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, 1998

                                       OR

          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                        FOR THE TRANSITION PERIOD FROM __ TO__

                          COMMISSION FILE NUMBER 0-1469

                          CHURCHILL DOWNS INCORPORATED
             (Exact name of registrant as specified in its charter)

                         KENTUCKY                      61-0156015
              (State or other jurisdiction of        (IRS Employer
               incorporation or organization)      Identification No.)

                       700 CENTRAL AVENUE, LOUISVILLE, KY
                    (Address of principal executive offices)
                                      40208
                                   (Zip Code)

                                 (502) 636-4400
              (Registrant's telephone number, including area code)

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____

The number of shares outstanding of registrant's  common stock at August 7, 1998
was 7,516,934 shares.




<PAGE>



                          CHURCHILL DOWNS INCORPORATED

                                    I N D E X


                                                                      PAGES

PART I.  FINANCIAL INFORMATION

  ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

          Condensed Consolidated Balance Sheets, June 30, 1998,
          December 31, 1997 and June 30, 1997                             3

          Condensed Consolidated Statements of Earnings
          for the six and three months ended June 30, 1998 and 1997       4

          Condensed Consolidated Statements of Cash Flows for the
          six months ended June 30, 1998 and 1997                         5

          Condensed Notes to Consolidated Financial Statements          6-9

  ITEM 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations                         10-24

  ITEM 3. Quantitative and Qualitative Disclosures About
          Market Risk (Not Applicable)                                   25

PART II.  OTHER INFORMATION AND SIGNATURES

  ITEM 1. Legal Proceedings (Not applicable)                             25

  ITEM 2. Changes in Securities and Use of Proceeds                      25

  ITEM 3. Defaults Upon Senior Securities (Not applicable)               25

  ITEM 4. Submission of Matters to a Vote of Security Holders         25-26

  ITEM 5. Other Information                                              26

  ITEM 6. Exhibits and Reports on Form 8-K                               26

  Signatures                                                             27

  Exhibit Index                                                          28

  Exhibits                                                           29-193


                                    Page 2 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>



                                                                       June 30,          December 31,         June 30,
                       ASSETS                                            1998                 1997               1997

                                                                     ------------         -----------        -----------
Current assets:
<S>                                                                  <C>                  <C>                <C>        
     Cash and cash equivalents                                       $  7,952,835         $ 9,280,233        $16,156,852
     Accounts receivable                                               14,436,397           7,086,889         12,472,948
     Other current assets                                                 363,734             540,489            698,316
                                                                     ------------         -----------        -----------
          Total current assets                                         22,752,966          16,907,611         29,328,116

Other assets                                                           13,941,001           5,778,430          3,641,979
Plant and equipment                                                   128,177,587         104,554,196        102,842,179
Less accumulated depreciation                                         (43,514,141)        (41,391,429)       (39,195,894)
                                                                     ------------         -----------        -----------
                                                                       84,663,446          63,162,767         63,646,285
                                                                     ------------         -----------        -----------
                                                                     $121,357,413         $85,848,808        $96,616,380
                                                                     ============         ===========        ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                 $11,375,368         $ 5,732,783        $12,570,920
     Accrued expenses                                                   9,359,247           7,937,575          7,757,233
     Dividends payable                                                          -           3,658,468                  -
     Income taxes payable                                               7,110,768             186,642          6,839,208
     Deferred revenue                                                   2,307,262           7,344,830          1,127,166
     Long-term debt, current portion                                      122,801              79,805             73,893
                                                                     ------------         -----------        -----------
          Total current liabilities                                    30,275,446          24,940,103         28,368,420

Long-term debt, due after one year                                      8,728,963           2,633,164          2,781,462
Outstanding mutuel tickets (payable after one year)                     3,192,096           1,625,846          3,574,724
Deferred compensation                                                     907,698             880,098            857,274
Deferred income taxes                                                   8,000,643           2,377,100          2,316,600
Stockholders' equity:
     Preferred stock, no par value;
          authorized, 250,000 shares;  issued, none                             -                   -                  -
     Common stock, no par value; authorized,
          20,000,000 shares, issued 7,516,934 shares,
          June 30, 1998, 7,316,934 shares, December 31,
          1997 and 7,308,526 shares, June 30, 1997                      8,808,613           3,614,567          3,493,042
     Retained earnings                                                 61,796,384          49,842,930         55,289,858
     Deferred compensation costs                                         (287,430)                  -                  -
     Note receivable for common stock                                     (65,000)            (65,000)           (65,000)
                                                                     ------------         -----------        -----------
                                                                       70,252,567          53,392,497         58,717,900
                                                                     ------------         -----------        -----------
                                                                     $121,357,413         $85,848,808        $96,616,380
                                                                     ============         ===========        ===========


The  accompanying  notes  are an  integral  part of the  condensed  consolidated financial statements.
</TABLE>

                                    Page 3 of 195
<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
            for the six and three months ended June 30, 1998 and 1997
                                   (Unaudited)

<TABLE>


                                                    SIX MONTHS ENDED JUNE 30,                   THREE MONTHS ENDED JUNE 30,
                                                   1998                   1997                  1998                   1997


<S>                                             <C>                    <C>                   <C>                    <C>        
Net  revenues                                   $82,759,503            $74,058,499           $67,374,352            $60,779,635
Operating expenses                               58,336,648             51,986,126            42,337,520             37,562,122
                                                -----------            -----------           -----------            -----------

     Gross profit                                24,422,855             22,072,373            25,036,832             23,217,513

Selling, general and
     administrative expenses                      4,972,595              4,392,127             2,816,841              2,401,844
                                                -----------            -----------           -----------            -----------

     Operating income                            19,450,260             17,680,246            22,219,991             20,815,669
                                                -----------            -----------           -----------            -----------

Other income (expense):
          Interest income                           362,305                196,840               173,035                130,460
          Interest expense                         (405,297)              (148,710)             (300,773)               (68,494)
          Miscellaneous, net                        166,186                198,644                49,131                 68,071
                                                -----------            -----------           -----------            -----------

                                                    123,194                246,774               (78,607)               130,037
                                                -----------            -----------           -----------            -----------

    Earnings before income
         tax provision                           19,573,454             17,927,020            22,141,384             20,945,706
                                                -----------            -----------           -----------            -----------

Federal and state income tax
         provision                               (7,620,000)            (6,990,000)           (8,618,900)            (8,160,000)
                                                -----------            -----------           -----------            -----------

     Net earnings                               $11,953,454            $10,937,020           $13,522,484            $12,785,706
                                                ===========            ===========           ===========            ===========


Net earnings per share:
     Basic                                            $1.62                  $1.50                 $1.81                  $1.75
     Diluted                                          $1.61                  $1.50                 $1.79                  $1.75

Weighted average shares
outstanding:
     Basic                                        7,395,387              7,308,526             7,472,978              7,308,526
     Diluted                                      7,438,018              7,310,586             7,546,183              7,310,516


The  accompanying  notes  are an  integral  part of the  condensed  consolidated financial statements.
</TABLE>

                                  Page 4 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 for the six months ended June 30, 1998 and 1997
                                   (Unaudited)

<TABLE>


                                                                                                SIX MONTHS ENDED JUNE 30

                                                                                              1998                    1997
<S>                                                                                        <C>                    <C>
Cash flows from operating activities:
     Net earnings                                                                          $11,953,454            $10,937,020
     Adjustments to reconcile net earnings to
          net cash provided by operating activities:
     Depreciation and amortization                                                           2,551,573              2,248,616
     Deferred compensation                                                                      84,216                 32,063
     Increase (decrease) in cash resulting from
          changes in operating assets and liabilities:
          Accounts receivable                                                               (6,428,673)            (7,254,712)
          Other current assets                                                                 302,756                (19,095)
          Accounts payable                                                                   3,694,371              4,995,347
          Accrued expenses                                                                     681,115              1,954,903
          Income taxes payable                                                               6,924,126              4,328,700
          Deferred revenue                                                                  (5,071,986)            (5,384,736)
          Other assets and liabilities                                                       1,007,463              1,467,395
                                                                                           -----------            -----------
          Net cash provided by operating activities                                         15,698,415             13,305,501
                                                                                           -----------            -----------

