UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

             [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        For Year Ended December 31, 1998

            [ ] 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, KENTUCKY                 40208
Address of Principal Executive Offices                  Zip Code

Registrant's Telephone Number, Including Area Code      502-636-4400

           Securities registered pursuant to Section 12(b) of the Act:
             None                                   None       
Title of Each Class registered        Name of Each Exchange on which registered

           Securities registered pursuant to Section 12(g) of the Act:

                           COMMON STOCK, NO PAR VALUE
                                 Title of Class

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 and (2) has been subject to such filing requirements for
the past 90 days.  YES  X  NO    

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. (_________)

As of March 25, 1999,  7,525,041  shares of the  Registrant's  Common Stock were
outstanding,  and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $131,000,000.

Portions  of  the  Registrant's  Proxy  Statement  for  its  Annual  Meeting  of
Shareholders to be held on June 17, 1999 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K.  The exhibit index
is located on pages 58 to 59.


                                        1
<PAGE>



                                     PART I

ITEM 1.        BUSINESS

        A.     INTRODUCTION

        Churchill  Downs  Incorporated  (the "Company") is a racing company that
primarily  conducts  pari-mutuel  wagering on live Thoroughbred and Standardbred
horse racing and simulcast video feeds of races.  Additionally,  we offer racing
services through our other business interests.

        We own and operate our flagship operation, Churchill Downs racetrack, in
Louisville,   Kentucky  ("Churchill  Downs").   Churchill  Downs  has  conducted
Thoroughbred  racing  continuously since 1875, and is  internationally  known as
home of the Kentucky Derby.  The Churchill Downs operation also  encompasses the
Louisville Sports Spectrum, a simulcast- wagering facility.

        In 1992, we formed Churchill Downs Management Company ("CDMC"), a wholly
owned subsidiary that oversees properties we actively manage. CDMC manages Ellis
Park Race Course ("Ellis Park"),  a Thoroughbred  track in Henderson,  Kentucky,
and the Kentucky Horse Center in Lexington,  Kentucky.  We acquired ownership of
these two facilities in April 1998.  Additionally,  CDMC manages Hoosier Park in
Anderson,  Indiana ("Hoosier  Park"), of which we are a majority owner.  Hoosier
Park conducts  Thoroughbred,  Quarter Horse and Standardbred horse racing.  CDMC
also manages  three Sports  Spectrum  facilities  ("Sports  Spectrum")  owned by
Hoosier  Park in  Indiana.  The Sports  Spectrum  facilities  conduct  simulcast
wagering on horse racing  year-round.  We also  periodically  conduct  simulcast
wagering at our racetracks.

        In November 1997, we formed Churchill Downs Investment Company ("CDIC"),
a wholly owned subsidiary,  to oversee those investments in which we participate
as an equity  investor and do not actively  manage the  operations.  Among those
investments are NASRIN Services,  LLC ("NASRIN"),  a telecommunications  service
provider for the pari-mutuel and simulcasting  industries,  and EquiSource,  LLC
("EquiSource"),  a procurement  business that assists in the group purchasing of
supplies  and services for the equine  industry.  We are a minority  investor in
both  NASRIN  and  EquiSource.  In  March  1999, CDIC and  Autotote  Corporation
("Autotote")  formed  NASRIN,  which  operates  under the  NASRIN banner and is
managed on a day-to-day  basis by Autotote.  Autotote  owns 70 percent of
NASRIN and CDIC owns 30 percent.  Currently,  neither  NASRIN nor Equisource are
material investments for us.


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<PAGE>



        CDIC  also  holds  our  minority   investment  in  Kentucky  Downs,  LLC
("Kentucky  Downs"),  a Franklin,  Kentucky,  racetrack  that conducts a limited
Thoroughbred  race meet as well as  year-round  simulcasting.  Turfway  Park - a
Florence, Kentucky, racetrack - also holds a minority interest in Kentucky Downs
and manages its day-to-day  operations.  In March 1999,  Keeneland  Association,
Inc. ("Keeneland"), a Lexington, Kentucky, racetrack;  Dreamport, Inc., a wholly
owned subsidiary of GTECH  Corporation;  and Dusty  Corporation,  a wholly owned
subsidiary  of  Harrah's Entertainment,  Inc., through a jointly  owned company,
acquired all of Turfway Park's racetrack-related assets. It is not believed that
this transaction will have a  material  effect on the  management  of  Kentucky 
Downs.  Our  investment  in Kentucky  Downs is  not  material  to  the Company's
operations at this time.

        On January 11, 1999, we completed  the purchase of a majority  ownership
interest in Charlson  Industries,  Inc., a privately  held company that provides
simulcast  graphic  software  and video  services to  racetracks  and  simulcast
wagering  facilities.  Under the  purchase  agreement,  the two  parties  formed
Charlson Broadcast  Technologies,  LLC ("CBT"). We control a 60% interest in the
new venture. The cost of the transaction - including the purchase price, capital
commitments and contingent payments - totaled $4.9 million. CBT now owns all the
assets formerly owned by Charlson  Industries.  The new venture is expected
to be strategically  significant to our development of a comprehensive simulcast
product

        The  Company  was  organized  as a  Kentucky  corporation  in 1928.  Its
principal  executive offices are located at Churchill Downs, 700 Central Avenue,
Louisville, Kentucky 40208.

        B.     LIVE RACING OPERATIONS

        We conduct live horse racing at Churchill Downs,  Ellis Park and Hoosier
Park during each track's respective meets. Live racing produces revenues through
pari-mutuel wagering,  admissions and seating, concession commissions (primarily
the sales of food and beverage items), sponsorship revenues, and license, rights
and broadcast fees.

        The Kentucky Derby and the Kentucky Oaks, both held at Churchill  Downs,
continue to be our premier  racing events.  Churchill  Downs has also hosted the
Breeders' Cup  Championship a record four times,  in 1988,  1991, 1994 and 1998.
The  Breeders'  Cup races  are held  annually  for the  purpose  of  determining
Thoroughbred  champions  in eight  different  events.  Racetracks  across  North
America  compete for the privilege of hosting the Breeders' Cup races each year.
Hosting the  Breeders' Cup event has a positive  impact on marketing,  publicity
and financial results.



                                        3

<PAGE>



        Churchill Downs

        Churchill Downs annually  conducts two live  Thoroughbred  race meets, a
        Spring Meet (late April through late June) and a Fall Meet (late October
        through late November).

        We own the Churchill Downs racetrack site and improvements located at or
        adjacent to 700 Central  Avenue,  Louisville,  Kentucky (the  "Churchill
        facility").  The Churchill  facility consists of approximately 157 acres
        of land with a one-mile oval dirt track, a seven-eighths (7/8) mile turf
        track,  permanent  grandstands  and a stabling  area. The physical plant
        includes  clubhouse  and  grandstand  seating for  approximately  48,500
        persons,  a general  admission  area,  and food and beverage  facilities
        ranging  from  fast  food  to  full-service  restaurants.   The  Paddock
        Pavilion,  a  state-of-the-art  simulcast-wagering  facility designed to
        accommodate  450  patrons,  opened  in May  1997.  The  site  also has a
        saddling paddock,  infield accommodations for groups and special events,
        parking areas for the public,  and our office  facilities.  The backside
        stable area has sprinkled barns sufficient to accommodate  approximately
        1,400  horses,  and  other  facilities  for  backstretch  personnel.  In
        September  1998, our board of directors  approved the  construction of a
        114-room brick  dormitory for backstretch  personnel.  This $2.4 million
        project is expected to be completed during the track's 1999 Spring Meet.

        We have made numerous  capital  improvements  to the Churchill  facility
        during  the past 10 years in order to  better  serve  our  horsemen  and
        patrons.  The dirt and turf  tracks  provide  excellent  venues for live
        Thoroughbred  racing. We provide  additional  stabling  facilities and a
        training track at the Louisville Sports Spectrum, where a portion of the
        property is used as a  Thoroughbred  stabling  and  training  annex.  We
        converted a former  Standardbred  track into a three-quarter  (3/4) mile
        dirt track, which is used for training Thoroughbreds. The existing barns
        on the property were demolished,  and we constructed new sprinkled barns
        sufficient  to  accommodate   approximately  500  horses,   providing  a
        year-round  base of  operation  for many  horsemen  and  enabling  us to
        attract new horsemen who desire to race at Churchill Downs.

        Our physical  plant at the Churchill  facility is fully utilized only on
        those days when live racing is conducted.




                                        4

<PAGE>




        Ellis Park Race Course

        Ellis Park  conducts  Thoroughbred  racing  from late June or early July
        through Labor Day.

        We own the Ellis Park racetrack and improvements  located at or adjacent
        to 3300  U.S.  Highway  41 North in  Henderson,  Kentucky  ("Ellis  Park
        facility").  The Ellis Park facility  consists of 230 acres of land just
        north of the Ohio  River  with a one and  one-eighths  (1 1/8) mile dirt
        track, a one-mile turf course, permanent grandstands and a stabling area
        for 1,290 horses.  The physical plant includes  clubhouse and grandstand
        seating  for  8,000  people,  a  general  admission  area,  and food and
        beverage facilities ranging from fast food to full-service  restaurants.
        The Ellis Park facility also features a saddling paddock,  parking areas
        for the public and office facilities.

        Hoosier Park

        Hoosier  Park  conducts  live  Standardbred  racing  (mid-April  to late
        August),  live Thoroughbred racing  (mid-September to late November) and
        live Quarter Horse racing (late October).

        Hoosier Park is located in Anderson,  Indiana,  about 40 miles northeast
        of downtown Indianapolis. Hoosier Park leases the land under a long-term
        lease with the city of Anderson and owns all of the  improvements on the
        site  located  at 4500  Dan  Patch  Circle  in  Anderson,  Indiana.  The
        racetrack  facility  consists of approximately  110 acres of leased land
        with a seven-eighths (7/8) mile oval dirt track,  permanent grandstands,
        and stabling area. The physical plant includes seating for approximately
        2,400  persons,   a  general  admission  area,  and  food  and  beverage
        facilities ranging from fast food to a full-service restaurant. The site
        also has a saddling  paddock,  parking areas for the public,  and office
        facilities.  The stable area has barns  sufficient  to  accommodate  780
        horses, and other facilities for backstretch personnel.

        Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited
        partnership  formed in 1994.  We  currently  own a 77%  interest in HPLP
        through Anderson Park, Inc.  ("Anderson"),  a wholly owned subsidiary of
        CDMC.  The  remaining  23% of HPLP is held by unrelated  third  parties,
        Pegasus Group,  Inc.  ("Pegasus"),  and Conseco HPLP,  LLC  ("Conseco").
        Conseco and Pegasus are limited partners of HPLP, and Anderson continues
        to be the  sole  general  partner  of  HPLP.  HPLP  has  entered  into a
        management  agreement with CDMC under which CDMC has operational control
        of the day-to-day

                                        5

<PAGE>



        affairs of Hoosier Park and its related  simulcast  operations.  Through
        CDMC,  we have  loaned to HPLP $23.2  million,  which  includes  accrued
        interest,  for the  development  of the racetrack and related  simulcast
        wagering  facilities.  CDMC is  committed  to loan  an  additional  $2.6
        million to HPLP, but we do not anticipate any additional investment. The
        loan bears interest of prime plus 2% (9.75% at December 31, 1998).

        Licensing

        Kentucky's  racetracks,  including  Churchill  Downs and Ellis Park, 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 meets
        and to  participate  in  simulcasting  (discussed  below)  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 award 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.  The KRC has awarded  Churchill Downs a total of 71 live
        racing dates in 1999 and Ellis Park a total of 61 days.

        In Indiana,  licenses to conduct live Standardbred and Thoroughbred race
        meets, including Quarter Horse races, and to participate in simulcasting
        are approved annually by the Indiana Horse Racing  Commission  ("IHRC"),
        which  consists of five  members  appointed  by the governor of Indiana.
        Licenses  are  approved  annually  by the IHRC based  upon  applications
        submitted by Hoosier Park. Currently,  Hoosier Park is the only facility
        in  Indiana   licensed  to  conduct   pari-  mutuel   wagering  on  live
        Standardbred, Quarter Horse or Thoroughbred racing and to participate in
        simulcasting.  The IHRC  has  awarded  Hoosier  Park a total of 168 live
        racing dates in 1999.

        A substantial  change in the allocation of live racing days at Churchill
        Downs,  Ellis Park or Hoosier Park could adversely impact our operations
        and earnings in future years.

        Service Marks

        We hold  federal  service  mark  registrations  on the  names  "Kentucky
        Derby," "Churchill Downs," "Churchill Downs Sports Spectrum,"  "Kentucky
        Oaks,"  "Churchill  Charlie"  and the  Twin  Spires  design  in  various
        categories including

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<PAGE>



        entertainment  business,   apparel,  paper  goods,  printed  matter  and
        housewares  and glass.  We license  the use of these  service  marks and
        derive revenue from such license agreements.

        C.     SIMULCASTING OPERATIONS

        In the horse racing  industry,  simulcasting  involves sending audio and
video signals of live races to off-track facilities, including other racetracks,
for the purpose of wagering.

        We generate a significant portion of our revenues by sending our signals
to other facilities and receiving signals from other tracks.  These revenues are
earned through pari-mutuel wagering on signals that we both send and receive.

        During 1998,  we sold the Churchill  Downs,  Ellis Park and Hoosier Park
signals as separate  products.  The Kentucky Derby signal was packaged with that
of Churchill Downs. Starting in 1999, we intend to also offer all of the signals
we own as one product.

        Ellis Park and  Hoosier  Park act as  year-round  simulcast  facilities,
while  Churchill  Downs  receives  signals  only  during  its  race  meets.  The
Louisville Sports Spectrum conducts  simulcast  wagering when Churchill Downs is
not operating a live race meet with the exception of Kentucky  Derby Day and the
immediately  following  Sunday.  The Indiana  Sports  Spectrums and the Kentucky
Off-Track  Betting  facilities  (discussed below)  conduct  simulcast  wagering 
year-round.

Louisville Sports Spectrum

        We own the real property and improvements known as the Louisville Sports
Spectrum, located at 4520 Poplar Level Road in Louisville,  Kentucky. Formerly a
Standardbred  racetrack,  this property was acquired by us in 1992 and converted
into  a  simulcast  wagering  facility  and  Thoroughbred  training  annex.  The
100,000-square-foot  Louisville  Sports Spectrum is located on  approximately 88
acres of land, about seven miles from Churchill Downs.

