,987,024			—			73,486,669
OTHER EXPENSES (INCOME):
Interest expense, net		36,385,359			(69	)		16,771,327			—			53,156,617
Other, net		3,863,993			(121	)		(4,419,869	)		—			(555,997	)
Total other expense		40,249,352			(190	)		12,351,458			—			52,600,620
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(61,784,087	)		77,034,570			5,635,566			—			20,886,049
PROVISION (BENEFIT) FOR INCOME TAXES		(15,010,458	)		18,586,700			1,358,171			—			4,934,413
INCOME (LOSS) FROM CONTINUING OPERATIONS		(46,773,629	)		58,447,870			4,277,395			—			15,951,636
INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET OF TAXES		—			(98,770	)					—			(98,770	)
EQUITY IN EARNINGS OF SUBSIDIARIES		62,626,495			—			—			(62,626,495	)		—
NET INCOME (LOSS)		15,852,866			58,349,100			4,277,395			(62,626,495	)		15,852,866
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		514,308			—			—			—			514,308
NET INCOME (LOSS) ATTRIBUTABLE TO LANDRY’S		15,338,558			58,349,100			4,277,395			(62,626,495	)		15,338,558
LESS: ACCRETION OF REDEEMABLE NONCONTROLLING INTERESTS		2,725,641			—			—			—			2,725,641
NET INCOME (LOSS) AVAILABLE TO LANDRY’S COMMON STOCKHOLDERS	$	12,612,917		$	58,349,100		$	4,277,395		$	(62,626,495	)	$	12,612,917

25

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Six months ended June 30, 2010

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	751,024		$	63,177,965		$	5,883,894		$	(69,061,859	)	$	751,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,728,907			21,905,399			15,100,249			—			38,734,555
Gain on disposition of assets		(938,268	)		—			(1,605,708	)		1,605,708			(938,268	)
Gain on insurance claims		—			(669,826	)		(568,030	)		—			(1,237,856	)
Change in assets and liabilities, net and other		(24,129,327	)		(46,729,268	)		14,334,330			67,803,462			11,279,197
Total adjustments		(23,338,688	)		(25,493,695	)		27,260,841			69,409,170			47,837,628
Net cash provided (used) by operating activities		(22,587,664	)		37,684,270			33,144,735			347,311			48,588,652
CASH FLOWS FROM INVESTING
ACTIVITIES:
Property and equipment additions		(1,537,023	)		(16,414,116	)		(10,959,368	)		—			(28,910,507	)
Proceeds from disposition of assets		1,952,715			669,826			568,030			—			3,190,571
Increase in restricted cash		(132,123	)		—			—			—			(132,123	)
Business acquisitions, net of cash acquired		—			(22,043,122	)		—			—			(22,043,122	)
Net cash provided by (used in) investing activities		283,569			(37,787,412	)		(10,391,338	)		—			(47,895,181	)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Purchases of common stock for treasury		(42,884	)		—			—			—			(42,884	)
Payments of debt and related expenses, net		(8,000,000	)		—			(31,705,467	)		—			(39,705,467	)
Financing proceeds		49,820,000			—			—			—			49,820,000
Repayment of bonds		(14,000	)		—			—			—			(14,000	)
Debt issuance costs		(1,459,021	)		—			(1,789,137	)		—			(3,248,158	)
Proceeds from credit facility		94,000,000			—			46,283,946			—			140,283,946
Payments on credit facility		(112,000,000	)		—			(47,856,779	)		—			(159,856,779	)
Net cash provided (used) in financing activities		22,304,095			—			(35,067,437	)		—			(12,763,342	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			(103,142	)		(12,314,040	)		347,311			(12,069,871	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		—			4,074,225			68,574,641			(1,064,544	)		71,584,322
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	3,971,083		$	56,260,601		$	(717,233	)	$	59,514,451

26

LANDRY’S RESTAURANTS, INC.

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Unaudited Consolidating Financial Statements

Statement of Cash Flows

Six Months Ended June 30, 2009

	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated Entity
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,852,866		$	58,349,100		$	4,277,395		$	(62,626,495	)	$	15,852,866
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,958,626			21,958,711			11,544,361			—			35,461,698
Gain on disposition of assets		(4,931	)		—			(1,358,384	)		—			(1,363,315	)
Gain on insurance claims		(3,641,685	)		—			(361,963	)		—			(4,003,648	)
Change in assets and liabilities, net and other		13,684,189			(53,408,279	)		(4,440,136	)		62,775,822			18,611,596
Total adjustments		11,996,199			(31,449,568	)		5,383,878			62,775,822			48,706,331
Net cash provided (used) by operating activities		27,849,065			26,899,532			9,661,273			149,327			64,559,197
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions		1,169,447			(28,489,459	)		(69,686,770	)		—			(97,006,782	)
Proceeds from disposition of assets		3,646,616			—			6,684,983			—			10,331,599
Net cash provided by (used in) investing activities		4,816,063			(28,489,459	)		(63,001,787	)		—			(86,675,183	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of common stock for treasury		(47,931	)		—			—			—			(47,931	)
Proceeds from exercise of stock options		30,628			—			—			—			30,628
Payments of debt and related expenses, net		(2,503,832	)		—			(561,194	)		—			(3,065,026	)
Financing proceeds		390,040,000			—			—			—			390,040,000
Repayment of bonds		(398,362,000	)		—			—			—			(398,362,000	)
Debt issuance costs		(17,639,190	)		—			—			—			(17,639,190	)
Proceeds from credit facility		97,633,246			—			126,060,606			—			223,693,852
Payments on credit facility		(101,816,049	)		—			(56,000,000	)		—			(157,816,049	)
Net cash provided by (used in) financing activities		(32,665,128	)		—			69,499,412			—			36,834,284
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			(1,589,927	)		16,158,898			149,327			14,718,298
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		—			5,705,232			46,595,810			(1,234,237	)		51,066,805
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	4,115,305		$	62,754,708		$	(1,084,910	)	$	65,785,103

27

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

Introduction

The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.