Cash flows from investing activities:
     Additions to plant and equipment, net                                                  (2,181,257)            (2,838,956)
     Acquisition of RCA, net of cash acquired                                              (17,232,849)                    -
                                                                                           -----------            -----------
          Net cash used in investing activities                                            (19,414,106)            (2,838,956)
                                                                                           -----------            -----------

Cash flows from financing activities:
     Increase (decrease) in long-term debt, net                                                 46,761               (143,836)
     Borrowings on bank line of credit                                                      16,000,000                     -
     Repayments of bank line of credit                                                     (10,000,000)                    -
     Dividends paid                                                                         (3,658,468)            (2,375,271)
                                                                                           -----------            -----------
           Net cash provided by (used in) financing activities                               2,388,293             (2,519,107)
                                                                                           -----------            -----------

Net increase (decrease) in cash and cash equivalents                                        (1,327,398)             7,947,438
Cash and cash equivalents, beginning of period                                               9,280,233              8,209,414
                                                                                           -----------            -----------
Cash and cash equivalents, end of period                                                    $7,952,835            $16,156,852
                                                                                           ===========            ===========
Supplemental  disclosures of cash flow information: 
Cash paid during the period for:
     Interest                                                                                 $410,652               $115,290
     Income taxes                                                                             $539,000             $2,640,000

Noncash transaction:
    Issuance of common stock related to the acquisition of RCA                              $4,850,000                     -

The  accompanying  notes  are an  integral  part of the  condensed  consolidated financial statements.
</TABLE>

                                  Page 5 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 for the six months ended June 30, 1998 and 1997
                                   (Unaudited)

         1. The accompanying  condensed  consolidated  financial  statements are
presented in accordance with the  requirements of Form 10-Q and  consequently do
not include all of the  disclosures  normally  required  by  generally  accepted
accounting  principles or those normally made in Churchill Downs  Incorporated's
(the "Company") annual report on Form 10-K. The year end condensed  consolidated
balance sheet data was derived from audited financial  statements,  but does not
include all disclosures  required by generally accepted  accounting  principles.
Accordingly,  the  reader of this  Form 10-Q may wish to refer to the  Company's
Form 10-K for the period ended  December 31, 1997 for further  information.  The
accompanying  condensed  consolidated financial statements have been prepared in
accordance with the  registrant's  customary  accounting  practices and have not
been audited. In the opinion of management, all adjustments necessary for a fair
presentation of this  information have been made and all such adjustments are of
a normal recurring nature.

         2. Because of the seasonal nature of the Company's  business,  revenues
and operating results for any interim quarter are not indicative of the revenues
and  operating  results  for the year and are not  necessarily  comparable  with
results for the  corresponding  period of the previous  year.  The  accompanying
condensed  consolidated financial statements reflect a disproportionate share of
annual net earnings as the Company  normally earns a substantial  portion of its
net earnings in the second  quarter of each year during which the Kentucky Derby
and Kentucky  Oaks are run. The Kentucky  Derby and Kentucky Oaks are run on the
first weekend in May.

            The Company's second quarter acquisition of Racing Corporation of
America  (RCA),  which owns and operates  Ellis Park Race Course (Ellis Park)
and the Kentucky  Horse  Center,  contributed  positively  to the  Company's net
revenues,  but it had a negative  effect on the  Company's  net earnings for the
quarter. A substantial  portion of RCA's earnings  historically occur during the
third  quarter when the  majority of Ellis  Park's race meet,  this year running
June 29 through September 7, is conducted.

         3. On June 17, 1998, the Company  obtained a $50 million line of credit
with its principal  lender which expires in March 2000. The interest rate on the
line of credit is based upon LIBOR plus 50 to 100 additional  basis points which
is  determined  by certain  Company  financial  ratios.  There was $6.0  million
outstanding on the line of credit at June 30, 1998 and no borrowings outstanding
at December 31, 1997 or March 31, 1997 under previous  lines of credit.  On June
18, 1998 the Company's Board of Directors (the "Board")  approved an increase in
the Company's  line of credit from $50 million to $100 million which is expected
to be finalized in the third quarter of 1998.

         4.  Certain  prior  period  financial   statement   amounts  have  been
reclassified to conform to the current period presentation.



                                  Page 6 of 195
<PAGE>



                          CHURCHILL DOWNS INCORPORATED
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           for the six months ended June 30, 1998 and 1997 (continued)
                                   (Unaudited)


         5.  Effective  January  1,  1998,  the  Company  adopted  Statement  of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
130).  Currently,  there are no amounts to be  included  in the  computation  of
comprehensive  income of the Company that are required to be disclosed under the
provisions of SFAS 130. As such, total comprehensive income and net earnings are
the  same  for  the  six  and  three  months  ended  June  30,  1998  and  1997,
respectively.

         6. In June 1997,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial Accounting  Standards No. 131,  "Disclosures about
Segments of an Enterprise  and Related  Information"  (SFAS 131). The Company is
assessing the impact of the standard on its financial  statements and will adopt
SFAS 131 during the fourth quarter of 1998 as required.

         7. In February 1998, the FASB issued Statement of Financial  Accounting
Standards   No.  132,   "Employers'   Disclosures   about   Pensions  and  other
Post-retirement   Benefits"  (SFAS  132).  This  statement  revises   employers'
disclosures about pensions and other  post-retirement plans without changing the
measurement or  recognition of those plans.  The Company is assessing the impact
of  the  standard  on  its  financial  statements  and  will  include  SFAS  132
disclosures in its 1998 annual report.

         8. On April 21, 1998, the Company acquired from TVI Corp.,  ("TVI") all
of the outstanding stock of Racing Corporation of America ("RCA") for a purchase
price of $22.6 million, including transaction costs of $.6 million. RCA owns and
operates Ellis Park Race Course in Henderson,  Kentucky,  and the Kentucky Horse
Center,  a training  facility  located in  Lexington,  Kentucky.  As part of the
transaction, TVI received 200,000 shares of the Company's common stock valued at
$4.9 million with the remaining  balance of $17.1 million paid from cash on hand
and a draw on the  Company's  bank line of credit.  The purchase  price of $22.6
million was allocated to the acquired assets and liabilities based on their fair
values on the acquisition date with the excess of $7.7 million being recorded as
goodwill which is being  amortized over 40 years.  The acquisition was accounted
for by the Company under the purchase method of accounting and, accordingly, the
results of  operations  of RCA  subsequent to April 20, 1998 are included in the
Company's consolidated results of operations. The purchase is expected to have a
positive impact on the Company's earnings in 1998.

         The purchase  price  allocation  above is  preliminary  and may require
adjustment  in the  Company's  future  financial  statements  based on the final
determination  of  available  elections  related to the income tax  treatment of
certain assets acquired and liabilities assumed in the acquisition.

                                  Page 7 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          for the six months ended June 30, 1998 and 1997 (continued)
                                   (Unaudited)


         Following  are the  unaudited pro forma results of operations as if
the April 21, 1998 transaction had occurred on January 1, 1997 ( in  thousands,
except per share and share amounts):

<TABLE>

                                                             Six Months Ended        Six Months Ended
                                                              June 30, 1998           June 30, 1997

             <S>                                             <C>                     <C>    
              Net revenues                                   $84,732                 $77,359
              Net earnings                                   $10,776                 $9,623

              Net earnings per share data:
                   Basic                                     $1.43                   $1.28
                   Diluted                                   $1.43                   $1.28

              Weighted average shares outstanding:
                   Basic                                     7,516,936               7,508,526
                   Diluted                                   7,559,567               7,510,516

</TABLE>

                  This   unaudited   proforma   financial   information  is  not
necessarily indicative of the operating results that would have occurred had the
transaction  been  consumated  as of  January  1,  1997,  nor is it  necessarily
indicative of future operating results.