        The Louisville  Sports Spectrum  provides  state-of-the art audio/visual
technology,  seating  for  approximately  3,000  persons,  parking,  offices and
related  facilities for simulcasting races in Kentucky and throughout the United
States.  Seven  separate  areas were created within the structure to accommodate
the needs of a variety of patrons,  from the seasoned  handicapper to the novice
player.  As mentioned  above,  the  Louisville  Sports  Spectrum also provides a
stabling and training annex for Churchill Downs.


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<PAGE>



Indiana Sports Spectrums

        Hoosier Park owns and operates  three  simulcast-wagering  facilities in
Indiana,  which are branded with the Churchill Downs Sports Spectrum name. These
simulcast  wagering  facilities  provide a  statewide  distribution  system  for
Hoosier Park's racing signal and additional  simulcast markets for our products.
The  Sports  Spectrum  at  Merrillville,  located  about 30 miles  southeast  of
Chicago,  consists of  approximately  27,300  square  feet of space.  The Sports
Spectrum at Fort Wayne  consists of  approximately  15,750 square feet of space.
Hoosier  Park also  leases  space in the  Claypool  Courts  Building in downtown
Indianapolis  where it operates the Sports Spectrum at Indianapolis.  In October
1998, the IHRC approved the expansion of this facility from approximately 17,500
square feet to 24,800  square feet.  This project,  completed in February  1999,
increased capacity by 180 patrons to 630.

        Hoosier  Park is  continuing  to  evaluate  sites for the  location of a
fourth Sports Spectrum  facility.  The State of Indiana has enacted  legislation
that  requires a county fiscal body to adopt an ordinance  permitting  simulcast
wagering  facilities  before such a facility can be located in that county.  The
county  fiscal body may require in the  ordinance  that the voters of the county
must approve the operation of a simulcast-wagering facility in that county. This
legislation  may affect Hoosier Park's ability to locate its fourth  facility in
certain counties.

Kentucky Off-Track Betting, Inc.

        In 1992,  the Company and three other Kentucky  Thoroughbred  racetracks
formed  Kentucky  Off-Track  Betting,  Inc.  ("KOTB"),  of  which  we  are a 50%
shareholder.   KOTB's  purpose  is  to  own  and  operate   facilities  for  the
simulcasting  of races and the  acceptance  of wagers on such races at locations
other than a racetrack. These simulcast  wagering  facilities  may be located no
closer than 75 miles from an existing  racetrack  without  the track's  consent
and  in  no event  closer  than 50 miles to an  existing  track.  Each simulcast
wagering  facility  must  first  be  approved  by  the KRC. Once  approved,  the
simulcast wagering facility may then be established unless the local  government
where the  facility is to be located votes to disapprove its establishment. KOTB
currently owns or leases and operates  simulcast wagering  facilities in Corbin,
Maysville,  Jamestown,  and Pineville, Kentucky.

        Simulcast  wagering  facilities  developed  by KOTB  provide  additional
markets for the  intrastate  simulcasting  of Churchill  Downs' and Ellis Park's
live races and interstate  simulcasting  on out-of-state  signals.  KOTB did not
contribute  significantly  to our  operations in 1998 and is not  anticipated to
have a substantial impact on operations in the future.

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In-Home Wagering

        Churchill  Downs,  in  conjunction  with ODS  Entertainment  ("ODS") and
InterMedia,  continues to operate its in-home  interactive  television  wagering
system, the first such system in the country. Testing began in July 1995 and has
expanded to approximately  1,250 homes in Jefferson  County,  Kentucky.  In-home
patrons can wager on Churchill  Downs' live racing,  as well as  intrastate  and
interstate race signals.  We believe  development of such in-home technology can
be used as an efficient delivery system that could increase revenues and attract
new segments of the market to our racetracks.

        The second phase of our  relationship  with ODS will be the launching of
the Television Games Network ("TVG"),  which is projected to begin in the fourth
quarter  of  1999.   This  new  network  is  anticipated  to  eventually   offer
24-hour-a-day  programming  throughout  the United States that will be primarily
devoted to developing new fans for racing.  Once  completed,  this would include
interactive wagering from home.

        D.     OTHER SOURCES OF REVENUE

           In  addition  to  revenues  from live  racing  and  simulcasting,  we
generate revenues from additional sources.

Riverboat Admissions Tax

        To compensate for the adverse impact of riverboat competition, the horse
industry in Indiana  presently  receives $0.65 per $3 admission to riverboats in
the state.  The horse  industry  is  required  to  allocate  70% of any  revenue
received from the subsidy  directly for purse  expenses,  breed  development and
reimbursement of approved  marketing costs. The balance,  or 30%, is received by
Hoosier Park as the only horse racetrack currently operating in Indiana.

Kentucky Horse Center

        We own the real property and  improvements  known as the Kentucky  Horse
Center, located at 3380 Paris Pike in Lexington,  Kentucky ("KHC"). The KHC is a
Thoroughbred  training and boarding facility that we acquired with Ellis Park in
April 1998.  The  facility,  which sits on 245 acres of land,  offers a one-mile
dirt track,  a  five-eighths  (5/8) mile  training  track and stabling for 1,000
horses.  Additionally,  the KHC has  facilities  for meetings and larger special
events, including a 920-seat auditorium known as the Pavilion. Escorted tours of
the KHC's training facilities are offered to the public.  KHC's revenues are not
material to our operations at this time.

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        E.     OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS

        North  American  bloodstock  sales climbed  again in 1998,  continuing a
trend that began in 1997 when the market rebounded  dramatically from its decade
long slump. According to The Blood-Horse magazine, expenditures for Thoroughbred
weanlings,  yearlings, 2 year olds and broodmares totaled $816.9 million in 1998
compared to $693 million in 1997,  which was the previous  record.  Beginning in
1995, the number of Thoroughbred  foals born each year had also begun to show an
increase.  These recent  increases in bloodstock  prices and number of foals are
indicators of a resurgence of the Thoroughbred  breeding  industry,  reversing a
trend  of  declines  experienced  from  1986 to  1995.  These  recent  increases
ultimately  resulted in an increase in the number of Thoroughbreds  available to
run in  races,  which  enables  racetracks  to  increase  the  number  of horses
participating in live racing.

        Churchill  Downs,  Ellis Park and Hoosier Park were able to  effectively
compete for horses and  experienced a high quality of racing in 1998.  Churchill
Downs offered  record  average daily purses that ranked among the highest in the
nation.  We believe these purses  attracted many of the country's top horses and
trainers.  During Churchill Downs' live race meets, average daily purses reached
$436,833.  Purse  increases  at  Hoosier  Park in  1998  strengthened  both  its
Thoroughbred  and  Standardbred  racing programs and created greater demand from
horsemen to race at the Indiana track. Average daily purses of $197,738 resulted
in competitive race fields for Hoosier Park's  Thoroughbred  meet, while average
daily purses of $141,535 during its Standardbred meet ranked Hoosier Park behind
only The Meadowlands in New Jersey in terms of purse levels. This trend was also
evident at Ellis  Park,  where  1998  average  daily  purses  reached  $170,916,
compared  to  $163,546  in 1997.  Based  on the  competitiveness  of its  racing
products in Kentucky and Indiana,  we believe we are well positioned to grow our
share of the interstate simulcast market.

        We generally do not directly  compete with other racetracks or simulcast
facilities for patrons due to geographic separation of such facilities. However,
we compete  with other  sports,  entertainment  and  gaming  options,  including
riverboat  casinos  and  lotteries,   for  patrons  for  both  live  racing  and
simulcasting (For a further discussion of the Company's competitive environment,
see  "Management  Discussion and Analysis of Financial  Condition and Results of
Operations").

        We have  successfully  grown  our live  racing  product  and  positioned
ourself to compete by  strengthening  our flagship  operations,  increasing  our
share of the  interstate  simulcast  market,  and  geographically  expanding our
racing operations. We also continue to pursue legislation to allow

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<PAGE>



video lottery  terminals at our  racetrack  facilities in Kentucky as a means to
attract  new  patrons  and  generate  additional  revenue for purses and capital
investment.

        F.     ENVIRONMENTAL MATTERS

        On January 22, 1992, we  acquired  certain assets of Louisville  Downs,
Incorporated  for  $5,000,000  including  the  site  of  the Louisville  Sports 
Spectrum.  In conjunction with this purchase,  we  withheld  $1,000,000 from the
amount due to the  sellers  to offset  certain costs  related to the remediation
of environmental contamination  associated with underground storage tanks at the
site.  All of the  $1,000,000  hold back had been  utilized  as of December  31,
1997  and  additional  costs  of  remediation  have  not yet been  conclusively 
determined.  The  sellers  have  now received  a reimbursement from the State of
Kentucky of $995,000 for remediation costs and that amount is now being held in
an escrow  account to pay further costs of  remediation.  Approximately $985,000
remains  in  the  account. In  addition  to  the  hold back, we have obtained an
indemnity  to  cover  the full cost of  remediation from the prior owner of the 
property.

        In January 1995, Hoosier Park opened the Churchill Downs Sports Spectrum
in  Merrillville,   Indiana.   The  27,300  square  foot  facility  is  designed
exclusively  for the simulcast of horse races and the  conducting of pari-mutuel
wagering. The Merrillville,  Indiana,  facility is also subject to contamination
related to prior business  operations  adjacent to the property.  In conjunction
with the  purchase,  Hoosier  Park  withheld  $50,000 from the amount due to the
seller  to  offset  costs  related  to  remediation  of the  contamination.  The
contamination  on the property is being  remediated under the State of Indiana's
voluntary  remediation  program.  The State of Indiana  approved the remediation
plan in May of 1995. The cost of remediation is not expected to exceed  $50,000.
In addition to the hold back,  Hoosier  Park has  obtained an indemnity to cover
the full cost of remediation from the prior owner of the property.

        It is not  anticipated  that we will have any  material  liability  as a
result  of  compliance  with  environmental  laws  with  respect  to  any of our
property.  Compliance with  environmental  laws has not materially  affected the
ability to develop and operate our properties  and we are not otherwise  subject
to  any  material   compliance   costs  in  connection  with  federal  or  state
environmental laws.

        G.     EMPLOYEES

        We employ  approximately  500 full-time  employees.  Due to the seasonal
nature of our 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 we employ as

                                       11

<PAGE>



many  as  2,600  persons.  During 1998,  average employment  per pay  period was
approximately 1,000 individuals.

ITEM 2.        PROPERTIES

        Information concerning property owned by the us required by this Item is
incorporated by reference to the information  contained in Item 1. "Business" of
this Report.

        Upon the closing of our  proposed  $250 million line of credit, our real
and  personal  property (but not including the property of Hoosier Park, KOTB or
Charlson) will be encumbered by liens securing our $250 million credit facility.
The shares of stock certain of our subsidiaries will also be pledged to secure
this facility.

        The Kentucky Derby Museum is operated on property  adjacent to Churchill
Downs.   The  Museum  is  owned  and  operated  by  the  Kentucky  Derby  Museum
Corporation,  a tax-exempt  organization under Section 501(c)(3) of the Internal
Revenue Code of 1986.

ITEM 3.        LEGAL PROCEEDINGS

        There are no material  pending  legal  proceedings,  other than ordinary
routine  litigation  incidental to our  business,  to which we are a party or of
which any of our property is the subject and no such proceedings are known to be
contemplated by governmental authorities.


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

        No matter was submitted to a vote of our stockholders  during the fourth
quarter of the fiscal year covered by this Report.


                                       12

<PAGE>



                                     PART II

ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER MATTERS

        Our  common  stock  is  traded  in  the over-the-counter  market. As of 
March  29,  1993,  our common  stock was  listed on the  National Association of
Securities  Dealers,  Inc.'s  Small  Cap  Market  automated  quotation  system
("NASDAQ"). As of March 24, 1999, there were approximately 3,100 stockholders of
record.

        The  following  table  sets  forth the high and low bid  quotations  (as
reported by NASDAQ) and dividend payment information for our common stock during
its last two years:


                      1998 - By Quarter                 1997 - By Quarter
                     -----------------                  -----------------

               1st     2nd     3rd     4th       1st     2nd     3rd     4th
               ---     ---     ---     ---       ---     ---     ---     ---

High Bid      $25.31  $43.25  $41.44  $36.44    $18.50  $19.00  $21.00  $23.38
Low Bid       $19.31  $24.00  $27.63  $27.25    $16.00  $16.50  $16.25  $20.75

Dividend per share:
Annual                     $.50                              $.25
Special                       -                              $.25

        Stock  quotations  and dividend per share  amounts  reflect  retroactive
adjustments for the 2- for-1 stock split with a record date of March 30, 1998.

        Quotations  reflect   inter-dealer   prices,   without  retail  mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.

        We presently  expect that  comparable  annual cash  dividends (adjusted 
for any stock splits or other similar  transactions) will continue to be paid in
the future.





                                       13

<PAGE>



ITEM 6.        CONSOLIDATED SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                1998         1997            1996           1995          1994
                                ----         ----            ----           ----          ----

Operations:
<S>                         <C>           <C>            <C>             <C>            <C>        
Net revenues                $147,300,299  $118,907,367   $107,858,818    $92,434,216    $66,419,460

Operating income             $17,143,410   $14,405,288    $12,314,897    $10,305,210     $9,861,086

Net earnings                 $10,518,548    $9,148,560     $8,071,526     $6,203,135     $6,166,353

Basic net earnings per share       $1.41         $1.25          $1.08           $.82           $.82
Diluted net earnings per share     $1.40         $1.25          $1.08           $.82           $.82

Dividend paid per share
     Annual                         $.50          $.25           $.25           $.25           $.25
     Special                           -          $.25           $.08              -              -


Balance Sheet Data At Period End:

Total assets                $114,650,775   $85,848,808    $80,728,966    $77,486,482    $70,175,840

Working capital
(deficiency)                $(7,791,319)   $(8,032,492)  $(10,789,190)  $(10,433,929)  $(10,131,254)

Long-term debt               $13,664,839    $2,712,969     $2,952,607     $6,421,176     $8,683,314
Other Data:

Stockholders' equity         $65,230,988   $53,392,497    $47,780,880    $46,653,157    $42,003,147

Stockholders' equity
  per share                        $8.67         $7.30          $6.54          $6.17          $5.55

Additions to racing
  plant and equipment,
   exclusive of business
   acquisitions               $3,524,032    $4,568,494     $2,570,795     $8,589,535    $23,310,204

</TABLE>

Earnings,  dividend  and  stockholders'  equity  per  share  amounts  have  been
retroactively  adjusted for the 2-for-1  stock split with a record date of March
30, 1998.