We are a national, diversified, restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full service, casual dining restaurants and gaming facilities. We locate our restaurants in high-profile, specialty locations in markets that provide a balanced mix of tourist, convention, business and residential clientele. We focus on providing quality food at reasonable prices while offering a memorable atmosphere for our guests. As of June 30, 2010, we operated 183 restaurants, as well as several limited menu restaurants and other properties, including the Golden Nugget Hotels and Casinos (“Golden Nugget”) in Las Vegas and Laughlin, Nevada.

Merger Agreement

In August 2009, we established a special committee comprised entirely of independent directors to review strategic alternatives. On November 3, 2009, the special committee recommended that our board accept a proposal from Mr. Fertitta to acquire all of our stock that he does not already own for $14.75 per share, in cash, and the board of directors approved the execution of a merger agreement with companies wholly-owned by Mr. Fertitta (original merger agreement).

On May 23, 2010, we entered into an amendment to the original merger agreement (first amended merger agreement). Pursuant to the first amended merger agreement, Mr. Fertitta agreed to acquire all of our stock that he does not already own for $24.00 per share, in cash.

On June 20, 2010, we entered into a second amendment to the original merger agreement (second amended merger agreement, and collectively with the original merger agreement and the first amended merger agreement, the merger agreement). Pursuant to the second amended merger agreement, Mr. Fertitta agreed to acquire all of our stock that he does not already own for $24.50 per share, in cash. In connection with the second amended merger agreement, we entered into voting agreements with Pershing Square Capital Management, L.P. and Pershing Square GP, LLC and with Richard T. McGuire (collectively, the Pershing Square Group), whereby the Pershing Square Group has agreed to support the merger, subject to the terms and conditions set forth in the voting agreements. As of June 20, 2010, the Pershing Square Group beneficially owned approximately 9.9% of our outstanding shares of common stock.

On May 24, 2010, we announced that a partial settlement (the May Settlement) has been reached to settle derivative and certain other claims against Mr. Fertitta, affiliates of Mr. Fertitta and our directors in the lawsuit entitledLouisiana Municipal Police Employees’ Retirement System, on behalf of itself and all other similarly situated shareholders of Landry’s Restaurants, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurants, Inc. v. Tilman J. Fertitta, et al., C.A. No. 4339-VCL, in the Court of Chancery of the State of Delaware (the Delaware litigation).

On July 15, 2010, we also reached an agreement (the July Settlement) with plaintiff’s attorneys to settle all remaining claims in the Delaware litigation for $14.5 million. Under the July Settlement, defendants will deposit $14.5 million in escrow to pay the class claims and their attorney’s fees. The proceeds of the July Settlement will be paid primarily from existing insurance policies. The July Settlement is subject to approval by the court after notice and a fairness hearing. In addition, we reached agreement on the May settlement to pay attorney’s fees of $8.0 million, subject to court approval all of which have been accrued as of June 30, 2010.

Our board of directors, acting upon the unanimous recommendation of the special committee, has approved the merger agreement and has recommended that our stockholders vote in favor of the merger agreement. There can be no assurances that the proposed acquisition will be approved by our stockholders or that an acceptable transaction will be completed.

Oceanaire Acquisition

On April 30, 2010, we completed the acquisition of all of the capital stock of the Oceanaire, Inc (Oceanaire), and its wholly owned subsidiaries, a seafood restaurant company with 12 locations, in accordance with a plan of reorganization submitted by the unsecured creditors of Oceanaire in a U.S. Bankruptcy court for $23.4 million in cash, plus the assumption of certain additional working capital liabilities. The acquisition of Oceanaire provides additional growth within our high end seafood line, as well as a known brand.

Nashville Flood

        In May 2010, Nashville, Tennessee experienced severe flooding that resulted in closing the Opry Mills Mall where we operated both a Rainforest Café and an Aquarium restaurant. These restaurants remain closed and cannot effectively reopen

28

until the mall reopens. We cannot estimate the reopening date at this time, but believe it may not occur until 2011. We have sufficient insurance for reconstruction, and substantial business interruption coverage, enhanced by rent abatement during the mall closure. There is no assurance that the restaurant will reopen prior to exhausting such coverage.

Other Matters

During 2006, as part of a strategic review of our operations, we initiated a plan to divest certain restaurants, including 136 Joe’s Crab Shack units. Subsequently, several additional locations were added to our disposal plan. The results of operations for all units included in the disposal plan have been reclassified to discontinued operations in the statements of income, balance sheets and segment information for all periods presented.

The restaurant and gaming industries are intensely competitive and affected by changes in consumer tastes and by national, regional, and local economic conditions and demographic trends. The performance of individual restaurants or casinos may be affected by factors such as: traffic patterns, demographic considerations, marketing, weather conditions, and the type, number, and location of competing operations. We have many well established competitors with greater financial resources, larger marketing and advertising budgets, and longer histories of operation than ours, including competitors already established in regions where we are considering expansion, as well as competitors planning to expand in the same regions. We face significant competition from other casinos in the markets in which we operate and from other mid-priced, full-service, casual dining restaurants offering or promoting seafood and other types and varieties of cuisine. Our competitors include national, regional, and local chains as well as local owner-operated restaurants. We also compete with other restaurants and retail establishments for restaurant sites.

The current economic conditions in the United States have continued to have a negative impact on our results of operations during 2010. A decline in discretionary spending attributable to tighter credit markets, high unemployment, increased home foreclosures, and other factors have impacted our customer’s level of spending on dining out, gaming, and tourism in general. It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and the extent to which our operations will be adversely affected.

Results of Operations

The following table sets forth the percentage relationship to total revenues of certain operating data for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Restaurant and hospitality:
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	24.2	%	24.0	%	24.4	%	24.4	%
Labor	28.1	%	28.5	%	28.7	%	28.7	%
Other operating expenses (1)	24.9	%	24.4	%	25.1	%	22.5	%
Unit Level Profit (1)	22.8	%	23.1	%	21.8	%	24.4	%
Gaming:
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Casino costs	31.0	%	31.0	%	31.0	%	33.0	%
Rooms costs	11.5	%	10.2	%	10.7	%	10.1	%
Food and beverage costs	11.7	%	11.9	%	11.2	%	11.1	%
Other operating expenses (1)	26.4	%	24.8	%	25.4	%	23.4	%
Unit Level Profit (1)	19.4	%	22.1	%	21.7	%	22.4	%

(1) Excludes depreciation, amortization, asset impairment, general and administrative and pre-opening expenses.

