SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                For the quarterly period ended September 30, 1998

                                       OR

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

                   For the transition period from ---- to----

                          Commission file number 0-1469

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

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

              700 Central Avenue, Louisville, KY 40208 (Address of
                          principal executive offices)
                                   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                  Yes   X     No____


The number of shares  outstanding  of  registrant's  common stock at November 1,
1998 was 7,525,041 shares.



<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                                    I N D E X
                                      PAGES

PART I.  FINANCIAL INFORMATION
  ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

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

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

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

          Condensed Notes to Consolidated Financial Statements               6-9
  
  ITEM 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations                              10-27
 
  ITEM 3. Quantitative and Qualitative Disclosures About
          Market Risk (Not Applicable)                                        28

PART II. OTHER INFORMATION AND SIGNATURES

  ITEM 1. Legal Proceedings (Not applicable)                                  28

  ITEM 2. Changes in Securities and Use of Proceeds (Not applicable)          28

  ITEM 3. Defaults Upon Senior Securities (Not applicable)                    28

  ITEM 4. Submission of Matters to a Vote of Security Holders (Not applicable)28

  ITEM 5. Other Information                                                   28

  ITEM 6. Exhibits and Reports on Form 8-K                                    28

  Signatures                                                                  29

  Exhibit Index                                                               30

  Exhibits                                                                    31

                                       -2-

<PAGE>



                          CHURCHILL DOWNS INCORPORATED
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)


<TABLE>
                                                         September 30,     December 31,     September 30,
                      ASSETS                                 1998              1997             1997
                                                             ----              ----             ----
Current assets:
<S>                                                      <C>               <C>              <C>        
     Cash and cash equivalents                           $  8,130,380      $ 9,280,233      $11,030,692
     Accounts receivable                                   10,925,891        7,086,889       11,627,361
     Other current assets                                     564,286          540,489          548,464
                                                         -------------     ------------     ------------
        Total current assets                               19,620,557       16,907,611       23,206,517
 
Other assets                                               13,839,250        5,778,430        5,803,188
Plant and equipment                                       128,803,415      104,554,196      104,059,771
Less accumulated depreciation                             (44,853,970)     (41,391,429)     (40,227,530)
                                                         -------------     ------------     ------------
                                                           83,949,445       63,162,767       63,832,241
                                                         -------------     ------------     ------------
                                                         $117,409,252      $85,848,808      $92,841,946
                                                         =============     ============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                    $ 10,213,879      $ 5,732,783      $10,532,273
     Accrued expenses                                       8,695,124        7,937,575        6,096,346
     Dividends payable                                            -          3,658,468                -
     Income taxes payable                                   2,310,085          186,642        2,605,534
     Deferred revenue                                       5,647,027        7,344,830        7,778,630
     Long-term debt, current portion                          128,404           79,805           79,805
                                                         -------------     ------------     ------------
        Total current liabilities                          26,994,519       24,940,103       27,092,588

Long-term debt, due after one year                          9,543,201        2,633,164        2,827,191
Outstanding mutuel tickets (payable after one year)         2,204,634        1,625,846        2,702,221
Deferred compensation                                         921,498          880,098          884,000
Deferred income taxes                                       8,000,643        2,377,100        2,316,600
Stockholders' equity:
     Preferred stock, no par value;
        authorized, 250,000 shares;  issued, none               -                -                -
     Common stock, no par value; authorized,
        20,000,000  shares,  issued  7,525,041  shares, 
        September 30,1998, 7,316,934 shares, December 31 
        and September 30, 1997                              8,926,975        3,614,567        3,613,697
     Retained earnings                                     61,141,469       49,842,930       53,470,649
     Deferred compensation costs                             (258,687)           -                -
     Note receivable for common stock                         (65,000)         (65,000)         (65,000)
                                                         -------------     ------------     ------------
                                                           69,744,757       53,392,497       57,019,346
                                                         -------------     ------------     ------------
                                                         $117,409,252      $85,848,808      $92,841,946
                                                         =============     ============     ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>



                                       -3-

<PAGE>



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

<TABLE>

                                           Nine Months Ended                 Three Months Ended
                                              September 30,                     September 30,
                                         1998             1997              1998             1997
                                         ----             ----              ----             ----

<S>                                  <C>               <C>              <C>              <C>        
Net  revenues                        $116,058,759      $90,488,275      $33,299,256      $16,827,607
Operating expenses                    88,884,904        69,391,492       30,548,256       17,803,197
                                     -------------     ------------     ------------     ------------

     Gross earnings (loss)             27,173,855       21,096,783        2,751,000         (975,590)

Selling, general and
     administrative expenses            8,739,883        6,421,807        3,767,288        2,029,680
                                     -------------     ------------     ------------     ------------

     Operating income (loss)           18,433,972       14,674,976       (1,016,288)      (3,005,270)
                                     -------------     ------------     ------------     ------------

Other income (expense):
          Interest income                 449,543          349,286           87,238          152,446
          Interest expense               (646,521)        (255,930)        (241,224)        (107,220)
          Miscellaneous, net              261,545          289,479           95,359           90,835
                                     -------------     ------------     ------------     ------------

                                           64,567          382,835          (58,627)         136,061
                                     -------------     ------------     ------------     ------------

Earnings (loss) before income
    tax provision (benefit)            18,498,539       15,057,811       (1,074,915)      (2,869,209)

Federal and state income tax
      (provision) benefit              (7,200,000)      (5,940,000)         420,000        1,050,000
                                     -------------     ------------     ------------     ------------

     Net earnings (loss)             $ 11,298,539       $9,117,811        $(654,915)     $(1,819,209)
                                     =============     ============     ============     ============

Earnings (loss) per share:
     Basic                                  $1.52            $1.25            $(.09)           $(.25)
     Diluted                                $1.51            $1.25            $(.09)           $(.25)

Weighted average shares
outstanding:
     Basic                              7,438,159        7,310,405        7,522,309        7,314,101
     Diluted                            7,496,524        7,312,325        7,522,309        7,314,101