                                       14

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS


        This  discussion  and analysis  includes  forecasts of future results of
operations  which  are  considered  "forward-looking  statements"  and are  made
pursuant to the safe harbor  provisions  of the  Private  Securities  Litigation
Reform Act of 1995.  Our  actual  results  could  differ  materially  from these
forecasts,  and there can be no assurance that these forecasts of future results
will be achieved.  Important  factors that could cause actual  results to differ
materially from the presently  estimated results include:  our continued ability
to  effectively  compete for the country's top horses and trainers  necessary to
field  high-quality horse racing, our continued ability to grow our share of the
interstate  simulcast market, a substantial  change in allocation of live racing
days, the impact of competition from alternative gaming (including riverboat and
cruise ship casinos and lotteries) and other sports and entertainment options in
those markets in which we operate,  a decrease in riverboat  admissions  revenue
from our  Indiana  operations,  Year 2000  computer  issues  and our  success in
pursuit of our  strategic  initiatives  designed  to  attract  new  patrons  and
generate additional revenues.

Overview

        We conduct  pari-mutuel  wagering on live  Thoroughbred and Standardbred
horse  racing and  simulcast  audio and video feeds of races.  Additionally,  we
offer racing services through our other interests.

        We own and operate  Churchill  Downs  racetrack in Louisville,  Kentucky
("Churchill  facility"),  which has conducted  Thoroughbred  racing continuously
since 1875 and is  internationally  known as home of the Kentucky Derby. We also
own and operate Ellis Park Race Course, a Thoroughbred  racetrack, in Henderson,
Kentucky ("Ellis Park"), and the Kentucky Horse Center, a Thoroughbred  training
center,  in Lexington,  Kentucky.  Additionally,  we are the majority  owner and
operator of Hoosier  Park in Anderson,  Indiana,  which  conducts  Thoroughbred,
Quarter Horse and Standardbred  horse racing. We conduct  simulcast  wagering on
horse racing at our four simulcast wagering facilities in Louisville,  Kentucky,
and in Merrillville,  Fort Wayne and  Indianapolis,  Indiana,  as well as at our
three racetracks.

         Because of the seasonal nature of our 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.  We  normally  earn a  substantial
portion of our net earnings in the second quarter of each year during

                                       15

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

        Our  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 subsidy,  concession
commissions  (primarily  for  the  sale  of  food  and  beverages),  sponsorship
revenues, and license, rights and broadcast fees.

        Churchill  Downs and Ellis  Park,  which we  acquired  during the second
quarter of 1998,  as well as  Kentucky's  other  racetracks  are  subject to the
licensing and  regulation of the Kentucky  Racing  Commission  ("KRC").  The KRC
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 from 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 from June 29 through September 7,
1998, for a total of 61 racing days compared to 55 days in 1997, which was prior
to our acquisition of Ellis Park .

        We received  approval  from the KRC to conduct  live racing at Churchill
Downs from April 24 through  June 27, 1999  ("Spring  Meet") and from October 31
through  November 27, 1999 ("Fall Meet") for a total of 71 days.  Ellis Park has
been  granted  a total of 61 live  racing  days  running  from  June 28  through
September 6, 1999. 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 adversely impact our operations and earnings in future years.

        Churchill Downs hosted 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  $13 million in purses,  for the purpose of
determining Thoroughbred champions in eight different

                                       16

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

events. Racetracks across the United States compete for the privilege of hosting
the Breeders' Cup Day races each year, and the 1998 Breeders' Cup was our fourth
time hosting this event, the most of any racetrack.  Although most of the income
earned from this event was allocated to Breeder's Cup Limited,  hosting the 1998
event had a positive impact on our 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 five  members  appointed  by the  governor of Indiana.  Licenses are
approved annually by the IHRC based upon applications submitted by Hoosier Park.
Currently, Hoosier Park is the only facility in Indiana licensed to conduct live
Standardbred,  Quarter  Horse  or  Thoroughbred  racing  and to  participate  in
simulcasting.  Quarter Horse races are conducted during some  Thoroughbred  race
days.  Hoosier Park conducted  live racing from April 17, 1998 through  November
28,  1998,  for a total of 153 racing days,  including  95 days of  Standardbred
racing and 58 days of  Thoroughbred  racing (which also  includes  Quarter Horse
races).  Hoosier  Park  received a license to conduct  live racing in 1999 for a
total of 168 racing days,  including 103 days of Standardbred racing and 65 days
of Thoroughbred  racing.  A substantial  change in the allocation of live racing
days at Hoosier  Park could  adversely  impact our  operations  and  earnings in
future years.

        We employ  approximately  500 full-time  employees.  Due to the seasonal
nature of our 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 we employ as many as 2,600 persons.  Through  December 31, 1998,
average full-time and seasonal employment per pay period was approximately 1,000
individuals.

        We generally do not directly  compete with other racetracks or simulcast
wagering facilities for patrons due to geographic separation of such facilities.
However,  we  compete  with other  sports,  entertainment  and  gaming  options,
including riverboat casinos and lotteries,  for patrons for both live racing and
simulcasting.  We attempt to attract  patrons by providing  the highest  quality
racing  products in  attractive  entertainment  facilities  with fairly  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
pari-mutuel wagering on live racing.


                                       17

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        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  five  riverboat
casinos  operating on the Ohio River along Kentucky's border -- including two in
the  southeastern  Indiana  cities  of  Lawrenceburg  and  Rising  Sun,  one  in
southwestern  Indiana in Evansville and one at Metropolis,  Illinois.  The fifth
riverboat  casino,  licensed to  RDI/Caesars  World,  opened in November 1998 in
Harrison County, Indiana, 10 miles from Louisville. Admission and handle figures
at the Churchill Downs racetrack during the RDI/Caesars  World's opening week in
November 1998,  were not  significantly  different from the same period in 1997.
However,  during December 1998, when the  RDI/Caesars  riverboat  casino and the
Louisville Sports Spectrum ("Sports Spectrum") were concurrently open, admission
and handle numbers at the Sports  Spectrum  decreased from those numbers for the
same period in 1997. At this time,  we cannot  determine the extent to which the
decrease was due to the new riverboat  casino in the  Louisville  market.  Other
factors, such as inclement weather, may also have had an impact.

        The Indiana Gaming Commission voted in September 1998 to grant a license
to open a sixth Indiana  riverboat  along the Ohio River in Switzerland  County,
about 70 miles from  Louisville.  The license holder,  Hollywood  Park-Boomtown,
Inc.,  plans to build a riverboat  casino,  hotel and resort complex near Vevay,
Indiana.  Hollywood  Park  estimates  the resort will open as early as the third
quarter of 2000.

        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 to full capacity and has established  itself
in the market.  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 our
Sports Spectrum in Merrillville, Indiana. Our pari-mutuel wagering activities at
the Merrillville  facility have been adversely  impacted by the opening of these
Lake Michigan riverboats.


                                       18

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Additionally,  the  Pokagon  Band of the  Potawatomi  Indian  Tribe  has
expressed an interest in establishing land-based casinos in northeastern Indiana
and southwestern  Michigan although Indiana Governor Frank O'Bannon has publicly
expressed his opposition at this time to any further  expansion of casino gaming
in Indiana. We continue to anticipate that development of any such Indian casino
will negatively impact pari-mutuel wagering activities at Hoosier Park's Indiana
facilities.  However,  the extent of the impact is unknown at this time due,  in
part, to the uncertain  geographic  distances  between Hoosier Park's operations
and the potential casino sites.

         The  integration  of  alternative  gaming  products  at  our  racetrack
facilities is one of our four core business strategies  developed to position us
to compete in this changing environment.  Implementing these strategies, we have
successfully  grown  our live  racing  product  by  strengthening  our  flagship
operations,  increasing  our  share  of the  interstate  simulcast  market,  and
geographically  expanding  our racing  operations  in Kentucky and into Indiana.
Alternative  gaming in the form of video  lottery  terminals  and slot  machines
should enable us to more effectively  compete with Indiana riverboat casinos and
provide  new revenue  for purse  money and  capital  investment.  We continue to
pursue legislation to allow video lottery terminals at our racetrack  facilities
in  Kentucky.  Currently,  we are 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 Indiana riverboats to compensate for the effect of riverboat competition. The
horse  industry is required to allocate 70% of such  revenue  directly for purse
expenses,  breed development and reimbursement of approved  marketing costs. The
balance,  or 30%,  is  received  by  Hoosier  Park as the only  horse  racetrack
currently  operating in Indiana.  Riverboat  admissions revenue from our Indiana
operations  increased $5.1 million for the year ended December 31, 1998 compared
to 1997, as a result of the opening of additional  riverboats.  The net increase
in riverboat  admissions  revenue,  after required  purse and marketing  expense
increases of approximately $3.2 million, is $1.8 million.

        Legislation which seeks to cap Hoosier Park's share of the $.65  subsidy
was  introduced  in  the  1999  session  of  the  Indiana  General Assembly.  A 
significant change in Hoosier  Park's share of the subsidy  would impact funding

                                       19

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

for  operating  expenditures,  potentially  reducing the number of race dates at
Hoosier Park and, in all likelihood,  re-emphasize  the need for the integration
of alternative  gaming products at the Hoosier Park racetrack in order for it to
effectively compete with riverboat casinos.

        We have partnered with ODS  Technologies  L.P. (ODS) in the  development
and operation of an in-home  interactive  wagering  system in Jefferson  County,
Kentucky,  since  1995.  The second  phase of our  relationship  with ODS is the
launching of the Television  Games Network (TVG),  originally  projected for the
fourth quarter of 1998. In June 1998, an arbitration panel approved United Video
Satellite  Group,  Inc.'s  proposal to acquire all of the assets of ODS.  United
Video,  which  previously  owned  approximately  10% of ODS,  has bought out the
majority  partners  and  assumed  control  over  agreements  between  ODS and 12
racetracks, including Churchill Downs. At this time, we cannot assess any impact
of this development on our in- home wagering operations.

RESULTS OF OPERATIONS

Wagering   information, or  handle, and attendance  for our  three  live  racing
facilities  and  four  separate simulcast wagering  facilities during the years 
ended December 31, 1998 and 1997 are as follows:


                              ($ in thousands, except for number of days)
                         Churchill Downs     Hoosier Park        Ellis Park*
Live Racing
     1998 handle                $128,250           $16,092            $20,944
     1998 no.of days                  70               153                 61
     1997 handle                $132,290           $16,937            $17,215
     1997 no. of days                 77               142                 55
Simulcast sending
     1998 handle                $421,200           $62,720           $116,735
     1998 no. of days                 70               153                 61
     1997 handle                $424,194           $39,772            $87,799
     1997 no. of days                 77               142                 55
Simulcast receiving
     1998 handle                $138,443          $133,770            $38,065
     1998 no. of days                232             1,219                288
     1997 handle                $132,431          $130,020            $35,954
     1997 no. of days                212             1,215                294

* Handle  information  for Ellis Park is provided  for years ended  December 31,
1998 and 1997.  However,  only revenues generated since its acquisition on April
21, 1998 have been included in the Company's results of operations.

                                       20

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of Profit and Loss for Year Ended December 31, 1998 to 1997

Net Revenues

Net revenues increased $28.4 million (24%) from $118.9 million in 1997 to $147.3
million  in  1998.  Churchill  Downs  revenues  increased  $3.5 million (5%) due
primarily to increases in simulcast  revenues and  license,  rights,  broadcast 
revenues and increased  corporate  sponsorship of the Kentucky  Derby.  Hoosier 
Park  revenues  increased  $6.2  million (15%)  primarily  due  to  increased  
simulcasting   revenues  and  a  $5.1 million  increase  in the riverboat gross 
admissions  subsidy  of  which a  portion was required to be spent on purses and
marketing expenses.  Ellis Park contributed  $17.4  million to 1998 net revenues
since its  acquisition  in the second quarter. Other operations,  including the
Kentucky  Horse  Center which was also acquired in the second quarter, comprised
the remaining $1.3 million of the increase.

Operating Expenses

Operating  expenses  increased $23.7 million (25%) from $95.4 million in 1997 to
$119.1  million in 1998.  Churchill  Downs  operating  expenses  increased  $1.9
million  (3%)  due  primarily to increased marketing, simulcast, totalisator and
video expenses.  Hoosier Park operating  expenses increased  $5.0 million  (14%)
due  primarily  to required  increases in  purses and marketing expenses of $2.8
million and $0.8 million,  respectively,  related to the riverboat  admissions 
subsidy. Ellis Park increased 1998 operating  expenses  by $15.4  million  since
its  acquisition.  Other  operations,  including  the  Kentucky  Horse  Center,
accounted for the remaining $1.4 million of the increase in operating expenses.

Gross Profit

Gross profit  increased  $4.7 million  (20%) from $23.5 million in 1997 to $28.2
million in 1998.  Churchill  Downs and Hoosier Park gross profit  increased $1.5
million (9%) and $1.2 million  (25%),  respectively,  for the reasons  described
above. The Ellis Park acquisition contributed $2.0 million to 1998 gross profit.
The slight  decrease in the gross profit  percentage from 19.7% in 1997 to 19.2%
in 1998 was due mainly to a lower gross profit  percentage  at Ellis Park due to
purse increases implemented to improve the quality of racing at the track.


                                       21

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Selling, General and Administrative Expenses

Selling,  general and administrative ("SG&A") expenses increased by $2.0 million
(22%) from $9.1  million  in 1997 to $11.1  million in 1998.  SG&A  expenses  at
Churchill  Downs  increased  $1.3  million  (19%)  due  primarily  to  increased
corporate staffing, compensation and business development expenses. Hoosier Park
SG&A  expenses  decreased  by  $0.2  million (9%) due  primarily to  declines in
professional  fees and wages.  The  acquisition of Ellis Park  contributed  $0.6
million to the increase in 1998 SG&A expenses.  Other  operations  accounted for
the remaining $0.3 million of the  increase.  SG&A  expenses as a  percentage of
net revenues decreased slightly from 7.6% in 1997 to 7.5% in 1998.

Other Income and Expense

Interest  expense  increased  $0.6  million  from $0.3  million  in 1997 to $0.9
million  in 1998 as a  result  of  borrowings  to  finance  our  second  quarter
acquisition of Ellis Park and the Kentucky Horse Center.

Income Tax Provision

Our income tax provision  increased by $1.0 million from $5.8 million in 1997 to
$6.8 million in 1998 primarily as the result of an increase in pre-tax  earnings
of $2.3 million.  The effective income tax rate increased slightly from 38.9% in
1997 to 39.1% in 1998  due  primarily  to  non-deductible  amortization  expense
related to the  acquisition  of Ellis  Park and the  Kentucky  Horse  Center and
increases in other permanent  differences,  partially  offset by the reversal of
the  valuation  allowance  on  certain  state  income  tax  net  operatin  loss
carryforwards.