                                  Page 8 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           for the six months ended June 30,1998 and 1997 (continued)
                                   (Unaudited)


         9. The following is a  reconciliation  of the numerator and denominator
 of the basic and diluted per share computations:

<TABLE>


                                                                Six months ended                    Three months ended
                                                                    JUNE 30,                             JUNE 30,
                                                                    --------                             --------
                                                              1998               1997               1998               1997

                                                              ----               ----               ----               ----

<S>                                                         <C>                <C>                <C>               <C>        
Earnings (numerator) amounts used for
basic and diluted per share computations:                   $11,953,454        $10,937,020        $13,522,484       $12,785,706
                                                            -----------        -----------        -----------       -----------

Weighted average shares (denominator)
of common stock outstanding per share:
     Basic                                                    7,395,387          7,308,526          7,472,978         7,308,526
     Plus dilutive effect of shares                              42,631              1,990             73,205             2,060
                                                             ----------         ----------          ---------         ---------
     Diluted                                                  7,438,018          7,310,516          7,546,183         7,310,586

Basic net earnings per share                                      $1.62              $1.50              $1.81             $1.75
Diluted net earnings per share                                    $1.61              $1.50              $1.79             $1.75
</TABLE>

         Options to purchase  290,500 shares for the three months and six months
ended ended June 30, 1997 were not included in the  computation  of earnings per
share common  share-assuming  dilution because the options' exercise prices were
greater than the average market price of the common shares.




                                  Page 9 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

                  This  discussion  and  analysis  includes a forecast of future
results of operations.  Such a forecast is a  "forward-looking  statement" under
the federal  securities laws.  Actual results could differ  materially from this
forecast and there can be no assurance that such forecast of future results will
be  achieved.  Important  factors  that  could  cause  actual  results to differ
materially from the presently  estimated amounts include:  the continued ability
of the Company to effectively  compete for the country's top horses and trainers
necessary to field  high-quality  horse  racing;  the  continued  ability of the
Company to grow its share of the  interstate  simulcast  market;  a  substantial
change in  allocation  of live  racing  days;  the  impact of  competition  from
alternative gaming ( including riverboat casinos and lotteries) and other sports
and  entertainment  options in those  markets in which the Company  operates;  a
decrease in riverboat  admissions revenue from the Company's Indiana operations;
and the Company's  success in its pursuit of strategic  initiatives  designed to
attract  new  patrons  and  generate  additional  revenue for purses and capital
investment.

                  The  Company  primarily  conducts   pari-mutuel   wagering  on
Thoroughbred  and  Standardbred  horse racing at its  facilities in Kentucky and
Indiana.  The Company owns and operates Churchill Downs racetrack in Louisville,
Kentucky   ("Churchill   Downs"),   which  has  conducted   Thoroughbred  racing
continuously  since 1875 and is  internationally  known as home of the  Kentucky
Derby. The Company also owns and operates Ellis Park Race Course, a Thoroughbred
racetrack,  in Henderson,  Kentucky ("Ellis Park"), the Kentucky Horse Center, a
Thoroughbred training center, in Lexington,  Kentucky and is also majority owner
and operator of Hoosier Park in Anderson,  Indiana, which conducts Thoroughbred,
Quarter Horse and  Standardbred  horse racing.  The Company  conducts  simulcast
receiving  wagering on horse racing  year-round at its four  simulcast  wagering
facilities  in  Louisville,   Kentucky  and  in  Merrillville,  Fort  Wayne  and
Indianapolis, Indiana, as well as its three racetracks.

                   Because of the  seasonal  nature of the  Company's  business,
revenues and operating results for any interim quarter are not indicative of the
revenues and operating  results for the year and are not necessarily  comparable
with  results for the  corresponding  period of the previous  year.  The Company
normally  earns a substantial  portion of its net earnings in the second quarter
of each year during which the Kentucky  Derby and the Kentucky Oaks are run. The
Kentucky Derby and the Kentucky Oaks are run on the first weekend in May.

                  The Company's  primary  sources of income are  commissions and
fees earned from pari- mutuel wagering on live and simulcast horse races.  Other
sources of income  include  admissions  and  seating,  riverboat  admission  tax
supplement,   concession  commissions  (primarily  for  the  sale  of  food  and
beverages), license, rights and broadcast fees and sponsorship revenues.


                                 Page 10 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)


                  Kentucky's  racetracks,  including  Churchill  Downs and Ellis
Park,  which was acquired by the Company  during the second quarter of 1998, are
subject to the  licensing  and  regulation  of the  Kentucky  Racing  Commission
("KRC"),  which  consists of 11 members  appointed  by the governor of Kentucky.
Licenses to conduct  live  Thoroughbred  race  meetings  and to  participate  in
simulcasting are approved annually by the KRC based upon applications  submitted
by the racetracks in Kentucky. Although to some extent Churchill Downs and Ellis
Park compete with other racetracks in Kentucky for the awarding of racing dates,
the  KRC is  required  by  state  law to  consider  and  seek to  preserve  each
racetrack's  usual and  customary  live  racing  dates.  Generally,  there is no
substantial  change  from  year to  year in the  racing  dates  awarded  to each
racetrack.  Churchill Downs conducted live racing from April 25 through June 28,
1998,  and has been granted a license to conduct  live racing  during the period
November 1 through  November 28, 1998 for a total of 71 racing days  compared to
77 racing days in 1997. Ellis Park conducted live racing beginning June 29, 1998
and has received a license to conduct live racing through  September 7, 1998 for
a total of 55 racing days. The total number of days on which Churchill Downs and
Ellis Park conduct  live racing  fluctuates  annually  according to the calendar
year. A  substantial  change in the  allocation of live racing days at Churchill
Downs or Ellis Park could impact the Company's operations and earnings in future
years.

                  Churchill  Downs will host  Breeders'  Cup Day on  November 7,
1998.  Breeders'  Cup Day is sponsored by  Breeders'  Cup Limited,  a tax-exempt
organization   chartered  to  promote  Thoroughbred  racing  and  breeding.  The
Breeders' Cup Day races are held annually,  featuring $12 million in purses, for
the purpose of determining  Thoroughbred  champions in seven  different  events.
Racetracks  across the United  States  compete for the  privilege of hosting the
Breeders'  Cup Day  races  each  year  and the  1998  Breeders'  Cup will be the
Company's  fourth  time  hosting  this  event,  the most of any  racetrack.  The
Breeders' Cup Day races were held in California  in November  1997.  Hosting the
event in 1998 is  expected  to have a  positive  impact  on the  Company's  1998
results.

                  In  Indiana,   licenses  to  conduct  live   Standardbred  and
Thoroughbred race meetings, including Quarter Horse races, and to participate in
simulcasting  are  approved  annually by the  Indiana  Horse  Racing  Commission
("IHRC"),  which  consists of 5 members  appointed  by the  governor of Indiana.
Licenses are approved annually by the IHRC based upon applications  submitted by
the Company.  Currently, the Company is the only facility in Indiana licensed to
conduct  live  Standardbred,   Quarter  Horse  or  Thoroughbred  racing  and  to
participate  in  simulcasting.  Quarter Horse races were  conducted  during some
Thoroughbred  race days.  Hoosier Park conducted live racing beginning April 17,
1998 and has received a license to conduct live racing through November 28, 1998
for a total of 152 racing days, including 94 days of Standardbred racing, and 58
days of Thoroughbred  racing (which also includes Quarter Horse races). In 1997,
the Company conducted 142 days of live racing, including 85 days of Standardbred
racing  and  57  days  of  Thoroughbred  racing.  A  substantial  change  in the
allocation  of live  racing  days at  Hoosier  Park could  impact the  Company's
operations and earnings in future years.


                                 Page 11 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

         The Company employs  approximately 480 full-time employees.  Due to the
seasonal  nature of the Company's live racing  business,  the number of seasonal
and  part-time  persons  employed  will  vary  throughout  the  year,  with peak
employment  occurring  Kentucky  Derby week when the Company  employs as many as
2,600  persons.  Through June 30, 1998,  average  employment  per pay period was
approximately 900 individuals.