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

                                       -4-

<PAGE>



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

<TABLE>

                                                                  Nine Months Ended September 30,
                                                                       1998             1997
Cash flows from operating activities:
<S>                                                                <C>              <C>        
     Net earnings                                                  $11,298,539      $ 9,117,811
     Adjustments to reconcile net earnings to
          net cash provided by operating activities:
     Depreciation and amortization                                   3,972,359        3,340,076
     Deferred compensation                                             126,759           58,789
     Increase (decrease) in cash resulting from
          changes in operating assets and liabilities:
          Accounts receivable                                          804,593       (1,383,807)
          Other current assets                                         102,204          130,757
          Accounts payable                                           2,532,882        2,956,700
          Accrued expenses                                             (35,259)         294,016
          Income taxes payable                                       2,123,443           95,026
          Deferred revenue                                          (5,454,981)      (3,758,590)
          Other assets and liabilities                                 95,609           539,170
                                                                   ------------     ------------
               Net cash provided by operating activities            15,566,148       11,389,948
                                                                   ------------     ------------

Cash flows from investing activities:
     Additions to plant and equipment, net                          (2,809,648)      (4,034,359)
     Acquisition of RCA, net of cash acquired                      (17,232,849)           -
     Purchase of minority-owned investment                               -           (2,187,500)
                                                                   ------------     ------------
          Net cash used in investing activities                    (20,042,497)      (6,221,859)
                                                                   ------------     ------------

Cash flows from financing activities:
     Increase (decrease) in long-term debt, net                       (133,398)         (92,195)
     Borrowings on bank line of credit                              17,000,000             -
     Repayments of bank line of credit                             (10,000,000)            -
     Dividends paid                                                 (3,658,468)      (2,375,271)
     Common stock issued                                               118,362          120,655
                                                                   ------------     ------------
          Net cash provided by (used in) financing activities        3,326,496       (2,346,811)
                                                                   ------------     ------------

Net increase (decrease) in cash and cash equivalents                (1,149,853)       2,821,278
Cash and cash equivalents, beginning of period                       9,280,233        8,209,414
                                                                   ------------     ------------
Cash and cash equivalents, end of period                           $ 8,130,380      $11,030,692
                                                                   ============     ============

Supplemental  disclosures of cash flow information:
Cash paid during the period
for:
     Interest                                                      $   451,377      $   115,290
     Income taxes                                                  $ 4,919,540      $ 5,823,674
Noncash transactions:
    Issuance of common stock related to the acquisition of RCA     $ 4,850,000             -
    Invoicing for 1999 and 1998 Kentucky Derby and Oaks            $ 2,765,865      $ 5,612,204
    Invoicing for November 1998 Breeders' Cup races                $   956,895               -
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>

                                       -5-

<PAGE>



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

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

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

               The  Company's  second  quarter  acquisition  of Ellis  Park Race
Course (Ellis Park) contributed positively to the Company's net revenues and net
earnings  by $15.5 and $1.7  million,  respectively,  for the third  quarter.  A
substantial  portion of Ellis  Park's  annual net  earnings  historically  occur
during the third quarter when the majority of its live race meet is conducted.

        3. On September  15, 1998,  the Company  obtained a $100 million line of
credit through a syndicate of banks headed by its principal lender which expires
in September 2001. 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 $7.0 million outstanding on the line
of credit at September  30, 1998 and no borrowings  outstanding  at December 31,
1997 or September 30, 1997 under previous lines of credit.

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



                                       -6-

<PAGE>



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

        5. During the third quarter of 1998,  the Company issued 8,107 shares of
its common stock to employees  under its Stock  Purchase Plan for total proceeds
of $118,362.

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

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

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

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

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

                                       -7-

<PAGE>



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


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

<TABLE>

                                                 Nine Months Ended        Nine Months Ended
                                                 September 30, 1998       September 30,1997
<S>                                                 <C>                      <C>     
      Net revenues                                   $118,031                 $107,200
      Net earnings                                    $10,121                  $9,229

      Net earnings per share data:
           Basic                                      $1.35                    $1.23
           Diluted                                    $1.34                    $1.23

      Weighted average shares outstanding:
           Basic                                    7,516,934                7,510,405
           Diluted                                  7,575,299                7,512,325
</TABLE>


               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.

        10. In September  1998,  the Company  announced that it is negotiating a
purchase  of a majority  ownership  interest  in Charlson  Industries,  Inc.,  a
privately  held company that provides video services to racetracks and off-track
betting facilities. If the transaction occurs, the  total cost of the  Company's
equity interest is not expected to exceed $7 million.


                                       -8-

<PAGE>



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


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

<TABLE>

                                                     Nine months ended              Three months ended
                                                        September 30,                  September 30,

                                                     1998            1997           1998           1997
<S>                                               <C>             <C>            <C>            <C>
Earnings (loss) (numerator) amounts used for
basic and diluted per share computations:         $11,298,539     $9,117,811     $ (654,915)    $(1,819,209)
                                                  -----------     ----------     ----------     -----------

Weighted average shares (denominator)
of common stock outstanding per share:
     Basic                                          7,438,159      7,310,405      7,522,309       7,314,101
     Plus dilutive effect of shares                    58,365          1,920          -               -
                                                  -----------     ----------     ----------     -----------
     Diluted                                        7,496,524      7,312,325      7,522,309       7,314,101

Basic net earnings (loss) per share                     $1.52          $1.25          $(.09)          $(.25)
Diluted net earnings (loss) per share                   $1.51          $1.25          $(.09)          $(.25)
</TABLE>

        Options to purchase  426,532 shares for the three months ended September
30,  1998 are  excluded  from the  computation  of  earnings  (loss)  per common
share-assuming  dilution since their effect is  antidilutive  because of the net
loss for the period.  In addition,  options to purchase  290,500  shares for the
three months and nine months ended  September  30, 1997 were not included in the
computation of earnings (loss) per common  share-assuming  dilution  because the
options'  exercise  prices were  greater  than the average  market  price of the
common shares.




                                       -9-

<PAGE>


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


Results of Operations

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

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

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

        The Company's  loss in the third quarter of 1998 is  substantially  less
the loss in than the same period in 1997 due to the  acquisition of Ellis Park. 
Closing for this purchase was in April 1998,  but the track's  annual live race 
meet was run primarily  during  the third  quarter.  The  greatest  portion  of 
Ellis   Park's  earnings  are  attributable  to its annual live race meet, which
traditionally has run from the end of June through Labor Day.



