Penn National Gaming Inc – ‘424B4’ on 2/12/97

As of:  Wednesday, 2/12/97   ·   Accession #:  950115-97-164   ·   File #:  333-18861

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Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Final Prospectus                                     117    692K 

Document Table of Contents

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PROSPECTUS                                                               [LOGO] 

1,725,000 SHARES                                                                
PENN NATIONAL GAMING, INC.                                                      

COMMON STOCK                                                                    
($.01 PAR VALUE)                                                                

All of the 1,725,000 shares of common stock, $.01 par value per share (the      
"Common Stock"), offered hereby are being sold by Penn National Gaming, Inc.    
("Penn National Gaming" or the "Company").                                      

The Common Stock is quoted on The Nasdaq National Market under the symbol       
"PENN." On February 11, 1997, the last reported sale price of the Common Stock  
on The Nasdaq National Market was $15 3/8 per share. See "Price Range of Common 
Stock."                                                                         

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.             

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND    
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES   
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE      
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.                                                               

--------------------------------------------------------------------------------
                                      PRICE TO        UNDERWRITING   PROCEEDS TO
                                      PUBLIC          DISCOUNT       COMPANY (1)
Per Share .........................   $14.50          $0.80          $13.70     
Total (2) .........................   $25,012,500     $1,380,000     $23,632,500
--------------------------------------------------------------------------------

(1) Before deducting offering expenses payable by the Company estimated to be   
$650,000.                                                               

(2) The Company has granted the Underwriters a 30-day option to purchase up to  
258,750 shares of Common Stock at the Price to the Public, less the     
Underwriting Discount, solely to cover over-allotments, if any. If the  
Underwriters exercise such option in full, the total Price to Public,   
Underwriting Discount and Proceeds to Company will be $28,764,375,      
$1,587,000 and $27,177,375, respectively. See "Underwriting."           

The shares of Common Stock are offered subject to receipt and acceptance by the 
Underwriters, to prior sale and to the Underwriters' right to reject any order  
in whole or in part and to withdraw, cancel or modify the offer without notice. 
It is expected that delivery of the shares of Common Stock will be made at the  
offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York,  
or through the facilities of The Depository Trust Company, on or about February 
18, 1997.                                                                       

SALOMON BROTHERS INC                                                            
GERARD KLAUER MATTISON & CO., INC.    
                                                       JEFFERIES & COMPANY, INC.
The date of this Prospectus is February 11, 1997.                               

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[PICTURE]                                [PICTURE]            
(See Appendix A for Description)       (See Appendix A for Description)         

Penn National, celebrating 25          Penn National's newest OTW facility      
years of thoroughbred racing           in Lancaster, PA.                        
in 1997.                                                                        

[PICTURE]                                [PICTURE]            
(See Appendix A for Description)       (See Appendix A for Description)         

The recently renovated paddock     Racing on-track at Penn National since 1972. 
area at Penn National.                                                          

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     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN     
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR      
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.     

   IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER  
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."                        

AVAILABLE INFORMATION 

    The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance        
therewith files reports, proxy statements and other information with the        
Securities and Exchange Commission (the "Commission"). Such reports, proxy      
statements and other information filed by the Company with the Commission can be
inspected and copied at prescribed rates at the public reference facilities     
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,   
N.W., Washington, D.C. 20549, and at the following regional offices: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, 
Suite 1400, Chicago, Illinois 60661. In addition, registration statements and   
certain other filings made with the Commission through its Electronic Data      
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available       
through the Commission's site on the Internet's World Wide Web, located at      
http://www.sec.gov.                                                             

  The Common Stock is quoted on The Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can be inspected at the 
National Association of Securities Dealers, Inc., 9513 Key West Avenue,         
Rockville, MD 20850.                                                            

    The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended 
(the "Securities Act"), with respect to the Common Stock offered hereby. This   
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with  
respect to the Company and its Common Stock, reference is hereby made to such   
Registration Statement, exhibits and schedules. Statements contained in this    
Prospectus as to the contents of any contract or any other document are not     
necessarily complete, and in each instance reference is hereby made to the copy 
of such contract or document (if any) filed as an exhibit to the Registration   
Statement, each such statement being qualified in all respects by such          
reference. The Registration Statement and the exhibits and schedules thereto may
be examined without charge at the public reference section of the Commission at 
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and 
copies of all or any part thereof may be obtained from the Commission upon      
payment of prescribed fees. The Registration Statement, including all exhibits  
thereto and amendments thereof, has been filed with the Commission through EDGAR
and is publicly available through the Commission's site on the Internet's World 
Wide Web.                                                                       

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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 

The following documents filed by the Company with the Commission are  
incorporated by reference in this Prospectus:                                   

        (1) Annual Report on Form 10-K for the year ended December 31, 1995;

    (2) Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996;                                     

    (3) Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996;                                      

    (4) Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996;                                 

(5) Current Report on Form 8-K filed June 24, 1996;         

         (6) Current Report on Form 8-K filed December 12, 1996, as amended by
Form 8-K/A filed February 6, 1997;                  

(7) Current Report on Form 8-K filed January 21, 1997;      

(8) Current Report on Form 8-K filed January 30, 1997; and  

      (9) the description of the Company's Common Stock contained in its
              Registration Statement on Form 8-A as filed with the Commission on
May 26, 1994.                                       

    All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock offered hereby shall be     
deemed to be incorporated by reference into this Prospectus and to be a part    
hereof from the filing date of such documents. Any statement contained in a     
document incorporated or deemed to be incorporated by reference herein shall be 
deemed to be modified or superseded for purposes of this Prospectus to the      
extent that a statement contained herein or in any other subsequently filed     
document which also is or is deemed to be incorporated by reference herein      
modifies or supersedes such statement. Any such statement so modified or        
superseded shall not be deemed, except as so modified or superseded, to         
constitute a part of this Prospectus. Subject to the foregoing, all information 
appearing in this Prospectus is qualified in its entirety by the information    
appearing in the documents incorporated by reference herein.                    

     This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (not including exhibits to the    
documents incorporated by reference unless such exhibits are specifically       
incorporated by reference into the information that the Prospectus incorporates)
are available without charge to each person to whom a Prospectus is delivered   
upon written or oral request. Written or telephone requests should be directed  
to Penn National Gaming, Inc., Wyomissing Professional Center, 825 Berkshire    
Boulevard, Suite 203, Wyomissing, Pennsylvania 19610, Attention: Robert S.      
Ippolito, Chief Financial Officer (telephone number (610) 373-2400).            

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PROSPECTUS SUMMARY

     The following summary is qualified in its entirety by reference to the more
detailed information contained in this Prospectus or incorporated by reference  
herein. Unless otherwise indicated, all information in this Prospectus assumes  
no exercise of the Underwriters' over-allotment option, and gives effect to: (i)
the three-for-two split of the Common Stock effected through a stock dividend   
paid on May 23, 1996; (ii) the two-for-one split of the Common Stock effected   
through a stock dividend paid on December 20, 1996; (iii) the Pocono Downs      
Acquisition, as defined below; and (iv) the Charles Town Acquisition, as defined
below. The Pocono Downs Acquisition and the Charles Town Acquisition are        
referred to collectively herein as the "Acquisitions." This Prospectus contains 
forward-looking statements that inherently involve risks and uncertainties. The 
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set  
forth under "Risk Factors" and elsewhere in this Prospectus. References to "Penn
National Gaming" or the "Company" include Penn National Gaming, Inc. and its    
subsidiaries. "Penn National" refers to Penn National Gaming, Inc. and its      
subsidiaries prior to the consummation of the Pocono Downs Acquisition.         

THE COMPANY 

    Penn National Gaming, which began operations in 1972, operates the largest
number of pari-mutuel wagering locations in Pennsylvania. The Company provides  
pari-mutuel wagering opportunities on both live and simulcast thoroughbred and  
harness horse races at two racetracks and six off-track wagering facilities     
("OTWs") located principally in Eastern and Central Pennsylvania. Prior to the  
consummation of the Acquisitions, the Company owned and operated Penn National  
Race Course located outside Harrisburg, Pennsylvania (the "Thoroughbred Track"),
and four OTWs in Chambersburg, Lancaster, Reading and York, Pennsylvania. On    
November 27, 1996, the Company consummated the Pocono Downs Acquisition, and as 
a result acquired Pocono Downs Racetrack, located outside Wilkes-Barre,         
Pennsylvania (the "Harness Track"), and two OTWs in Allentown and Erie,         
Pennsylvania. The Company now operates one of the two thoroughbred tracks in    
Pennsylvania and one of the two harness tracks in Pennsylvania. The Company has 
received approval for, and will open on February 13, 1997, an OTW in            
Williamsport, Pennsylvania. The Company intends to develop four additional OTWs 
that have been allocated to it under Pennsylvania law, after which it would     
operate a total of 11 of the 23 OTWs currently authorized in Pennsylvania.      

   Following the consummation of the Charles Town Acquisition on January 15,
1997, the Company operates, and has reached an agreement with its joint venture 
partner to hold an 89% interest in, Charles Town Races, a thoroughbred racing   
facility located in Jefferson County, West Virginia, which is approximately a   
60-minute drive from Baltimore, Maryland and approximately a 70-minute drive    
from Washington, D.C. After refurbishment, the Company expects to reopen Charles
Town Races as an entertainment complex (the "Charles Town Facility") that will  
feature live racing, dining, simulcast wagering and video gaming machines       
("Gaming Machines"). On November 5, 1996, Jefferson County approved a referendum
permitting the installation of Gaming Machines at the Charles Town Facility.    
Approval for the installation of 400 Gaming Machines has been applied for and is
expected to be obtained from the West Virginia Lottery Commission within 90 to  
120 days after the January 15, 1997 consummation of the Charles Town            
Acquisition. The Company expects that these machines will be installed and      
operational in mid-1997. The installation of additional Gaming Machines at the  
Charles Town Facility is subject to approval by the West Virginia Lottery       
Commission after application and a public hearing. The Company anticipates that 
the Charles Town Joint Venture will apply for approval of the installation and  
operation of a total of 1,000 Gaming Machines within the first year after the   
opening of the Charles Town Facility.                                           

STRATEGY                                                                        

     The Company intends to be a leading participant in the wagering industry by
capitalizing upon its horse racing expertise and its numerous wagering          
locations. The Company's strategy is to focus on: (i) increasing its OTW        
revenues by opening all five of the additional OTWs which it has been allocated 

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under Pennsylvania law; (ii) developing the Charles Town Facility into an       
entertainment complex that integrates Gaming Machines with the Company's core   
business strengths of live racing and simulcast wagering; (iii) maintaining the 
quality of import simulcasting to all of the Company's racetracks and OTWs,     
increasing the volume of export simulcasting from the Thoroughbred Track and the
Harness Track and introducing export simulcasting from the refurbished Charles  
Town Facility; and (iv) exploring other gaming opportunities, including         
capitalizing upon any changes in gaming legislation in Pennsylvania, West       
Virginia and other states in order to expand the wagering opportunities that the
Company can make available to its customers. See "Business -- Strategy."        

RACING AND WAGERING OPERATIONS                                                  

The Company conducts pari-mutuel wagering at all of its locations on  
thoroughbred and harness races run at its own tracks ("Company Races") and on   
thoroughbred and harness races simulcast from other racetracks ("import         
simulcasting"). The Company also simulcasts Company Races for wagering at other 
racetracks and OTWs in Pennsylvania and at other locations throughout the United
States ("export simulcasting"). The Company's customers can also wager on       
Company Races and on races import simulcast from other racetracks through the   
Company's telephone account betting network ("Telebet"). See "Business."        