         The Company  generally does not directly  compete with other racetracks
or  simulcast  facilities  for  patrons  due to  geographic  separation  of such
facilities.  However, the Company competes with other sports,  entertainment and
gaming options,  including riverboat casinos and lotteries, for patrons for both
live  racing and  simulcasting.  The  Company  attempts  to  attract  patrons by
providing  the  highest  quality  racing  products in  attractive  entertainment
facilities with well-priced,  appealing concession services.  Churchill Downs is
the premier racetrack in Kentucky for both live racing and  simulcasting,  based
upon total  handle and  attendance,  and  Hoosier  Park is the only  facility in
Indiana providing live and simulcast racing.

         The  development  of  riverboat  gaming  facilities  began  in  Indiana
pursuant  to  authorizing  legislation  passed by the state of  Indiana in 1993.
Illinois had previously  authorized  riverboat gaming.  There are currently four
riverboat  casinos operating on the Ohio River along Kentucky's border -- two in
the  southeastern  Indiana  cities  of  Lawrenceburg  and  Rising  Sun,  one  in
southwestern Indiana in Evansville and one at Metropolis, Illinois.

         Direct  competition  with  these  riverboats  has  negatively  impacted
wagering at Churchill Downs and Ellis Park. However,  both tracks have minimized
this  negative  impact  compared  to the  impact  suffered  by other racetracks,
due primarily to an aggressive
on-track  marketing  program,  and further  expansion  of  interstate  simulcast
receiving wagering.

         Two  additional  riverboats  are  anticipated to open along the Indiana
shore of the Ohio River.  In May 1996,  the Indiana  Gaming  Commission  ("IGA")
awarded a  preliminary  license  to  RDI/Caesars  World to operate  the  world's
largest  riverboat  casino  in  Harrison  County,  Indiana,  just 10 miles  from
Louisville.  A construction  permit was issued to RDI/Caesars  World by the U.S.
Army  Corps  of  Engineers  ("Corps")  in  February  1998.  However,   the  U.S.
Environmental  Protection  Agency ("EPA") has conducted a separate review of the
Corps'  decision,  and issued a letter  critical  of some  aspects of the Corps'
decision-making process. Also, some environmental groups have filed a lawsuit in
U.S. District Court for the Western District of Kentucky  challenging the Corps'
decision to issue a  construction  permit to RDI/Caesars  World  ("environmental
litigation").  It is not known  whether  the EPA's  letter or the  environmental
litigation  will  result  in  further  delays  for  the  project.  Additionally,
RDI/Caesars  World is  seeking  approval  from the  Corps to build  and  operate
temporary  dockside facilities. Even though RDI/Caesars has stated publicly that
the the project  is anticipated  to be operational in the fouth quarter of 1998,
the Corps has stated that the approval process for the modifications may require
additional  public  hearings,  possibly  delaying  the  opening  of  riverboat 
operations until the first quarter of 1999.


                                 Page 12 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

                  The IGA  voted  in May  1998 to  consider  in  September  1998
whether  to grant a license  to open a fifth  Indiana  riverboat  along the Ohio
River in either  Crawford County or Switzerland  County,  within 30 or 70 miles,
respectively,  of  Louisville.  Prior to the vote in May,  the IGA had  voted to
postpone  indefinitely  the  granting  of a fifth  license.  In  June,  Harrah's
Entertainment,  Inc. withdrew its interest in developing a riverboat in Crawford
County,  Indiana.  At this time,  Crawford County  officials are seeking another
casino  operator  to  apply to the IGA for a  riverboat  license  and have  been
granted an extension until August 13, 1998 to issue their application.

          The full  impact of  riverboat  casinos on Kentucky  racing  cannot be
accurately  determined  until all  riverboats are open and the markets are fully
matured.  Studies  project  that  Churchill  Downs could  experience  a material
adverse impact on its wagering and attendance in the Louisville  market when the
RDI/Caesars  World  riverboat is open and mature.  These same studies  projected
similar declines in western and northern Kentucky but recent experience at Ellis
Park and Turfway Park indicates the impact may not be as severe as these studies
projected.

          In addition to those riverboats  operating along the Ohio River,  five
riverboat  casinos have opened along the Indiana shore of Lake Michigan near the
Company's Sports Spectrum in Merrillville,  Indiana.  The Company's  pari-mutuel
wagering activities at the Merrillville facility have been adversely impacted by
the opening of these Lake Michigan riverboats.

          Additionally, the Potawatomi Indian Tribe has expressed an interest in
establishing a land-based casino in northeastern Indiana and it is attempting to
negotiate a compact with the state of Indiana. At this time, proposed changes to
the Indian Gaming  Regulatory  Act could have an impact on compact  negotiations
between the Potawatomi Tribe and the state of Indiana.  The Company continues to
anticipate  that  development  of such an Indian casino will  negatively  impact
pari-mutuel  wagering activities at its Indiana facilities.  However, the extent
of the impact is unknown at this time due, in part, to the uncertain  geographic
distances between the Company's operations and the potential casino sites.

          The Company  continues to pursue  legislation  to allow video  lottery
terminals at its racetrack  facilities in Kentucky and Indiana.  The integration
of alternative gaming products is one of four core business strategies developed
by the  Company to  position  itself to compete  in this  changing  environment.
Implementing  these  strategies,  the  Company has  successfully  grown its live
racing product by strengthening its flagship operations, increasing its share of
the  interstate  simulcast  market,  and  geographically  expanding  its  racing
operations in Kentucky and into Indiana. Alternative gaming in the form of video
lottery   terminals  and  slot  machines  should  enable  the  Company  to  more
effectively compete with Indiana riverboat casinos,  and provide new revenue for
purse  money and capital  investment.  Currently,  the  Company is working  with
members of the Kentucky  horse  industry to establish a consensus  for a plan to
operate video lottery terminals exclusively at Kentucky's racetracks.

          The horse industry in Indiana presently receives $.65 per $3 admission
to  riverboats  in  the  state  to  compensate   for  the  effect  of  riverboat
competition. Riverboat admissions revenue from the

                                 Page 13 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

Company's  Indiana  operations  increased  $2.9 million for the six months ended
June 30, 1998 as a result of the  opening of  additional  riverboats  along Lake
Michigan  compared to June 30, 1997.  The net  increase in riverboat  admissions
revenue,  after required purse and marketing  expense increases of approximately
$1.8 million, is $1.1 million.

          Legislation  challenging  the  allocation  of  the  $.65  subsidy  was
introduced to the Senate Finance  Committee in the recent session of the Indiana
General  Assembly,  but the bill did not pass out of the committee.  A change in
Hoosier Park's share of the tax would significantly impact funding for operating
expenditures  and  would  in  all  likelihood   reemphasize  the  need  for  the
integration of alternative  gaming  products at the racetrack in order for it to
effectively compete with riverboat casinos.

          The Company has partnered with ODS in the development and operation of
an in-home  interactive  wagering system in Jefferson  County,  Kentucky,  since
1995. The second phase of the Company's  relationship  with ODS is the launching
of the Television  Games Network  ("TVG"),  originally  projected for the fourth
quarter of 1998. In June, an arbitration  panel approved  United Video Satellite
Group,  Inc.'s  proposal to acquire ODS Technologies  L.P.("ODS"). United Video,
which previously owned  approximately  10% of ODS, has now acquired ODS. At this
time, the Company  cannot  assess  any  impact  of this  ruling  on its  in-home
wagering operations.