                                      -10-

<PAGE>


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

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

        Churchill Downs and Ellis Park, which was acquired by the Company 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 has been granted
a license to conduct live racing during the period  November 1 through  November
28,  1998,  for a total of 71 racing  days  compared  to 77 racing days in 1997.
Ellis Park conducted  live racing from June 29 through  September 7, 1998, for a
total of 61 racing days.

        The Company has 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 impact the Company's 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 $12 million in purses, for
the purpose of determining  Thoroughbred  champions in seven  different  events.
Racetracks  across the United  States  compete for the  privilege of hosting the
Breeders'  Cup  Day  races  each  year,  and  the 1998  Breeders'  Cup  was  the
Company's  fourth  time  hosting  this  event,  the most of any  racetrack.  The
Breeders' Cup Day races were held in California in November 1997.  Although most
of the income earned from this event goes to Breeder's Cup Limited,  hosting the
event in 1998 is  expected  to have a  positive  impact  on the  Company's  1998
results.

        In Indiana,  licenses to conduct live Standardbred and Thoroughbred race
meetings,  including Quarter Horse races, and to participate in simulcasting are
approved annually by the Indiana Horse Racing Commission (IHRC),  which consists
of five  members  appointed  by the  governor of Indiana.  Licenses are approved
annually  by  the  IHRC  based  upon  applications  submitted  by  the  Company.
Currently,  the Company is the only facility in Indiana licensed to conduct live
Standardbred, Quarter

                                      -11-

<PAGE>


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

Horse or Thoroughbred  racing and to participate in simulcasting.  Quarter Horse
races are conducted during some Thoroughbred race days.  Hoosier Park conducted
live racing beginning April 17, 1998, and has received a license to conduct live
racing through  November 28, 1998, for a total of 152 racing days,  including 94
days of  Standardbred  racing and 58 days of  Thoroughbred  racing  (which  also
includes Quarter Horse races).  In 1997, the Company  conducted 142 days of live
racing,  including 85 days of  Standardbred  racing and 57 days of  Thoroughbred
racing.  A substantial  change in the  allocation of live racing days at Hoosier
Park could impact the Company's operations and earnings in future years.

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

        The Company generally does not directly compete with other racetracks or
simulcast   facilities  for  patrons  due  to  geographic   separation  of  such
facilities.  However, the Company competes with other sports,  entertainment and
gaming options,  including riverboat casinos and lotteries, for patrons for both
live  racing and  simulcasting.  The  Company  attempts  to  attract  patrons by
providing  the  highest  quality  racing  products in  attractive  entertainment
facilities with 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 live and simulcast racing.

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

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

        Two  additional  riverboats  are  anticipated  to open along the Indiana
shore of the Ohio  River.  In May 1996,  the  Indiana  Gaming  Commission  (IGA)
awarded a  preliminary  license  to  RDI/Caesars  World to build a $275  million
riverboat casino complex,  featuring the world's largest  riverboat  casino,  in
Harrison County,  Indiana, just 10 miles from Louisville.  A construction permit
was issued to RDI/Caesars  World by the U.S. Army Corps of Engineers  (Corps) in
February  1998.  However,  the U.S.  Environmental  Protection  Agency (EPA) has
conducted a separate review of the Corps' decision

                                      -12-

<PAGE>


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

and issued a letter  critical  of some  aspects  of the  Corps'  decision-making
process.  It is not known  what,  if any,  impact  this  letter will have on the
process. In May 1998, three Indiana environmental groups filed a lawsuit in U.S.
District  Court for the  Southern  District  of Indiana  challenging  the Corps'
decision to issue a  construction  permit to RDI/Caesars  World  ("environmental
litigation"). It is unlikely the lawsuit will be heard in court until next year,
and the groups  have not yet  sought an  injunction  while the case is  pending.
RDI/Caesars World  representatives  have announced that a "shakedown"  cruise is
scheduled  for  mid-November,  1998,  on the "Glory of Rome"  riverboat  and the
riverboat  casino  will be open for  customers  soon  after.  The vessel must be
inspected and cleared for cruises by the U.S. Coast Guard prior to its opening.

        The IGA  voted  in  September  1998 to grant a  license  to open a fifth
Indiana  riverboat  along the Ohio River in Switzerland  County,  about 70 miles
from Louisville. The licenseholder, Hollywood Park-Boomtown, Inc. plans to build
a $150 to $160 million  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 and mature.  These same studies  projected
similar declines in western and northern Kentucky but recent experience at Ellis
Park and Turfway Park indicates the impact may not be as severe as these studies
projected.

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

         Additionally,  the  Pokagon  Band of the  Potawatomi  Indian  Tribe has
expressed  an interest  in  establishing  a  land-based  casino in  northeastern
Indiana.  At this time,  Indiana Governor Frank O'Bannon has publicly  expressed
his  opposition to any further  expansion of casino  gaming in Indiana,  and has
enlisted  the  support  of  Indiana's  congressional  delegation  in  blocking a
potential Indian casino.  Currently,  Indiana's U.S. Senators are co-sponsors of
the Enzi Amendment to the fiscal year 1999 Department of Interior Appropriations
Bill, which would prohibit the Secretary of the Interior from formally approving
Indian  gaming  compacts  that  have  not  first  been  approved  by the  states
themselves.  The Company  continues to anticipate  that  development  of such an
Indian casino will  negatively  impact  pari-mutuel  wagering  activities at its
Indiana  facilities.  However,  the extent of the impact is unknown at this time
due, in part,  to the  uncertain  geographic  distances  between  the  Company's
operations and the potential casino sites.

         The Company  continues  to pursue  legislation  to allow video  lottery
terminals at its racetrack  facilities in Kentucky and Indiana.  The integration
of alternative gaming products is one of four core

                                      -13-

<PAGE>


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

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

         The horse industry in Indiana presently  receives $.65 per $3 admission
to  riverboats  in  the  state  to  compensate   for  the  effect  of  riverboat
competition.  Riverboat admissions revenue from the Company's Indiana operations
increased $3.9 million for the nine months ended  September 30, 1998 as a result
of the opening of additional riverboats along Lake Michigan compared to the same
period in 1997. The net increase in riverboat admissions revenue, after required
purse and marketing  expense  increases of approximately  $2.4 million,  is $1.5
million.