Three months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009

Restaurant and Hospitality

Restaurant and hospitality revenues increased $11,371,541, or 5.0%, from $225,508,163 to $236,879,704 for the three months ended June 30, 2010 compared to the prior year comparable period. The change in revenue is the result of the following approximate amounts: acquisition of Oceanaire— increase $9.9 million; new restaurant openings—increase $4.4 million; same store sales (restaurants open all of the first quarter 2010 and 2009)—increase $0.8 million; closed or sold

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restaurants—decrease $4.4 million and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of June 30, 2010 and 2009 was 183 and 175, respectively.

Cost of revenues increased $3,121,331 or 5.8%, from $54,105,878 to $57,227,209 for the three months ended June 30, 2010 as compared to the prior year and such expenses increased as a percentage of revenues for the three months ended June 30, 2010 to 24.2% from 24.0% in 2009. This increase is due primarily to the increase in revenues, as well as a change in product mix and higher average costs associated with Oceanaire as a percentage of revenue.

Labor expense increased $2,490,856, or 3.9%, from $64,189,889 to $66,680,745 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. Labor expenses as a percentage of revenues for 2010 decreased to 28.1% from 28.5% in 2009. The increase in labor expense associated with increased revenues was partially offset by the impact of reduced bonuses.

Other operating expenses increased $3,789,625 or 6.9%, from $55,169,808 to $58,959,433 for the three months ended June 30, 2010 as compared to the prior year period and such expenses increased as a percentage of revenues to 24.9% in 2010 from 24.4% in 2009. The increase primarily relates to the increase in revenues, additional repairs and maintenance costs and loyalty program costs.

Gaming

Casino revenues decreased $1,716,893, or 5.0%, from $34,427,793 to $32,710,900 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. This decrease is primarily the result of lower table game revenue and reduced slot activity, primarily in Las Vegas.

Room revenues increased $2,407,900, or 19.4%, from $12,441,637 to $14,849,537 for the three months ended June 30, 2010 as compared to the prior year period. This increase is the result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009, partially offset by reduced average daily room rates in Las Vegas as compared to the prior year period.

Food and beverage revenues increased $466,909, or 4.0%, from $11,718,082 to $12,184,991 for the three months ended June 30, 2010 as compared to the comparable prior year period. This increase is a result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009.

Casino expenses increased $403,429, or 2.3%, from $17,511,110 to $17,914,539 for the three months ended June 30, 2010 as compared to the comparable prior year period. This increase is primarily the result of increased promotional expenses.

Room expenses increased $860,831 or 14.9% from $5,772,122 to $6,632,953 for the three months ended June 30, 2010 as compared to the comparable prior year period. This increase is primarily the result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009.

Other expenses increased $1,177,300, or 8.4%, from $14,007,287 to $15,184,587 for the three months ended June 30, 2010 as compared to the comparable period in the prior year. This increase resulted primarily from increased staffing levels, maintenance, and utilities associated with the opening of Rush Tower in the fourth quarter of 2009.

Consolidated

General and administrative expenses increased $11,601,152 or 91.9%, from $12,622,404 to $24,223,556 for the three months ended June 30, 2010 as compared to the comparable prior year period and increased as a percentage of revenue to 8.2% in 2010 from 4.5% in 2009. This increase is primarily the result of charges associated with the settlements reached in the Delaware litigation, as well as fees and expenses associated with the Oceanaire acquisition and the merger transaction.

Depreciation and amortization expense increased $1,929,327, or 10.9%, from $17,701,207 to $19,630,534 for the three months ended June 30, 2010 as compared to the comparable prior year period as a result of increased depreciation expense associated with the opening of Rush Tower in the fourth quarter of 2009 and the Oceanaire acquisition.

Impairment expense amounted to $3,806,778 for the three months ended June 30, 2010 and was related to two underperforming restaurant locations.

We recorded a gain on insurance claims of $520,751 during 2009, representing insurance proceeds associated with Hurricane Ike that exceeded the recorded book value of the assets which were damaged. No gain was recorded in 2010.

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We recorded gains on disposal of assets amounting to $741,016 during 2009, as a result of gains associated with the disposition of two restaurant properties. No gain was recorded in 2010.

Pre-opening expenses decreased by $106,025, or 23.1% from $459,398 to $353,373 for the three months ended June 30, 2010 as compared to the comparable prior year period due to reduced activity.

Net interest expense for the three months ended June 30, 2010 increased by $987,502, or 3.5%, from $28,542,043 to $29,529,545 as compared to the comparable prior year period. This increase is primarily due to increased borrowings associated with our refinancing and construction of the Golden Nugget tower.

Other expense amounted to $5,855,544 for the three months ended June 30, 2010 as compared to other income totaling $4,690,409 for the three months ended June 30, 2009. The 2010 amount relates primarily to non-cash charges of $5.3 million related to interest rate swaps not considered hedges. The 2009 amount related primarily to non-cash gains of $4.9 million related to interest rate swaps that were not considered hedges.

A benefit for income taxes of $4,433,725 was recorded for three months ended June 30, 2010 compared with a provision of $2,546,832 for the three months ended June 30, 2009. The effective tax rate for 2010 was 24.4% compared to 22.9% for the prior year period.

Six months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

Restaurant and Hospitality

Restaurant and hospitality revenues increased $10,340,323, or 2.4%, from $425,783,813 to $436,124,136 for the six months ended June 30, 2010 compared to the prior year comparable period. The change in revenue is the result of the following approximate amounts: acquisition of Oceanaire— increase $9.9 million; new restaurant openings—increase $6.9 million; same store sales (restaurants open all of the first six months of 2010 and 2009)—decrease $2.0 million; closed or sold restaurants—decrease $6.5 million and the remainder of the difference is attributable to the change in sales for stores not open a full comparable period or other sales. The total number of units open as of June 30, 2010 and 2009 was 183 and 175, respectively.