                                 Page 14 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)


          The Company  owned and  operated two live racing  facilities  and five
simulcast wagering facilities during the entire six month periods ended June 30,
1998 and 1997.  Ellis Park, a third live racing  facility  acquired on April 21,
1998,  was included in the Company's  operations  for a portion of the six month
period  with the  Company  operating  only 1 live race day  during the period as
discussed  separately below. The chart below summarizes the results of Churchill
Downs, Hoosier Park and their respective simulcast wagering facilities:

<TABLE>


                                      Churchill Downs and the Louisville                  Hoosier Park and all four Indiana
                                              SIMULCAST FACILITY                                 SIMULCAST FACILITIES
                                              ------------------                                 --------------------

                                   Six Months         Six Months                         Six Months      Six Months
                                     Ended              Ended                              Ended           Ended
                                    June 30            June 30           Increase         June 30          June 30        Increase
                                      1998               1997           (DECREASE)          1998            1997         (DECREASE)

                                      ----               ----           ----------          ----            ----         ----------
ON-TRACK
<S>                                <C>                <C>                <C>             <C>             <C>              <C>
    Number of Race Days                      47                 47        -                       54              45             9
    Attendance                          692,725            687,533             1%             45,347          46,117            (2%)
    Handle                          $95,951,158        $95,093,015             1%         $4,924,346      $4,944,802        -
    Average daily attendance             14,739             14,628             1%                840           1,025            18%)
    Average daily handle             $2,041,514         $2,023,256             1%            $91,192        $109,884           (17%)
    Per capita handle                   $138.51            $138.31        -                  $108.59         $107.22             1%

INTRASTATE SIMULCAST
  Sending
    Number of Race Days                      47                 47        -                   -               -             -
    Handle                          $27,424,738        $26,741,196             3%             -               -             -
    Average Daily Handle               $583,505           $568,962             3%             -               -             -

  Receiving
    Number of Race Days                      81                 75             6              -               -             -
    Handle                          $19,414,343        $19,664,891            (1%)            -               -             -
    Average Daily Handle               $239,683           $262,199            (9%)            -               -             -

INTERSTATE SIMULCAST
  Sending
    Number of Race Days                      47                 47        -                       54              45             9
    Handle                         $276,526,231       $255,947,702             8%         $9,170,275      $3,951,922           132%
    Average Daily Handle             $5,883,537         $5,445,696             8%           $169,820         $87,820            93%

  Receiving*
    Number of Race Days                      98                 92             6                 589             598             (9)
    Handle                          $42,626,447        $38,172,838            12%        $66,617,630     $66,702,101        -
    Average Daily Handle               $434,964           $414,922             5%           $113,103        $111,542             1%
Totals                             $461,942,917       $435,619,642             6%        $80,712,251     $75,598,825             7%
</TABLE>


* The Company's  Indiana  operations  include four separate  simulcast  wagering
facilities.

                                 Page 15 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)


       Total handle at Churchill  Downs and the  Louisville  simulcast  facility
increased $26.3 million (6%) for the six months ended June 30, 1998 primarily as
the result of a general  increase in handle bet on  Churchill  Downs' live races
through  interstate  simulcast  sending  including record handle bet on Kentucky
Derby and  Kentucky  Oaks  weekend.  An  increase  in the  number of  interstate
simulcast  receiving  wagering days at the  Louisville  simulcast  facility also
contributed to the overall handle increase for Churchill Downs.

       Total  handle  at  Hoosier  Park  and the  Indiana  simulcast  facilities
increased  $5.1  million (7%) for the six months ended June 30, 1998 as a result
of a 132% increase in interstate  simulcast  sending  handle  resulting  from an
increase in the number of  interstate  simulcast  sending days  combined with an
increase in average  daily  handle of 93%.  Hoosier  Park's live race signal was
sent to a record number of outlets during the first six months of 1998.

       Ellis Park  contributed  a total of $12  million in handle to the Company
since April 21, 1998, the acquisition date. Ellis Park conducted live racing for
one day during the period ended June 30, 1998 producing $.3 million in live race
handle.  Intrastate and interstate simulcast sending handle on Ellis Park's live
races  were  $.3 and  $1.3  million,  respectively.  Intrastate  and  interstate
simulcast  receiving  handle  were  $4.2 and  $5.9  million,  respectively.  The
purchase of Ellis Park is expected  to have a positive  impact on the  Company's
earnings in 1998.


COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------------
NET REVENUES
------------

       Net  revenues  during the six months ended June 30, 1998  increased  $8.7
million (12%).

       Pari-mutuel  revenues  increased  $2.9 million (6%) due primarily to a $1
million increase in intrastate and interstate  simulcast sending revenues on the
Churchill  Downs  Spring  Meet.  Ellis Park,  which was  acquired by the Company
during the second quarter, contributed $.9 million in total pari- mutuel revenue
for the six month period ended June 30, 1998.

       Admission  and seat revenue  increased $1 million (9%)  primarily  due to
higher  admission prices on Kentucky Derby and Kentucky Oaks days and due to the
record attendance on those two days. License,  rights, broadcast and sponsorship
revenues increased $1.2 million (21%) due to new corporate sponsorships received
during the Spring Meet at Churchill  Downs and an increase in the broadcast fees
for the Kentucky Derby.  Concession revenues grew $.4 million (24%) primarily as
a result of the increased  attendance at Churchill Downs during its Spring Meet.
Other  revenues  increased  $.3  million  (10%)  primarily  as a  result  of the
acquisition of RCA during the second quarter of 1998.


                                 Page 16 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)


       Riverboat  admissions  revenue  from  the  Company's  Indiana  operations
increased  $2.9 million for the six months ended June 30, 1998  compared to June
30, 1997  primarily as a result of the opening of  additional  riverboats  along
Lake Michigan.  The net increase in riverboat admissions revenue, after required
purse and marketing  expense  increases of approximately  $1.8 million,  is $1.1
million.

       Following is a summary of Net Revenues:
<TABLE>

                                                                            NET REVENUE SUMMARY
                                                                            -------------------
                                        Six Months          % to           Six Months          % to            1998    VS      1997
                                                                                                               --------------------
                                           Ended            Total            Ended             Total            $              %
                                       JUNE 30, 1998       REVENUE        JUNE 30,1997        REVENUE         CHANGE          CHANGE

                                       -------------       -------        ------------        -------         ------          ------


Pari-Mutuel Revenue:
<S>                                         <C>                  <C>          <C>                   <C>         <C>             <C>
     On-track                               $15,340,940           19%         $14,863,607            20%          $477,333        3%
     Intrastate Sending                       5,102,578            6            4,582,492             6            520,086       11
     Interstate Sending                       9,898,957           12            9,191,211            12            707,746        8
     Intrastate Receiving                     2,149,637            3            1,855,121             3            294,516       16
     Interstate Receiving                    16,639,240           20           15,698,627            21            940,613        6
                                            -----------          ----         -----------           ----        ----------      ---
                                            $49,131,352           60%         $46,191,058            62%        $2,940,294        6%

Admission & Seat                             11,664,146           14           10,681,419            15            982,727        9
Revenue

Riverboat Admissions                          8,318,935           10            5,430,462             7          2,888,473       53
Revenue

License, Rights, Broadcast                    7,041,290            8            5,833,765             8          1,207,525       21
& Sponsorship Revenue

Concession Commission                         1,895,810            2            1,531,761             2            364,049       24

Program Revenue                               1,748,684            2            1,696,010             2             52,674       3
 
Other                                         2,959,286            4            2,694,024             4            265,262       10
                                            -----------          ----         -----------          -----        ----------      ----
                                            $82,759,503          100%         $74,058,499           100%        $8,701,004       12%
                                            ===========          ====         ===========           ====        ==========      ====
</TABLE>


                                 Page 17 of 195
<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)


OPERATING EXPENSES

        Total  operating  expenses  increased  $6.4 million (12%) during the six
months ended June 30, 1998. Gross profit increased $2.4 million (11%) during the
same period.

        Purse  expense  increased  $2.8  million  (12%)  with  riverboat  purses
contributing  $1.4 million  (50%) to the total purse  increase.  In Kentucky and
Indiana,  all other purse expense varies directly with pari- mutuel revenues and
is calculated as a percentage of the related revenue and may change from year to
year  pursuant to contract or statute.  Accordingly,  on-track,  intrastate  and
interstate  simulcast purses reflect changes in direct  proportion to changes in
pari-mutuel revenues for the same categories. The increases in all categories of
purses  expense  ,  including  riverboat  purses,  is  directly  related  to the
increases in the  respective  pari-mutuel  net revenue  category  and  riverboat
admissions revenue.