Live Racing. The Company has conducted live racing at the Thoroughbred
Track since 1972, and has held at least 204 days of live racing at the facility 
in each of the last five years. Although other regional racetracks offer        
nighttime thoroughbred racing, the Thoroughbred Track is the only racetrack in  
the Eastern time zone conducting year-round nighttime thoroughbred horse racing,
which the Company believes increases its opportunities to export simulcast      
during periods in which other racetracks are not conducting live racing.        

     The Pocono Downs Acquisition was consummated following the last day of live
racing at the Harness Track for the 1996 season. The Company expects to resume  
live racing at the Harness Track in April 1997 and plans to conduct 135 days of 
live harness racing at the facility in the 1997 season. The Charles Town        
Facility is currently closed. The Company has received preliminary approval for,
and plans to conduct, 159 days of thoroughbred racing at the Charles Town       
Facility in the 1997 season following the reopening of the racetrack (currently 
anticipated to be in April 1997).                                               

    OTW Wagering. At OTWs, as at the Company's racetracks, customers can place
wagers on thoroughbred and harness races simulcast from the Company's racetracks
and on import simulcast races from other tracks around the country. Under the   
Pennsylvania Race Horse Industry Reform Act (the "Pennsylvania Racing Act"),    
only licensed thoroughbred and harness racing associations, such as the Company,
can operate OTWs or accept customer wagers on simulcast races at Pennsylvania   
racetracks. The Company operates six of the 16 OTWs now open in Pennsylvania,   
will open an additional OTW on February 13, 1997, and has the right (subject to 
applicable regulatory approvals) to open and operate an additional four         
Pennsylvania OTWs, which would give the Company a total of 11 of the 23 OTWs    
currently authorized by Pennsylvania law.                                       

    Simulcasting. The Company has been transmitting simulcasts of its races to
other wagering locations, and receiving simulcasts of races from other locations
for wagering by its customers at Company facilities year-round, for more than   
five years. When customers place wagers on import simulcast races, of the amount
not returned to bettors as winning wagers, a portion is paid to the state in    
which the Company's wagering facility is located, a portion is paid to the      
"purse" fund for the horse owners and trainers (thoroughbred or harness) of the 
Company's racetrack with which the wagering facility is associated, and the     
balance is retained by the Company. The Company believes that "full card" import
simulcasting, in which all of the races at a non-Company track are import       
simulcast to a Company wagering facility, has improved the wagering             
opportunities for its customers and thereby increased the amount wagered at     
Company facilities. When the Company export simulcasts Company Races for        
wagering at non-Company locations, it receives a flat percentage of the amounts 
wagered on that race from the location to which the simulcast is exported, while
incurring minimal additional expense. During the year ended December 31, 1996,  
the Company received import simulcasts from approximately 57 racetracks         
(including Belmont Park, Saratoga, Gulfstream Park, Santa Anita and             

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Arlington International Racecourse) and transmitted export simulcasts of Company
Races to 63 locations.                                                          

Telebet. In 1983, the Company pioneered Telebet, Pennsylvania's first 
telephone account wagering system. Telebet customers open an account by         
depositing funds with the Company at one of its locations. Account holders can  
then place wagers by telephone on Company Races and import simulcast races to   
the extent of the funds on deposit in the account; any winnings are posted to   
the account and are available for future wagers. In December 1995, the Harness  
Track instituted Dial-A-Bet, a similar telephone account wagering system.       

Gaming Machine Operations. On November 5, 1996, Jefferson County, West
Virginia approved a referendum authorizing the installation and operation of    
Gaming Machines at the Charles Town Facility. As a result, the Company          
consummated the Charles Town Acquisition on January 15, 1997. In mid-1997, the  
Company intends to reopen the Charles Town Facility as an entertainment complex 
that will feature live racing, dining, simulcast wagering and Gaming Machines.  
The Company anticipates that it will initially operate 400 Gaming Machines.     
Approval for the installation of the 400 Gaming Machines has been applied for   
and is expected to be obtained from the West Virginia Lottery Commission within 
90 to 120 days after the January 15, 1997 consummation of the Charles Town      
Acquisition. The Gaming Machines will be slot-machine-style video machines that 
depict spinning reels and video card games such as blackjack and poker. The     
installation of additional Gaming Machines at the Charles Town Facility is      
subject to approval by the West Virginia Lottery Commission after application   
and a public hearing. The Company anticipates that it will apply for approval of
the installation and operation of a total of 1,000 Gaming Machines at the       
Charles Town Facility within the first year after opening.                      

ACQUISITIONS                                                                    

   Pocono Downs Acquisition. On November 27, 1996, the Company acquired (the
"Pocono Downs Acquisition") all of the capital stock of The Plains Company and  
all of the limited partnership interests in The Plains Company's affiliated     
entities (together, "Pocono Downs") for an aggregate purchase price of $47.0    
million plus approximately $525,000 in acquisition-related fees and expenses.   
Pocono Downs conducts harness racing at the Harness Track located outside       
Wilkes-Barre, Pennsylvania, export simulcasting of Harness Track races to       
locations throughout the United States, pari-mutuel wagering at the Harness     
Track and at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and 
on import simulcast races from other racetracks and telephone account wagering  
on live and import simulcast races. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, Pocono Downs had revenues of approximately
$33.9 million and $25.7 million, respectively, and earnings before interest,    
taxes, depreciation and amortization ("EBITDA") of approximately $8.0 million   
and $5.5 million, respectively. See "Business -- Acquisitions -- Pocono Downs   
Acquisition" and "-- Properties."                                               

Charles Town Acquisition. On January 15, 1997, a joint venture (the   
"Charles Town Joint Venture") in which the Company will hold an 89% ownership   
interest, acquired (the "Charles Town Acquisition") substantially all of the    
assets of Charles Town Racing Limited Partnership and Charles Town Races, Inc.  
(together "Charles Town") relating to the Charles Town Facility for an aggregate
net purchase price of approximately $16.5 million plus approximately $2.0       
million in acquisition-related fees and expenses. The Charles Town Facility     
conducts live thoroughbred horse racing, on-site pari-mutuel wagering on live   
races run at the Charles Town Facility and wagering on import simulcast races.  
The Company expects to refurbish the Charles Town Facility as an entertainment  
complex that will feature live racing, dining, simulcast wagering and, upon     
completion of the interior refurbishment in mid-1997, 400 Gaming Machines. The  
estimated cost of the refurbishment, exclusive of the cost of the purchase or   
lease of the Gaming Machines, is approximately $16.0 million. Pursuant to the   
original operating agreement governing the Charles Town Joint Venture, the      
Company currently holds an 80% ownership interest in the Charles Town Joint     
Venture and was obligated to contribute 80% of the purchase price of the Charles
Town Acquisition and 80% of the cost of refurbishing the Charles Town Facility. 
In fact, the Company contributed 100% of the purchase price of the Charles Town 
Acquisition and expects to contribute 100% of the cost of refurbishing the      
Charles Town Facility. The Company                                              

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has reached an agreement with its joint venture partner, Bryant Development     
Company ("Bryant"), pursuant to which the parties agreed to amend the operating 
agreement to increase the Company's ownership interest in the Charles Town Joint
Venture to 89% and decrease Bryant's interest to 11%. In addition, the amendment
will provide that the entire amount the Company has contributed, and will       
contribute, to the Charles Town Joint Venture for the acquisition and           
refurbishment of the Charles Town Facility would be treated, as between the     
joint venture partners, as a loan to the Charles Town Joint Venture from the    
Company. For the year ended December 31, 1995 and the nine months ended         
September 30, 1996, Charles Town had revenues of approximately $11.0 million and
$8.7 million, respectively, and net losses of approximately $2.2 million and    
$1.9 million, respectively. See "Risk Factors -- Future Development of Charles  
Town Facility" and "Business -- Acquisitions -- Charles Town Acquisition" and   
"-- Properties."                                                                
------------------------

    The Company is the successor to several businesses which have operated the
Penn National Race Course since 1972. The Company was incorporated in           
Pennsylvania in 1982 as PNRC Corp. It adopted its present name in 1994. The     
Company's principal executive offices are located in the Wyomissing Professional
Center, 825 Berkshire Boulevard, Suite 203, Wyomissing, Pennsylvania 19610; its 
telephone number is (610) 373-2400.                                             

THE OFFERING

                                                        [Enlarge/Download Table]
                                                                                                            
Common Stock Offered by the Company................... 1,725,000 shares (1)                                 
Common Stock Outstanding Immediately After the                                                              
  Offering............................................ 15,080,290 shares (1)(2)                             
Use of Proceeds....................................... To repay indebtedness incurred in connection with the
                                                       Pocono Downs Acquisition and the Charles Town        
                                                       Acquisition, and to finance a portion of the cost of 
                                                       refurbishment of the Charles Town Acquisition. The   
                                                       balance, if any, will be used for working capital and
                                                       other general corporate purposes. See "Use of        
                                                       Proceeds."                                           
Nasdaq National Market Symbol......................... PENN                                                 

------------------                                                              
(1) Excludes 258,750 shares of Common Stock to be issued and sold by the Company
if the Underwriters' over-allotment option is exercised in full.        

(2) Based on shares outstanding as of December 31, 1996. Excludes (i) 1,179,750 
   shares reserved for issuance under the Company's 1994 Stock Option Plan, of
   which options to purchase 1,179,750 shares of Common Stock were outstanding
   as of December 31, 1996, and (ii) 195,000 shares reserved for issuance upon
   the exercise of warrants to purchase Common Stock which were outstanding as
of December 31, 1996. See "Description of Capital Stock -- Warrants" and
   Note 9 of the Notes to the Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.                                  

RISK FACTORS

  Prospective purchasers of the securities offered hereby should carefully
read the specific factors set forth under "Risk Factors" as well as the other   
information set forth in this Prospectus or incorporated herein by reference.   

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SUMMARY CONSOLIDATED FINANCIAL DATA 

The following table sets forth the summary historical consolidated    
financial data of the Company. The summary historical financial data for each of
the five years in the period ended December 31, 1995 are derived from the       
Company's audited consolidated financial statements. The summary historical     
financial data of the Company and its subsidiaries as of September 30, 1996 and 
for the nine months ended September 30, 1995 and 1996 are unaudited, but, in the
opinion of management, all adjustments necessary to present fairly the financial
data for such periods have been made, none of which were other than normal      
accruals. The results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results for the full year, or any future period.  
For additional information, see the consolidated financial statements of the    
Company appearing elsewhere in this Prospectus. The summary historical financial
data should also be read in conjunction with "Management's Discussion and       
Analysis of Financial Condition and Results of Operations."                     