Comparison of Profit and Loss for Year Ended December 31, 1997 to 1996

Revenues

Net revenues increased $11.0 million (10%)from $107.9 million  in 1996 to $118.9
million in 1997.  Churchill  Downs  revenues  increased  $2.8  million  (4%) due
primarily to increases in simulcast  revenues that were generated as a result of
the new Paddock Pavilion  simulcast  wagering  facility used during live racing.
Hoosier Park revenues  increased  $8.2 million (25%)  primarily due to increased
simulcasting revenues and a $7.9 million increase in the riverboat

                                       22

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

gross  admissions  subsidy of which a portion was required to be spent on purses
and marketing expenses.

Operating Expenses

Operating  expenses  increased  $8.5 million (10%) from $86.9 million in 1996 to
$95.4 million in 1997. Churchill Downs operating expenses increased $3.2 million
(6%) due  mainly to  increased  purses and wages and also  increased  marketing,
simulcast and video  expenses.  Hoosier Park operating  expenses  increased $5.3
million  (18%) due  primarily to increases in purses and  marketing  expenses of
$3.9 million and $1.0 million, respectively, related to the riverboat admissions
subsidy.

Gross Profit

Gross profit  increased  $2.5 million  (12%) from $21.0 million in 1996 to $23.5
million in 1997.  Churchill  Downs gross profit  decreased $0.4 million (2%) and
Hoosier Park gross profit increased $2.9 million (86%) for the reasons described
above.  The gross profit  percentage  increased  slightly  from 19.5% in 1996 to
19.7% in 1997.

Selling, General and Administrative Expenses

Selling,  general and administrative ("SG&A") expenses increased by $0.4 million
(5%) from  $8.7  million  in 1996 to $9.1  million  in 1997.  SG&A  expenses  at
Churchill  Downs  increased  $0.4  million  (11%)  due  primarily  to  increased
corporate staffing, compensation and business development expenses. Hoosier Park
SG&A  expenses  decreased  by $0.2  million  (8%) while SG&A  expenses  at other
operations were up by $0.2 million.

Other Income and Expense

Interest income increased $0.2 million from $0.4 million in 1996 to $0.6 million
in 1998 as a result of the additional  earnings generated by our short-term cash
investments (cash equivalents). Miscellaneous income decreased $0.4 million from
$0.7  million  in 1996 to  $0.3  million  in  1998  as the  result  of the  gain
recognized on Conseco's acquisition of 10% of Hoosier Park in 1996.


                                       23

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Tax Provision

Our income tax provision  increased by $0.9 million from $4.9 million in 1996 to
$5.8 million in 1997 primarily as the result of an increase in pre-tax  earnings
of $1.9 million.  The effective  income tax rate increased from 38.1% in 1996 to
38.9% in 1997 due primarily to increases in permanent differences.

Significant Changes in the Balance Sheet December 31, 1998 to December 31, 1997

The cash and cash equivalent  balances at December 31, 1998 of $6.4 million were
$2.9 million lower than December 31, 1997,  primarily due to aggregate  payments
on our line of credit which were partially used to fund the Ellis acquisition.

Accounts receivable balances grew by $4.9 million in 1998 due to the increase of
$1.5 million in the Indiana riverboat admissions receivable, an increase of $1.1
million in receivables  relating to advanced  billing for the Kentucky  Derby, a
$1.0 million increase in simulcast and other operating  receivables  relating to
Churchill  Downs'  Fall  race  meet  and  an  increase  of  $0.9 million  in the
receivable  from  the  Commonwealth  of  Kentucky  relating  to  purse  expense
reimbursements.  Additionally,  Ellis  Park  and  the  Kentucky  Horse  Center  
accounted for $0.3 million of the overall increase.

Intangible assets increased $6.5 million as a result of the acquisition of Ellis
Park and the Kentucky Horse Center.

Plant and equipment  increased  $25.0 million during 1998,  primarily due to the
acquisition of Ellis Park and the Kentucky Horse Center ($22.0 million). Routine
capital  spending at our operating  units made up the remainder of the increase.
Accumulated depreciation increased  $5.5  million for current  year depreciation
expense.

We borrowed on our bank  line of  credit  during  1998  primarily  for the Ellis
acquisition  during the second  quarter.  Additional  borrowings  on the line of
credit  during  the  third  and  fourth  quarters  were  made to fund  operating
expenses.


                                       24

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Deferred income tax  liabilities  increased to $6.9 million in 1998, an increase
of $4.6 million from 1997 balances,  primarily as a result of the acquisition of
Ellis Park and the Kentucky Horse Center.

Significant Changes in the Balance Sheet December 31, 1997 to December 31, 1996

The cash and cash equivalent  balances at December 31, 1997 of $9.3 million were
$1.1 million higher than December 31, 1996,  based  primarily upon our increased
earnings.

Accounts receivable at December 31, 1997,  increased by $2 million due primarily
to the increase in the Indiana  riverboat  admissions tax  receivable  resulting
from the additional Indiana riverboats being open for a longer period of time in
1997 versus 1996.

Other assets at December 31,  1997,  increased by $2.3 million due  primarily to
our investment in Kentucky Downs, LLC.

The  cost  of  plant  and  equipment  increased  by  $4.5  million  due  to  the
construction of a new on-site  simulcast  facility at Churchill Downs as well as
other routine capital spending. This was offset by approximately $4.2 million in
depreciation expense.

Income taxes  payable  decreased  by $2.3  million in 1997 due  primarily to the
timing of estimated tax payments made throughout the year.

Liquidity and Capital Resources

         Working capital as of December 31, 1998, 1997 and 1996 follows:

                                   1998             1997              1996
                                   ----             ----              ----
Deficiency in working capital  $(7,791,319)     $(8,032,492)     $(10,789,190)
                                .71 to 1          .68 to 1          .45 to 1

The working  capital  deficiency  results from the nature and seasonality of our
business.  Cash flows provided by operations were $10.8, $10.5 and $15.1 million
for the years ended  December 31,  1998,  1997 and 1996,  respectively.  The net
increase of $.3 million in 1998  resulted  from a $1.4  million  increase in net
earnings and $1.2 million increase in depreciation and amortization coupled with
the timing of accounts  receivable,  accounts payable,  income taxes payable and
deferred revenue  balances.  Management  believes cash flows from operations and
available

                                       25

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

borrowings  during 1999 will be sufficient to fund our cash requirements for the
year, including capital improvements and any acquisitions.

Cash flows used in investing  activities  were $20.8,  $6.9 and $2.6 million for
the years  ended  December  31,  1998,  1997 and 1996,  respectively.  The $20.8
million in 1998 is  primarily  comprised  of the cash portion of our purchase of
Ellis Park and the Kentucky  Horse Center during the second quarter of 1998. The
$6.9 million in 1997  primarily  represents  the  acquisition of 24% of Kentucky
Downs during the third quarter of 1997 and additional  capital  spending for the
construction of a new on-site  simulcast  facility in Kentucky.  Routine capital
spending  accounted  for a portion  of the cash used in  investing  for 1998 and
1997. The capital additions for all locations,  including construction of a $2.4
million stable area dormitory at the Churchill Downs facility,  are expected to
approximate $7.3 million for 1999.

Cash flows  provided by (used in)  financing  activities  were $7.0,  $(2.5) and
$(10.2)  million  for  the  years  ended  December  31,  1998,  1997  and  1996,
respectively.  We  borrowed  $22  million  and repaid $11 million on our line of
credit  during  1998  primarily  to finance  the  purchase of Ellis Park and the
Kentucky Horse Center.  Cash dividends of $3.7 million were paid to shareholders
in 1998 (declared in 1997) versus $2.4 million paid in 1997 (declared in 1996).

We have a $100  million  line of credit, of which $89 million was  available  at
December 31, 1998, to meet working capital and other short-term requirements and
to provide funding for acquisitions scheduled to close in 1999. We are arranging
a new $250 million line of credit  which will  replace  the $100 million line of
credit.  We anticipate  closing on the  new  line of credit  during the  second 
quarter of 1999.

Impact of the Year 2000 Issue

The "Year 2000 Issue" is the result of computer programs that were written using
two digits  rather  than four to define the  applicable  year in  date-dependent
systems.  If our computer  programs with  date-sensitive  functions are not Year
2000  compliant,  they may be unable to distinguish  the year 2000 from the year
1900.  This  could  result in system  failure  or  miscalculations  leading to a
disruption of business operations.

Certain of our mission  critical  operations are dependent upon computer systems
and  applications.  These systems are either directly owned and controlled by us
or are provided under contract by

                                       26

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

third party  technology  service  providers.  To address the Year 2000 issue, we
have categorized the Year 2000 Issue into four principal areas.

A) Systems Owned By the Company

The first area is related to systems that are owned by us. These systems include
application   software  and  dedicated   hardware  that  administrate  our  core
operations.   In  addition,   there  are  numerous   applications  that  provide
administrative  support  and  management  reporting  functions.  Some  of  these
applications have been developed internally and others have been purchased.

To address Year 2000 compliance  across this broad category of systems,  we have
broken  each system  down into its most  elemental  pieces in order to study the
hardware including any embedded chip technology/firmware,  the operating systems
and finally, the applications themselves.

Hardware including any embedded chip  technology/firmware that was not Year 2000
compliant has been  identified  and replaced as part of the routine  turnover of
technology capital. Hardware remaining to be replaced is scheduled for upgrading
during the first half of 1999.  By June 1999,  all hardware  and  embedded  chip
technology/firmware owned by the Company is expected to be Year 2000 compliant.

All operating  systems  supporting  specific  applications  have been checked by
advancing  the dates to  determine if operating  system-level  functionality  is
impacted by the date change. As new operating system upgrades are made available
and installed,  periodic testing will continue to assure operating  system-level
functionality  is maintained.  In addition,  we have contacted the developers of
the  operating  systems  we  use  and  have  received  assurances  as  to  their
compatibility with the Year 2000 transition.

Application  software compliance with the Year 2000 has been certified through a
combination of technical  consultation with the software developers and testing.
Applications  developed with internal  resources have been written with the Year
2000 compliance in mind using development tools that are Year 2000 compliant. We
have  received  assurances  from  third  parties  on Year  2000  compliance  for
financial  reporting,  payroll,  operations  control and  reporting and internal
communications  applications.  We require Year 2000  compliance  on any software
upgrades.


                                       27

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Based on the schedule  outlined  above, we expect to be Year 2000 compliant with
our owned systems prior to the year 2000. The system will be tested by advancing
dates to  include a  majority  of the Year  2000  critical  dates by the  fourth
quarter of 1999.  However,  even though our planned  modifications to internally
owned hardware and software should  adequately  address Year 2000 issues,  there
can be no assurance that unforeseen difficulties will not arise.

B) Technology Services Provided to the Company Under Contract By Third Parties

The second  area is  services  provided  to us by third  parties.  Many of these
services are mission critical and could materially  impact us should the systems
upon which the services are dependent be unable to function.

The  totalisator  services  provided by United Tote are the most critical to our
operations.  Totalisator services include the calculation of amounts wagered and
owed to  winning  ticket  holders.  United  Tote  developed  a plan to bring all
systems  provided to us into Year 2000 compliance  during 1998.  United Tote and
the Company initiated this plan during the second quarter of 1998 by undertaking
a  comprehensive  system  hardware  and  software  upgrade  that  is  Year  2000
compliant. The systems were successfully installed in three phases with the last
phase having been completed in October 1998. All on-track,  intertrack  wagering
and hub  operations  are Year 2000  compliant.  We will continue to work closely
with  United  Tote to assure that future  releases  and  upgrades  are Year 2000
compliant by including this  provision as a condition of contracting  for future
services.

The video  services  provided  by an outside  vendor are also  important  to our
operations.  Video services include the capture,  production and distribution of
the television  signal for distribution to customers located on our premises and
to customers  located at remote outlets  throughout  the nation.  We are working
closely  with the vendor to ensure the  software  applications  that provide the
graphical enhancements and other distinguishing features to the televised signal
for  Churchill  Downs and Hoosier  Park are Year 2000  compliant.  The  existing
software for the graphical  enhancements  to the  television  signal is not Year
2000 compliant. We have contacted the developer of the software package directly
and have received  assurances  that an upgrade to the software will be Year 2000
compliant.

We purchased  certain data and statistical  information from Equibase for resale
to the public.  This  information is an essential  element of our product and is
included in printed material made

                                       28

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

available to our customers to assist in their wagering  decisions.  Equibase has
implemented a Year 2000  remediation  plan, which is expected to be completed by
the second quarter of 1999.

A variety of other smaller and less critical  technology  service  providers are
involved with the Company's  product.  We have received assurance letters from a
majority of these suppliers and will continue to work to receive assurances from
those remaining.

Because of the nature of our business  and its  dependence  upon key  technology
services  provided  by third  parties,  we  require  that all new  software  and
technology services are Year 2000 compliant. This requirement extends to include
patches, upgrades and fixes to existing technology services.

In the event that any of our third party service  providers do not  successfully
and timely achieve Year 2000 compliance,  and we are unable to replace them with
alternate  service  providers,  it could result in a delay in providing our core
live  racing and  simulcasting  products  to our  customers  and have a material
adverse effect on our business, financial condition and results of operations.

C) Industry-wide Issues

Because a  significant  portion of our revenues  are derived  from  customers at
other  racing  organizations  that are  confronted  with the same  technological
issues,  including totalisator,  video and statistical  information services, we
have been actively  participating  in an  industry-wide  assessment and remedial
efforts to address the Year 2000 issue.

D) Feedback Control Systems

A variety  of the newer  control  and  regulating  systems  are date  sensitive.
Environmental  control  systems,  elevator/escalator  systems,  fire control and
security systems utilize  date-sensitive  software/embedded  chip technology for
correct operation. We have systems that perform each of these functions, and are
identifying if any of these systems employ  technology that may not be Year 2000
compliant.  We will work closely with these  manufacturers to develop a remedial
plan to assure year 2000 compliance if problems are identified.


                                       29

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
ITEM 7.        MANAGEMENT'S  DISCUSSION  AND  ANALYSIS   OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

To date,  we have  incurred  less than $25,000 in costs to  remediate  Year 2000
compliance  issues.  Our management  believes that any future costs to remediate
Year 2000  compliance  issues will not be material to our financial  position or
results of operations.

We are currently  evaluating our most  reasonably  likely  worst-case  Year 2000
scenario and are also developing  contingency plans to be implemented as part of
our efforts to identify and correct Year 2000 issues affecting our owned systems
as well as issues involving third party service providers. We intend to complete
both its evaluation of a worst-case Year 2000 scenario and contingency  planning
by June 30, 1999.