         Legislation   challenging  the  allocation  of  the  $.65  subsidy  was
introduced in the 1998 session of the Indiana General Assembly, but the bill did
not pass out of the Senate Finance  Committee.  A change in Hoosier Park's share
of the tax would  significantly  impact funding for operating  expenditures  and
would in all likelihood re-emphasize the need for the integration of alternative
gaming  products at the  racetrack in order for it to  effectively  compete with
riverboat casinos.

         The Company  has  partnered  with ODS  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 the Company's  relationship
with ODS is the  launching of the  Television  Games Network  (TVG),  originally
projected for the fourth quarter of 1998. In June, an arbitration panel approved
United Video  Satellite  Group,  Inc.'s proposal to acquire 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, the Company cannot assess
any impact of this ruling on its in-home wagering operations.

         In September  1998,  the Company  announced  that it is  negotiating  a
purchase  of a majority  ownership  interest  in Charlson  Industries,  Inc.,  a
privately  held company that provides video services to racetracks and off-track
betting facilities. If the transaction  occurs, the total cost of  the Company's
equity interest is not expected to exceed $7 million.




                                      -14-

<PAGE>


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

           The Company  owned and operated two live racing  facilities  and five
simulcast  wagering  facilities  during the  entire  nine  month  periods  ended
September 30, 1998 and 1997.  Ellis Park, a third live racing facility  acquired
on April 21, 1998, was included in the Company's operations for a portion of the
nine month period with the Company operating 61 live race days during the period
as  discussed  separately  below.  The chart  below  summarizes  the  results of
Churchill  Downs,   Hoosier  Park  and  their  respective   simulcast   wagering
facilities:
<TABLE>
<CAPTION>


                             Churchill Downs and the Louisville                    Hoosier Park and all four Indiana 
                                  Simulcast Facility                                   Simulcast Facilities
                             Nine Months        Nine Months                   Nine Months      Nine Months
                                Ended              Ended                         Ended            Ended
                             September 30       September 30    Increase      September 30     September 30      Increase
                                1998               1997        (Decrease)        1998             1997          (Decrease)
                                ----               ----        ----------        ----             ----          ----------
On-Track
<S>                           <C>                   <C>             <C>        <C>              <C>                  <C>
    Number of Race Days                47                    47       -                110              100             10
    Attendance                    692,725               687,533        1%          116,398          119,068           (2%)
    Handle                    $95,951,158           $95,093,015        1%      $11,179,288      $11,621,736           (4%)
    Average daily attendance       14,739                14,628        1%            1,058            1,191          (11%)
    Average daily handle       $2,041,514            $2,023,256        1%         $101,630         $116,217          (13%)
    Per capita handle             $138.51               $138.31       -             $96.04           $97.61           (2%)

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

  Receiving
    Number of Race Days               156                   148         8
    Handle                    $28,380,521           $37,523,088     (24%)
    Average Daily Handle         $181,926              $253,534     (28%)

Interstate simulcast
  Sending
    Number of Race Days                47                    47       -                110              100             10
    Handle                   $276,632,157          $255,947,702        8%      $25,322,707      $15,690,932            61%
    Average Daily Handle       $5,885,791            $5,445,696        8%         $230,206         $156,909            47%

  Receiving*
    Number of Race Days               178                   166        12              901              904            (3)
    Handle                    $72,028,977           $64,435,630       12%      $99,984,111      $97,692,525             2%
    Average Daily Handle         $404,657              $388,166        4%         $110,970         $108,067             3%

Totals                       $500,417,551          $479,740,631        4%     $136,486,106     $125,005,193             9%
</TABLE>


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

                                      -15-

<PAGE>


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

      Total  handle at Churchill  Downs and the  Louisville  simulcast  facility
increased  $20.7  million  (4%) for the nine  months  ended  September  30, 1998
primarily as the result of a general  increase in handle bet on Churchill Downs'
live races through  interstate  simulcast sending including record handle bet on
Kentucky  Derby  and  Kentucky  Oaks  weekend.  An  increase  in the  number  of
interstate  simulcast  receiving  wagering  days  at  the  Louisville  simulcast
facility also contributed to the overall handle increase for Churchill Downs.

      Total  handle  at  Hoosier  Park  and  the  Indiana  simulcast  facilities
increased  $11.5 million (9%) for the nine months ended  September 30, 1998 as a
result of a 61%  increase  in  interstate  simulcast  sending  handle  due to an
increase in the number of interstate simulcast sending days combined with higher
average  daily  handle of 47%.  Hoosier  Park's  live race  signal was sent to a
record number of outlets during the first nine months of 1998.

      Ellis Park  contributed a total of $150.4 million in handle to the Company
since April 21, 1998, the acquisition date. Ellis Park conducted live racing for
61 days  during the period June 29 through  September  7, 1998  producing  $21.0
million in live race handle.  Intrastate and interstate simulcast sending handle
on  Ellis  Park's  live  races  were  $22.7  and  $94.0  million,  respectively.
Intrastate and interstate simulcast receiving handle were $5.0 and $7.7 million,
respectively.

Comparison of nine  months  ended  September 30, 1998 to  nine  months ended
September 30,1997

Net Revenues

      Net revenues  during the nine months ended  September  30, 1998  increased
$25.6 million (28%).

      Pari-mutuel  revenues  increased  $17.0 million (30%) due primarily to the
acquisition  of RCA which  includes  Ellis Park Race  Course  located in western
Kentucky.  Ellis  Park,  which was  acquired  by the  Company  during the second
quarter,  contributed  $14.6 million in total pari- mutuel  revenue for the nine
month period ended  September 30, 1998.  Ellis Park  conducted  live racing from
June 29 through September 7, 1998, for a total of 61 racing days.  Additionally,
interstate  simulcast  sending  revenues  were  up as the  result  of a  general
increase in betting on Churchill  Downs' live races including record wagering on
Kentucky Derby and Kentucky Oaks weekend.