Cost of revenues increased $2,466,873, or 2.4%, from $103,769,403 to $106,236,276 for the six months ended June 30, 2010 as compared to the prior year and such expenses as a percentage of revenues for the six months ended June 30, 2010 were flat at 24.4%. This increase in costs is due primarily to the increase in revenues.

Labor expense increased $2,990,307, or 2.4%, from $122,185,597 to $125,175,904 for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009. Labor expenses as a percentage of revenues for 2010 were flat at 28.7%. The increase in expense was due primarily to the increase in revenues.

Other operating expenses increased $13,517,979 or 14.1%, from $96,043,477 to $109,561,456 for the six months ended June 30, 2010 as compared to the prior year period and such expenses increased as a percentage of revenues to 25.1% in 2010 from 22.5% in 2009. This increase primarily relates to decreased rent expense in 2009 associated with a $7.5 million lease termination payment received from a landlord, increased revenues as compared to 2009 and increased marketing and promotions spend as compared to the comparable prior year period.

Gaming

Casino revenues decreased $867,383, or 1.2%, from $70,396,082 to $69,528,699 for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009. This decrease is primarily the result of lower table game and slot revenue, primarily in Las Vegas.

Room revenues increased $4,115,458, or 16.6%, from $24,847,453 to $28,962,911 for the six months ended June 30, 2010 as compared to the prior year period. This increase is the result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009, partially offset by reduced average daily room rates in Las Vegas as compared to the prior year period.

Food and beverage revenues increased $1,081,386, or 4.9%, from $22,204,310 to $23,285,696 for the six months ended June 30, 2010 as compared to the comparable prior year period. This increase is a result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009, as well as the temporary closure of certain outlets in the first quarter of 2009 as a cost saving measure.

Other revenues increased $420,557, or 5.4%, from $7,722,307 to $8,142,864 for the six months ended June 30, 2010 as a result of increased retail revenue as a result of the increased occupied rooms and the opening of new retail outlets in the Rush Tower.

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Casino expenses decreased $786,837, or 2.1%, from $37,131,600 to $36,344,763 for the six months ended June 30, 2010 as compared to the comparable prior year period. This decrease is primarily the result of reduced payroll related costs.

Room expenses increased $1,178,410 or 10.4% from $11,381,837 to $12,560,247 for the six months ended June 30, 2010 as compared to the comparable prior year period. This increase is primarily the result of additional occupied rooms associated with the opening of Rush Tower in the fourth quarter of 2009.

Food and beverage expenses increased $688,902, or 5.5%, from $12,433,916 to $13,122,818 for the six months ended June 30, 2010 as compared to the comparable prior year period. This increase is a result of the additional traffic associated with the opening of Rush Tower in the fourth quarter of 2009, as well as the temporary closure of certain outlets in the first quarter of 2009 as a cost saving measure.

Other expenses increased $3,377,014, or 12.8%, from $26,371,974 to $29,748,988 for the six months ended June 30, 2010 as compared to the comparable period in the prior year. This increase resulted primarily from increased staffing levels, maintenance, and utilities associated with the opening of Rush Tower in the fourth quarter of 2009 and increased cost of additional retail sales.

Consolidated

General and administrative expenses increased $12,241,889 or 49.6%, from $24,680,554 to $36,922,443 for the six months ended June 30, 2010 as compared to the comparable prior year period and increased as a percentage of revenue to 6.7% in 2010 from 4.6% in 2009. This increase is primarily the result of charges associated with the settlements reached in the Delaware litigation, as well as fees and expenses associated with the Oceanaire acquisition and the merger transaction.

Depreciation and amortization expense increased $3,272,857, or 9.2%, from $35,461,698 to $38,734,555 for the six months ended June 30, 2010 as compared to the comparable prior year period largely as a result of increased depreciation expense associated with the opening of Rush Tower in the fourth quarter of 2009 and the Oceanaire acquisition.

Impairment expense amounted to $3,806,778 for the six months ended June 30, 2010 and was related to two underperforming restaurant locations.

We recorded $1,237,856 for the six months ended June 30, 2010 as income representing insurance proceeds associated with Hurricane Ike that exceeded the recorded book value of the assets which were damaged. Gains recorded in 2009 amounted to $4,003,648.

Gains on disposals of assets amounted to $938,268 for the six months ended June 30, 2010 as a result of gains on the disposition of two restaurant properties. Gains on disposals of fixed assets amounted to $1,363,315 for the six months ended June 30, 2009 as a result of a gain on the disposition of property in Galveston, Texas and a single restaurant location.

Pre-opening expenses decreased by $269,575, or 37.7% from $715,562 to $445,987 for the six months ended June 30, 2010 as compared to the comparable prior year period due to reduced activity.

Net interest expense for the six months ended June 30, 2010 increased by $5,406,626, or 10.2%, from $53,156,617 to $58,563,243 as compared to the comparable prior year period. This increase is primarily due to increased borrowings associated with our refinancing and construction of the Golden Nugget tower.

Other income amounted to $16,788,648, for the six months ended June 30, 2010 as compared to other income totaling $555,997 for the six months ended June 30, 2009. The 2010 amount relates primarily to a $33.0 million gain related to the repurchase of $62.8 million of the Golden Nugget second lien indebtedness at 40% of face value, partially offset by non-cash charges of $15.3 million related to interest rate swaps not considered hedges. The 2009 amount is primarily comprised of non-cash gains of $4.9 million related to interest rate swaps not considered hedges, partially offset by $4.0 million in call premiums associated with refinancing our 7.5% and 9.5% senior notes.

A provision for income taxes of $232,489 was recorded for the six months ended June 30, 2010 compared with a provision of $4,934,413 for the six months ended June 30, 2009. The effective tax rate for 2010 was 21.5% compared to 23.6% for the prior year period.

Liquidity and Capital Resources

On April 28, 2010, we announced the completion of an offering of an additional $47.0 million aggregate principal amount of 11 5/8% senior secured notes due 2015 (the “Additional Notes”). The sale of the Additional Notes provided gross proceeds of approximately $49.8 million which were used to pay for the acquisition of The Oceanaire, Inc. (“Oceanaire”), and its wholly owned subsidiaries, to repay outstanding revolver balances and for general corporate purposes.