Subsequent Events

On  January 13, 1999, we  acquired  a  60%  interest  in  Charlson  Broadcast 
Technologies, LLC, ("CBT") for the purchase price of $5.4 million. CBT provides
simulcast graphic software video services to racetracks and simulcast  wagering
facilities  throughout  the  United  States. The  purchase  agreement  includes
provisions for an additional contingent purchase price to be paid by us to the 
former  owners  of  the  60% interest  based  upon  the  achievement  of certin 
operating targets.

On  January  21, 1999,  we  entered  into an  agreement to  acquire all of the  
outstanding   shares  of  Calder  Race Course,  Inc., and Tropical  Park,  Inc. 
("Calder"),  from KE Acquisition Corp., a private holding company.  Terms of the
agreement  include  a  purchase  price  of  $86  million  subject  to  certain
adjustments.  Closing of the acquisition is expected in early April 1999.

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
               MARKET RISK

Our major market risk  exposure is  primarily  due to possible  fluctuations  in
interest  rates as they relate to its variable  rate debt.  We do not enter into
derivative  financial  investments  for trading or  speculation  purposes.  As a
result,  we  believe  that our  market  risk  exposure  is not  material  to our
financial position, liquidity or results of operations.


                                       30

<PAGE>



ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors
Churchill Downs Incorporated

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14 (a) (1), present fairly, in all material  respects,  the
consolidated   financial  position  of  Churchill  Downs  Incorporated  and  its
subsidiaries  as of December 31, 1998,  1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting  principles.
In addition,  in our opinion,  the  consolidated  financial  statement  schedule
listed in the index appearing  under Item 14 (a) (2),  presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  These financial statements
and financial  statement  schedule are the  responsibility  of  management;  our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial  statement  schedule  based on our audits.  We conducted our audits of
these statements in accordance with generally  accepted auditing standards which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.


/s/PricewaterhouseCoopers
PricewaterhouseCoopers LLP

Louisville, Kentucky
February 24, 1999

                                       31

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                     December 31,
                      ASSETS                             1998           1997          1996
                                                         ----           ----          ----
<S>                                                  <C>             <C>           <C>
Current assets:
     Cash and cash equivalents                        $ 6,379,686    $ 9,280,233   $ 8,209,414
     Accounts receivable                               11,968,114      7,086,889     5,218,236
     Other current assets                               1,049,084        540,489       679,221
                                                     ------------   ------------   -----------
          Total current assets                         19,396,884     16,907,611    14,106,871

Other assets                                            3,796,292      3,884,080     1,574,714
Plant and equipment, net                               83,088,204     63,162,767    62,882,189
Intangible assets, net                                  8,369,395      1,894,350     2,165,192
                                                     ------------   ------------   -----------
                                                     $114,650,775    $85,848,808   $80,728,966
                                                     ============   ============   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                 $ 6,530,502    $ 5,732,783    $5,403,000
     Accrued expenses                                   8,098,228      7,937,575     8,021,487
     Dividends payable                                  3,762,521      3,658,468     2,375,271
     Income taxes payable                                 257,588        186,642     2,510,508
     Deferred revenue                                   8,412,552      7,344,830     6,511,902
     Long-term debt, current portion                      126,812         79,805        73,893
                                                     ------------   ------------   -----------
          Total current liabilities                    27,188,203     24,940,103    24,896,061

Long-term debt, due after one year                     13,538,027      2,633,164     2,878,714
Outstanding mutuel tickets (payable after one year)       806,573      1,625,846     2,031,500
Deferred compensation                                     949,187        880,098       825,211
Deferred income taxes                                   6,937,797      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 7,525,041 ,
          shares 1998,  7,316,934 shares, 1997 
          and 7,308,524 shares, 1996
                                                        8,926,975      3,614,567     3,493,042
     Retained earnings                                 56,598,957     49,842,930    44,352,838
     Deferred compensation costs                         (229,944)            -             -
     Note receivable for common stock                     (65,000)       (65,000)      (65,000)
                                                     ------------   ------------   -----------
                                                       65,230,988     53,392,497    47,780,880
                                                     ------------   ------------   -----------
                                                     $114,650,775    $85,848,808   $80,728,966
                                                     ============   ============   ===========
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       32

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                       CONSOLIDATED STATEMENTS OF EARNINGS


<TABLE>
<CAPTION>

                                                    Years ended December 31,
                                             1998              1997             1996

<S>                                      <C>               <C>              <C>         
Net  revenues                            $147,300,299      $118,907,367     $107,858,818
                                         -------------     ------------     ------------

Operating expenses:
   Purses                                   50,192,973       39,718,374       34,439,143
   Other direct expenses                    68,895,654       55,705,722       52,438,836
                                         -------------     ------------     ------------
                                           119,088,627       95,424,096       86,877,979
                                         -------------     ------------     ------------

     Gross profit                           28,211,672       23,483,271       20,980,839

Selling, general and administrative         11,068,262        9,077,983        8,665,942
                                         -------------     ------------     ------------

     Operating income                       17,143,410       14,405,288       12,314,897
                                         -------------     ------------     ------------

Other income (expense):
          Interest income                      679,782          575,084          390,669
          Interest expense                    (896,067)        (332,117)        (337,438)
          Miscellaneous income                 342,423          325,087          673,398
                                         -------------     ------------     ------------

                                               126,138          568,054          726,629
                                         -------------     ------------     ------------

Earnings before provision for income        17,269,548       14,973,342       13,041,526
taxes

Provision for income taxes                   6,751,000        5,824,782        4,970,000
                                         -------------      -----------     ------------

Net earnings                               $10,518,548       $9,148,560       $8,071,526
                                         =============     ============     ============

Earnings per common share data:
     Basic                                       $1.41            $1.25            $1.08
     Diluted                                     $1.40            $1.25            $1.08

Weighted average shares outstanding:
     Basic                                   7,460,058        7,312,052        7,445,542
     Diluted                                 7,539,482        7,320,670        7,447,706
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       33

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                  Years Ended December 31, 1998, 1997 and 1996
                                                                           Note        Deferred
                                   Common       Stock       Retained     Receivable   Compensation
                                   Shares       Amount      Earnings    Common Stock     Costs        Total
<S>                               <C>         <C>          <C>           <C>           <C>           <C>
Balances December 31, 1995        7,569,206   $3,504,388   $43,486,460   $ (65,000)    $(272,691)   $46,653,157

Net earnings                                                 8,071,526                                8,071,526

Deferred compensation
  amortization                                                                           272,691        272,691

Issuance of common stock
  at $14.45 per share                 7,818      112,970                                                112,970

Repurchase of common stock         (268,500)    (124,316)   (4,829,877)                              (4,954,193)

Cash dividends, $.33 per share                              (2,375,271)                              (2,375,271)
                                  ---------   ----------   -----------   ---------     ---------    -----------

Balances December 31, 1996        7,308,524    3,493,042    44,352,838     (65,000)           -      47,780,880

Net earnings                                                 9,148,560                                9,148,560

Issuance of common stock
  at $14.45 per share                 8,410      121,525                                                121,525

Cash dividends, $.50 per share                              (3,658,468)                              (3,658,468)
                                  ---------   ----------   -----------   ---------     ---------    -----------
 
Balances December 31, 1997        7,316,934    3,614,567    49,842,930     (65,000)           -      53,392,497

Net earnings                                                10,518,548                               10,518,548

Deferred compensation                            344,046                               (344,046)            -

Deferred compensation
amortization                                                                             114,102        114,102

Issuance of common stock at
   $24.25 per share in conjunction
   with RCA acquisition             200,000    4,850,000                                              4,850,000

Issuance of common stock
  at $14.60 per share                 8,107      118,362                                                118,362

Cash dividends, $.50 per share                              (3,762,521)                              (3,762,521)
                                  ---------   ----------   -----------   ---------     ---------    -----------

Balances December 31, 1998        7,525,041   $8,926,975   $56,598,957   $ (65,000)    $(229,944)   $65,230,988
                                  =========   ==========   ===========   ==========    ==========   ===========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       34

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                                         1998          1997          1996
<S>                                                   <C>            <C>           <C>
Cash flows from operating activities:
     Net earnings                                     $10,518,548    $9,148,560    $8,071,526
     Adjustments to reconcile net earnings to
          net cash provided by operating activities:
     Depreciation and amortization                      5,743,932     4,558,761     4,814,114
     Deferred income taxes                               (121,000)      352,100      (461,000)
     Deferred compensation                                183,191        54,887       226,690
     Increase (decrease) in cash resulting from
          changes in operating assets and liabilities:
          Accounts receivable                          (2,972,985)   (2,053,211)   (2,943,932)
          Other current assets                           (292,994)     (152,868)      232,699
          Accounts payable                             (1,245,550)      329,783    (1,114,508)
          Accrued expenses                               (579,904)      (83,912)    4,710,605
          Income taxes payable (refundable)                70,946    (2,323,866)    1,461,000
          Deferred revenue                                757,889     1,017,486       237,958
          Other assets and liabilities                 (1,245,808)     (377,523)     (109,037)
                                                      ------------   -----------   -----------
             Net cash provided by operating activities 10,816,265    10,470,197    15,126,115
                                                      ------------   -----------   -----------

Cash flows from investing activities:
     Acquisition of business, net of cash      
         acquired of $517,151                          (17,232,849)           -            -
     Additions to plant and equipment, net             (3,524,032)   (4,568,494)   (2,570,795)
     Purchase of minority-owned investment                     -     (2,337,500)           -
                                                      -----------    -----------   -----------
          Net cash used in investing activities       (20,756,881)   (6,905,994)   (2,570,795)
                                                      -----------    -----------   -----------

Cash flows from financing activities:
     Decrease in long-term debt, net                     (140,164)     (239,638)   (3,468,569)
     Borrowings on bank line of credit                 22,000,000
     Repayments of bank line of credit                (11,000,000)
     Dividends paid                                    (3,658,468)   (2,375,271)   (1,892,302)
     Common stock issued                                  118,362       121,525       112,970
     Common stock repurchased                                  -             -     (4,954,193)
     Loan origination costs                              (279,661)           -             -
                                                      -----------    -----------   -----------
          Net cash provided by (used in)
              financing activities                      7,040,069    (2,493,384)  (10,202,094)
                                                      -----------    -----------   -----------

Net increase (decrease) in cash and cash equivalents   (2,900,547)    1,070,819     2,353,226
Cash and cash equivalents, beginning of period          9,280,233     8,209,414     5,856,188
                                                      -----------    -----------   -----------
Cash and cash equivalents, end of period               $6,379,686    $9,280,233    $8,209,414
                                                      ===========    ===========   ===========
Supplemental  disclosures of cash flow information: 
Cash paid during the period for:
     Interest                                           $ 497,307      $151,397      $277,149
     Income taxes                                     $ 7,129,540    $7,914,974    $3,970,000
Schedule of Non-cash Activities:
     Issuance of common stock related to the
          acquisition of RCA                          $ 4,850,000            -            -
     Invoicing for future Kentucky Derby and Oaks       $ 677,733     $ 402,328     $ 586,886
     Plant & equipment additions included in accounts 
     payable                                              $95,055            -            -
Compensation expense                                    $ 344,406            -            -
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       35

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      Basis of Presentation and Summary of Significant Accounting Policies:

        Basis of Presentation:

        Churchill Downs Incorporated (the "Company") conducts Spring, Summer and
        Fall live race  meetings for  Thoroughbred  horses and  participates  in
        intrastate  and  interstate  simulcast  wagering  at its  racetracks  in
        Kentucky. In Indiana, the Company, through its subsidiary,  Hoosier Park
        L.P.  (Hoosier  Park),  conducts  live  Thoroughbred,  Quarter Horse and
        Standardbred  horse  races  and  participates  in  interstate  simulcast
        wagering.  Both its  Kentucky  and  Indiana  operations  are  subject to
        regulation by the racing commissions of the respective states.

        The accompanying  consolidated financial statements include the accounts
        of the Company,  its wholly owned  subsidiaries,  Ellis Park Race Course
        (Ellis Park), Churchill Downs Management Company (CDMC), Churchill Downs
        Investment  Company (CDIC),  the Kentucky Horse Center and Anderson Park
        Inc.  (Anderson) and its  majority-owned  subsidiary,  Hoosier Park. All
        significant intercompany balances and transactions have been eliminated.

        The  preparation  of financial  statements in conformity  with generally
        accepted accounting principles requires management to make estimates and
        assumptions  that affect the reported  amounts of assets and liabilities
        and disclosure of contingent  assets and liabilities at the dates of the
        financial  statements and the reported  amounts of revenues and expenses
        during the  reporting  periods.  Actual  results could differ from those
        estimates.

        A Summary of Significant Accounting Policies Follows:

        Cash  Equivalents:

        The Company  considers  investments  with  original  maturities of three
        months or less to be cash  equivalents.  The Company  has,  from time to
        time, cash in the bank in excess of federally insured limits.

        Plant and Equipment:

        Plant and  equipment  are recorded at cost.  Depreciation  is calculated
        using the  straight-line  method over the estimated  useful lives of the
        related assets.





                                       36

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


1.      Basis of Presentation and Summary of Significant Accounting Policies: 
        (cont'd)

        Intangible Assets:

        Amortization  of the cost of  acquisition  in  excess  of fair  value of
        assets acquired and the Indiana racing license is provided over 40 years
        using the  straight-line  method.  Organizational  costs were  amortized
        using  the  straight-line  method  over 24  months  to 60  months.  Loan
        origination  costs on the Company's  line of credit are being  amortized
        under the  effective  interest  method  over 36 months,  the term of the
        loan.

        Long-lived Assets:

        In the event that facts and  circumstances  indicate  that the  carrying
        amount of tangible or intangible  long-lived  assets or groups of assets
        may be impaired, an evaluation of recoverability would be performed.  If
        an evaluation is required,  the estimated future undiscounted cash flows
        associated  with the assets  would be compared  to the assets'  carrying
        amount to determine if a write-down to market value or  discounted  cash
        flow value is required.

        Deferred Revenue:

        Deferred  revenue  includes  primarily  advance  sales  related  to  the
        Kentucky Derby and Oaks races in Kentucky.

        Stock-Based Compensation:

        The  Company  accounts  for stock-based  compensation in accordance with
        Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
        to  Employees".  In accordance  with  Statement of Financial  Accounting
        Standards  (SFAS)  No.  123 "Accounting  for  Stock-based  Compensation"
        proforma disclosure of net earnings and earnings per share are presented
        in Note 10 as if SFAS No. 123 had been applied.

        Reclassification:

        Certain financial  statement amounts have been reclassified in the prior
        years to conform to current year presentation.