      Admission and seat revenue  increased  $1.0 million (9%)  primarily due to
higher  admission prices on Kentucky Derby and Kentucky Oaks days and due to the
record attendance on those two days. License,  rights, broadcast and sponsorship
revenues increased $1.3 million (21%) due to new corporate sponsorships received
during the Spring Meet at Churchill  Downs and an increase in the broadcast fees
for the  Kentucky  Derby.  Concession  revenues  increased  $1.2  million  (74%)
primarily  as a result of the  acquisition  of RCA during the second  quarter of
1998.

                                      -16-

<PAGE>


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

Other revenues grew $1.0 million (33%)  primarily from  additional  stall rental
revenues earned from RCA which was acquired during the second quarter of 1998.

      Riverboat   admissions  revenue  from  the  Company's  Indiana  operations
increased $3.9 million for the nine months ended  September 30, 1998 compared to
September 30, 1997  primarily as a result of increased  admissions on riverboats
bordering  the state of Indiana and the opening of additional  riverboats  along
Lake Michigan.  The net increase in riverboat admissions revenue, after required
purse and marketing  expense  increases of approximately  $2.4 million,  is $1.5
million.

         Following is a summary of Net Revenues:

<TABLE>

                                                       NET REVENUE SUMMARY
                              Nine Months                  Nine Months
                                 Ended          % to          Ended          % to            1998 vs 1997
                              September 30,     Total      September 30,     Total          $             %
                                 1998          Revenue        1997          Revenue       Change        Change
Pari-Mutuel Revenue:
<S>                            <C>                <C>      <C>                 <C>       <C>               <C>
     On-track                  $20,183,932         18%     $16,087,293          18%      $4,096,639        25%
     Intrastate Sending         11,858,205          10       4,863,669            5       6,994,536        144
     Interstate Sending         12,883,541          11       9,165,465           10       3,718,076         41
     Intrastate Receiving        3,646,059           3       3,457,119            4         188,940          5
     Interstate Receiving       25,689,534          22      23,728,719           26      1 ,960,815          8
                              ------------        ----     -----------         ----     -----------       ----
                               $74,261,271         64%     $57,302,265          63%     $16,959,006        30%
Riverboat Admissions
     Revenue                    13,016,460          11       9,137,345           10       3,879,115         42

Admission & Seat
     Revenue                    11,979,850          10      11,016,414           12         963,436          9

License, Rights,
Broadcast &                      7,181,100           6       5,925,759            7       1,255,341         21
Sponsorship Revenue

Concession Revenue               2,920,202           3       1,678,846            2       1,241,356         74

Program Revenue                  2,486,682           2       2,256,058            2         230,624         10

Other                            4,213,194           4       3,171,588            4       1,041,606         33
                              ------------        ----     -----------         ----     -----------       ----
                              $116,058,759        100%     $90,488,275         100%     $25,570,484        28%
                              ============        ====     ===========         ====     ===========       ====

</TABLE>

                                      -17-

<PAGE>


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


Operating Expenses

       Total  operating  expenses  increased $19.5 million (28%) during the nine
months ended September 30, 1998.  Gross profit grew by $6.1 million (29%) during
the same period.

       Purse  expense  increased  $10.0 million (35%) with Ellis Park purses and
riverboat  purses  contributing  $7.0  million  (70%)  and $1.9  million  (19%),
respectively,  to the total purse  increase.  In  Kentucky  and  Indiana,  purse
expense  varies  directly  with  pari-mutuel  revenues  and is  calculated  as a
percentage  of the related  revenue and may change from year to year pursuant to
contract or statute. Accordingly,  on-track, intrastate and interstate simulcast
purses reflect changes in direct  proportion to changes in pari-mutuel  revenues
for the same  categories.  The increases in all  categories of purses  expense ,
including  riverboat  purses,  is  directly  related  to  the  increases  in the
respective pari-mutuel net revenue category and riverboat admissions revenue.

       Wages and contract labor  increased  $2.7 million (20%)  primarily due to
the addition of RCA during the second  quarter of 1998.  Higher salary  expenses
resulting   from  increased  business activity and general cost of living raises
also account for a portion of the variance.

       Simulcast  host fees and audio,  video and signal  distribution  expenses
were higher by $.5 million (8%) and $.4 million (26%), respectively,  during the
period primarily as a result of the acquisition of RCA during the second quarter
of 1998.

       Advertising, marketing and publicity  expenses  grew $1.1  million  (31%)
primarily  as a result of an  increase in  marketing  expenses in Indiana of $.5
million which were reimbursed from the riverboat admissions subsidy.

       Racing  relations and services,  depreciation & amortization  expense and
insurance,  taxes & license fees were higher by $.5 million  (36%),  $.6 million
(19%) and $.8 million (46%) during the nine months ended  September 30, 1998 and
1997,  respectively,  primarily due to the  acquisition of RCA during the second
quarter of 1998.

       Utilities  expense grew $.6 million (35%)  primarily due to warmer spring
and summer months in 1998 at Churchill  Downs and also due to the acquisition of
RCA during the second quarter of 1998.

       Concessions  expense  of $.5  million  in 1998  resulted  from the second
quarter  RCA  acquisition.  Expenses  are  incurred  by  Ellis  Park's  in-house
concession services.

       Other meeting expense  increased $1.0 million (36%) primarily as a result
of the acquisition of RCA during the second quarter of 1998.


                                      -18-

<PAGE>


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

        Following is a summary of Operating Expenses:

<TABLE>

                                                     OPERATING EXPENSE SUMMARY
                              Nine Months                  Nine Months
                                 Ended         % to          Ended          % to             1998 vs 1997
                             September 30,     Total      September 30,     Total            $            %
                                 1998         Expenses         1997        Expenses       Change        Change

                                ----         --------         ----        --------       ------        ------
Purses:
<S>                           <C>                 <C>      <C>                 <C>      <C>               <C>
     On-track                 $10,412,979          12%     $ 8,452,993          12%      $1,959,986        23%
     Intrastate Sending         5,685,536            7       2,282,013            4       3,403,523        149
     Interstate Sending         6,558,991            7       4,669,537            7       1,889,454         40
     Intrastate Receiving       1,549,853            2       1,464,810            2          85,043          6
     Interstate Receiving       7,875,133            9       7,138,002           10         737,131         10
     Riverboat                  6,608,272            7       4,701,220            7       1,907,052         41
                              -----------         ----     -----------         ----     -----------       ----
                              $38,690,764          44%      28,708,575          42%      $9,982,189        35%