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On November 30, 2009, we completed the offering of $406.5 million in aggregate principal amount of 11 5/8 % senior secured notes due 2015 (the “Initial Notes”). The gross proceeds from the offering and sale of the Initial Notes were $400.1 million, (the Initial Notes and the Additional Notes are herein referred to as the “Notes”). The Notes are unconditionally guaranteed on a senior secured basis as to principal, premium, if any, and interest by all of our current and future domestic restricted subsidiaries (each individually a Guarantor and collectively, the Guarantors) and are secured by a second lien position on substantially all assets of Landry’s and the Guarantors.

On April 26, 2010 and July 23, 2010, we and the Guarantors commenced an offer to exchange the Initial Notes and Additional Notes, respectively, for notes registered under the Securities Act, having substantially identical terms as the Initial Notes. The offer to exchange the Initial Notes was completed on May 28, 2010 and all $406.5 million of the Initial Notes Series A were exchanged for registered Initial Notes Series B. The exchange offer for the Additional Notes has not yet been completed.

The Indenture under which the Notes have been issued contains covenants that will limit our ability of the Company and the ability of the Guarantors to, among other things: incur or guarantee additional indebtedness or issue disqualified capital stock; transfer or sell assets; pay dividends or distributions, redeem subordinated indebtedness, make certain types of investments or make other restricted payments; create or incur liens; incur dividend or other payment restrictions affecting certain subsidiaries; consummate a merger, consolidation or sale of all or substantially all assets; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; engage in business other than a business that is the same or similar to the current business and reasonably related businesses; take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes.

On November 30, 2009, we also amended and restated our Credit Agreement (the Amended Credit Facility) to allow us to borrow $235.6 million. The Amended Credit Facility provides for a term loan of $160.6 million and a revolving credit line of $75.0 million. The obligations under the Amended Credit Facility are unconditionally guaranteed by the Guarantors and are secured by a first lien position on substantially all assets of Landry’s and the Guarantors.

Interest on the Amended Credit Facility accrues at a base rate (which is the greater of 4.0%, the Federal Funds Rate plus 0.5% or Wells Fargo’s prime rate) plus a credit spread of 5.0%, or at our option, at the Eurodollar base rate but no less than 2.0%, plus a credit spread of 6.0%, and matures on November 30, 2013.

The Amended Credit Facility contains covenants that limit our ability and the ability of the Guarantors to, among other things, incur or guarantee additional indebtedness; create liens; make capital expenditures; pay dividends on or repurchase stock; make certain types of investments; sell assets or merge with other companies. The Amended Credit Facility contains financial covenants, including a maximum leverage ratio, a maximum senior leverage ratio, and a minimum fixed charge coverage ratio.

Proceeds from the Initial Notes and the Amended Credit Facility were used to repay all of our then outstanding 14.0% Senior Secured Notes due 2011, pay fees and expenses and provide approximately $73.0 million in restricted cash available to complete a proposed merger of an affiliate of Tilman Fertitta and us. In connection with the repayment of the 14.0% Senior Secured Notes, we expensed $35.6 million in interest expense, primarily associated with early recognition of unamortized discount and deferred loan costs.

On February 13, 2009, we completed an offering of $295.5 million in aggregate principal amount of 14.0% Senior Secured Notes due 2011 (the “Series A Notes”). The gross proceeds from the offering and sale of the Series A Notes were $260.0 million were used in conjunction with borrowing under our then outstanding credit facility to refinance substantially all of our outstanding $400.0 million of 9.5% and 7.5% senior notes due 2014. The Series A Notes were unconditionally guaranteed by the Guarantors and were secured by a second lien position on substantially all of our and the Guarantors’ assets.

On February 17, 2010, the Golden Nugget, Inc., a wholly owned, unrestricted subsidiary of ours, entered into Amendment No. 2 and Waiver to the First Lien Credit Agreement (First Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Bank and Issuing Bank, and each of the Lender parties thereto, dated June 14, 2007.

The First Lien Second Amendment replaced the existing first lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum capital expenditure (CAPEX) covenants. In addition, consenting First Lien lenders received a consent fee of 0.5% and all First Lien lenders will receive a 0.5% annual consent fee on outstanding commitments through maturity. First Lien Lenders will also receive additional interest in an amount equal to 1.00% per annum on unpaid Advances in the form of “PIK” interest, or at the option of Golden Nugget, cash. The First Lien Second Amendment precludes dividends or other restricted payments, limits incurring additional debt, making investments and other

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cash distributions from the Golden Nugget, increases the excess cash flow sweep to 75% from 50% if certain liquidity levels are reached and requires additional reporting of financial performance including cash flow reports. Certain potential defaults under the existing First Lien Credit Agreement were waived.

Concurrently with the First Lien Second Amendment, the Golden Nugget entered into Amendment No. 2 and Waiver to the Second Lien Credit Agreement (Second Lien Second Amendment) by and among Golden Nugget, Inc., Wachovia Bank, National Association and the other financial institutions parties thereto, dated June 14, 2007. The Second Lien Second Amendment replaced the existing second lien financial covenants with minimum EBITDA, minimum liquidity, minimum cage cash and maximum CAPEX covenants and waived certain potential defaults under the existing Second Lien Credit Agreement. The Second Lien Second Amendment advances the maturity date on the second lien facility from December 31, 2014 to November 2, 2014. The maturity date on the existing $4.0 million Seller note was extended to November 2, 2014 from November 2, 2010.

In connection with the Golden Nugget amendments, affiliates of the Golden Nugget provided $50.0 million in additional funds to the Golden Nugget in return for non-interest bearing subordinated notes. $20.0 million of these funds was used for operating liquidity and to pay fees and expenses associated with the amendments. $30.0 million was available to purchase second lien indebtedness at 40% of face value. At closing, approximately $62.8 million of second lien indebtedness was acquired and retired at 40% of face value and accordingly, a $33.0 million gain was recognized in other income, net during the three months ended March 31, 2010. The remaining balance of the $30.0 million not used to purchase second lien debt by December 31, 2010, if any, will be used to purchase first lien debt at par value. All such purchased debt shall be immediately retired. The Golden Nugget may also incur up to an additional $8.0 million in affiliate subordinated debt during the remaining term of the First Lien Credit Agreement to meet liquidity requirements.