                                                        [Enlarge/Download Table]


                                                                                                   NINE MONTHS ENDED    
                                                  YEAR ENDED DECEMBER 31,                            SEPTEMBER 30,      
                                 -------------------------------------------------------------  ------------------------
                                 1991 (1)   1992 (1)    1993 (1)          1994         1995         1995         1996   
                                 --------   --------  -----------     -----------  -----------  -----------  -----------
                                           (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)                  
                                                                                                                        
INCOME STATEMENT DATA:                                                                                                  
 Total revenues................. $ 33,334   $ 41,824  $    42,664     $    46,031  $    57,676  $    43,893  $    46,474
 Total operating expenses.......   32,208     39,523       40,208          41,607       49,421       37,518       39,237
 Income from operations.........    1,126      2,301        2,456           4,424        8,255        6,375        7,237
 Income before income taxes and                                                                                         
   extraordinary item...........      305      1,440        1,500           4,099        8,463        6,525        7,422
 Taxes on income................       76        150           42           1,381        3,467        2,680        3,016
 Net income.....................      229      1,290        1,458           2,603        4,996        3,845        4,406
 Net income per share...........                                                           .38          .29          .32
 Supplemental pro forma net                                                                                             
   income (2)...................                            1,819           2,724                                       
 Supplemental pro forma net                                                                                             
   income per share (2).........                              .15             .22                                       
 Weighted average common shares                                                                                         
   outstanding..................                       12,249,000(3)   12,663,000   13,104,000   13,044,000   13,754,000
OTHER DATA (UNAUDITED):                                                                                                 
 Total paid attendance (4)......  636,944    785,569      799,625         848,482    1,051,803      813,823      802,948
 Pari-mutuel wagering:                                                                                                  
   Penn National races.......... $128,551   $153,332  $   138,939     $   111,248  $   102,145  $    79,235  $    69,200
   Import simulcasting..........   28,660     42,159       58,252          93,461      142,499      106,664      122,895
   Export simulcasting..........       --     10,202       12,746          40,337       72,252       48,327       84,228
                                 --------   --------  -----------     -----------  -----------  -----------  -----------
 Total pari-mutuel wagering..... $157,211   $205,693  $   209,937     $   245,046  $   316,896  $   234,226  $   276,323
                                 ========   ========  ===========     ===========  ===========  ===========  ===========
 Gross profit from wagering                                                                                             
   (5) .                         $ 11,201   $ 14,549  $    15,346     $    17,963  $    24,634  $    18,430  $    19,952

                                                             SEPTEMBER 30,
                                                            1996
                                                            --------------
                                                            (IN THOUSANDS)
BALANCE SHEET DATA:                                                             
Cash......................................................       $ 5,602      
Working capital...........................................         2,994      
Total assets..............................................        33,733      
Total debt................................................           302      
Shareholders' equity......................................        26,694      

------------------                                                              
(1) The Consolidated Financial Statements of the Company include entities which,
prior to a reorganization which occurred in 1994 shortly before the     
 Company's initial public offering (the "Reorganization"), were affiliated
through common ownership and control. See Note 1 of the Notes to the    
   Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.                                                             
(2) Supplemental pro forma amounts for the years ended December 31, 1993 and    
  1994 reflect (i) the elimination of $1,208,000 and $345,000, respectively,
   in management fees paid to a related entity, (ii) the inclusion of $320,000
    and $133,000, respectively, in executive compensation, (iii) the elimination
    of $946,000 and $413,000, respectively, of interest expenses on Company debt
  which was repaid with the proceeds of the initial public offering in 1994,
(iv) the elimination of $0 and $198,000, respectively, of loss on early 
    extinguishment of debt, and (v) a provision for income taxes of $701,000 and
    $377,000, respectively, as if the S corporations and partnerships comprising
   part of the Company prior to the Reorganization in 1994 had been taxed as C
corporations. There were no supplemental pro forma adjustments for any  
subsequent periods.                                                     

(3) Based on 8,400,000 shares of Common Stock outstanding before the initial    
    public offering in May 1994 plus 4,500,000 shares sold by the Company in the
initial public offering.                                                

(4) Does not reflect attendance at the Thoroughbred Track for wagering on       
    simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May 
1992, April 1994, March 1995 and July 1996, respectively.               

(5) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,     
  taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.                                               

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SUMMARY PRO FORMA FINANCIAL DATA

 The following table sets forth certain unaudited pro forma consolidated
financial and other data for the Company, giving effect to the Pocono Downs     
Acquisition and the Charles Town Acquisition using the purchase method of       
accounting in each case and the related acquisition financing. The pro forma    
consolidated balance sheet data as of September 30, 1996 assume that the Pocono 
Downs Acquisition and the Charles Town Acquisition had both occurred on         
September 30, 1996. The pro forma consolidated income statement data for the    
year ended December 31, 1995 and for the nine months ended September 30, 1996   
assume that the Pocono Downs Acquisition and the Charles Town Acquisition had   
both occurred on January 1, 1995.                                               

The unaudited pro forma consolidated financial data are presented for 
informational purposes only and are not necessarily indicative of the results of
operations that would actually have been obtained if the Acquisitions had       
occurred on the dates indicated, or the results of operations that may be       
obtained in the future. These statements are qualified in their entirety by, and
should be read in conjunction with, the unaudited Pro Forma Consolidated        
Financial Statements and related notes thereto included elsewhere in this       
Prospectus, the historical consolidated financial statements of Penn National,  
The Plains Company and Charles Town and related notes thereto included elsewhere
in this Prospectus or incorporated herein by reference and "Management's        
Discussion and Analysis of Financial Condition and Results of Operations."      

                                                        [Enlarge/Download Table]


                                                                                PRO FORMA               
                                                                  --------------------------------------
                                                                     YEAR ENDED       NINE MONTHS ENDED 
                                                                  DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                                  -----------------   ------------------
                                                                   (IN THOUSANDS, EXCEPT SHARE AND PER  
                                                                              SHARE DATA)               
                                                                                                        
INCOME STATEMENT DATA:                                                                                  
  Total revenues.................................................    $   102,557         $    80,966    
  Total operating expenses.......................................         89,448              70,802    
  Income from operations.........................................         13,109              10,164    
  Income before income taxes.....................................          8,235               6,470    
  Taxes on income................................................          3,388               2,851    
  Net income.....................................................          4,847               3,619    
  Net income per share...........................................            .37                 .26    
  Weighted average common shares outstanding.....................     13,104,000          13,754,000    

                                                        [Enlarge/Download Table]


                                                                           SEPTEMBER 30, 1996     
                                                                      ----------------------------
                                                                                      PRO FORMA   
                                                                      PRO FORMA    AS ADJUSTED (1)
                                                                      ---------    ---------------
                                                                           (IN THOUSANDS)         
                                                                                                  
BALANCE SHEET DATA:                                                                               
  Cash and cash equivalents.......................................... $  5,832        $  5,832    
  Working capital....................................................    1,355           1,355    
  Total assets.......................................................  100,659         104,642    
  Total debt.........................................................   63,802          44,802    
  Shareholders' equity...............................................   26,694          49,678    

------------------                                                              
(1) As adjusted amounts reflect the application, as defined in "Use of          
  Proceeds," of net proceeds from the sale of the 1,725,000 shares of Common
    Stock offered by the Company hereby at a price of $14.50 per share (assuming
no exercise of the Underwriters' over-allotment option). See "Use of    
Proceeds."                                                              

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RISK FACTORS

   This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing   
such forward-looking statements may be found in the material set forth under    
"Prospectus Summary," "Use of Proceeds," "Management's Discussion and Analysis  
of Financial Condition and Results of Operations" and "Business," as well as    
within the Prospectus generally (including the documents incorporated by        
reference). Also, documents subsequently filed by the Company with the          
Commission may contain forward-looking statements. Actual results could differ  
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and the matters set forth or incorporated by   
reference in the Prospectus generally. The Company cautions the reader, however,
that this list of factors may not be exhaustive, particularly with respect to   
future filings. Before making a decision to purchase any of the Common Stock,   
prospective purchasers should carefully consider the following factors.         

EFFECT OF RECENT ACQUISITIONS; ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL 
INABILITY TO MANAGE GROWTH                                                      

    The Pocono Downs Acquisition was consummated on November 27, 1996, and the
Charles Town Acquisition was consummated on January 15, 1997. The Company,      
Pocono Downs and Charles Town have been operating independently, and the        
Company's management control structure for the Pocono Downs business and the    
Charles Town business is still in its formative stages. The Company may not be  
able to integrate successfully and oversee these businesses and their disparate 
operations, employees and management. Moreover, the Company intends to operate  
Gaming Machines at the Charles Town Facility, although the Company's management 
has no experience in operating Gaming Machines and may not be able to do so     
effectively.                                                                    

The Acquisitions represent a significant expansion of the Company's   
business and operational scale. This expansion will place demands on the        
Company's administrative, operational and financial resources. Any continued    
growth of the Company's business, including growth from the opening of further  
OTWs or from the operation of other forms of gaming at Company facilities, as   
well as any geographic expansion that the Company may undertake, could place an 
additional strain on the capacity, management and operations of the Company.    
Such strain may have a material adverse effect on the Company's business,       
financial condition and results of operations.                                  

 Approximately $13.6 million, or 13.5%, of the Company's pro forma total
assets as of September 30, 1996 consists of goodwill arising from the           
Acquisitions that will represent an expense, and thereby reduce the Company's   
net income, in the periods over which it is amortized. The reduction in net     
income resulting from the amortization of goodwill may have an adverse impact   
upon the market price for the Common Stock. See "Management's Discussion and    
Analysis of Financial Condition and Results of Operations," "Business --        
Strategy" and "-- Acquisitions" and the Notes to the Consolidated Financial     
Statements of the Company included elsewhere in this Prospectus.                

DECLINE IN LIVE RACING ATTENDANCE AT THE THOROUGHBRED TRACK AND HARNESS TRACK;  
FUTURE GROWTH DEPENDENT ON OTWS AND GAMING MACHINE OPERATIONS                   

  The Pennsylvania Racing Act requires the Company to schedule 200 days of
live thoroughbred racing and 150 days of live harness racing, regardless of     
attendance, in order to retain the Company's Pennsylvania thoroughbred and      
harness licenses to present import simulcast racing. Over the past few years,   
however, there has been a substantial decline in attendance and wagering on live
racing at the Thoroughbred Track, the Harness Track and the Charles Town        
Facility even though the number of racing days has remained relatively constant.
The Company believes this decline is primarily a result of competition from     
other forms of entertainment and gaming, including wagering at OTWs and wagering
at tracks in neighboring states where additional forms of casino-style gaming   
(such as video gaming and slot machines) are available, and which are perhaps   
closer in proximity to patrons who might otherwise travel to the Thoroughbred   
Track, the Harness Track and the Charles Town Facility. Because live racing     
revenues are declining, the Company's future growth is dependent on its OTWs and
Gaming Machine operations. If not offset by increased revenues from other       
sources, continued                                                              

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declines in live racing attendance could have a material adverse effect on the  
Company's business, financial condition and results of operations because a     
relatively high proportion of the Company's costs of operating its live racing  
facilities are fixed. The Company intends (after compliance with regulatory     
requirements) to open OTWs in Downingtown and up to three other Pennsylvania    
locations which have yet to be determined, in addition to operating its existing
OTWs. The Company's existing OTWs may be unable to increase or maintain their   
current level of profitability, and the remaining four OTWs which the Company   
has been allocated under the Pennsylvania Racing Act may never be opened, or, if
opened, achieve profitability. Moreover, as with racetracks, a relatively high  
proportion of the costs of operating an OTW are fixed, while OTW attendance is  
subject to significant variation based on a variety of factors, including the   
quality of the races import simulcast to the facility and the proximity of other
live racing and OTW venues. To the extent that attendance and wagering at       
existing or new OTWs is not consistent with the Company's historical experience,
the Company's business, financial condition and results of operations may be    
materially and adversely affected. See "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" and "Business -- OTW Wagering"   
and "-- Competition."                                                           

COMPETITION                                                                     

   The Company faces significant competition for wagering dollars from other
racetracks and OTWs in Pennsylvania and neighboring states (some of which also  
offer other forms of gaming), other gaming venues such as casinos and           
state-sponsored lotteries, including the Pennsylvania Lottery. The Company may  
also face competition in the future from new OTWs or from new racetracks. From  
time to time, Pennsylvania has considered legislation to permit other forms of  
gaming. Although Pennsylvania has not authorized any form of casino or other    
gaming, if additional gaming opportunities become available in or near          
Pennsylvania, such gaming opportunities could have a material adverse effect on 
the Company's business, financial condition and results of operations.          