                                       37

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.      Acquisitions:

        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. RCA owns
        and  operates  Ellis Park Race Course in  Henderson,  Kentucky,  and the
        Kentucky  Horse  Center,  a  training  facility  located  in  Lexington,
        Kentucky. The purchase price was paid as 200,000 shares of the Company's
        common stock valued at $4.9 million with the remainder paid in cash. The
        purchase  price was  allocated  to the acquired  assets and  liabilities
        based on their fair  values on the  acquisition  date with the excess of
        $6.4 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.

        Pursuant to the terms of the purchase  agreement between the Company and
        TVI, if alternative  gaming (whether full casino,  slot machine or video
        lottery) is  legalized in the  Commonwealth  of Kentucky by December 31,
        2015, TVI will receive royalty  payments equal to 50% of annual earnings
        before  interest and taxes of the gaming  operations  at Ellis Park Race
        Course and at the  Kentucky  Horse  Center.  Should  gaming be legalized
        before  December 31, 2006,  such royalties will be payable for ten years
        from the date that such gaming  becomes fully  operational.  The royalty
        period will be reduced by one year for each year from 2006  through 2015
        in which gaming is  legalized.  

        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):

                                           1998                1997
                                           ----                ----
     Net revenues                        $149,272            $137,316
     Net earnings                         $9,404              $8,845
     Earnings per common share:
          Basic                           $1.25                $1.18
          Diluted                         $1.24                $1.18
     Weighted average shares
     outstanding:
          Basic                         7,520,332            7,512,052
          Diluted                       7,599,756            7,520,670



                                       38
<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.      Acquisitions: (cont'd)

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

        In July 1997, the Company purchased a 24% interest in the Kentucky Downs
        racecourse  in Franklin,  Kentucky.  The  Company's  investment  of $2.2
        million is accounted for under the equity method of accounting.

3.      Plant and Equipment:

        Plant and equipment is comprised of the following:


                                       1998           1997            1996
                                       ----           ----            ----
Land                                $7,631,657     $5,999,036      $5,879,994
Grandstands and buildings           73,376,961     57,579,747      56,154,054
Equipment                            4,979,383      3,416,306       2,936,129
Furniture and fixtures               5,341,119      4,327,797       3,603,276
Tracks and other improvements       37,997,696     33,118,100      31,377,753
Construction in process                249,438        113,210          74,206
                                  ------------   ------------    -------------
                                   129,576,254    104,554,196     100,025,412
Accumulated depreciation           (46,488,050)   (41,391,429)    (37,143,223)
                                  ------------   ------------    -------------
                                   $83,088,204    $63,162,767     $62,882,189 
                                  ============   ============    =============

        Depreciation expense was $5,490,450,  $4,287,916, and $4,038,135 for the
        years ended December 31, 1998, 1997 and 1996.

4. Intangibles assets:

        The Company's intangible assets are comprised of the following:
<TABLE>

                                                 1998           1997            1996
                                                 ----           ----            ----
<S>                                            <C>            <C>            <C>
Cost of acquisition in excess of fair value
   of net assets acquired                      $6,448,867             -              -
Indiana racing license                          2,085,428     $2,085,428     $2,085,428
Loan origination costs                            279,661             -              -
Organizational and preopening costs                    -              -         932,738
                                               -----------    -----------    -----------
                                                8,813,956      2,085,428      3,018,166
   Accumulated amortization                      (444,561)      (191,078)      (852,974)
                                               -----------    -----------    -----------
                                               $8,369,395     $1,894,350     $2,165,192
                                               ===========    ===========    ===========

</TABLE>

                                       39
<PAGE>

                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


4.      Intangibles assets: (cont'd)

        Amortization  expense was $253,482,  $270,845 and $775,979 for the years
        ended December 31, 1998, 1997 and 1996.

5.      Income Taxes:

        Components of the provision for income taxes are as follows:


                                       1998          1997           1996
                                       ----          ----           ----
Currently payable:
     Federal                        $6,110,000    $4,616,800     $4,538,000
     State & local                     762,000       856,100        893,000
                                    -----------   -----------   ------------
                                     6,872,000     5,472,900      5,431,000
                                    -----------   -----------   ------------
Deferred:
     Federal                            45,500       308,100       (382,000)
     State & local                       6,500        44,000        (79,000)
                                    -----------   -----------   ------------
                                        52,000       352,100       (461,000)
                                    -----------   -----------   ------------
Reversal of valuation allowance       (173,000)           -              -
                                    -----------   -----------   ------------
                                    $6,751,000    $5,825,000     $4,970,000
                                    ===========   ===========   ============

         The Company's  income tax expense is different from the amount computed
         by applying  the  statutory  federal  income tax rate to income  before
         taxes as follows:


                                       1998          1997          1996
                                       ----          ----          ----
Federal statutory tax on
   earnings before income tax       $5,942,000    $5,141,000    $4,464,000
State income taxes, net of
   federal income tax benefit          747,000       612,000       537,000
Permanent differences and other        235,000        72,000       (31,000)
Reversal of valuation allowance       (173,000)           -             -
                                    -----------  ------------   -----------
                                    $6,751,000    $5,825,000    $4,970,000
                                    ===========  ============   ===========

        At December 31, 1998, the Company has net operating  loss  carryforwards
        of  approximately  $3,885,000  for  Indiana  state  income tax  purposes
        expiring  from  2009  through  2011  and  approximately  $8,786,000  for
        Kentucky  state income tax  purposes  expiring  from 2002 through  2011.
        Management has determined that its ability to realize future benefits of
        the state net operating loss  carryforwards  meets the "more likely than
        not" criteria of SFAS No. 109, "Accounting for Income Taxes"; therefore,
        no valuation allowance has been recorded at December 31, 1998.


                                       40

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.      Income Taxes: (cont'd)

        Components of the Company's  deferred tax assets and  liabilities are as
follows:

<TABLE>
<CAPTION>
                                                 1998           1997         1996
                                                 ----           ----         ----
<S>                                           <C>           <C>           <C>
Deferred tax liabilities:
   Property & equipment in excess
      of tax basis                            $7,804,600    $2,415,000    $2,284,000
   Racing license in excess of tax basis         650,000       636,000       657,000
                                              -----------   -----------   -----------
          Deferred tax liabilities             8,454,600     3,051,000     2,941,000
                                              -----------   -----------   -----------

Deferred tax assets:
   Supplemental  benefit plan                    315,400       295,000       273,000
   State net operating loss carryforwards        856,700       173,000       176,000
   Allowance for uncollectible receivables        87,100        71,000        66,000
   Other assets                                  191,300       250,000       136,000
   Other accruals                                246,100       128,400       511,500
                                              -----------   -----------   -----------
         Deferred tax assets                   1,696,600       917,400     1,162,500
                                              -----------   -----------   -----------

Valuation allowance for state net operating
   loss carryforwards                                 -        173,000       176,000
                                              -----------   -----------   -----------
      Net deferred tax liability              $6,758,000    $2,306,600    $1,954,500
                                              ===========   ===========   ===========

Income taxes are classified in the balance sheet as follows:

   Net non-current deferred tax liability     $6,937,800    $2,377,100    $2,316,600
   Net current deferred tax asset               (179,800)      (70,500)     (362,100)
                                              -----------  ------------   -----------
                                              $6,758,000    $2,306,600    $1,954,500
                                              ===========  ============   ===========
</TABLE>


                                       41


<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6. Stockholders' Equity:

        On March 19, 1998, the Company's Board of Directors authorized a 2-for-1
        stock split of its common stock  effective March 30, 1998. All share and
        per share amounts in the accompanying  consolidated financial statements
        have been restated to give effect to the stock split.

        Additionally,  the Company's  Board of Directors  approved a stockholder
        "Rights  Plan"  (the  "Plan")  on March  19,  1998,  which  grants  each
        stockholder  the right to  purchase a fraction of a share of Series 1998
        Preferred Stock at the rate of one right for each share of the Company's
        common stock.  The rights will become  exercisable  10 business days (or
        such  later  date as  determined  by the Board of  Directors)  after any
        person or group  acquires,  obtains a right to  acquire or  announces  a
        tender offer for 15% or more of the Company's  outstanding common stock.
        The rights  would  allow the holder to purchase  preferred  stock of the
        Company at a 50% discount.  The Plan is intended to protect stockholders
        from  takeover  tactics  that may be used by an acquirer  that the Board
        believes  are not in the best  interests of the  shareholders.  The Plan
        expires on March 19, 2008.

7.      Employee Benefit Plans:

        The  Company  has  a  profit-sharing  plan  that  covers  all  full-time
        employees  with one year or more of  service.  The  Company  will  match
        contributions  made by the  employee up to 2% of the  employee's  annual
        compensation and contribute a discretionary  amount determined  annually
        by the Board of Directors.  The Company's  contribution  to the plan for
        the years ended December 31, 1998, 1997 and 1996 was $806,000, $535,000,
        and $402,000 respectively.

        The  Company  is  a  member  of  a   noncontributory   defined   benefit
        multi-employer  retirement  plan  for  all  members  of the  Pari-mutuel
        Clerk's Union of Kentucky.  Contributions  are made in  accordance  with
        negotiated labor  contracts.  Retirement plan expense for the year ended
        December 31, 1998, 1997 and 1996 was $258,000,  $205,000,  and $183,000,
        respectively. The Company's policy is to fund this expense as accrued.

        The estimated  present  value of future  payments  under a  supplemental
        benefit plan is charged to expense over the period of active  employment
        of the  employees  covered  under the plan.  Supplemental  benefit  plan
        expense  for the  years  ended  December  31,  1998,  1997  and 1996 was
        $55,200, $51,000, and $51,000 respectively.





                                       42

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8.      Long-Term Debt:

        On  September  15,  1998,  the Company  obtained a $100  million line of
        credit,  which expires in September  2001,  through a syndicate of banks
        headed by its principal  lender.  The new credit facility replaces a $50
        million line of credit  obtained  during the second quarter of 1998. The
        interest  rate on  borrowings  is  based  upon  LIBOR  plus 50 to  112.5
        additional basis points which is determined by certain Company financial
        ratios.  There was $11.0  million  outstanding  on the line of credit at
        December 31, 1998,  and no borrowings  outstanding  at December 31, 1997
        and 1996 under  previous  lines of credit.  Provisions  contained in the
        line of credit  agreement  require  the  Company to  maintain  specified
        levels of net worth,  a specific  ratio of  consolidated  funded debt to
        consolidated   earnings  before   interest,   taxes,   depreciation  and
        amortization  and a  specific  ratio  of  consolidated  earnings  before
        interest  and  taxes to the sum of  consolidated  interest  expense  and
        consolidated dividends.

        The  Company  also has two  non-interest  bearing  notes  payable in the
        aggregate  face  amount  of  $900,000  relating  to the  purchase  of an
        intrastate  wagering  license from the former  owners of the  Louisville
        Sports Spectrum  property.  Interest has been imputed at 8%. The balance
        of these notes net of unamortized discount was $196,000,  $276,000,  and
        $350,000 at December 31, 1998,  1997 and 1996,  respectively.  The notes
        require aggregate annual payments of $110,000.

        On May  31,  1996,  the  Company  entered  into a  Partnership  Interest
        Purchase Agreement with Conseco, L.L.C.  ("Conseco") for the sale of 10%
        of the Company's  partnership  interest in Hoosier Park to Conseco.  The
        transaction also included assumption by Conseco of a loan to the Company
        of  approximately  $2,600,000,  of which the  balance is  $2,395,092  at
        December 31, 1998. The loan requires interest of prime plus 2% (9.75% at
        December 31, 1998) payable monthly with principal due November 2004. The
        note is collateralized by 10% of the assets of Hoosier Park. Conseco had
        an option to purchase an  additional  47% interest in Hoosier Park which
        expired unexercised on December 31, 1998.

        Future aggregate maturities of long-term debt are as follows:


                                        1999-           $   127,000
                                        2000-               126,000
                                        2001-            11,008,000
                                        2002-                 9,000
                                        2003-                   -  
                                 Thereafter -             2,395,000
                                                        -----------
                                                        $13,665,000
                                                        ===========

                                       43

<PAGE>


                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.      Operating Leases:

        The Company has a long-term  operating  lease for the land in  Anderson,
        Indiana  on which its  Hoosier  Park  facility  is  located,  as well as
        operating  leases for the  Indianapolis  off-track  betting facility and
        certain  totalisator and  audio/visual and other equipment and services.
        The Anderson  lease expires in 2003,  with an option to extend the lease
        for three additional ten year terms.  The Indianapolis  lease expires in
        2009,  with an option to extend the lease for two  additional  five year
        terms. The leases include  provisions for minimum lease payments as well
        as contingent  lease  payments  based on handle or revenues.  Total rent
        expense  for  all  operating  leases  was  $4,022,000,   $3,803,000  and
        $3,465,000 for the years ended December 31, 1998, 1997 and 1996.

        Future minimum operating lease payments are as follows:


                                        Minimum Lease
                                           Payment
                                           -------
                        1999                  $ 725,604
                        2000                    704,625
                        2001                    556,214
                        2002                    462,045
                        2003                    372,840
                     Thereafter               1,694,301
                                             ----------
                                             $4,515,629
                                             ==========

10.     Stock-Based Compensation Plans:

        The Company sponsors both the "Churchill Downs  Incorporated  1997 Stock
        Option Plan" (the "97 Plan") and the "Churchill Downs  Incorporated 1993
        Stock Option Plan" (the "93 Plan"),  stock-based incentive  compensation
        plans, which are described below. The Company applies APB Opinion 25 and
        related  interpretations in accounting for both the plans.  However, pro
        forma  disclosures  as if  the  Company  adopted  the  cost  recognition
        provisions of SFAS 123 are presented below.

        The  Company is  authorized  to issue up to 300,000  shares and  400,000
        shares of common  stock (as  adjusted  for the stock split) under the 97
        Plan and 93 Plan, respectively, pursuant to "Awards" granted in the form
        of incentive stock options (intended to qualify under Section 422 of the
        Internal  Revenue  Code of 1986,  as amended)  and  non-qualified  stock
        options.  Awards may be granted to selected  employees of the Company or
        any subsidiary.

                                       44


<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.     Stock-Based Compensation Plans: (cont'd)

        Employee Stock Options:

        Both the 97 Plan and the 93 Plan provide that the exercise  price of any
        incentive stock option may not be less than the fair market value of the
        common  stock  on  the  date  of  grant.   The  exercise  price  of  any
        nonqualified  stock  option is not so limited by the plans.  The Company
        granted stock options in 1998,  1997 and 1996. The stock options granted
        in those years have  contractual  terms of 10 years and varying  vesting
        dates,  ranging from one to three years  following the date of grant. In
        accordance with APB 25, the Company has not recognized any  compensation
        cost for these stock options.