Wages and Contract  Labor      16,303,255           18      13,569,389           19       2,733,866         20

Simulcast Host Fee              6,403,552            7       5,906,651            8         496,901          8

Advertising, Marketing          4,686,067            5       3,584,782            5       1,101,285         31
     & Publicity
Racing Relations                1,755,219            2       1,295,212            2         460,007         36
     & Services
Totalisator Expense             1,298,830            1       1,119,758            2         179,072         16

Audio/Video & Signal            2,018,164            2       1,606,604            2         411,560         26
      Distribution Expense
Program Expense                 2,064,040            2       1,737,891            2         326,149         19

Depreciation &                  3,972,359            5       3,340,076            5         632,283         19
     Amortization
Insurance, Taxes &              2,656,172            3       1,819,475            3         836,697         46
     License Fees
Maintenance                     1,576,208            2       1,418,404            2         157,804         11

Utilities                       2,476,700            3       1,832,697            3         644,003         35

Facility/Land Rent                630,105            1         611,078            1          19,027          3

Concessions Expense               482,167            1               -            -         482,167        100

Other Meeting Expense           3,871,302            4       2,840,900            4       1,030,402         36
                              -----------         ----     -----------         ----     -----------       ----
                              $88,884,904         100%     $69,391,492         100%     $19,493,412        28%
                              ===========         ====     ===========         ====     ===========       ====
</TABLE>
                                      -19-
<PAGE>


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


Selling, General and Administrative Expenses

        Selling,  general and  administrative  (SG&A) expenses increased by $2.3
million (36%) during the nine month period ended September 30, 1998 primarily as
a result of increased business  activity,  general cost of living raises for the
Company's  employees  and the  acquisition  of RCA during the second  quarter of
1998. SG&A expenses as a percentage of net revenues  increased  slightly for the
nine months ended September 30, 1998 and 1997 to 7.5% from 7.1%, respectively.

Other Income and Expense

        Interest  income of $.4 million for the nine months ended  September 30,
1998 was $.1 million  over the same  period in 1997 as a result of the  interest
earned on notes receivable from a minority-owned investment.

        Interest  expense  increased  $.4 million  during the nine months  ended
September  30, 1998 as a result of financing  costs  associated  with the second
quarter  acquisition of RCA. The Company drew on its bank line of credit for $16
million of the acquisition costs and subsequently  repaid $10 million during the
second quarter of 1998. The Company drew an additional $1 million on the line of
credit  during  the third  quarter  leaving  an unpaid  balance of $7 million at
September 30, 1998.

Income Tax Provision

        Income tax provision increased by $1.3 million for the nine months ended
September 30, 1998 as the result of higher pre-tax earnings of $3.4 million.

Comparison  of three  months  ended  September  30, 1998 to three  months  ended
September 30, 1997

        Net  revenues for the three  months  ended  September  30, 1998 of $33.3
million grew by $16.5 million  compared to the same period in 1997  primarily as
the result of revenues  generated by RCA during the quarter.  Net losses for the
three months ended  September 30, 1998 of $.7 million were lower by $1.2 million
compared  to the  same  three  months  in 1997.  The  Company's  second  quarter
acquisition of RCA, which  includes  Ellis Park,  contributed  positively to the
Company's  net revenues and net earnings and  accounted  for the  decreased  net
losses  during the third  quarter of 1998.  A  substantial  portion of RCA's net
revenues and net earnings  historically  occur during the third quarter when the
majority of Ellis Park's race meet, this year running June 29 through  September
7, was conducted.

Comparison  of  three  months  ended September 30, 1998  to three  months ended 
June 30, 1998

        Net  revenues for the three  months  ended  September  30, 1998 of $33.3
million  were lower than the net  revenues  for the three  months ended June 30,
1998 by $34.1  million  and the  decrease  from the net  earnings  for the three
months ended June 30, 1998 of $13.5 million to the net loss for the three months

                                      -20-

<PAGE>


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

ended  September  30, 1998 of $.7 million is primarily the result of live racing
income  generated at Churchill  Downs during its 1998 Spring Meet which includes
Kentucky Derby and Kentucky Oaks weekend.  Live racing in Kentucky begins in the
second quarter  during which the Company earns a substantial  portion of its net
earnings for the year.

Significant Changes in the Balance Sheet September 30, 1998 to December 31, 1997

       The cash and cash  equivalent  balances at  September  30, 1998 were $1.1
million lower than December 31, 1997 primarily due to cash used in acquiring RCA
during the second  quarter of 1998.  Borrowings on the Company's  line of credit
for the acquisition were partially paid down by September 30, 1998.

       Accounts  receivable at September 30, 1998 were $3.8 million  higher than
December 31, 1997 primarily due to the timing of advanced invoicing of corporate
tents for the 1999  Kentucky  Oaks and Derby  days,  an  increase in the Indiana
riverboat  admissions tax receivable of $2.2 million and the advanced  invoicing
for  1998  Breeder's Cup  tickets of $1.0 million.  The 1998  Breeder's Cup  was
held at Churchill  Downs during the fourth  quarter.  The increase was partially
offset by decreases in intrastate and interstate simulcasting receivables.

       Other assets  increased  by $8.1  million  primarily as the result of the
goodwill of $7.7 million  recorded for the  acquisition of RCA during the second
quarter of 1998.

       Plant and  equipment  increased by $24.2  million  which  includes  $22.0
million for the acquisition of RCA during the second  quarter.  The increase was
also  due to  routine  capital  spending  throughout  the  Company.  Accumulated
depreciation  increased $3.5 million from depreciation  expense on the Company's
plant and equipment.

       Accounts  payable at  September  30, 1998 were $4.5  million  higher than
December 31, 1997  primarily  as a result of a $3.9  million  increase in purses
payable due to Churchill  Downs and Hoosier  Park  horsemen.  Live-meet  payable
balances  for the  Company's  1997 live race meets had  substantially  been paid
prior  to  December  31,  1997.  The  increase  is  also  due to  the  Company's
acquisition of RCA during the second quarter of 1998.