        Wages and contract labor increased $1 million (11%) primarily due to the
addition of RCA during the second quarter of 1998.  Salary  increases  resulting
from increased  business activity and general cost of living raises also account
for a portion of the variance.

        Advertising,  marketing & publicity expenses increased $.7 million (26%)
primarily  as a result of an  increase in  marketing  expenses in Indiana of $.5
million which were reimbursed from the riverboat admissions subsidy.

        Depreciation and amortization increased $.3 million (13%) primarily as a
result of the acquisition of RCA during the second quarter of 1998.

        Insurance,  taxes & license fees  increased $.4 million (30%)  primarily
due to the acquisition of RCA during the second quarter of 1998.

        Utilities  expense  increased $.3 million (22%)  primarily due to warmer
spring and summer months in 1998 and also due the  acquisition of RCA during the
second quarter of 1998.

        Other meeting expense increased $.5 million primarily as a result of the
acquisition of RCA during the second quarter of 1998.




                                 Page 18 of 195

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

         Following is a summary of Operating Expenses:

<TABLE>
                                                           OPERATING EXPENSE SUMMARY
                                                            -------------------------
                                     Six Months           % to            Six Months           % to         1998   VS   1997
                                                                                                          -----------------------
                                       Ended              Total              Ended             Total          $           %
                                    JUNE 30, 1998        EXPENSES        JUNE 30, 1997       EXPENSES       CHANGE      CHANGE


                                   -------------        --------        -------------       --------       ------      ------
Purses:
<S>                                   <C>                    <C>           <C>                    <C>     <C>              <C>
     On-track                         $ 8,149,080             14%          $ 7,877,015             15%    $  272,065        3%
     Intrastate Sending                 2,415,503              4             2,150,473              4        265,030        12
     Interstate Sending                 5,006,122              9             4,594,141              9        411,981         9
     Intrastate Receiving                 924,898              2               804,412              2        120,486       15
     Interstate Receiving               5,083,517              9             4,783,440              9        300,077        6
     Riverboat                          4,256,931              7             2,863,606              6      1,393,325       49
                                      -----------            ----          -----------            ----    ----------       --
                                      $25,836,051             45%          $23,073,087             45%    $2,762,964       12%

Wages and Contract  Labor              10,837,598             18             9,798,634             19      1,038,964       11

Simulcast Host Fee                      4,116,920              7             3,919,550              8        197,370        5

Advertising, Marketing                  3,385,106              6             2,689,438              5        695,668       26
     & Publicity
Racing Relations                        1,177,019              2             1,068,113              2        108,906       10
     & Services
Totalisator Expense                       864,593              1               789,877              2         74,716        9

Audio/Video & Signal                    1,115,670              2             1,088,597              2         27,073        2
     Distribution Expense
Program Expense                         1,335,608              2             1,251,719              2         83,889        7

Depreciation &                          2,551,573              4             2,248,616              4        302,957       13
     Amortization
Insurance, Taxes &                      1,647,192              3             1,269,905              2        377,287       30
     License Fees
Maintenance                             1,019,837              2             1,075,505              2        (55,668)      (5)

Utilities                               1,477,501              3             1,214,189              2        263,312       22

Facility/Land Rent                        411,881              1               397,958              1         13,923        3

Other meeting expense                   2,560,099              4             2,100,938              4        459,161       22
                                      -----------            ----          -----------            ----    ----------       ---
                                      $58,336,648            100%          $51,986,126            100%    $6,350,522       12%
                                      ===========            ====          ===========            ====    ==========       ---
</TABLE>





                                 Page 19 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling,  general and  administrative  (SG&A) expenses increased by $.6
million  (13%) during the six month  period  ended June 30, 1998  primarily as a
result of increased  business  activity,  general cost of living  raises for the
Company's  employees  and the  acquisition  of RCA during the second  quarter of
1998. SG&A expenses as a percentage of net revenues  increased  slightly for the
six months ended June 30, 1998 and 1997 to 6.0% from 5.9%, respectively.

OTHER INCOME AND EXPENSE

         Interest  income of $.4 million for the six months  ended June 30, 1998
increased  $.2 million  over the same period in 1997 as a result of the interest
earned  on notes  receivable  from a  minority-owned  investment  as well as the
additional   earnings   generated  by  the  Company  from  its  short-term  cash
investments (cash equivalents).

         Interest expense increased $.3 million during the six months ended June
30,  1998 as a result of  financing  costs  associated  with the second  quarter
acquisition  of RCA. The Company drew on its bank line of credit for $16 million
of the acquisition  costs and subsequently  repaid $10 million during the second
quarter of 1998 leaving an unpaid balance of $6 million at June 30, 1998.

INCOME TAX PROVISION

         Income tax provision  increased by $.6 million for the six months ended
June 30, 1998 as the result of an increase in pre-tax earnings of $1.6 million.

COMPARISSON OF THREE MONTHS ENDED JUNE 30, 1998 TO
--------------------------------------------------
            THREE MONTHS ENDED JUNE 30, 1997
--------------------------------------------------

         Net  earnings  for the three  months  ended June 30, 1998  increased by
approximately  $.7  million  compared  to the same three  months in 1997.  A $.5
million  net  increase  in  riverboat  admissions  revenue  from two  additional
riverboats  opening along the shore of Lake Michigan during the second and third
quarters of 1997 resulted in the additional revenues for the first six months of
1998.  Additionally,  record  attendance and handle produced during the Kentucky
Derby and  Kentucky  Oaks  weekend,  an  increase  in  revenues  generated  from
interstate  simulcast  sending  for  Churchill  Downs'  live  Spring Meet and an
increase in the number of days of interstate simulcast receiving wagering during
the Churchill  Downs' live Spring Meet also  contributed  to the increase in net
earnings for the Company during the three months ended June 30, 1998.  RCA's net
loss of $.3 million for the period from April 21 (acquisition date) through June
30 offset some of the increased  earnings of the Company  during the three month
period.


                                 Page 20 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

COMPARISON  OF THREE  MONTHS ENDED JUNE 30, 1998 TO 
--------------------------------------------------- 
            THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
1998

         The  increase  from the net loss for the three  months  ended March 31,
1998 of $1.6  million to the net  earnings  for the three  months ended June 30,
1998 of $13.5 million is primarily the result of live racing income generated at
Churchill  Downs during its 1998 Spring Meet which  includes  Kentucky Derby and
Kentucky  Oaks  weekend.  Live racing in Kentucky  begins in the second  quarter
during which the Company earns a substantial portion of its net earnings for the
year.

SIGNIFICANT CHANGES IN THE BALANCE SHEET JUNE 30, 1998 TO DECEMBER 31, 1997
        The cash and cash equivalent balances at June 30, 1998 were $1.3 million
lower than December 31, 1997 primarily due to cash used in acquiring RCA during 
the second  quarter  of 1998.  Borrowings  on the  Company's  line of credit for
the acquisition were partly paid down by June 30, 1998.

        Accounts  receivable  at June 30,  1998 were $7.3  million  higher  than
December  31, 1997  primarily  due to  interstate  and  intrastate  simulcasting
settlements  relating to the 1998 Spring race meet of $4.6 million,  an increase
in the Indiana  riverboat  admissions  tax  receivable  of $1.3  million and the
advanced  invoicing  for 1998  Breeders  Cup tickets of $1.0  million.  The 1998
Breeders Cup will be held at Churchill Downs during the Fall race meet.

        Other assets  increased  by $8.2 million  primarily as the result of the
goodwill of $7.7 million  recorded for the  acquisition of RCA during the second
quarter of 1998.

        Plant and  equipment  increased by $23.6 million  which  includes  $22.0
million for the acquisition of RCA during the second  quarter.  The increase was
also  due to  routine  capital  spending  throughout  the  Company.  Accumulated
depreciation  increased $2.1 million from depreciation  expense on the Company's
plant and equipment.

        Accounts payable at June 30, 1998 were $5.6 million higher than December
31, 1997 primarily as a result of simulcast settlements due other racetracks and
additional  payables  relating to Churchill  Downs and Hoosier  Park's 1998 live
race meets including horsemen's payable balances. Live-meet payable balances for
the Company's 1997 live race meets had substantially been paid prior to December
31, 1997.  The increase is also due to the Company's  acquisition  of RCA during
the second quarter of 1998.