        A summary of the status of the  Company's  stock  options as of December
        31, 1998,  1997 and 1996 and the changes  during the year ended on those
        dates is presented below:

<TABLE>
<CAPTION>

                                 1998                       1997                       1996
                        -----------------------    -----------------------    -----------------------

                        # of Shares    Weighted    # of Shares    Weighted    # of Shares    Weighted
                         Underlying     Average     Underlying     Average     Underlying     Average
                          Options      Exercise      Options      Exercise      Options      Exercise
                                        Prices                     Prices                     Prices
<S>                        <C>          <C>           <C>          <C>           <C>          <C>
Outstanding at beginning
     of the year           426,532      $19.45        337,000      $19.08        248,000      $22.34
Granted                     51,766      $32.50         89,532      $20.83        274,400      $18.97
Exercised                       -           -              -           -              -           -
Canceled                        -           -              -           -         185,400      $23.27
Forfeited                       -           -              -           -              -           -
Expired                         -           -              -           -              -           -
Outstanding at end
   of year                 478,298      $20.86        426,532      $19.45        337,000      $19.08
Exercisable at
   end of year             248,000      $21.02        207,400      $19.67             -           -
Weighted-average fair value per
   share of options granted
   during the year                      $10.42                      $6.34                      $5.55
</TABLE>

        The fair value of each stock option  granted is estimated on the date of
        grant using the Black- Scholes  option-pricing  model with the following
        weighted-average   assumptions  for  grants  in  1998,  1997  and  1996,
        respectively:  dividend  yields ranging from 1.20% to 1.54%;  risk- free
        interest  rates are  different  for each  grant and range  from 5.75% to
        6.63%;  and the expected  lives of options are  different for each grant
        and range from approximately  5.83 to 6.5 years,and expected  volatility
        rates of 24.86%,  19.38% and 18.75% for years ending  December 31, 1998,
        1997 and 1996.


                                       45

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.     Stock-Based Compensation Plans: (cont'd)

        The  following  table   summarizes   information   about  stock  options
        outstanding at December 31, 1998:
<TABLE>
<CAPTION>


                                 Options Outstanding                     Options Exercisable
                      -------------------------------------              -------------------
                     Number      Weighted Average      Weighted         Number         Weighted
Range of           Outstanding      Remaining           Average       Exercisable      Average
Exercise Prices    at 12/31/98   Contributing Life   Exercise Price   at 12/31/98   Exercise Price
---------------    -----------   -----------------   --------------   -----------   --------------
<S>                    <C>             <C>              <C>               <C>              <C>
$15.75 to $19.25       315,900         6.05             $18.72            211,000          $20.89
$21.25 to $32.50       162,398         8.20             $25.02             37,000          $21.71
                       -------                                            -------
TOTAL                  478,298         6.77             $20.86            248,000          $21.02
                       =======                                            =======
</TABLE>

        Employee Stock Purchase Plan:

        Under the Company's  Employee Stock  Purchase Plan (the "Employee  Stock
        Purchase  Plan"),  the  Company  is  authorized  to  sell,  pursuant  to
        short-term  stock  options,  shares of its common stock to its full-time
        (or  part-time  for at least 20 hours per week and at least five  months
        per year)  employees at a discount  from the common  stock's fair market
        value.  The  Employee  Stock  Purchase  Plan  operates  on the  basis of
        recurring, consecutive one-year periods. Each period commences on August
        1 and ends on the next following July 31.

        On the first day of each 12-month  period,  August 1, the Company offers
        to each  eligible  employee the  opportunity  to purchase  common stock.
        Employees  elect to  participate  for each  period to have a  designated
        percentage of their compensation withheld (after-tax) and applied to the
        purchase of shares of common  stock on the last day of the period,  July
        31. The Employee  Stock Purchase Plan allows  withdrawals,  terminations
        and reductions on the amounts being deducted. The purchase price for the
        common stock is 85% of the lesser of the fair market value of the common
        stock on (i) the  first day of the  period,  or (ii) the last day of the
        period.  No employee may purchase  common stock under the Employee Stock
        Purchase Plan valued at more than $25,000 for each calendar year.

        Under the Employee Stock Purchase Plan, the Company sold 8,107 shares of
        common stock to 102 employees  pursuant to options  granted on August 1,
        1997, and exercised on July 31, 1998. Because the plan year overlaps the
        Company's  fiscal  year,  the  number of shares to be sold  pursuant  to
        options  granted on August 1, 1998,  can only be  estimated  because the
        1998 plan year is not yet complete.  The  Company's  estimate of options
        granted in 1998 under the Plan is based on the number of shares  sold to
        employees under the Plan for the 1997 plan year, adjusted to reflect the
        change in the number of employees participating in the Plan in 1998.



                                       46

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.     Stock-Based Compensation Plans: (cont'd)

        A  summary  of the  status  of the  Company's  stock  options  under the
        Employee Stock Purchase Plan as of December 31, 1998,  1997 and 1996 and
        the changes during the year ended on those dates is presented below:

<TABLE>
<CAPTION>

                              1998                    1997                     1996
                    ----------------------   ----------------------   ----------------------

                    # of Shares   Weighted   # of Shares   Weighted   # of Shares   Weighted
                    Underlying     Average   Underlying     Average   Underlying     Average
                      Options     Exercise     Options     Exercise     Options     Exercise
                                   Prices                   Prices                   Prices
<S>                       <C>       <C>            <C>       <C>            <C>       <C>
Outstanding at beginning
   of the year            8,030     $14.60         8,000     $14.45         7,818     $14.45
Adjustment to prior
year estimated grants        77     $14.60           410     $14.45             -          -
Granted                   5,238     $31.45         8,030     $18.94         8,000     $17.22
Exercised                 8,107     $14.60         8,410     $14.95         7,818     $14.45
Forfeited                     -          -             -          -             -          -
Expired                       -          -             -          -             -          -
Outstanding at end
   of year                5,238     $31.45         8,030     $18.94         8,000     $17.22
Exercisable at end
   of year                    -          -             -          -             -          -
Weighted-average
   Fair value per share
   of options granted
   during the year       $12.16                    $5.36                    $5.35

</TABLE>

                                       47

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.     Stock-Based Compensation Plans: (cont'd)

        Had the  compensation  cost for the Company's  stock-based  compensation
        plans  been  determined  consistent  with SFAS 123,  the  Company's  net
        earnings and  earnings  per common  share for 1998,  1997 and 1996 would
        approximate the pro forma amounts presented below:


                                   1998               1997             1996
                                -----------       -----------       ----------
Net earnings:
   As reported                  $10,518,548        $9,148,560       $8,071,526
   Pro-forma                    $10,086,914        $8,605,000        7,530,000

Earnings per common share:
   As reported
       Basic                          $1.41             $1.25            $1.08
       Diluted                        $1.40             $1.25            $1.08
   Pro-forma
       Basic                          $1.35             $1.18            $1.01
       Diluted                        $1.34             $1.18            $1.01

        The effects of applying  SFAS 123 in this pro forma  disclosure  are not
        indicative of future amounts.  The Company  anticipates making awards in
        the future under its stock-based compensation plans.

11.     Fair Values of Financial Instruments:

        Financial   Accounting  Standards  Board  ("FASB")  Statement  No.  107,
        "Disclosure  about Fair Value of Financial  Instruments," is a part of a
        continuing  process  by the FASB to  improve  information  on  financial
        instruments.  The  following  methods and  assumptions  were used by the
        Company in  estimating  its fair value  disclosures  for such  financial
        instruments as defined by the Statement:

        Cash and Cash  Equivalents - The carrying amount reported in the balance
        sheet for cash and cash equivalents approximates its fair value.

        Long-Term Debt - The carrying amounts of the Company's  borrowings under
        its line of credit agreements and other long-term debt approximates fair
        value, based upon current interest rates.


                                       48

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.     Contingencies:

        On January 22, 1992, the Company  acquired  certain assets of Louisville
        Downs,  Incorporated for $5,000,000 including the site of the Louisville
        Sports Spectrum. In conjunction with this purchase, the Company withheld
        $1,000,000  from the amount due to the sellers to offset  certain  costs
        related to the  remediation of  environmental  contamination  associated
        with  underground  storage tanks at the site. All of the $1,000,000 hold
        back had been utilized as of December 31, 1998 and  additional  costs of
        remediation have not yet been conclusively determined.  The sellers have
        now received a reimbursement  from the State of Kentucky of $995,000 for
        remediation costs and that amount is now being held in an escrow account
        to pay further costs of remediation.  Approximately  $985,000 remains in
        the account.  In addition to the hold back,  the Company has obtained an
        indemnity to cover the full cost of remediation  from the prior owner of
        the property.

        It is not  anticipated  that the Company  will have any  liability  as a
        result of compliance with  environmental laws with respect to any of the
        Company's  property.   Except  as  discussed  herein,   compliance  with
        environmental  laws has not  affected the ability to develop and operate
        the Company's properties and the Company is not otherwise subject to any
        material   compliance   costs  in  connection   with  federal  or  state
        environmental laws.

13.     Earnings Per Common Share Computations:

        The following is a  reconciliation  of the numerator and  denominator of
        the earnings per common share computations:
<TABLE>
<CAPTION>

                                                      1998           1997          1996
                                                      ----           ----          ----
<S>                                                <C>            <C>           <C>
Net earnings (numerator) amounts used
   for basic and diluted per share computations:   $10,518,548    $9,148,560    $8,071,526
                                                   ===========    ==========    ==========
Weighted average shares (denominator) of
   common stock outstanding per share
   computations:
      Basic                                          7,460,058     7,312,052     7,445,542
      Plus dilutive effect of stock options             79,424         8,618         2,164
                                                   -----------    ----------    ----------
      Diluted                                        7,539,482     7,320,670     7,447,706
                                                   ===========    ==========    ==========
Earnings per common share:
      Basic                                              $1.41         $1.25         $1.08
      Diluted                                            $1.40         $1.25         $1.08
</TABLE>

        Options to purchase 51,766, 9,800 and 135,250 shares for the years ended
        December 31, 1998, 1997 and 1996, respectively, were not included in the
        computation of earnings per common  share-assuming  dilution because the
        options'  exercise  prices were greater than the average market price of
        the common shares.



                                       49

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


14.     Segment Information

        In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of
        an Enterprise and Related  Information." The Company has determined that
        it currently  operates in the  following  four  segments:  (1) Churchill
        Downs racetrack and the Louisville Sports Spectrum  simulcast  facility,
        (2) Ellis Park racetrack and its on-site simulcast facility, (3) Hoosier
        Park  racetrack and its on-site  simulcast  facility and the other three
        Indiana simulcast facilities and (4) Other operations.

        Most  of the  Company's  revenues  are  generated  from  commissions  on
        pari-mutuel  wagering at the Company's racetracks and simulcast wagering
        facilities,  as well  as  simulcast  fees,  admissions  and  concessions
        revenue and other sources.  Other operations includes the Kentucky Horse
        Center  and  the  Company's   investments   in  various  other  business
        enterprises.  The  Company's  equity in the net income of equity  method
        investees is not  significant.  Eliminations  include the elimination of
        management fees and other intersegment transactions.

        The accounting  policies of the segments are the same as those described
        in  the  "Summary  of  Significant  Accounting  Policies."  The  Company
        evaluates the  performance  of its segments and  allocates  resources to
        them  based  on  earnings  before  interest,   taxes,  depreciation  and
        amortization ("EBITDA") and operating income.




                                       50

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.     Segment Information: (cont'd)

        The table below presents  information  about  reported  segments for the
        years ending December 31, 1998, 1997 and 1996:

                                Segment Information (in thousands)
<TABLE>
<CAPTION>
                     Churchill    Hoosier    Ellis Park      Other       Elimina-
                       Downs       Park                    Operations      tions       Total
<S>                    <C>        <C>           <C>            <C>         <C>        <C>
Net revenues:
1998                   $80,925    $47,744       $17,386        $2,497      $(1,252)   $147,300
1997                    77,404     41,503            -          1,299       (1,299)    118,907
1996                    74,540     33,319            -          1,334       (1,334)    107,859
EBITDA:
1998                   $14,417     $5,599        $2,305          $909           -      $23,230
1997                    14,205      4,282            -            802           -       19,289
1996                    15,390      1,565            -            847           -       17,802
Operating income:
1998                   $10,700     $4,499        $1,422          $522           -      $17,143
1997                    10,557      3,088            -            760           -       14,405
1996                    11,482          6            -            827           -       12,315
Total assets:
1998                   $89,427    $31,732       $23,038       $71,109    $(100,655)   $114,651
1997                    72,490     29,689            -         31,180      (47,510)     85,849
1996                    71,047     28,626            -         26,062      (45,006)     80,729
</TABLE>

          Following  is a  reconciliation  of  total  EBITDA  to  income  before
provision for income taxes:


(in thousands)                          1998            1997            1996
                                        ----            ----            ----
Total EBITDA                           $23,230         $19,289         $17,802
Depreciation and amortization           (5,744)         (4,559)         (4,814)
Interest income (expense)                 (216)            243             53
                                       --------        --------        --------
Earnings before provision for
income taxes                           $17,270         $14,973         $13,041
                                       ========        ========        =========


                                       51

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.     Subsequent Events:

        On  January 13, 1999,  the Company  acquired a 60% interest in Charlson
        Broadcast  Technologies, LLC ("CBT") for  a  purchase  price  of  $5.4 
        million.  CBT provides  simulcast  graphic  software  video  services to
        racetracks  and   simulcast  wagering  facilities throughout the United 
        States. The  purchase  agreement includes  provisions for an additional 
        contingent purchase price to be paid by the Company to the former owners
        of  the  60%  interest  based  upon the achievement of certain operating
        targets. 

        On January 21, 1999, the Company entered into an  agreement  to acquire
        all  of  the  outstanding  shares of  Calder  Race  Course,  Inc., and 
        Tropical Park, Inc.  ("Calder"),  from KE Acquisition Corp., a private  
        holding company.  Terms of the agreement include a purchase price of $86
        million  subject to certain  adjustments. Closing of the acquisition is
        expected in early April 1999.