On September 25, 2009, an unrestricted subsidiary of Landry’s completed the acquisition of $33.2 million face amount of Golden Nugget second lien term loan debt through a dutch tender and open market purchases at a weighted average cost approximating 41% of face value. In connection with the debt purchases, the unrestricted subsidiary agreed to forgive the face amount of the debt acquired and accordingly, a $19.4 million gain was recognized in other income, net during the three months ended September 30, 2009.

Previously in June 2007, our wholly owned unrestricted subsidiary, Golden Nugget, Inc., completed a new $545.0 million credit facility consisting of a $330.0 million first lien term loan, a $50.0 million revolving credit facility, and a $165.0 million second lien term loan. The $330.0 million first lien term loan includes a $120.0 million delayed draw component to finance the expansion at the Golden Nugget Hotel and Casino in Las Vegas, Nevada. The revolving credit facility expires on June 30, 2013 and the first lien term loan matures on June 30, 2014. Both the first lien term loan and the revolving credit facility bear interest at Libor or the bank’s base rate, plus a financing spread of 2.0% and 0.75%, respectively, at June 30, 2010. In addition, the credit facility requires a commitment fee on the unfunded portion for both the $50.0 million revolving credit facility and the $120.0 million delayed draw component of the first lien term loan. The second lien term loan matures on November 2, 2014 and bears interest at Libor or the bank’s base rate, plus a financing spread of 3.25% and 2.0%, respectively, at June 30, 2010. The financing spreads and commitment fees for the revolving credit facility increase or decrease depending on the leverage ratio as defined in the credit facility. The first lien term loan requires one percent of the outstanding principal balance due annually to be paid in equal quarterly installments commencing on September 30, 2009, with the balance due on maturity. Principal of the second lien term loan is due at maturity. The Golden Nugget’s subsidiaries have granted liens on substantially all real property and personal property as collateral under the credit facility and are guarantors of the credit facility.

Consistent with our policy to manage our exposure to interest rate risk and in conformity with the requirements of the first and second lien facilities, we entered into interest rate swaps for all of the first and second lien borrowings of the Golden Nugget that fix the interest rates at between 5.4% and 5.5%, plus the applicable margin. We designated $210.0 million of the first lien interest rate swaps and all of the second lien swaps as cash flow hedges. The swaps mirror the terms of the underlying debt and reset using the same index and terms. As of June 30, 2010, an aggregate $96.0 million in second lien term loan debt has been repurchased and retired, and as such a proportional share of the second lien swaps are no longer an effective cash flow hedge. Accordingly, a $2.6 million and $11.5 million non-cash expense associated with this portion of the swaps was recorded as other expense for the three and six months ended June 30, 2010, respectively. At June 30, 2010, the remaining portion of these swaps were determined to be highly effective, and no ineffective portion was recognized in income. Included in accumulated other comprehensive loss at June 30, 2010 and December 31, 2009 are unrealized losses, net of income taxes, totaling $27.6 million and $27.0 million, respectively, related to these hedges. The remaining interest rate swaps associated with the $120.0 million of first lien borrowings representing the delayed draw construction loan have not been designated as hedges and the change in fair market value is reflected as other income/expense in the consolidated financial statements. A non-cash expense of approximately $2.7 million was recorded related to these interest rate swaps for the three months ended June 30, 2010, while a non-cash gain of approximately $4.5 million was recorded for the three

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months ended June 30, 2009. For the six months ended June 30, 2010, we recorded a non-cash expense of approximately $3.8 million and a non-cash gain of $4.9 million for the six months ended June 30, 2009. The impact of these interest rate swaps was an increase to interest expense of $6.4 million and $5.5 million during the three months ended June 30, 2010 and 2009, respectively, and $12.8 million and $11.0 million during the six months ended June 30, 2010 and 2009, respectively.

Our debt agreements contain various restrictive covenants including minimum EBITDA, fixed charge, net worth, and financial leverage ratios as well as limitations on dividend payments, capital expenditures and other restricted payments as defined in the agreements. As of June 30, 2010, we were in compliance with all such covenants. As of June 30, 2010, we had approximately $17.5 million in letters of credit outstanding, and our available borrowing capacity was approximately $54.4 million.

As a primary result of the extraordinary disruption to the credit markets in 2009, our 2009 financing carried substantially higher interest rates and original issue discount than the previous debt instruments. In addition, the Golden Nugget amendments increase its cash interest rate by 0.5% annually and its total interest rate by 1.5% annually on all first lien debt. These higher interest rates, combined with additional borrowing to provide liquidity and pay fees and expenses for the financing as well as to fund the hotel tower at the Golden Nugget, will result in substantially higher interest expense over at least the next few years.

Working capital decreased from $13.3 million as of December 31, 2009 to $11.8 million as of June 30, 2010. Cash flow to fund future operations, new restaurant development and acquisitions will be generated from operations, available capacity under our credit facilities and additional financing, if appropriate.

From time to time, we review opportunities for restaurant acquisitions and investments in the hospitality, gaming, entertainment, amusement, food service and facilities management and other industries. Our exercise of any such investment opportunity may impact our development plans and capital expenditures. We believe that adequate sources of capital are available to fund our business activities for the next twelve months.

Capital expenditures for the six months ended June 30, 2010 were $16.2 million. We expect capital expenditures to be approximately $11.4 million for the remainder of the year.

Seasonality and Quarterly Results

Our business is seasonal in nature. Our reduced winter volumes cause revenues and, to a greater degree, operating profits to be lower in the first and fourth quarters than in other quarters. We have and will continue to open restaurants in highly seasonal tourist markets. Periodically, our sales and profitability may be negatively affected by adverse weather. The timing of unit openings can and will affect quarterly results.

Critical Accounting Policies

Restaurant and other properties are reviewed on a property by property basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverability of properties that are to be held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. Goodwill and other non-amortizing intangible assets are reviewed for impairment at least annually. Significant estimates used in these reviews include projected operating results and cash flows, discount rates, terminal value growth rates, capital expenditures, changes in future working capital requirements, cash flow multiples, control premiums and assumed royalty rates. If such assets are considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their fair value. Properties to be disposed of are reported at the lower of their carrying amount or fair values, reduced for estimated disposal costs, and are included in other current assets.