        Accrued expenses increased by $1.4 million at June 30, 1998 primarily as
a result of expenses generated during the Company's 1998 live race meets.

        Dividends  payable decreased by $3.7 million at June 30, 1998 due to the
payment of dividends (declared in 1997) in the first quarter of 1998.

        Income  taxes  payable  increased  by  $6.9  million  at June  30,  1998
representing the estimated income tax expense attributed to the income generated
in the second quarter of 1998.


                                 Page 21 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

        Deferred  revenue  was $5.0  million  lower at June 30,  1998 due to the
significant amount of admission and seat revenue that was received in advance at
December  31 and  recognized  as income in May 1998 for the  Kentucky  Derby and
Kentucky Oaks.  The decrease was partially  offset by $1 million in Breeders Cup
invoicing during the second quarter of 1998.

        Long-term  debt  increased  $6.1  million  as a result of line of credit
borrowings used for the acquisition of RCA during the second quarter of 1998.

        Outstanding  mutuel  tickets  increased by $1.6 million at June 30, 1998
primarily as a result of unclaimed  mutuel tickets  relating to Churchill Downs'
1998 Spring Meet.

        Deferred  income  taxes  increased  by $6.5 million as a  result  of the
second quarter acquisition of RCA.

        Common stock  increased  by $5.2  million  primarily as a result of $4.9
million of stock issued as part of the RCA acquisition.

SIGNIFICANT CHANGES IN THE BALANCE SHEET JUNE 30, 1998 TO JUNE 30, 1997

        Cash and cash  equivalents  decreased $8.2 million in 1998 primarily due
to the cash used for the acquisition of RCA during the second quarter of 1998.

        Accounts receivable  increased $2.0 million primarily due to an increase
in the Indiana  riverboat  admissions  tax  receivable  of $1.6  million and the
advanced invoicing for 1998 Breeders Cup tickets of $1 million.  The acquisition
of RCA during the second  quarter of 1998 also  contributed  to the  increase in
receivables.

        Other assets  increased by $10.3 million  primarily as the result of the
goodwill of $7.7 million  recorded for the  acquisition of RCA during the second
quarter of 1998. The Company's $2.2 million ownership  investment in and loan to
BC Racing Group,  LLC in July 1997 (Kentucky Downs race track) also  contributed
to the increase in other assets.

        Plant and  equipment  increased by $25.3 million  which  includes  $22.0
million for the acquisition of RCA during the second  quarter.  The increase was
also due to routine capital spending throughout the Company since June 30, 1997.
Accumulated depreciation increased $4.3 million from depreciation expense on the
Company's plant and equipment.

        Accounts  payable  decreased by $1.2 million due primarily to the timing
of payments for  horsemen-related  and simulcast  payables for Churchill  Downs'
Spring live race meet offset partially by an increase in payables related to the
acquisition of RCA during the second quarter of 1998.

        Deferred revenue increased by $1.2 million primarily due to the advanced
invoicing for 1998 Breeders Cup tickets of $1 million  during the second quarter
of 1998.


                                 Page 22 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

        Long-term  debt  increased  $5.9  million  as a result of line of credit
borrowings used for the acquisition of RCA during the second quarter of 1998.

        Deferred income taxes increased by $5.7 as a result of the assumption of
deferred taxes in the RCA second quarter acquisition.

        Common stock  increased  by $5.3  million  primarily as a result of $4.9
million of stock issued as part of the RCA acquisition.

LIQUIDITY AND CAPITAL RESOURCES

        The working  capital  deficiency  for the six months ended June 30, 1998
increased by  approximately  $8.5 million  compared to the June 30, 1997 working
capital surplus as shown below:

                                                     JUNE  30
                                          --------------------------------

                                               1998             1997
                                               ----             ----
Working capital surplus (deficiency)      $(7,522,480)         $959,696
Working capital ratio                       0.75 to 1         1.03 to 1

         The working capital  deficiency results from the nature and seasonality
of the  Company's  business.  During the six months  ended  June 30,  1998,  the
working capital deficiency compared to the working capital surplus from June 30,
1997 is  primarily  due to the use of  cash  and  cash  equivalents  toward  the
purchase of RCA and the repayment of a portion of the  Company's  line of credit
used to finance the  acquisition  during the second quarter of 1998.  Cash flows
provided by  operations  were $15.7 million and $13.3 million for the six months
ended June 30,  1998 and 1997,  respectively.  The  increase  of $2.4 in 1998 is
primarily the result of an increase in net earnings of $1.0 million,  the timing
of income taxes payable and a decrease in accounts  receivable  offset partially
by a decrease in accounts payable and accrued expenses. Management believes cash
flows from operations and available borrowings during the remainder of 1998 will
be  substantially  in  excess  of the  Company's  disbursements  for  the  year,
including capital improvements.

         Cash flows used in  investing  activities  were $19.4  million and $2.8
million  for the six months  ended  June 30,  1998 and 1997,  respectively.  The
increase in cash used of $16.6 million is due to the  Company's  purchase of RCA
during the second  quarter of 1998.  Routine  capital  spending  throughout  the
Company  accounted  for a portion of the cash used in investing for 1998 and for
all of the cash used in investing for 1997.

         Cash flows provided by (used in) financing activities were $2.4 million
and  $(2.5)   million  for  the  six  months  ended  June  30,  1998  and  1997,
respectively.  Cash  provided by increases  in  long-term  debt is the result of
incurring debt for the acquisition of RCA during the second quarter of 1998. The
Company borrowed $16 million and repaid $10 million on its line of credit during
the period to  finance a portion  of the  acquisition.  Cash  dividends  of $3.7
million were paid to shareholders in 1998 (declared in 1997)

                                 Page 23 of 195

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
       ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

versus $2.4 million paid in 1997 (declared in 1996).

         The Company has a $50 million  line of credit,  of which $44 million is
available  at June 30,  1998,  to meet  working  capital  and  other  short-term
requirements.  The Company also received approval from its Board of Directors in
June 1998 to increase its line of credit to $100 million which is expected to be
finalized in the third quarter of 1998.

IMPACT OF THE YEAR 2000 ISSUE

                  The  Company  has  conducted  a  comprehensive  review  of its
computer systems to identify the systems that could be affected by the Year 2000
Issue and has developed a comprehensive plan to resolve the issue. The Year 2000
Issue  is the  result  of  computer  programs  that  fail to  utilize  the  full
four-digit representation of a year which would cause date-sensitive software to
recognize  a date using  "00" as the year 1900  rather  than the year  2000.  An
inability  of  the  systems  to  correctly  recognize  dates  in  date-sensitive
calculations  could lead to system  failure and  disruption of  operations.  The
Company plans to complete the Year 2000 Issue project by June 30, 1999.

                  The    pari-mutuel    industry   is   very    dependent   upon
telecommunication  links which connect  companies  together for normal commerce.
The  transition  to the year 2000 may adversely  affect the  operations of these
links. In addition,  the Company obtains critical services  necessary for normal
operations from technology vendors who likewise may be affected by the Year 2000
Issue. The Company is communicating  with its significant  suppliers,  customers
and others with which it conducts  business  to help them  identify  and resolve
their own Year 2000 Issue.  If necessary  modifications  and  conversions by the
Company and those with which it conducts business are not completed timely,  the
Year 2000 Issue may have a material  adverse effect on the Company's  results of
operations.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

                  Effective  January 1, 1998, the Company  adopted  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
130).  Currently,  there are no amounts to be  included  in the  computation  of
comprehensive  income of the Company that are required to be disclosed under the
provisions of SFAS 130. As such, total  comprehensive  income and net income are
the  same  for  the  six  and  three  months  ended  June  30,  1998  and  1997,
respectively.