 Company Races compete for wagering dollars and simulcast fees with live
races and races simulcast from other racetracks both inside and outside         
Pennsylvania (including several in New York, New Jersey, West Virginia, Ohio,   
Maryland and Delaware). The Company's ability to compete successfully for       
wagering dollars is dependent, in part, upon the quality of its live horse      
races. The quality of horse races at some racetracks that compete with the      
Company, either by live races or simulcasts, is higher than the quality of      
Company Races. The Company believes that there has been some improvement over   
the last several years in the quality of the horses racing at the Thoroughbred  
Track, due to incrementally higher purses being paid as a result of the         
Company's increased simulcasting activities. However, increased purses may not  
result in a continued improvement in the quality of racing at the Thoroughbred  
Track or in any material improvement in the quality of racing at the Harness    
Track or the Charles Town Facility.                                             

    The Company's OTWs compete with the OTWs of other Pennsylvania racetracks,
and new OTWs may compete with the Company's existing or proposed wagering       
facilities. Competition between OTWs increases as the distance between them     
decreases. For example, the Company believes that its Allentown OTW, which was  
acquired in the Pocono Downs Acquisition and which is approximately 50 miles    
from the Thoroughbred Track and 35 miles from the Company's Reading OTW, has    
drawn some patrons from the Thoroughbred Track, the Reading OTW and Telebet and 
that its Lancaster OTW, which is approximately 31 miles from the Thoroughbred   
Track and 25 miles from the Company's York OTW, has drawn some patrons from the 
Thoroughbred Track, the York OTW and Telebet. Moreover, the Company believes    
that a competitor's new OTW in King of Prussia, Pennsylvania, which is          
approximately 23 miles from the Reading OTW, has drawn some patrons from the    
Reading OTW. The opening of new OTWs in close proximity to the Company's        
existing or future OTWs could have a material adverse effect on the Company's   
business, financial condition and results of operations.                        

    If the Company obtains approval for the installation of Gaming Machines at
the Charles Town Facility, the Company's Gaming Machine operations will face    
competition from other Gaming Machine venues in West Virginia and in neighboring
states (including Dover Downs in Dover, Delaware, Delaware Park in northern     
Delaware, Harrington Raceway in southern Delaware and the casinos in Atlantic   
City, New Jersey). Venues in Delaware and New Jersey, in addition to video      
gaming machines,                                                                

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currently offer mechanical slot machines that feature physical spinning reels,  
pull-handles and the ability to both accept and pay out coins. West Virginia has
not authorized, and may never approve, such mechanical slot machines. The       
failure to attract or retain Gaming Machine customers at the Charles Town       
Facility, whether arising from such competition or from other factors, could    
have a material adverse effect upon the Company's business, financial condition 
and results of operations.                                                      

RISKS ASSOCIATED WITH THE CHARLES TOWN FACILITY                                 

     On January 15, 1997, the Charles Town Joint Venture consummated the Charles
Town Acquisition. Pursuant to the original operating agreement governing the    
Charles Town Joint Venture, the Company currently holds an 80% ownership        
interest in the Charles Town Joint Venture and was obligated to contribute 80%  
of the purchase price of the Charles Town Acquisition and 80% of the cost of    
refurbishing the Charles Town Facility. In fact, the Company contributed 100% of
the purchase price of the Charles Town Acquisition and expects to contribute    
100% of the cost of refurbishing the Charles Town Facility. The Company has     
reached an agreement with its joint venture partner, Bryant, pursuant to which  
the parties agreed to amend the operating agreement to increase the Company's   
ownership interest in the Charles Town Joint Venture to 89% and decrease        
Bryant's interest to 11%. In addition, the amendment will provide that the      
entire amount the Company has contributed, and will contribute, to the Charles  
Town Joint Venture for the acquisition and refurbishment of the Charles Town    
Facility would be treated, as between the joint venture partners, as a loan to  
the Charles Town Joint Venture from the Company. The proposed changes in the    
ownership of the Charles Town Joint Venture are subject to the review of        
applicable West Virginia racing and lottery regulatory authorities.             

The Charles Town Joint Venture has applied to the West Virginia State 
Racing Commission for confirmation of the preliminary license to conduct racing 
and pari-mutuel wagering and to the West Virginia Lottery Commission for a      
license to install and operate Gaming Machines at the refurbished Charles Town  
Facility. The failure to receive or retain or a delay in receiving such licenses
could cause the reduction or suspension of racing and pari-mutuel wagering, as  
well as of Gaming Machines operations, at the Charles Town Facility and have a  
material adverse effect upon the Company's business, financial condition and    
results of operations. See "-- Regulation and Taxation." Failure by the Charles 
Town Joint Venture to obtain a license from the West Virginia Lottery Commission
by June 1, 1997 or to retain both licenses also constitutes an event of default 
under the Company's bank credit agreement. See "Management's Discussion and     
Analysis of Financial Condition and Results of Operations -- Liquidity and      
Capital Resources."                                                             

    The Charles Town Joint Venture acquired its option to purchase the Charles
Town Facility from Bryant; Bryant, in turn, acquired the option from Showboat   
Operating Company ("Showboat"). Showboat retained an option (the "Showboat      
Option") to operate any casino at the Charles Town Facility in return for a     
management fee (to be negotiated at the time, based on rates payable for similar
properties). Showboat has also retained a right of first refusal to purchase or 
lease the site of any casino at the Charles Town Facility proposed to be leased 
or sold and to purchase any interest proposed to be sold in any such casino (on 
the same terms offered by a third party or otherwise negotiated with the Charles
Town Joint Venture). The rights retained by Showboat extend for a period of five
years from the date that the Charles Town Joint Venture exercises its option to 
purchase the Charles Town Facility and expire thereafter unless legislation to  
permit casino gaming at the Charles Town Facility has been adopted prior to the 
end of the five-year period. If such legislation has been adopted prior to such 
time, then the rights of Showboat continue for a reasonable time (not less than 
24 months) to permit completion of negotiations.                                

   While the agreement with Showboat does not specify what activities at the
Charles Town Facility would constitute operation of a casino, Showboat has      
agreed that the installation and operation of video lottery terminals (like the 
Gaming Machines the Company proposes to install) at the Charles Town Facility's 
racetrack would not trigger the Showboat Option. If West Virginia law were to   
permit casino gaming at the Charles Town Facility and if Showboat were to       
exercise the Showboat Option, the Company would be required to pay a management 
fee to Showboat for the operation of the casino.                                

  On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia     
against Charles Town, the Company,                                              

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Penn National Gaming of West Virginia, Inc., a wholly owned subsidiary of the   
Company, and Bryant. The complaint filed by GTECH alleges that Charles Town and 
AmTote International, Inc. ("AmTote") were parties to an October 20, 1994       
agreement, as amended by an amendment agreement dated January 1, 1995 (the      
"AmTote Agreement"), pursuant to which AmTote was allegedly granted an exclusive
right to install and operate a "video lottery system" at the Charles Town       
Facility. When the AmTote Agreement was entered into, AmTote was a subsidiary of
GTECH; GTECH has since divested itself of AmTote, but is purportedly the        
assignee of certain of AmTote's rights under the AmTote Agreement pursuant to an
assignment and assumption agreement dated February 22, 1996. The complaint seeks
(i) preliminary and permanent injunctive relief enjoining Charles Town, Bryant, 
the Company and its subsidiary from consummating the Charles Town Acquisition or
any similar transaction unless the purchasing party explicitly accepts and      
assumes the AmTote Agreement, (ii) a declaratory judgment that the AmTote       
Agreement is valid and binding, that GTECH has the right to be the exclusive    
installer, operator, provider and servicer of a video lottery system at the     
Charles Town Facility and that any party buying the stock or assets of Charles  
Town must accept and assume the AmTote Agreement and recognize such rights of   
GTECH thereunder, (iii) compensatory damages, (iv) legal fees and costs and (v) 
such other further legal and equitable relief as the court deems just and       
appropriate. On December 23, 1996, the court denied GTECH's motion to           
preliminarily enjoin the Company from consummating the Charles Town Acquisition 
unless it accepts and assumes the AmTote Agreement. The court noted that GTECH  
may pursue its claim for damages and, if warranted, pursue other injunctive     
relief in the future. The Company consummated the Charles Town Acquisition on   
January 15, 1997, at which time Charles Town assigned to the Charles Town Joint 
Venture all legally valid and binding obligations, if any, under the AmTote     
Agreement. In addition, the Company has agreed to indemnify Charles Town for any
damages Charles Town may suffer as a result of a claim that Charles Town failed 
to fulfill its obligations under the AmTote Agreement. On January 13, 1997,     
Charles Town filed a motion to dismiss GTECH's complaint. The court has not yet 
ruled on the motion. The Company believes the allegations of the complaint to be
without merit and intends to contest the action vigorously.                     

REGULATION AND TAXATION                                                         

General. The Company is authorized to conduct thoroughbred racing and 
harness racing in Pennsylvania under the Pennsylvania Racing Act. The Company is
also authorized, under the Pennsylvania Racing Act and the Federal Interstate   
Horseracing Act of 1978 (the "Federal Horseracing Act"), to conduct import      
simulcast wagering. The Company is also subject to the provisions of West       
Virginia law that govern the conduct of thoroughbred horseracing in West        
Virginia (the "West Virginia Racing Act") and the operation of Gaming Machines  
in West Virginia (the "West Virginia Gaming Machine Act"). The Company's live   
racing, pari-mutuel wagering and Gaming Machine operations are contingent upon  
the continued governmental approval of such operations as forms of legalized    
gaming. All of the Company's current and proposed operations are subject to     
extensive regulations and could be subjected at any time to additional or more  
restrictive regulations, or banned entirely.                                    

 Sunset Provisions in Gaming Machine Legislation. The Charles Town Joint
Venture has applied for approval to install and operate Gaming Machines at the  
refurbished Charles Town Facility pursuant to the West Virginia Gaming Machine  
Act. The West Virginia Gaming Machine Act was adopted in 1994, and will         
terminate on June 30, 1997 unless extended or reenacted. If the West Virginia   
Gaming Machine Act terminates, then the Company will be required to discontinue 
any Gaming Machine operations for which it may obtain approval. There can be no 
assurance that the West Virginia legislature will extend or reenact the West    
Virginia Gaming Machine Act beyond June 30, 1997. If the Charles Town Joint     
Venture obtains approval for the installation of Gaming Machines at the Charles 
Town Facility and the West Virginia Gaming Machine Act is not extended or       
reenacted, then the Company's business, financial condition and results of      
operations would be materially and adversely affected.                          