We operate approximately 183 restaurants and periodically we expect to experience unanticipated individual unit deterioration in revenues and profitability, on a short-term and occasionally longer-term basis. When such events occur and we determine that the associated assets are impaired, we will record an asset impairment expense in the quarter such determination is made. Due to our average restaurant net investment cost, such amounts could be significant when and if they occur. However, such asset impairment expense does not affect our financial liquidity, and is usually excluded from many valuation model calculations.

We maintain a large deductible insurance policy related to property, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued expenses and other liabilities include estimated costs to settle unpaid claims and estimated incurred but not reported claims using actuarial methodologies.

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GAAP requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carry forwards and certain temporary differences. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be recognized. We regularly assess the likelihood of realizing the deferred tax assets based on forecasts of future taxable income and available tax planning strategies that could be implemented and adjust the related valuation allowance if necessary.

Our income tax returns are subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. Inherent in our determination of any necessary reserves are assumptions based on past experiences and judgments about potential actions by taxing authorities. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets and costs to settle unpaid claims. Actual results may differ materially from those estimates.

Recent Accounting Pronouncements

In September 2009, the FASB amended authoritative guidance associated with multiple-deliverable revenue arrangements. This amended guidance addresses the determination of when individual deliverables within an arrangement may be treated as separate units of accounting and modifies the manner in which consideration is allocated across the separately identifiable deliverables. The amendments to authoritative guidance associated with multiple-deliverable revenue arrangements are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06,Improving Disclosures about Fair Value Measurements(“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-16,“Accruals for Casino Jackpot Liabilities”, which clarifies when a casino entity is required to accrue a jackpot liability. ASU No. 2010-16 will be effective for fiscal years beginning on or after December 15, 2010, with early adoption permitted. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.

Impact of Inflation

We do not believe that inflation has had a significant effect on our operations during the past several years. We believe we have historically been able to pass on increased costs through menu price increases, but there can be no assurance that we will be able to do so in the future. Future increases in commodity costs, labor costs, including expected future increases in federal and state minimum wages, energy costs, and land and construction costs could adversely affect our profitability and ability to expand.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.

Interest Rate Risk

Total debt at June 30, 2010 included $196.6 million of floating-rate debt attributed to borrowings at an average interest rate of 7.1%. As a result, our annual interest cost in 2010 will fluctuate based on short-term interest rates.

Consistent with our policy to manage our exposure to interest rate risk, and in conformity with the requirements of our first and second lien facilities, we entered into interest rate swaps with notional amounts covering all of the first and second

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lien borrowings of the Golden Nugget. The hedges are designed to convert the lien facilities’ floating interest rates to fixed rates at between 5.4% and 5.5%, plus the applicable margin.

The impact on annual cash flow of a ten percent change in the floating-rate (approximately 0.7%) would be approximately $1.4 million annually based on the floating-rate debt and other obligations outstanding at June 30, 2010; however, there are no assurances that possible rate changes would be limited to such amounts.

ITEM 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13e-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2010, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2010, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. During the six months ended June 30, 2010, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

General Litigation

On February 5, 2009, a purported class action and derivative lawsuit entitledLouisiana Municipal Police Employee’s Retirement System on behalf of itself and all other similarly situated shareholders of Landry’s Restaurant’s, Inc. and derivatively on behalf of nominal defendant Landry’s Restaurant’s, Inc. (“Delaware Litigation”) was brought against all members of our Board of Directors, Fertitta Holdings, Inc., and Fertitta Acquisition Co. in the Court at Chancery of the State of Delaware. The lawsuit originally alleged, among other things, a breach of a fiduciary duty by the directors for renegotiating the 2008 merger agreement with the Fertitta entities, allowing Mr. Fertitta to acquire shares of stock in the Company and gain majority control thereof, and terminating the 2008 merger agreement without requiring payment of the reverse termination fee. The suit seeks consummation of the merger buyout at $21.00 a share or damages representing the difference between $21.00 per share and the price at which class members sold their stock in the open market, or damages for allowing Mr. Fertitta to acquire control of the Company without paying a control premium, or alternatively requiring payment of the reverse termination fee or damages for the devaluation of the Company’s stock.

On January 29, 2010, plaintiff in the foregoing action filed an amended complaint also naming Fertitta Group, Inc. and Fertitta Merger Co. as defendants and has further alleged that Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009 was unfair and that defendants breached their fiduciary duties in entering into a 2009 merger agreement at $14.75. Also, the amended complaint alleges that the Board approved an excessive golden parachute for Mr. Fertitta (albeit over seven (7) years ago) and requests that the Court invalidate same. In addition, plaintiff asserts that there has been inadequate disclosure in our preliminary proxy statement filed with the SEC in connection with the $14.75 merger transaction. In connection with the amended complaint, plaintiff also seeks an injunction of the $14.75 transaction unless curative disclosures are made, appointment of a Trustee to conduct a sale of us to maximize shareholder value, and the imposition of a constructive trust on shares acquired by Mr. Fertitta after June 2008 to be voted in favor of a transaction that provides the highest offer to our shareholders. We believe that the new claims asserted in the amended complaint are also without merit and intend to vigorously contest them as well. On May 21, 2010, plaintiff again amended its complaint substantively reasserting the same allegations.

On May 23, 2010, the parties reached a partial settlement in the above litigation and delivered a Memorandum of Understanding for Partial Settlement to the Vice Chancellor of the Delaware Chancery Count.

On June 22, 2010, following negotiations, the parties to the Delaware Litigation memorialized the terms of the May 23, 2010 Memorandum of Understanding for Partial Settlement of the Delaware Litigation (“May Settlement”). The May Settlement will settle and release certain claims that were asserted and/or could have been asserted against defendants in connection with Counts IV through VIII of the amended complaint. On the same day, the parties submitted the May Settlement to the Delaware Chancery Court. Plaintiff’s counsel will request an award of $8 million in attorneys fees, and costs, if approved by the Delaware Chancery Court, as part of the settlement of the Delaware Litigation. If approved, the attorneys fees and cost award will be paid by us.