                  In  June  1997,  the  Financial   Accounting  Standards  Board
("FASB")   issued   Statement  of  Financial   Accounting   Standards  No.  131,
"Disclosures  about  Segments of an Enterprise  and Related  Information"  (SFAS
131).  The  Company  will adopt  SFAS 131  during the fourth  quarter of 1998 as
required.

                  In February  1998,  the FASB  issued  Statement  of  Financial
Accounting Standards No. 132,  "Employers'  Disclosures about Pensions and other
Post-retirement   Benefits"  (SFAS  132).  This  statement  revises   employers'
disclosures about pensions and other  post-retirement plans without changing the
measurement or recognition of those plans. The Company will include SFAS 132
disclosures in its 1998 annual report.

                                 Page 24 of 195

<PAGE>






                          CHURCHILL DOWNS INCORPORATED

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  Not Applicable

                           PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

                  Not Applicable

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

                           On  April  21,  1998,  the  Company  acquired  Racing
                  Corporation  of America  ("RCA")  pursuant to a Stock Purchase
                  Agreement  dated as of March  28,  1998,  by and  between  the
                  Company  and TVI Corp.  ("TVI") and an  Agreement  and Plan of
                  Merger dated as of April 17, 1998,  by and among TVI, RCA, the
                  Company and RCA Acquisition Company, a wholly-owned subsidiary
                  of the Company (the "Acquisition").  The consideration paid by
                  the Company in the Acquisition included the issuance to TVI of
                  200,000  shares of the common  stock of the Company  valued at
                  $4,850,000,  based  upon the  closing  price of the  Company's
                  common stock of $24.25 per share as agreed upon by the parties
                  based on a review of recent  trading  activity  as reported on
                  the  NASDAQ   Small  Cap  Market   (adjusted  to  reflect  the
                  two-for-one  stock split of the Company  declared on March 19,
                  1998).  The  additional   consideration  for  the  Acquisition
                  received by TVI was cash of $17,150,000. In issuing the shares
                  in the  Acquisition,  the Company relied on the exemption from
                  registration  afforded by Rule 506 of Regulation D promulgated
                  pursuant to the Securities Act of 1933,  based on the issuance
                  of shares meeting the requirements of Rule 506.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

                  Not Applicable

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                           The registrant's  1998 Annual Meeting of Shareholders
                  was held on June  18,  1998.  Proxies  were  solicited  by the
                  registrant's  board of  directors  pursuant to  Regulation  14
                  under  the  Securities  Exchange  Act of  1934.  There  was no
                  solicitation  in opposition to the board's  nominees as listed
                  in

                                 Page 25 of 195

<PAGE>



                  the proxy statement, and all nominees were elected by vote of 
                  the shareholders.  Voting results for each nominee were as
                  follows:

                                               VOTES FOR        VOTES WITHHELD
                  CLASS II DIRECTORS:
                  J. David Grissom             5,952,211                34,980
                  Seth W. Hancock              5,954,063                33,128
                  Frank B. Hower, Jr.          5,947,153                40,038
                  W. Bruce Lunsford            5,950,831                36,360

                           A proposal  (Proposal No. 2) to approve the Churchill
                  Downs  Incorporated  1997 Stock  Option Plan was approved by a
                  vote of the majority of the shares of the registrant's  common
                  stock represented at the meeting:  5,718,846 shares were voted
                  in favor of the proposal;  221,542 were voted against;  17,228
                  abstained and 29,575 were not voted by beneficial holders.

                           A  proposal  (Proposal  No.  3) to  approve  amending
                  Churchill  Downs'  Articles of  Incorporation  to increase the
                  number of  authorized  common  shares  from 10  million  to 20
                  million was  approved by a vote of the  majority of the shares
                  of the registrant's  common stock  represented at the meeting:
                  5,866,218 shares were voted in favor of the proposal;  104,967
                  were voted against; and 16,006 abstained.

                           A proposal (Proposal No. 4) to approve the minutes of
                  the 1997 Annual Meeting of Shareholders was approved by a vote
                  of the majority of the shares of the registrant's common stock
                  represented  at the  meeting:  5,939,711  shares were voted in
                  favor of the proposal;  25,204 were voted against;  and 22,276
                  abstained.

                           The  total   number   of   shares  of  common   stock
                  outstanding  as of April  20,  1998,  the  record  date of the
                  Annual Meeting of Shareholder, was 7,316,934.

ITEM 5.           OTHER INFORMATION

                           Pursuant  to  the  Company's  bylaws,   proposals  of
                  shareholders  intended to be presented at the  Company's  1999
                  annual meeting of shareholders must be received by the Company
                  at the  principal  executive  offices of the  Company not less
                  than 90 nor more than 120 days prior to the  anniversary  date
                  of the immediately  preceding  annual meeting of shareholders.
                  Accordingly,   any  shareholder   proposals   intended  to  be
                  presented at the 1999 annual  meeting of  shareholders  of the
                  Company  must be  received  in writing  by the  Company at its
                  principal  executive offices not later than March 20, 1999 nor
                  sooner than February 18, 1999.  Any proposal  submitted  after
                  that date will be considered  untimely and management  proxies
                  will be allowed to use their discretionary voting authority if
                  the proposal is raised at the annual meeting.

                                 Page 26 of 195

<PAGE>





ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K.

                  A.       Exhibits

                           See exhibit index on page 28.

                  B.       Reports on Form 8-K

                           Churchill Downs  Incorporated  filed a Current Report
                           on Form 8-K dated  April 28,  1998  reporting,  under
                           Item 2,  "Acquisition or disposition of assets",  the
                           acquisition of Racing Corporation of America pursuant
                           to a Stock  Purchase  Agreement  dated March 28, 1998
                           and an  Agreement  and Plan of Merger dated April 17,
                           1998 as amended by Form 8-K/A, dated July 1, 1998 and
                           further amended by Form 8-K/A dated July 10, 1998.










                                 Page 27 of 195

<PAGE>




                                   SIGNATURES


                  Pursuant to the requirements of the Securities Exchange Act of
1934,  the  registrant has duly caused this Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.

                                           CHURCHILL DOWNS INCORPORATED



         August 14, 1998                   \S\THOMAS H. MEEKER
                                           -------------------------------------
                                           Thomas H. Meeker
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


         August 14, 1998                   \S\ROBERT L. DECKER
                                           -------------------------------------
                                           Robert L. Decker
                                           Senior Vice President, Finance
                                           (Chief Financial Officer)



         August 14, 1998                   \S\VICKI L. BAUMGARDNER
                                           -------------------------------------
                                           Vicki L. Baumgardner
                                           Vice President, Finance/Treasurer
                                           (Principal  Accounting Officer)


















                                 Page 28 of 195

<PAGE>



                                                       EXHIBIT INDEX
<TABLE>
<CAPTION>

        NUMBERS          DESCRIPTION                                                     BY REFERENCE TO
        <S>     <C>                                                             <C>
         (3)(e) Amended and Restated Articles of Incorporation                  Pages 30 to 41, Report on Form 10-
                of Churchill Downs  Incorporated                                Q for the fiscal quarter ended June
                                                                                30, 1998

         (3)(i) Restated Bylaws as amended                                      Pages 42 to 51, Report on Form 10-
                                                                                Q for the fiscal quarter ended June
                                                                                30, 1998

        (10)(a) Churchill Downs Incorporated 1997 Stock Option Plan             Pages 80 to 88, Report on Form 10-K
                                                                                for the year ended December 31, 1997

        (10)(b) $50 Million Revolving Credit Facility  Credit Agreement         Pages 52 to 194, Report on Form
                between Churchill Downs Incorporated, Churchill                 10-Qfor the fiscal quarter ended
                Downs Management Company, Churchill Downs                       June 30, 1998
                Investment Company, Racing Corporation of
                America, Ellis Park Race Course, Inc., the banks
                party thereto and PNC Bank, National
                Association, as Agent, dated as of June 17, 1998

           (27) Financial Data Schedule for the quarter ended                   Page 195, Report on Form 10-Q for
                June 30, 1998 the fiscal quarter ended June 30,                 the fiscal quarter ended June 30, 1998
                1998
</TABLE>







                                 Page 29 of 195
<PAGE>