   Pennsylvania Racing Regulations. The Company's horse racing operations at
the Thoroughbred Track and the Harness Track are subject to extensive regulation
under the Pennsylvania Racing Act, which established the Pennsylvania State     
Horse Racing Commission and the Pennsylvania State Harness Racing Commission    
(together, the "Pennsylvania Racing Commissions"). The Pennsylvania             

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Racing Commissions are responsible for, among other things, (i) granting        
permission annually to maintain racing licenses and schedule race meets, (ii)   
approving, after a public hearing, the opening of additional OTWs, (iii)        
approving simulcasting activities, (iv) licensing all officers, directors,      
racing officials and certain other employees of the Company and (v) approving   
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.                                                             

As in most states, the regulations and oversight applicable to the    
Company's operations in Pennsylvania are intended primarily to safeguard the    
legitimacy of the sport and its freedom from inappropriate or criminal          
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain      
acquisitions following their consummation or withhold permission for a proposed 
OTW site for a variety of reasons, including community opposition. The          
Pennsylvania legislature also has reserved the right to revoke the power of the 
Pennsylvania Racing Commissions to approve additional OTWs and could, at any    
time, terminate pari-mutuel wagering as a form of legalized gaming in           
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse  
effect upon the Company's business, financial condition and results of          
operations.                                                                     

The Company may not be able to obtain all necessary approvals for the 
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania 
State Horse Racing Commission to conduct live racing at the Thoroughbred Track  
since it commenced operations in 1972, and has obtained permission from the     
Pennsylvania State Harness Racing Commission to conduct live racing at the      
Harness Track beginning with the 1997 season. Currently, the Company has        
approval from the Pennsylvania Racing Commissions to operate seven OTWs and the 
right, under the Pennsylvania Racing Act, to operate four additional OTWs,      
subject to approval by the Pennsylvania Racing Commissions. A Commission may    
refuse to grant permission to open additional OTWs or to continue to operate    
existing facilities. The failure to obtain required regulatory approvals would  
have a material adverse effect upon the Company's business, financial condition 
and results of operations.                                                      

The Pennsylvania Racing Act provides that no corporation licensed to  
conduct thoroughbred racing shall be licensed to conduct harness racing and that
no corporation licensed to conduct harness racing shall be licensed to conduct  
thoroughbred racing. The Company's harness and thoroughbred licenses are held by
separate corporations, each of which is a wholly owned subsidiary of the        
Company. Moreover, the Pennsylvania State Harness Racing Commission has reissued
the Pocono Downs harness racing license and has found, in connection with the   
reissuance, that it is not "inconsistent with the best interests, convenience or
necessity or with the best interests of racing generally" that a subsidiary of  
the Company beneficially owns Pocono Downs. The Company thus believes that the  
arrangement under which it holds both a harness and a thoroughbred license      
complies with applicable regulations.                                           

  West Virginia Racing and Gaming Regulation.  The Company's operations at
the Charles Town Facility are subject to regulation by the West Virginia State  
Racing Commission (the "West Virginia Racing Commission") under the West        
Virginia Racing Act, and by the West Virginia Lottery Commission under the West 
Virginia Gaming Machine Act. The powers and responsibilities of the West        
Virginia Racing Commission under the West Virginia Racing Act are substantially 
similar in scope and effect to those of the Pennsylvania Racing Commissions and 
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. The Charles Town Joint Venture has applied to the West     
Virginia Racing Commission for a license to conduct racing and pari-mutuel      
wagering at the Charles Town Facility. The West Virginia Racing Commission has  
issued this license, subject to its review and approval of the documents        
pursuant to which the Charles Town Acquisition was consummated and financing    
therefor was obtained and to its review and approval of any changes in the      
ownership of the Charles Town Joint Venture, among other conditions. The Charles
Town Joint Venture has also applied to the West Virginia Lottery Commission for 
approval to install and operate 400 Gaming Machines at the refurbished Charles  
Town Facility; this approval has not yet been granted. The Company anticipates, 
but cannot assure, that it will obtain approval for the installation            

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and operation of the 400 Gaming Machines within 90 to 120 days after the January
15, 1997 consummation of the Charles Town Acquisition. Failure by the Charles   
Town Joint Venture to obtain such approval by June 1, 1997 constitutes an event 
of default under the Company's bank credit agreement. The Charles Town Joint    
Venture may not receive or retain all of the regulatory approvals necessary from
time to time to conduct racing and pari-mutuel wagering operations at the       
Charles Town Facility. The failure to receive or retain or a delay in receiving 
such approvals could cause the reduction or suspension of racing and pari-mutuel
wagering, as well as of Gaming Machine operations, at the Charles Town Facility 
and have a material adverse effect upon the Company's business, financial       
condition and results of operations.                                            

     The installation of additional Gaming Machines at the Charles Town Facility
is subject to approval by the West Virginia Lottery Commission after application
and a public hearing. The Company anticipates that the Charles Town Joint       
Venture will apply for approval of the installation and operation of a total of 
1,000 Gaming Machines at the Charles Town Facility within the first year after  
the opening of the Charles Town Facility. The West Virginia Lottery Commission  
may not approve the installation of the initial 400 Gaming Machines or any      
additional Gaming Machines, however, or may not do so in a timely manner, or may
ultimately approve the installation of a smaller number of Gaming Machines than 
requested.                                                                      

   Moreover, the West Virginia Gaming Machine Act requires that the operator
of the Charles Town Facility enter into a written agreement with the horse      
owners and trainers who race horses at that facility (the "Charles Town         
Horsemen") in order to conduct Gaming Machine operations. The West Virginia     
Gaming Machine Act also requires that the operator of the Charles Town Facility 
enter into a written agreement with the pari-mutuel clerks in order to operate  
Gaming Machines. Currently, there is no agreement between the operator of the   
Charles Town Facility and either the Charles Town Horsemen or the pari-mutuel   
clerks. The Company has entered into discussions with both the Charles Town     
Horsemen and the pari-mutuel clerks toward obtaining such agreements. The       
absence of an agreement with the Charles Town Horsemen or the pari-mutuel clerks
at the Charles Town Facility, or the termination or non-renewal of such         
agreement, would have a material adverse effect on the Company's business,      
financial condition and results of operations.                                  

  State and Federal Simulcast Regulation. Both the Federal Horseracing Act
and the Pennsylvania Racing Act require that the Company have a written         
agreement with the horse owners and trainers who race horses at the Thoroughbred
Track (the "Thoroughbred Horsemen") and with horse owners and trainers at the   
Harness Track (the "Harness Horsemen" and, together with the Thoroughbred       
Horsemen, the "Pennsylvania Horsemen") in order to simulcast races. The Company 
has entered into agreements with the Pennsylvania Horsemen (the "Horsemen       
Agreements"), and in accordance therewith has agreed upon the allocations of the
Company's revenues from import simulcast wagering to the purse funds for the    
Thoroughbred Track and the Harness Track. Because the Company cannot conduct    
import simulcast wagering in the absence of the Horsemen Agreements, the        
termination or non-renewal of either Horsemen Agreement could have a material   
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

    The Federal Horseracing Act requires that the operator of the Charles Town
Facility obtain the approval of the Charles Town Horsemen before import         
simulcast wagering can be conducted there. While such approval has been obtained
by Charles Town in the past, there is no written agreement with the Charles Town
Horsemen providing for such approval in the future. The Company has entered into
discussions with the Charles Town Horsemen toward obtaining an agreement        
evidencing such approval. The failure to obtain such approval could have a      
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

    Taxation. The Company believes that the prospect of significant additional
revenue is one of the primary reasons that jurisdictions permit legalized       
gaming. As a result, gaming companies are typically subject to significant taxes
and fees in addition to normal federal and state income taxes, and such taxes   
and fees are subject to increase at any time. The Company pays substantial taxes
and fees with respect to its operations. From time to time, federal legislators 
and officials have proposed changes in tax laws, or in the administration of    
such laws, affecting the gaming industry. It is not possible to determine with  
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such laws. Such changes, if adopted, could have a material adverse effect on the
Company's business, financial condition and results of operations.              

    Compliance with Other Laws. The Company and its OTWs are also subject to a
variety of other rules and regulations, including zoning, construction and      
land-use laws and regulations in Pennsylvania and West Virginia governing the   
serving of alcoholic beverages. Currently, Pennsylvania laws and regulations    
permit the construction of off-track wagering facilities, but may affect the    
selection of a particular OTW site because of parking, traffic flow and other   
similar considerations, any of which may serve to delay the opening of future   
OTWs in Pennsylvania. By contrast, West Virginia law does not permit the        
operation of OTWs. The Company derives a significant portion of its other       
revenues from the sale of alcoholic beverages to patrons of its facilities. Any 
interruption or termination of the Company's existing ability to serve alcoholic
beverages would have a material adverse effect on the Company's business,       
financial condition and results of operations.                                  

   Restrictions on Share Ownership and Transfer. The Pennsylvania Racing Act
requires that any shareholder proposing to transfer beneficial ownership of 5%  
or more of the Company's shares file an affidavit with the Company setting forth
certain information about the proposed transfer and transferee, a copy of which 
the Company is required to furnish to the Pennsylvania Racing Commission. The   
certificates representing the Company shares owned by 5% beneficial shareholders
are required to bear certain legends prescribed by the Pennsylvania Racing Act. 
In addition, under the Pennsylvania Racing Act, the Pennsylvania Racing         
Commission has the authority to order a 5% beneficial shareholder of the Company
to dispose of his Common Stock of the Company if it determines that continued   
ownership would be inconsistent with the public interest, convenience or        
necessity or the best interest of racing generally. The West Virginia Gaming    
Machine Act provides that a transfer of more than 5% of the voting stock of a   
corporation which controls the license may only be to persons who have met the  
licensing requirements of the West Virginia Gaming Machine Act or which transfer
has been pre-approved by the West Virginia Lottery Commission. Any transfer that
does not comply with this requirement voids the license. See "Description of    
Capital Stock -- Certain Restrictions on Share Ownership and Transfer."         

EFFECT OF INCLEMENT WEATHER AND SEASONALITY                                     

     Because horse racing is conducted outdoors, variable weather contributes to
the seasonality of the Company's business. Weather conditions, particularly     
during the winter months, may cause races to be canceled or may curtail         
attendance. Because a substantial portion of the Company's Thoroughbred Track   
and Harness Track expenses are fixed, the loss of scheduled racing days could   
have a material adverse effect on the Company's business, financial condition   
and results of operations.                                                      

    The severe winter weather in 1996 resulted in the closure of the Company's
OTW facilities for two days in January 1996. Because of the Company's growing   
dependence upon OTW operations, severe weather that causes the Company's OTWs to
close could have a material adverse effect upon the Company's business,         
financial condition and results of operations.                                  

 Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a 
result, the Company's revenues and net income have been greatest in the second  
and third quarters of the year and lowest in the first and fourth quarters of   
the year. See "Management's Discussion and Analysis of Financial Condition and  
Results of Operations -- Effect of Inclement Weather and Seasonality."          

LIMITATIONS AND RESTRICTIONS OF CONTRACTS WITH HORSEMEN                         

The Thoroughbred Horsemen Agreement was entered into in February 1996,
expires in February 1999 and is subject to automatic renewal for successive one 
year terms unless either party gives notice of termination at least 90 days     
prior to the end of any such period. The Harness Horsemen Agreement was entered 
into in November 1994, became effective in January 1995 and expires in January  
2000. There is no agreement between Charles Town and the Charles Town Horsemen, 
and                                                                             

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although such horsemen have granted approval for import simulcast wagering in   
the past, there can be no assurance that such approval will be obtained in the  
future. The future success of the Company depends, in part, on its ability to   
maintain a good relationship with the Pennsylvania Horsemen and the Charles Town
Horsemen (together, the "Horsemen") and to obtain renewal of the Horsemen       
Agreements and required approvals from the Charles Town Horsemen on satisfactory
terms. Failure to do so could lead to an interruption in live racing or OTW     
operations or, at the Charles Town Facility, Gaming Machine operations. The     
Company may not be able to renew or modify the Horsemen Agreements on           
satisfactory terms, and failure to obtain satisfactory renewal terms could have 
a material adverse effect on the Company's business, financial condition and    
results of operations. See "Business -- Purses; Agreements with Horsemen" and   
"-- Regulation."                                                                

POTENTIAL ENVIRONMENTAL LIABILITIES                                             

     As a result of the Pocono Downs Acquisition, the Company owns a solid waste
landfill (the "Landfill") located outside Wilkes-Barre, Pennsylvania on a parcel
of land adjacent to the Harness Track. The Landfill was operated by the East    
Side Landfill Authority (the "Landfill Authority"), which disposed of municipal 
waste in the Landfill from 1970 until 1982 on behalf of four municipalities. The
Landfill is currently subject to a closure order, issued by the Pennsylvania    
Department of Environmental Resources ("PADER"), which the four municipalities  
are required to implement pursuant to a 1986 Settlement Agreement among the     
former trustee in bankruptcy for Pocono Downs, the Landfill Authority, the      
municipalities and PADER (the "Settlement Agreement"). According to the         
Company's environmental engineering consulting firm, the Landfill closure is    
substantially complete. To date the municipalities have been substantially      
fulfilling their obligations under the Settlement Agreement. However, there can 
be no assurance that the municipalities will continue to meet their obligations 
under the Settlement Agreement or that the terms of the Settlement Agreement    
will not be amended in the future. In addition, as the owner of the property,   
the Company may be liable for future claims with respect to the Landfill under  
the Comprehensive Environmental Response, Compensation and Liability Act        
("CERCLA") and analogous state laws. The Company may incur expenses in          
connection with the Landfill in the future, which expenses may not be reimbursed
by the municipalities. Any such expenses could have a material adverse effect on
the Company's business, financial condition and results of operations.          