       Accrued expenses increased by $.7 million at September 30, 1998 primarily
as a result of expenses generated during the Company's 1998 live race meets.

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

       Income taxes  payable  increased  by $2.1  million at September  30, 1998
primarily representing the estimated income tax expense attributed to the income
generated in the second quarter of 1998.


                                      -21-

<PAGE>


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

       Deferred  revenue was $1.7 million lower at September 30, 1998 due to the
significant amount of admission and seat revenue that was received in advance at
December  31 and  recognized  as income in May 1998 for the  Kentucky  Derby and
Kentucky  Oaks. The decrease was partially  offset by the advanced  invoicing of
corporate  tents for the 1999  Kentucky  Derby and Oaks  days  during  the third
quarter of 1998 and $1.0 million in Breeder's  Cup  invoicing  during the second
and third  quarters of 1998.  The 1998  Breeder's  Cup was be held at Churchill
Downs during the fourth quarter of 1998.

       Long-term debt  increased  $6.9 million  primarily as a result of line of
credit  borrowings  used for the acquisition of RCA during the second quarter of
1998.

       Outstanding mutuel tickets increased by $.6 million at September 30, 1998
primarily as a result of unclaimed  mutuel tickets  relating to Churchill Downs'
1998 Spring Meet.

       Deferred  income  taxes  increased  by $5.6 as a result of the RCA second
quarter acquisition.

       Common  stock  increased  by $5.3  million  primarily as a result of $4.9
million  of  stock  issued  as part of the RCA  acquisition  during  the  second
quarter.  The Company  also  issued $.1 million of common  stock under its stock
purchase plan during the third quarter.

Significant  Changes  in  the  Balance  Sheet  September 30, 1998 to 
September 30, 1997

       Cash and cash equivalents decreased $2.9 million in 1998 primarily due to
the cash used for the acquisition of RCA during the second quarter of 1998.

       Other assets  increased  by $8.0  million  primarily as the result of the
goodwill of $7.7 million  recorded for the  acquisition of RCA during the second
quarter of 1998.

       Plant and  equipment  increased by $24.7  million  which  includes  $22.0
million for the acquisition of RCA during the second  quarter.  The increase was
also due to routine capital spending  throughout the Company since September 30,
1997. Accumulated  depreciation increased $4.6 million from depreciation expense
on the Company's plant and equipment.

       Accrued  expenses  increased by $2.6 million due primarily to an increase
of $1.5 million in the amount of  outstanding  mutuel  tickets which are payable
within one year.  Effective  with the new state  legislation  in July 1998,  the
Company must remit all uncashed  outstanding  mutuel tickets to the Commonwealth
of Kentucky older than one year. Under previous law, tickets were remitted after
two years. Accrued expenses also grew as the result of the acquisition of RCA.

       Deferred revenue  decreased by $2.1 million  primarily as a result of the
timing  of  advanced  invoicing  for  Kentucky  Derby  and Oaks  tickets  offset
partially  by the  advanced  invoicing  for 1998  Breeder's  Cup tickets of $1.0
million during 1998.


                                      -22-

<PAGE>


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

       Long-term debt  increased  $6.7 million  primarily as a result of line of
credit  borrowings  used for the acquisition of RCA during the second quarter of
1998.

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

       Common  stock  increased  by $5.3  million  primarily as a result of $4.9
million  of  stock  issued  as part of the RCA  acquisition  during  the  second
quarter.  The Company  also  issued $.1 million of common  stock under its stock
purchase plan during the third quarter of 1998.

Liquidity and Capital Resources

       The working  capital  deficiency for the nine months ended  September 30,
1998  increased by $3.5 million to $7.4 million  compared to the  September  30,
1997 working capital deficiency as shown below:


                                            September 30
                                            ------------
                                       1998                           1997
                                       ----                           ----
Working capital deficiency         $(7,373,962)                   $(3,886,071)
Working capital ratio                .73 to 1                       .86 to 1

        The working capital  deficiency  results from the nature and seasonality
of the Company's business.  During the nine months ended September 30, 1998, the
working capital deficiency increased compared to the nine months ended September
30,  1997  primarily  due to the use of cash and  cash  equivalents  toward  the
purchase of RCA and the repayment of a portion of the  Company's  line of credit
used to finance the  acquisition  during the second quarter of 1998.  Cash flows
provided by operations  were $15.6 million and $11.4 million for the nine months
ended September 30, 1998 and 1997, respectively. The increase of $4.2 in 1998 is
primarily  the  result  of  an  increase in net earnings of $2.2 million and the
timing of income taxes payable of $2.0 million. Management believes  cash  flows
from operations and available borrowings  during  the  remainder  of 1998  will 
be  substantially  in  excess of  the Company's  disbursements  for  the  year, 
including capital improvements.

        Cash flows used in  investing  activities  were $20.0  million  and $6.2
million for the nine months ended September 30, 1998 and 1997, respectively. The
increase  in cash used of $13.8  million  during  1998 is  primarily  due to the
Company's  purchase of RCA during the second quarter of 1998 offset partially by
the acquisition of 24% of Dueling  Grounds  racecourse  (a.k.a.  Kentucky Downs)
during the third  quarter  of 1997.  Routine  capital  spending  throughout  the
Company accounted for a portion of the cash used in investing for 1998 and 1997.

        Cash flows provided by (used in) financing activities were $3.3 million 
and $(2.3) million for the

                                      -23-

<PAGE>


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

nine  months  ended  September  30,  1998 and 1997,  respectively.  The  Company
borrowed  $17 million  and repaid $10  million on its line of credit  during the
nine month period  primarily to finance the purchase of RCA,  which was acquired
during the second  quarter of 1998.  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).

        The Company has a $100 million  line of credit,  of which $93 million is
available at September  30, 1998, to meet working  capital and other  short-term
requirements and potential future acquisitions.

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 the Company's 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.

        A substantial portion of the Company's mission critical  operations are 
dependent  upon computer  systems and  applications.  These systems  are either 
directly owned and controlled  by the  Company  or are  provided under  contract
by  third  party technology  service  providers. To address the Year 2000 issue,
the Company has categorized the Year 2000 Issue into four principal areas.