The parties to the Delaware Litigation agreed to mediate the claims remaining in the Delaware Litigation and not resolved by the May Settlement. On July 7, 2010, the parties to the Delaware Litigation and their respective counsel engaged

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in a mediation conducted by a retired federal judge, which resulted in the parties reaching an agreement in principle to settle the remaining claims asserted against defendants in the complaint. The parties executed a term sheet on July 14, 2010 agreeing to settle the remaining claims for $14.5 million, to be paid primarily by defendants insurance carriers.

On July 23, 2010, the parties memorialized the term sheet and executed a Stipulation of Settlement (“July Settlement”) which would settle and release all remaining claims asserted or that could have been asserted against defendants in the amended complaint that will not be settled and released pursuant to the May Settlement, including the claims asserted against defendants in Counts I, II, III and IX of the amended complaint. On July 23, 2010, the parties submitted the July Settlement to the Delaware Chancery Court and requested that the Delaware Chancery Court enter a scheduling order for notice and hearing for final approval of the May and July Settlements.

On July 26, 2010 the Delaware Chancery Court entered a scheduling order setting the May and July Settlements for a hearing to consider final approval on October 6, 2010.

The defendants in the Delaware Litigation have denied and continued to deny any wrongdoing or liability with respect to all claims, events and transactions complained of in the Delaware Litigation. The defendants have settled the Delaware Litigation to eliminate the uncertainty, burden, risk, expense and distraction of further litigation. The foregoing descriptions of the May and July Settlements do not purport to be complete, and a more detailed description of the May and July Settlements will be provided to current stockholders and certain of our former stockholders prior to the Delaware Chancery Court’s final approval of the May and July Settlements.

Following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock on November 3, 2009, the class action lawsuit styledFrederic Goldfein, Individually and on behalf of all others similarly situated v. Landry’s restaurants, Inc., et al. was filed in the District Court of Harris County, 164^thJudicial District. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

Ralph Biancalana, Individually and on behalf of all others similarly situated v. Tilman J. Fertitta, et al., a putative class action, was filed on November 10, 2009 in the District Court of Harris County, Texas, 165^thJudicial District, following Mr. Fertitta’s latest proposal to acquire all of our outstanding stock. We are named in the Petition as a defendant along with all of our directors. Plaintiff has alleged, among other things, that in connection with the proposed merger transaction, our directors have knowingly and recklessly violated their fiduciary duty of care, have violated their fiduciary duties of loyalty, good faith, candor and independence, and that the transaction contains an inadequate and unfair price. Plaintiff also alleged that we aided and abetted our directors’ alleged breach of fiduciary duty. Plaintiff seeks to enjoin the transaction and the payment of a termination fee to Mr. Fertitta. Plaintiff also requests declarations from the Court that the termination fee is unfair, and that our directors have breached their fiduciary duties to our shareholders. Plaintiff seeds recovery of attorneys fees and costs. We believe this action is without merit and intend to vigorously contest this matter.

On November 17, 2009, Robert Caryer filed a class action petition in the District Court of Harris County, 125^thJudicial District. The lawsuit is styledRobert Caryer, individually and on behalf of all other similarly situated v. Landry’s Restaurants, Inc., Tilman J. Fertitta, Steve L. Scheinthal, Kenneth Brimmer, Michael S. Chadwick, Joe Max Taylor and Richard H. Liem. Plaintiff has alleged that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiff seeks to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter.

On January 15, 2010, the Goldfein, Biancalana and Caryer actions were consolidated by Court order. Plaintiffs allege in the consolidated petition that in connection with the proposed merger transaction, defendants have violated their fiduciary duties, duties of loyalty and good faith and fair dealing and have placed an artificial lid on the price of our stock by announcing a transaction at an inadequate price. Plaintiffs seek to enjoin the transaction until we adopt procedures and a process to obtain the highest price for shareholders, or alternatively to rescind the transaction. We believe this action is without merit and intend to vigorously contest this matter. In June 2010, the consolidated action was dismissed for lack of prosecution.

General Litigation

We are subject to other legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on our financial position, results of operations or cash flows.

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ITEM 1A. Risk Factors

There have been no material changes to the Risk Factors disclosed in our 2009 Annual Report on Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

In November 1998, we announced the authorization of an open market stock buy back program, which was renewed in April 2000, for an additional $36.0 million. In October 2002, we authorized a $50.0 million open market stock buy back program and in September 2003, we authorized another $60.0 million open market stock repurchase program. In October 2004, we authorized a $50.0 million open market stock repurchase program. In March 2005, we announced a $50.0 million authorization to repurchase common stock. In May 2005, we announced a $50.0 million authorization to repurchase common stock. In March, July and November 2007, we authorized an additional $50.0 million, $75.0 million and $1.5 million, respectively, of open market stock repurchases. These programs have resulted in our aggregate repurchasing of approximately 24.0 million shares of common stock for approximately $472.5 million through June 30, 2010.

All repurchases of our common stock during the quarter ended June 30, 2010 were made pursuant to our open market stock repurchase program. We have exhausted substantially all funds authorized for purchases under previously existing programs. The following table summarizes repurchases of our common stock during the quarter ended June 30, 2010 pursuant to our open market stock purchase program.

Period	(a) Total Number of Shares (or Units Purchased)	(b) Average Price paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 - 30, 2010	—	$	—	—	$	63,932
May 1 - 31, 2010	1,826	$	23.49	1,826	$	21,048
June 1 - 30, 2010	—	$	—	—	$	21,048
Total shares purchased	1,826	$	23.49	1,826	$	21,048

ITEM 6. Exhibits

The following Exhibits are set forth herein:

12.1	—	Ratio of Earnings to Fixed Charges
31.1	—	Certification by Chief Executive Officer
31.2	—	Certification by Chief Financial Officer
32	—	Certification with respect to quarterly report of Landry’s Restaurants, Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

LANDRY’S RESTAURANTS, INC.

(Registrant)

/s/ TILMAN J. FERTITTA

Tilman J. Fertitta

Chairman of the Board of Directors,

President and Chief Executive Officer

(Principal Executive Officer)

/s/ RICK H. LIEM

Rick H. Liem

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 9, 2010

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