Pursuant to an agreement entered into between the Charles Town Joint  
Venture and Charles Town coincident with the consummation of the Charles Town   
Acquisition, $200,000 of the purchase price of the Charles Town Acquisition was 
held in escrow to satisfy certain costs expected to be incurred for the         
remediation or other clean-up of various items of environmental concern; the    
estimated cost of such remediation and clean-up is approximately $400,000. No   
assurance can be given that additional liability in amounts that cannot now be  
estimated by the Company will not arise for which the Company and the Charles   
Town Joint Venture may not be able to obtain reimbursement or indemnification.  

The Company operates a water and sewage treatment facility at the     
Thoroughbred Track and a water and sewage treatment facility at the Charles Town
Facility. Operation of water and sewage treatment facilities is subject to both 
federal and state environmental regulation. If the Company's operation of the   
treatment facilities is found not to comply with these regulations or future    
regulations which may be more stringent, the Company may be required to make    
potentially significant expenditures to bring the facilities into compliance,   
and the Company may also be subject to monetary penalties.                      

CONCENTRATION OF OWNERSHIP                                                      

    Following the completion of this offering, and assuming no exercise of the
Underwriters' over-allotment option, the Company's executive officers, directors
and 5% shareholders will own beneficially an aggregate of approximately 51.4% of
the outstanding Common Stock. Peter M. Carlino, the Company's Chairman and Chief
Executive Officer, will have voting control, directly and indirectly through a  
family trust (the "Carlino Family Trust") and another corporation, of           
approximately 43.7% of the outstanding Common Stock. The Company's officers,    
directors and 5% shareholders if acting together will, and Mr. Carlino acting   
alone may, be able to significantly influence the election of                   

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directors and the business and affairs of the Company. Under certain            
circumstances, including the sale of all or substantially all of the assets of  
the Company or a merger, consolidation or liquidation of the Company, other     
trustees of the Carlino Family Trust, including Harold Cramer, who is a director
of the Company, may have voting power over approximately 37.8% of the shares of 
Common Stock outstanding following completion of the offering. See "Description 
of Capital Stock -- Possible Antitakeover Effect of Certain Charter, By-Law and 
Other Provisions."                                                              

DEPENDENCE ON KEY PERSONNEL                                                     

   The Company is highly dependent on the services of: Peter M. Carlino, the
Company's Chairman and Chief Executive Officer; William J. Bork, the Company's  
President, Chief Operating Officer and a Director; Robert S. Ippolito, the      
Company's Chief Financial Officer, Secretary and Treasurer; Philip T. O'Hara,   
Jr., the Company's Vice President and General Manager; and senior management    
personnel of the Company's operating units. The loss of the services of any of  
these individuals could have a material adverse effect on the Company's         
business, financial condition and results of operations. The Company has entered
into employment agreements with Messrs. Carlino, Bork and Ippolito. See Note 5  
of the Notes to the Consolidated Financial Statements of the Company included   
elsewhere in this Prospectus.                                                   

POTENTIAL VOLATILITY OF STOCK PRICE                                             

  The market price of the Common Stock has been, and may in the future be,
volatile. Fluctuations in the Company's operating results and other events or   
factors, such as announcements of new gaming or wagering opportunities by the   
Company or its competitors, legislation approving, defeating or restricting     
gaming, other developments with respect to government regulation, developments  
in the gaming industry generally and sales of substantial amounts of Common     
Stock in the public market, or the prospect of such sales, may have a           
significant effect on the market price of the Common Stock. In addition, the    
stock market generally and the gaming industry in particular have, from time to 
time, experienced extreme price and volume fluctuations; future fluctuations    
could adversely affect the market price of the Common Stock without regard to   
the financial or operating performance of the Company. A shift away from        
investor interest in gaming in general could adversely affect the trading price 
of the Common Stock in a manner unrelated to the Company's financial or         
operating performance. See "Price Range of Common Stock."                       

SHARES ELIGIBLE FOR FUTURE SALE                                                 

  Sales of a substantial number of shares of the Company's Common Stock in
the public market following this offering could adversely affect the market     
price of the Common Stock. Upon completion of this offering and assuming no     
exercise of outstanding stock options or warrants, the Company will have        
outstanding 15,080,290 shares of Common Stock (based upon the number of shares  
outstanding as of December 31, 1996), of which the 1,725,000 shares sold in this
offering will be freely tradeable. Immediately prior to the completion of the   
offering it is expected that 13,355,290 shares of Common Stock will be          
outstanding (based upon the number of shares outstanding as of December 31,     
1996). Of the currently outstanding shares, 6,525,042 shares are subject to     
agreements with the Underwriters under which such shares may not be offered,    
sold or otherwise disposed of for a period of 120 days after the date of this   
Prospectus without the prior written consent of Salomon Brothers Inc as         
representative of the Underwriters.                                             

POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND OTHER PROVISIONS    

  The Company's Amended and Restated Articles of Incorporation and By-Laws
provide that the Board of Directors is to consist of three classes of directors,
each comprised as nearly as practicable of one-third of the Board, and that     
one-third of the Board is to be elected each year. At each annual meeting, only 
directors of the class whose term is expiring are voted upon, and upon election 
each such director serves a three-year term. The Company's Amended and Restated 
Articles of Incorporation provide that a director may be removed with or without
cause only by the affirmative vote of the holders of 75% of the voting power of 
all shares of the Company entitled to vote generally in the                     

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election of directors, voting as a single class; the Company's By-Laws provide  
that a director may only be removed without cause by written consent of the     
shareholders and not at a meeting. The Company's Amended and Restated Articles  
of Incorporation provide that shareholder-proposed nominations for election of  
directors and shareholder-proposed business at meetings of shareholders shall be
subject to such advance notice requirements as may be contained in the By-Laws, 
which may be amended by the directors.                                          

The provisions of the Company's Amended and Restated Articles of      
Incorporation with respect to classification of the Board of Directors and      
shareholder approval of the removal of directors with or without cause may not  
be altered, amended or repealed without the affirmative vote of the holders of  
at least 75% of the voting power of all shares of the Company entitled to vote  
generally in the election of directors, voting as a single class. See           
"Description of Capital Stock -- Possible Antitakeover Effect of Certain        
Charter, By-Law and Other Provisions."                                          

   Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Board of Directors of the Company may issue shares of Preferred Stock of the
Company, without shareholder approval, on such terms as the Board of Directors  
may determine. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock  
that may be issued in the future. Moreover, although the ability to issue       
Preferred Stock may provide flexibility in connection with possible acquisitions
and other corporate purposes, such issuances may make it more difficult for a   
third party to acquire, or may discourage a third party from acquiring, stock of
the Company. The Company has no current plans to issue any shares of Preferred  
Stock. See "Description of Capital Stock -- Preferred Stock."                   

     Certain provisions of Pennsylvania law could delay or impede the removal of
incumbent directors and could make a merger, tender offer or proxy contest      
involving the Company more difficult, even if such event could be beneficial to 
the interests of the shareholders. Such provisions could limit the price that   
certain investors might be willing to pay in the future for the Company's Common
Stock. See "Description of Capital Stock -- Possible Antitakeover Effect of     
Certain Charter, By-Law and Other Provisions."                                  

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USE OF PROCEEDS 

The net proceeds from the sale of the 1,725,000 shares of Common Stock
offered hereby at an offering price of $14.50 per share are estimated to be     
approximately $23.0 million (approximately $26.5 million if the Underwriters'   
over-allotment option is exercised in full), after deducting the underwriting   
discount and estimated offering expenses payable by the Company.                

     Of the net proceeds to the Company, (i) $19.0 million will be used to repay
outstanding indebtedness and accrued interest under a credit facility, which was
entered into with Bankers Trust Company, as Agent, in November 1996 (the "Credit
Facility"), and (ii) the balance will be used to finance a portion of the cost  
of the refurbishment of the Charles Town Facility. Outstanding term loan        
indebtedness under the Credit Facility was incurred to finance the Pocono Downs 
Acquisition and the Charles Town Acquisition; additional term loan indebtedness 
is expected to be incurred under the Credit Facility to finance the             
refurbishment of the Charles Town Facility. Borrowings under the Credit Facility
bear interest at an annual interest rate equal to, at the option of the Company,
either the "base rate" of Bankers Trust Company plus an applicable margin of up 
to 2% or a eurodollar rate plus an applicable margin of up to 3%. Quarterly     
mandatory repayments of the amounts outstanding under the term loan portions of 
the Credit Facility commence December 31, 1997 and continue until the maturity  
date, November 26, 2001. Pursuant to the terms of the credit agreement under    
which such borrowings were made, the Company is obligated to apply to repayment 
of amounts outstanding under the Credit Facility 100% of the net proceeds to the
Company of any public offering of its equity securities if the aggregate amount 
of the remaining commitments and amounts outstanding under the Credit Facility  
exceeds $50.0 million, and 50% of the net proceeds to the Company of any public 
offering of its equity securities if the aggregate amount of the remaining      
commitments and amounts outstanding under the Credit Facility is between $25.0  
million and $50.0 million or if the Company's leverage ratio is greater than    
2-to-1; however, the credit agreement permits the Company to retain up to the   
first $8.0 million of proceeds from the initial offering of its equity          
securities after the date of the credit agreement. The Company must pay a fee of
$250,000 if the Company applies less than $19.0 million of the proceeds of such 
initial offering to repayment of amounts outstanding under the Credit Facility. 

    The Company intends to use any balance of the net proceeds remaining after
application as described above for working capital and other general corporate  
purposes. Pending application of the net proceeds as described above, the       
Company intends to invest the net proceeds in short-term investment grade       
securities.                                                                     

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PRICE RANGE OF COMMON STOCK 

  The Company's Common Stock is quoted on The Nasdaq National Market under
the symbol "PENN." The following table sets forth for the periods indicated the 
high and low sales prices per share of the Company's Common Stock as reported on
The Nasdaq National Market since the date on which the Common Stock commenced   
trading.                                                                        

                                                      HIGH         LOW
                                                       -------     -------
1994                                                                            

Second Quarter (May 25 through June 30, 1994).......... $ 3.458     $ 2.333 
Third Quarter..........................................   3.167       2.396 
Fourth Quarter.........................................   2.667       2.083 

1995                                                                            

First Quarter..........................................   2.917       2.250 
Second Quarter.........................................   5.125       2.500 
Third Quarter..........................................   6.833       4.417 
Fourth Quarter.........................................   6.458       4.167 

1996                                                                            

First Quarter..........................................   6.000       4.292 
Second Quarter.........................................  14.500       5.875 
Third Quarter..........................................  15.625       9.000 
Fourth Quarter.........................................  21.375      13.750 

1997                                                                            

First Quarter (through February 11, 1997)..............  18.250      14.250 

 The closing sale price per share of Common Stock on The Nasdaq National
Market on February 11, 1997 was $15 3/8. As of December 31, 1996, there were 261
holders of record of Common Stock.                                              