A) Systems Owned By the Company

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

        To address Year 2000  compliance  across this broad category of systems,
the Company has 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,  the  Company  has  contacted  the
developers  of the  operating  systems in use by the  Company  and has  received
assurances as to their compatibility with the Year 2000 transition.

                                      -24-
<PAGE>

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

        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. The Company has received technical reports from third parties on Year
2000  compliance  for  financial  reporting,  payroll,  operations  control  and
reporting and internal  communications  applications.  The Company requires Year
2000 compliance on any software upgrades.

        Based on the schedule  outlined  above,  the Company  expects to be Year
2000  compliant  with  systems  that are owned by the Company by June 30, 1999.
However,   even   though  the   Company's   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 of concern is services  provided to the company by third
parties.  Many of these  services are mission  critical to the Company and could
materially  impact the Company  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 the Company's  operations.  Totalisator  services  include the calculation of
amounts wagered and owed to winning ticket holders.  United Tote has developed a
plan to bring all systems  provided to the  Company  into Year 2000  compliance.
United Tote and the  Company  initiated  this plan during the second  quarter of
1998 by undertaking a comprehensive  system hardware and software  upgrade which
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. The Company 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 Spector  Entertainment  Group ("Spector")
are also  important to the  Company's  operations.  Video  services  include the
capture,  production and distribution of the television  signal for distribution
to customers  located on the  Company's  premises  and to  customers  located at
remote  outlets  throughout  the  nation.  The Company is working  closely  with
Spector  to  assure  the  software   applications  that  provide  the  graphical
enhancements and other distinguishing  features to the televised signal are Year
2000  compliant.  The existing  software for the graphical  enhancements  to the
television  signal is not Year 2000  compliant.  The  Company  and  Spector  are
expected to upgrade this software by the second  quarter of 1999. 

                                      -25-
<PAGE>


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

        The Company  purchases  certain data and  statistical  information  from
Equibase for resale to the public.  This information is an essential  element of
the Company's  product and is included in printed material made available to the
Company's  customers  to  assist  in  their  wagering  decisions.  Equibase  has
implemented a Year 2000 remediation plan to assure  compliance of their systems.
The Company  has  contacted  and  received  assurances  from  Equibase  that the
critical database  information  needed for the Company's core operations is Year
2000 compliant.

        A  variety  of  other  smaller  and  less  critical  technology  service
providers  are  involved  with the  Company's  product.  The  Company is working
closely with each of the  organizations  and is receiving  assurances that their
services are not expected to be disrupted by the Year 2000 transition.

        Because of the nature of the Company's  business and its dependence upon
key technology services provided by third parties, the Company requires 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 the Company's third party service  providers do
not  successfully  and timely achieve Year 2000  compliance,  and the Company is
unable to replace them with alternate  service  providers,  it could result in a
delay by the Company in providing its core live racing and simulcasting products
to the Company's  customers and have a material  adverse effect on the Company's
business, financial condition and results of operations.

C) Industry-wide Issues

        Because a significant portion of the Company's revenues are derived from
customers  at  other  racing  organizations  that are  confronted  with the same
technological issues,  including totalisator,  video and statistical information
services,  the  Company  has been  actively  participating  in an  industry-wide
assessment  and  remedial  efforts  to  assure  Year  2000  compliance.  Company
officials actively participate in industry trade organizations and committees to
study these issues on a large scale including the telecommunications and banking
industries.

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. Although the Company has systems which perform
each of the above named  functions,  the Company is  identifying if any of these
systems employ technology which may not be Year 2000 compliant. The Company will
work closely with these  manufacturers to develop a remedial plan to assure year
2000 compliance if problems are identified.

        To date,  the Company has incurred  limited costs to remediate Year 2000
compliance  issues.  Because  most of the Company's mission critical operations
rely  on  third  party  providers  and a substantial portion of the costs of the
Year  2000  remediation is  borne by  the third  party providers, the Company's
management  believes that any future costs to remediate  Year 2000  compliance  
issues will not be  material to the  financial position or results of operations
of the Company.

                                      -26-
<PAGE>

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

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

   Impact of Recent Accounting Pronouncements

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

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

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



                                      -27-

<PAGE>




                          CHURCHILL DOWNS INCORPORATED

ITEM 3.        Quantitative and Qualitative Disclosures about Market Risk

               Not Applicable

                                     PART II. OTHER INFORMATION

ITEM 1.        Legal Proceedings

               Not Applicable

ITEM 2.        Changes in Securities and Use of Proceeds

               Not Applicable

ITEM 3.        Defaults Upon Senior Securities

               Not Applicable

ITEM 4.        Submission of Matters to a Vote of Security Holders

               Not Applicable

ITEM 5.        Other Information

               Not Applicable

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

               A.     Exhibits

                      See exhibit index on page 31.

               B.     Reports on Form 8-K

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






                                      -28-

<PAGE>




                                   SIGNATURES


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


                                           CHURCHILL DOWNS INCORPORATED



        November 13, 1998                  \s\Thomas H. Meeker                  
                                           Thomas H. Meeker
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


        November 13, 1998                  \s\Robert L. Decker                  
                                           Robert L. Decker
                                           Senior Vice President, Finance
                                           (Chief Financial Officer)



        November 13, 1998                  \s\Vicki L. Baumgardner         
                                           Vicki L. Baumgardner
                                           Vice President, Finance/Treasurer
                                           (Principal  Accounting Officer)


















                                      -29-

<PAGE>



<TABLE>

                                            EXHIBIT INDEX

 Numbers         Description                                           By Reference To
<S>                                                           <C> 
(10)(b) $100 Million Revolving Credit Facility Credit         Pages 31 to 98, Report on Form
          Agreement between Churchill Downs Incorporated,     10-Q for the fiscal quarter ended
          Churchill Downs Management Company, Churchill       September 30, 1998
          Downs Investment Company, Racing Corporation of
          America, Ellis Park Race Course, Inc., the banks
          party thereto and PNC Bank, National Association,
          as Agent, dated as of September 15, 1998
(27) Financial Data Schedule  (FDS) for the quarter           Page 99, Report on Form 10-Q for
          ended  September  30, 1998                          the fiscal quarter ended September
                                                              30, 1998

</TABLE>


                                      -30-

<PAGE>