                                       52

<PAGE>




<TABLE>
<CAPTION>

      Supplementary Financial Information(Unaudited)                                 Common Stock Information
                                                                                Per Share of Common Stock
                                                                  -----------------------------------------------------
                                  Operating         Net            Basic      Diluted
                      Net          Income          Earnings       Earnings    Earnings                  Market Price
                    Revenues        (Loss)         (Loss)         (Loss)       (Loss)     Dividends    High       Low
                    --------      ----------      -----------     --------    --------    ---------    ------    -----
<S>               <C>             <C>             <C>                <C>         <C>          <C>      <C>       <C>
1998              $147,300,299    $17,143,410     $10,518,548        $1.41       $1.40
Fourth Quarter      31,241,540     (1,290,562)       (779,990)        (.10)       (.10)       $0.50    $36.44    $27.25
Third Quarter       33,299,256     (1,016,288)       (654,915)        (.09)       (.09)                 41.44     27.63
Second Quarter      67,374,352     22,219,991      13,522,484         1.81        1.79                  43.25     24.00
First Quarter       15,385,151     (2,769,731)     (1,569,031)        (.21)       (.21)                 25.31     19.31
-----------------------------------------------------------------------------------------------------------------------
1997              $118,907,367    $14,405,288      $9,148,560        $1.25       $1.25
Fourth Quarter      28,021,261       (269,688)         30,749         0.00        0.00        $0.50    $23.38    $20.75
Third Quarter       16,827,607     (3,005,270)     (1,819,209)       (0.25)     ( 0.25)                 21.00     16.25
Second Quarter      60,779,635     20,815,669      12,785,706         1.75        1.75                  19.00     16.50
First Quarter       13,278,864     (3,135,423)     (1,848,686)       (0.25)      (0.25)                 18.50     16.00
-----------------------------------------------------------------------------------------------------------------------
1996              $107,858,818    $12,314,897     $ 8,071,526        $1.08       $1.08
Fourth Quarter      26,369,324     (1,092,044)       (171,138)       (0.02)      (0.02)       $0.33    $18.25    $17.00
Third Quarter       15,200,752     (2,782,430)     (1,580,988)       (0.21)      (0.21)                 18.75     17.00
Second Quarter      54,939,249     19,637,584      11,896,865         1.59        1.59                  22.00     18.00
First Quarter       11,349,493     (3,448,213)     (2,073,213)       (0.27)      (0.27)                 20.00     16.00
-----------------------------------------------------------------------------------------------------------------------
</TABLE>




The Company's Common Stock is traded in the over-the-counter market. As of March
29, 1993, the Company's  Common Stock was listed on the National  Association of
Securities  Dealers,  Inc.'s  SmallCap Market under the symbol CHDN. As of March
24, 1999, there were approximately 3,100 stockholders of record.

Earnings  (loss) per share and other per share  amounts have been  retroactively
adjusted for the 2-for-1 stock split with a record date of March 30, 1998.

Quarterly  earnings (loss) per share figures may not equal total earnings (loss)
per share for the year due in part to the fluctuation of the market price of the
stock.

The above  table  sets forth the high and low bid  quotations  (as  reported  by
NASDAQ) and dividend  payment  information for the Company's Common Stock during
its last three years.  Quotations reflect  inter-dealer  prices,  without retail
mark-up,  mark-down  or  commissions,  and may not  necessarily  reflect  actual
transactions.


                                       53

<PAGE>



ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
               ON ACCOUNTING AND FINANCIAL DISCLOSURES

               None.

                                           PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The information required herein is incorporated by reference from
sections of the Company's  Proxy  Statement  titled  "Section  16(a)  Beneficial
Ownership  Reporting   Compliance,"  "Election  of  Directors,"  and  "Executive
Officers  of the  Company,"  which  Proxy  Statement  will  be  filed  with  the
Securities and Exchange  Commission  pursuant to instruction G(3) of the General
Instructions to Form 10-K.

ITEM 11.       EXECUTIVE COMPENSATION.

               The information required herein is incorporated by reference from
sections of the  Company's  Proxy  Statement  titled  "Election  of  Directors -
Compensation and Committees of the Board of Directors,"  "Compensation Committee
Report  on  Executive  Compensation,"  "Compensation  Committee  Interlocks  and
Insider Participation," "Performance Graph," and "Executive Compensation," which
Proxy  Statement  will be filed  with the  Securities  and  Exchange  Commission
pursuant to instruction G(3) of the General Instructions to Form 10-K.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT

               The information required herein is incorporated by reference from
the sections of the  Company's  Proxy  Statement  titled  "Common Stock Owned by
Certain  Persons,"  "Election  of  Directors"  and  "Executive  Officers  of the
Company,"  which Proxy  Statement will be filed with the Securities and Exchange
Commission  pursuant to  instruction  G(3) of the General  Instructions  to Form
10-K.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information required herein is incorporated by reference from
the section of the Company's Proxy Statement titled "Certain  Relationships  and
Related  Transactions,"  which Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to instruction G(3) of the General Instructions
to Form 10-K.


                                       54

<PAGE>



                                            PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
               REPORTS ON FORM 8-K


                                                                           Pages
(a)(1)   Consolidated Financial Statements
              The following financial statements of Churchill Downs 
              Incorporated for the years ended December 31, 1998, 1997
              and 1996 are included in Part II, Item 8:
              Report of Independent Accountants                               31
              Consolidated Balance Sheets                                     32
              Consolidated Statements of Earnings                             33
              Consolidated Statements of Stockholders' Equity                 34
              Consolidated Statements of Cash Flows                           35
              Notes to Consolidated Financial Statements                   36-52

   (2)        Schedule VIII - Valuation and Qualifying Accounts               57
              All  other schedules  are  omitted  because  they are not
              applicable, not  significant or not required, or because 
              the  required  information  is included in  the financial
              statement notes thereto.

   (3) For the list of required exhibits, see exhibit index.

(b)      Reports on Form 8-K:

   (1)   Report on Form 8-K - Description of Capital Stock, Item 5 Other Events,
              was  filed on December 14, 1998

   (2)   Report on  Form 8-K/ A-2, filing   of  accountant's  consent,   Item 7 
              Financial Statements and Exhibits, ws filed on December 21, 1998. 

(c)      Exhibits

         See exhibit index.

(d)      All  financial  statements  and schedules  except  those items
         listed  under items  14(a)(l)  and  (2)  above  are  omitted  
         because  they  are not applicable, or not required, or because
         the  required  information  is  included  in  the  financial 
         statements or notes thereto.


                                       55

<PAGE>



                                   SIGNATURES

               Pursuant  to the  requirements  of  Section  13 or  15(d)  of the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                          CHURCHILL DOWNS INCORPORATED

                               /s/Thomas H. Meeker
                              ---------------------
                                Thomas H. Meeker
                          President and Chief Executive
                                     Officer
                                 March 16, 1999

               Pursuant to the  requirements  of the Securities  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
the registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                  <C>                              <C>

/s/Thomas H.  Meeker                 /s/Robert L.  Decker             /s/Vicki.  L.  Baumgardner
---------------------------------    -----------------------------    --------------------------------
Thomas H. Meeker, President and      Robert L. Decker, Executive      Vicki L. Baumgardner, Vice
Chief Executive Officer              Vice President and Chief         President, Finance and Treasurer
March 16, 1999                       Officer                          March 16, 1999
(Director and Principal Executive    March 16, 1999                   (Principal Accounting Officer)
Officer)                             (Principal Financial Officer)

/s/Daniel P.  Harrington             /s/Frank B.  Hower, Jr.
---------------------------------    -----------------------------    --------------------------------
Daniel P.  Harrington                Frank B.  Hower, Jr.             Arthur B.  Modell
March 16, 1999                       March 16, 1999                   March 16, 1999
(Director)                           (Director)                       (Director)

/s/William S.  Farish                /s/G.  Watts Humphrey, Jr.       /s/Carl F.  Pollard
---------------------------------    -----------------------------    --------------------------------
William S.  Farish                   G.  Watts Humphrey, Jr.          Carl F.  Pollard
March 16, 1999                       March 16, 1999                   March 16, 1999
(Director)                           (Director)                       (Director)

/s/J.  David Grissom                 /s/W.  Bruce Lunsford            /s/Dennis D.  Swanson
---------------------------------    -----------------------------    --------------------------------
J.  David Grissom                    W.  Bruce Lunsford               Dennis D.  Swanson
March 16, 1999                       March 16, 1999                   March 16, 1999
(Director)                           (Director)                       (Director)

/s/Charles W.  Bidwill, Jr.          /s/Seth W.  Hancock              /s/Darrell R.  Wells
---------------------------------    -----------------------------    --------------------------------
Charles W.  Bidwill, Jr.             Seth W.  Hancock                 Darrell R.  Wells
March 16, 1999                       March 16, 1999                   March 16, 1999
(Director)                           (Director)                       (Director)

</TABLE>

                                       56

<PAGE>



                          CHURCHILL DOWNS INCORPORATED

               SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>

                                     Balance,     Accounts                                  Balance,
                                    Beginning    obtained in    Charged to                     End
Description                         of Period    Acquisition     Expenses     Deductions    of Period

Year ended December 31,
1998:
<S>                                  <C>            <C>           <C>         <C>            <C>
Allowance for doubtful
   account and notes receivable      $176,000        $98,000        $1,000     $(56,000)     $219,000
Valuation allowance for
   deferred tax asset                 173,000             -       (173,000)          -             -
                                     --------       --------     ----------    ----------    ---------
                                     $349,000        $98,000     $(172,000)     (56,000)     $219,000
                                     ========       ========     ==========    ==========    =========


Year ended December 31,
1997:
Allowance for doubtful
   account and notes receivable      $165,000             -        $61,000     $(50,000)     $176,000
Valuation allowance for
   deferred tax asset                 176,000             -             -        (3,000)      173,000
                                     --------       --------      --------    ----------     --------
                                     $341,000             -        $61,000     $(53,000)     $349,000
                                     ========       ========      ========    ==========     ========

Year ended December 31,
1996:
Allowance for doubtful
   account and notes receivable      $135,000             -        $30,000            -      $165,000
Valuation allowance for
   deferred tax asset                 104,000             -         72,000            -       176,000
                                     --------       --------      --------    ----------     --------
                                     $239,000             -       $102,000            -      $341,000
                                     ========       ========      ========    ==========     ========


</TABLE>




                                       57

<PAGE>


<TABLE>
<CAPTION>


                                  EXHIBIT INDEX
Numbers    Description                              By Reference To

<S>                                                 <C> 
(2) (a)    Stock Purchase Agreement dated as        Exhibit 2.1 to Current Report on Form
           of March 28, 1998 between Churchill      8-K dated April 21, 1998
           Downs Incorporated and TVI Corp.

    (b)    Agreement and Plan of Merger dated       Exhibit 2.2 to Current Report on Form
           as of April 17, 1998 by and among        8-K dated April 21, 1998 
           TVI Corp., Racing Corporation of
           America, Churchill Downs Incorporated
           and RCA Acquisition Company 
 
(3) (a)    Amended and Restated Articles of         Report on Form 10-Q for the fiscal
           Churchill Downs Incorporatiod            quarter ended June 30, 1998

    (b)    Restated  Bylaws  as  amended            Report  on Form 10-Q for the fiscal
                                                    quarter ended June 30, 1998

(4)        Rights  Agreement dated as of            Exhibit 4.1 to Current Report on Form
           March 19, 1998  between  Churchill        8-K dated March 19, 1998
           Downs,  Inc. and Bank of Louisville

(10)(a)    Churchill Downs Incorporated Amended     Pages 61 to 71, Report on Form 10-K
           and Supplemental Benefit Plan dated      the year ended  December 31, 1998
           December 1, 1998*

    (b)    Employment Agreement dated as of         Exhibit 19(a) to Report on Form 10-Q 
           October 1, 1984, with                    for fiscal quarter ended 4
           Thomas H. Meeker, President *            October 31, 198

    (c)    Churchill Downs Incorporated for         Exhibit 10 (c) to Report on Form 10-K
           Incentive Compensation Plan (1997)*      for the year ended  December 31, 1996
             
    (d)    Churchill Downs  Incorporated            Exhibit 10(h) to Report on Form 10-K
           for 1993 Stock Option Plan *             for the eleven  months ended 
                                                    December 31, 1993

    (e)    Stock Purchase  Agreement naming         Exhibit 10(i) to Current Report on
           Dominick Marotta, Frank Marotta,         Form 8-K filed with the Securities
           Louis E. Carlo and Edward F.             and Exchange Commission on 
            Draugelis                               February  10, 1994

    (f)    Amendment  of  Employment Agreement      Report on Form 10-K for the fiscal  
           with Thomas H. Meeker, President,        year ended January 31, 1986;  Report 
           dated October 1, 1984 *                  on Form 10-K for the fiscal year ended
                                                    January 31, 1987; 1988, 1990, 1991, 
                                                    1992 and 1993

    (g)    Amendment No. 1 to Churchill Downs       Exhibit 10 (g) to Report on Form 10-K
           Incorporated 1993 Stock Option Plan*     for the year ended December 31, 1994
             





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    (h)    $100  Million  Revolving Facility         Report on Form 10-Q for the fiscal 
           Credit Agreement between Churchill        quarter ended September 30, 1998
           Downs Incorporated, Churchill Downs
           Management Company, Churchill Downs
           Investmwnt Company, Racing Coporation
           of America, Ellis Park Race Course,
           Inc., the banks party thereto and PNC
           Bank, National Association, as Agent,
           dated as of September 15, 1998

    (i)    Amended and  Restated  Lease             Exhibit 10 (l) to Report on Form 10-K
           Agreement  dated  January 31, 1996       for the year ended  December 31, 1995

    (j)    Partnership  Interest Purchase           Exhibit 10(k) to Report on Form 10-K
           Agreement dated December 20, 1995        for the year ended December 31, 1995
           among Anderson Park,  Inc.,  Conseco 
           HPLP, LLC, Pegasus Group, Inc. and 
           Hoosier Park, L.P.

    (k)    Employment  Agreement between            Exhibit 10 (l) to Report on Form 10-Q
           Churchill Downs Incorporated and         for the fiscal quarter ended 
           Robert L. Decker *                       March 31, 1997

    (l)    Amendment No. 2 to Churchill Downs       Report on Form 10-K for the year
           Incorporated 1993 Stock Option Plan*     ended December 31, 1997
             
    (m)    Churchill  Downs  Incorporated           Report on Form 10-K for the year
           1997 Stock Option Plan*                  ended December 31, 1997

    (n)    Churchill Downs Incorporated Amended     Pages 72 to 88, Report on Form 10-K for
           and Restated Deferred Compensation       the year ended December 31, 1998
           Plan for Employees and Directors*

(21)       Subsidiaries of the registrant           Report on Form 10-K for the year ended
                                                    December 31, 1994

                                       59
<PAGE>

(23)       Consent of PricewaterhouseCoopers, LLP   Page 89, Report on Form 10-K for the 
           Independent Accountants                  year ended December 31, 1998
             
(27)       Financial  Data  Schedule for the        Page 90,  Report on Form 10-K for
           year ended December 31, 1998             the year ended December 31, 1998


*Management contract or compensatory plan or arrangement.
</TABLE>


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