DIVIDEND POLICY 

  Since the Company's initial public offering of Common Stock in May 1994,
the Company has not paid any cash dividends on its Common Stock. The Company    
intends to retain all of its earnings to finance the development of the         
Company's business and, thus, does not anticipate paying cash dividends on its  
Common Stock for the foreseeable future. Payment of any cash dividends in the   
future will be at the discretion of the Company's Board of Directors and will   
depend upon, among other things, future earnings, operations, capital           
requirements, the general financial condition of the Company and general        
business conditions. The Credit Facility prohibits the Company from authorizing,
declaring or paying any dividends until the Company's commitments under the     
Credit Facility have been terminated and all amounts outstanding thereunder have
been repaid. In addition, future bank financing may prohibit the payment of     
dividends under certain conditions.                                             

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CAPITALIZATION

  The following table sets forth: (i) the consolidated short-term debt and
capitalization of the Company as of September 30, 1996; (ii) the pro forma      
short-term debt and capitalization of the Company as of September 30, 1996,     
after giving effect to the Pocono Downs Acquisition, the Charles Town           
Acquisition and the borrowings under the Credit Facility made or to be made     
simultaneously with the consummation of each such Acquisition; and (iii) such   
pro forma short-term debt and capitalization, as adjusted to reflect the sale of
the 1,725,000 shares of Common Stock offered hereby at an offering price of     
$14.50 per share (assuming no exercise of the Underwriters' over-allotment      
option) and the application of the estimated net proceeds therefrom, as         
described under "Use of Proceeds." This table should be read in conjunction with
the pro forma consolidated financial statements of the Company and the          
consolidated financial statements of the Company, The Plains Company and Charles
Town, which are included elsewhere or incorporated by reference in this         
Prospectus.                                                                     

                                                        [Enlarge/Download Table]


                                                                                   SEPTEMBER 30, 1996          
                                                                            -----------------------------------
                                                                                                     PRO FORMA 
                                                                             ACTUAL    PRO FORMA    AS ADJUSTED
                                                                            -------    ---------    -----------
                                                                                    (IN THOUSANDS)             
                                                                                                               
Current maturities of long-term debt....................................... $   222     $   222       $   222  
                                                                            -------     -------       -------  
Long-term debt:                                                                                                
  Tranche A Term Loan (1)..................................................      --      47,000        32,936  
  Tranche B Term Loan (1)..................................................      --      16,500        11,564  
  Other....................................................................      80          80            80  
                                                                            -------     -------       -------  
     Total long-term debt..................................................      80      63,580        44,580  
                                                                            -------     -------       -------  
       Total debt..........................................................     302      63,802        44,802  
                                                                            -------     -------       -------  
Shareholders' equity:                                                                                          
  Preferred Stock, par value $.01 per share, 1,000,000 shares authorized;                                      
     none issued...........................................................      --          --            --  
  Common Stock, par value $.01 per share, 20,000,000 shares authorized,                                        
     13,330,290 shares outstanding and outstanding pro forma, 15,080,290                                       
     shares outstanding pro forma as adjusted (2)..........................     133         133           151  
  Additional paid-in capital...............................................  14,217      14,217        37,183  
  Retained earnings........................................................  12,344      12,344        12,344  
                                                                            -------     -------       -------  
     Total shareholders' equity............................................  26,694      26,694        49,678  
                                                                            -------     -------       -------  
       Total capitalization................................................ $26,996     $90,496       $94,480  
                                                                            =======     =======       =======  

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

(1) Repayments of the Term Loans are applied pro rata to the Tranche A Term Loan
and the Tranche B Term Loan.                                            

(2) Excludes (i) 1,179,750 shares reserved for issuance under the Company's 1994
Stock Option Plan, of which options to purchase 823,750 shares of Common
Stock were outstanding as of September 30, 1996, and (ii) 195,000 shares
    reserved for issuance upon the exercise of warrants to purchase Common Stock
  outstanding as of September 30, 1996. As of December 31, 1996, the Company
   had 13,355,290 shares outstanding and outstanding pro forma, and 15,080,290
    shares outstanding pro forma as adjusted, which excludes options to purchase
   1,179,750 shares of Common Stock and warrants to purchase 195,000 shares of
Common Stock outstanding as of December 31, 1996. See "Description of   
Capital Stock -- Warrants" and Note 9 of the Notes to the Consolidated  
  Financial Statements of the Company included elsewhere in this Prospectus.

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PENN NATIONAL GAMING, INC.

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS 

  The accompanying pro forma consolidated financial statements present pro
forma information for the Company, giving effect to the Pocono Downs Acquisition
and the Charles Town Acquisition using the purchase method of accounting in each
case and the related acquisition financing. These pro forma consolidated        
financial statements are based upon the historical financial statements of Penn 
National, The Plains Company and Charles Town as of September 30, 1996 and for  
the year ended December 31, 1995 and for the nine months ended September 30,    
1996.                                                                           

   The accompanying pro forma consolidated balance sheet as of September 30,
1996 has been presented as if the Pocono Downs Acquisition and the Charles Town 
Acquisition had both occurred on September 30, 1996. The accompanying pro forma 
consolidated statements of income for the year ended December 31, 1995 and for  
the nine months ended September 30, 1996 have been presented as if the Pocono   
Downs Acquisition and the Charles Town Acquisition had both occurred on January 
1, 1995.                                                                        

  The pro forma adjustments are based upon currently available information
and upon certain assumptions described in the accompanying Notes to Pro Forma   
Consolidated Financial Statements. These assumptions include assumptions        
relating to the allocation of the purchase price paid in the Pocono Downs       
Acquisition and the purchase price paid in the Charles Town Acquisition to the  
respective assets and liabilities of Pocono Downs and Charles Town based upon   
preliminary estimates of their fair values; the actual allocation of such       
purchase prices may differ from that reflected in the pro forma consolidated    
financial statements. The Company's management believes the assumptions         
underlying the pro forma consolidated financial statements to be reasonable     
under the circumstances.                                                        

The pro forma consolidated financial statements are unaudited, are    
presented for informational purposes only and are not necessarily indicative of 
the results of operations that would actually have been obtained if the         
Acquisitions had occurred on the dates indicated, or the results of operations  
that may be obtained in the future. These statements are qualified in their     
entirety by, and should be read in conjunction with, the historical financial   
statements of Penn National, The Plains Company and Charles Town and related    
notes thereto included elsewhere in this Prospectus or incorporated herein by   
reference and "Management's Discussion and Analysis of Financial Condition and  
Results of Operations."                                                         

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PENN NATIONAL GAMING, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1996

                                                        [Enlarge/Download Table]

                                                                        POCONO DOWNS   CHARLES TOWN           
                                                                          PRO FORMA      PRO FORMA            
                                                                         ADJUSTMENTS    ADJUSTMENTS           
                            PENN NATIONAL  POCONO DOWNS  CHARLES TOWN        AND            AND       COMPANY 
                             HISTORICAL     HISTORICAL    HISTORICAL    ELIMINATIONS   ELIMINATIONS  PRO FORMA
                            -------------  ------------  ------------   ------------   ------------  ---------
                                                                (IN THOUSANDS)                                
                                                                                                              
ASSETS                                                                                                        
 Cash and cash                                                                                                
   equivalents............     $ 5,602        $ 4,521      $   523       $(46,407)(1)   (17,165)(a)     5,832 
                                                                           44,822 (2)    16,500 (b)           
                                                                           (1,780)(3)      (784)(c)           
 Marketable securities....          --          6,001           --         (6,001)(2)        --            -- 
 Other current assets.....       3,362          1,557          190             --          (190)(a)     4,919 
                               -------        -------      -------       --------       -------      -------- 
   Total current assets...       8,964         12,079          713         (9,366)       (1,639)       10,751 
 Property and equipment,                                                                                      
   net....................      19,629         12,712        9,093         22,541 (1)     7,407 (a)    71,382 
 Intangibles, including                                                                                       
   goodwill...............       1,848             --           --         11,563 (1)     2,025 (a)    15,436 
 Other assets, including                                                                                      
   deferred charges.......       3,292            235           56         (1,118)(1)    (1,939)(a)     3,090 
                                                                            1,780 (3)       784 (c)           
                               -------        -------      -------       --------       -------      -------- 
   Total assets...........     $33,733        $25,026      $ 9,862       $ 25,400      $  6,638      $100,659 
                               =======        =======      =======       ========      ========      ======== 

 LIABILITIES AND SHAREHOLDERS' EQUITY                                                                         
 Current maturities of                                                                                        
   long-term debt.........     $   222        $ 1,020      $ 6,877       $ (1,020)(2)   $(6,877)(a)  $    222 
 Other current                                                                                                
   liabilities............       5,748          3,426        2,027             --        (2,027)(a)     9,174 
                               -------        -------      -------       --------       -------      -------- 
   Total current                                                                                              
     liabilities..........       5,970          4,446        8,904         (1,020)       (8,904)        9,396 
                               -------        -------      -------       --------       -------      -------- 
 Long-term debt...........          80          7,159        2,704         39,841 (2)    (2,704)(a)    63,580 
                                                                                         16,500 (b)           
 Other long-term                                                                                              
   liabilities............         989             --           84             --           (84)(a)       989 
                               -------        -------      -------       --------       -------      -------- 
   Total long-term                                                                                            
     liabilities..........       1,069          7,159        2,788         39,841        13,712        64,569 
                               -------        -------      -------       --------       -------      -------- 
 Minority interest........          --          1,880           --         (1,880)(1)        --            -- 
   Total shareholders'                                                                                        
     equity (deficit).....      26,694         11,541       (1,830)       (11,541)(1)     1,830(a)     26,694 
                               -------        -------      -------       --------       -------      -------- 
   Total liabilities and                                                                                      
     shareholders'                                                                                            
     equity...............     $33,733        $25,026      $ 9,862       $ 25,400       $ 6,638      $100,659 
                               =======        =======      =======       ========      ========      ======== 

The accompanying notes are an integral part of these pro forma consolidated 
financial statements. 

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PENN NATIONAL GAMING, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME 

                                                        [Enlarge/Download Table]

                                                        YEAR ENDED DECEMBER 31, 1995                             
                           ------------------------------------------------------------------------------------- 
                                                                        POCONO DOWNS   CHARLES TOWN              
                                                                          PRO FORMA      PRO FORMA               
                                                                         ADJUSTMENTS    ADJUSTMENTS              
                           PENN NATIONAL  POCONO DOWNS   CHARLES TOWN        AND            AND         COMPANY  
                            HISTORICAL     HISTORICAL     HISTORICAL    ELIMINATIONS   ELIMINATIONS    PRO FORMA 
                           -------------  ------------   ------------   ------------   ------------    --------- 
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)                        
                                                                                                                 
Total revenues............   $  57,676      $  33,854      $ 11,027      $     --      $      --       $ 102,557 
Total operating expenses..      49,421         27,261        12,776        (1,053)(6)        182(e)       89,448 
                                                                              861 (7)                            
                             ---------      ---------      --------      --------      ---------       --------- 
Income (loss) from                                                                                               
  operations..............       8,255          6,593        (1,749)          192           (182)         13,109 
Total other income                                                                                               
  (expenses)..............         208           (461)         (402)       (3,995)(4)     (1,249)(d)      (4,874)
                                                                              561 (5)        664 (g)             
                                                                                            (200)(h)             
Minority interest.........          --         (1,571)           --         1,571 (9)         --              -- 
                             ---------      ---------      --------      --------      ---------       --------- 
Income (loss) before                                                                                             
  income taxes............       8,463          4,561        (2,151)       (1,671)          (967)          8,235 
Taxes on income...........       3,467          1,602            --        (1,362)(8)       (979)(f)       3,388 
                                                                              660 (9)                            
                             ---------      ---------      --------      --------      ---------       --------- 
Net income (loss).........   $   4,996      $   2,959      $ (2,151)     $   (969)     $      12       $   4,847 
                             =========      =========      ========      ========      =========       ========= 
Net income per share......   $     .38                                                                 $     .37 
                             =========                                                                 ========= 
Weighted average common                                                                                          
  shares outstanding......      13,104                                                                    13,104 
                             =========                                                                 ========= 

                                                        [Enlarge/Download Table]

                                                    NINE MONTHS ENDED SEPTEMBER 30, 1996                         
                           ------------------------------------------------------------------------------------- 
                                                                        POCONO DOWNS   CHARLES TOWN              
                                                                          PRO FORMA      PRO FORMA               
                                                                         ADJUSTMENTS    ADJUSTMENTS              
                           PENN NATIONAL  POCONO DOWNS   CHARLES TOWN        AND            AND         COMPANY  
                            HISTORICAL     HISTORICAL     HISTORICAL    ELIMINATIONS   ELIMINATIONS    PRO FORMA 
                           -------------  ------------  -------------   ------------   ------------    --------- 
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)                        
                                                                                                                 
Total revenues............   $  46,474      $  25,746      $  8,746      $     --      $     --        $  80,966 
Total operating expenses..      39,237         21,306        10,328          (804)(6)       134 (e)       70,802 
                                                                              601 (7)                            
                             ---------      ---------      --------      --------      --------        --------- 
Income (loss) from                                                                                               
  operations..............       7,237          4,440        (1,582)          203          (134)          10,164 
Total other income                                                                                               
  (expenses)..............         185           (316)         (271)       (2,996)(4)      (936)(d)       (3,694)
                                                                              306 (5)       534 (g)              
                                                                                           (200)(h)              
Minority interest.........          --           (874)           --           874 (9)        --               -- 
                             ---------      ---------      --------      --------      --------        --------- 
Income (loss) before                                                                                             
  income taxes............       7,422          3,250        (1,853)       (1,613)         (736)           6,470 
Taxes on income...........       3,016          1,323            --        (1,045)(8)      (810)(f)        2,851 
                                                                              367 (9)                            
                             ---------      ---------      --------      --------      --------        --------- 
Net income (loss).........   $   4,406      $   1,927      $ (1,853)     $   (935)     $     74        $   3,619 
                             =========      =========      ========      ========      ========        ========= 
Net income per share......   $     .32                                                                 $     .26 
                             =========                                                                 ========= 
Weighted average common                                                                                          
  shares outstanding......      13,754                                                                    13,754 
                             =========                                                                 ========= 

The accompanying notes are an integral part of these pro forma consolidated 
financial statements. 

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PENN NATIONAL GAMING, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

POCONO DOWNS ACQUISITION:                                                       

The pro forma adjustments are as follows:                             

(1) The Company purchased Pocono Downs for $47,000,000 and recorded a 
charge of $525,000 for estimated acquisition-related costs.   

      The purchase price of the Pocono Downs Acquisition is reflected as
follows:                                                              

                                                    (IN THOUSANDS)
                                                    --------------
Cost of Pocono Downs Acquisition...........................  $ 47,525           
Less: Historical minority interest.........................    (1,880)          
Pocono Downs historical equity........................   (11,541)     
                                                  --------
Excess acquisition cost....................................  $ 34,104           
                                                  ========
Allocations:                                                                    
Increase to property and equipment.........................  $ 22,541           
Intangibles, including goodwill............................    11,563           
                                                  --------
                                                  $ 34,104
                                                  ========

The following pro forma adjustment records the Pocono Downs 
Acquisition:                                                          

                                                          SEPTEMBER 30, 1996
                                                          ------------------
                                                          DEBIT       CREDIT
                                                          -----       ------
                                                        (IN THOUSANDS)
        Cash...........................................              $46,407
Property and equipment, net....................  $22,541    
Intangibles, including goodwill................   11,563    
Minority interest..............................    1,880    
Stockholders' equity...........................   11,541    
        Other assets, including deferred charges.......                1,118

   (2) In connection with the Pocono Downs Acquisition, the Company borrowed
         $47,000,000. Approximately $8,179,000 of existing Pocono Downs cash and
      marketable securities was used to retire its long-term indebtedness.
      The following pro forma adjustment reflects the repayment of certain
Pocono Downs indebtedness, as well as the transaction-related 
borrowings:                                                   

                                                        SEPTEMBER 30, 1996
                                                        ------------------
                                                         DEBIT      CREDIT
                                                         -----      ------
                                                        (IN THOUSANDS)
Current maturities of long-term debt...........  $ 1,020    
       Long-term debt.................................             $39,841
Cash...........................................   44,822    
       Marketable securities..........................               6,001

    (3) Fees incurred or to be incurred in connection with the above-mentioned
        bank borrowing are estimated to be $1,780,000. The following pro forma
adjustment represents the payment of these fees:              

                                                            SEPTEMBER 30, 1996
                                                            ------------------
                                                            DEBIT     CREDIT
                                                            -----     ------
                                                              (IN THOUSANDS)
Other assets, including deferred charges...........$ 1,780  
        Cash...............................................          $ 1,780

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PENN NATIONAL GAMING, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(4) The purchase price was financed with the above-mentioned bank     
    borrowing. The following pro forma adjustment records the interest
       expense in connection with this borrowing at an assumed interest rate
of 8.5% per annum:                                            

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED       NINE MONTHS ENDED
                                                       DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -------------------  ------------------
                                                                   (IN THOUSANDS)            
                                                                                             
Interest expense -- senior debt......................      $ 3,995              $ 2,996      

   (5) The following pro forma adjustment reflects the elimination of Pocono
Downs, net interest expense relating to the repayment of its  
indebtedness:                                                 

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED       NINE MONTHS ENDED
                                                       DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      ------------------   ------------------
                                                                  (IN THOUSANDS)             
                                                                                             
Eliminate historical net interest expense............      $ (561)               $ (306)     

    (6) The following pro forma adjustment reflects the elimination of certain
historical Pocono Downs corporate and administrative expenses,
 principally certain duplicative senior management compensation:

                                                        [Enlarge/Download Table]

                                                            YEAR ENDED       NINE MONTHS ENDED
                                                        DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                       ------------------   ------------------
                                                                   (IN THOUSANDS)             
                                                                                              
Operating expenses other than depreciation and                                                
   amortization.......................................      $(1,053)              $(804)      

(7) The following pro forma adjustment reflects the incurrence of     
additional depreciation and amortization:                     

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED       NINE MONTHS ENDED
                                                       DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      ------------------  -------------------
                                                                  (IN THOUSANDS)             
                                                                                             
Operating expenses -- depreciation and                                                       
  amortization.......................................        $ 861                $ 601      

  (8) Pro forma adjustment to record income tax effect of pro forma income
statement adjustments at estimated effective tax rate of 42%: 

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED       NINE MONTHS ENDED
                                                      DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -----------------   ------------------
                                                                 (IN THOUSANDS)             
                                                                                            
Income tax effect....................................      $(1,362)             $(1,045)    

     (9) Pro forma adjustment to eliminate allocation of income to Pocono Downs'
minority interest and the related tax effect:                 

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED       NINE MONTHS ENDED
                                                      DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -----------------   ------------------
                                                                 (IN THOUSANDS)             
                                                                                            
Minority interest....................................     $ 1,571               $ 874       
Income tax provision.................................         660                 367       

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PENN NATIONAL GAMING, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CHARLES TOWN ACQUISITION:                                                       

The pro forma adjustments are as follows:                             

 (a) The Charles Town Joint Venture, in which the Company has reached an
   agreement with its joint venture partner to hold an 89% interest,
purchased substantially all of the assets of Charles Town for 
        approximately $16,500,000 and has incurred or will incur $2,025,000 of
estimated acquisition-related costs.                          

      The purchase price of the Charles Town Acquisition is reflected as
follows:                                                              

                                                              (IN THOUSANDS)
                                                              --------------
    Cost of Charles Town Acquisition......................   $18,525
     Less: Historical value of assets being acquired.......    (9,093)
                                                             -------
    Excess acquisition cost...............................   $ 9,432
                                                             =======
Allocations:                                                
    Increase to property and equipment....................   $ 7,407
    Intangibles, including goodwill.......................     2,025
                                                             -------
                                                             $ 9,432
                                                             =======

   The following pro forma adjustment records the Charles Town
          Acquisition and the elimination of all other components of Charles
Town's balance sheet as of September 30, 1996:          

                                                        SEPTEMBER 30, 1996
                                                        ------------------
                                                        DEBIT       CREDIT
                                                        -----       ------
                                                        (IN THOUSANDS)
       Cash............................................            $17,165
       Other current assets............................                190
Property and equipment, net..................... 7,407      
Intangibles, including goodwill................. 2,025      
Current maturities of long-term debt............ 6,877      
Other current liabilities....................... 2,027      
Long-term debt.................................. 2,704      
Other long-term liabilities.....................    84      
       Shareholders' equity............................              1,830
       Other assets, including deferred charges........              1,939

(b) The Company borrowed $16,500,000 to finance the Charles Town      
        Acquisition. The following pro forma adjustment reflects the financing
of the Charles Town Acquisition:                              

                                                        SEPTEMBER 30, 1996
                                                        ------------------
                                                        DEBIT       CREDIT
                                                        -----       ------
                                                          (IN THOUSANDS)
       Long-term debt.................................              16,500
Cash........................................... $16,500     

   (c) Fees incurred or to be incurred by the Company in connection with the
  above-mentioned bank borrowing are estimated to be $784,000. The
        following pro forma adjustment represents the payment for these costs:

                                                              SEPTEMBER 30, 1996
                                                              ------------------
                                                              DEBIT       CREDIT
                                                              -----       ------
                                                              (IN THOUSANDS)
Other assets, including deferred charges........  $  784    
        Cash............................................              $  784

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PENN NATIONAL GAMING, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(d) The following pro forma adjustment records the interest expense in
  connection with the above-mentioned bank borrowing at an assumed
interest rate of 8.5% per annum:                              

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED        NINE MONTHS ENDED
                                                      DECEMBER 31, 1995    SEPTEMBER 30, 1996
                                                      -----------------    ------------------
                                                                 (IN THOUSANDS)              
                                                                                             
Interest expense -- senior debt......................      $1,249                 $ 936      

  (e) The following pro forma adjustment reflects the effect of additional
depreciation and amortization:                                

                                                        [Enlarge/Download Table]

                                                           YEAR ENDED       NINE MONTHS ENDED
                                                       DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      ------------------   ------------------
                                                                  (IN THOUSANDS)             
                                                                                             
Operating expenses -- depreciation and                                                       
  amortization.......................................       $   182              $   134     

  (f) Pro forma adjustment to record income tax effect of pro forma income
statement adjustments at estimated effective tax rate of 34%: 

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED       NINE MONTHS ENDED
                                                      DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -----------------   ------------------
                                                                 (IN THOUSANDS)             
                                                                                            
Income tax effect....................................       $ (979)             $ (810)     

(g) The following pro forma adjustment reflects the elimination of    
substantially all of Charles Town's net interest expense:     

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED       NINE MONTHS ENDED
                                                      DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -----------------   ------------------
                                                                 (IN THOUSANDS)             
                                                                                            
Eliminate historical net interest expense............      $ (664)              $ (534)     

  (h) The following pro forma adjustment reflects the elimination of other
income recorded by Charles Town in relation to purchase option
payments:                                                     

                                                        [Enlarge/Download Table]

                                                          YEAR ENDED       NINE MONTHS ENDED
                                                      DECEMBER 31, 1995   SEPTEMBER 30, 1996
                                                      -----------------   ------------------
                                                                 (IN THOUSANDS)             
                                                                                            
Other income.........................................      $ (200)              $ (200)     

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SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial information with respect to
the Company's financial position as of December 31, 1994 and 1995 and its       
results of operations for each of the three years in the period ended December  
31, 1995 has been derived from the audited consolidated financial statements of 
the Company appearing elsewhere in this Prospectus. The selected consolidated   
financial information with respect to the Company's results of operations for   
the years ended December 31, 1991 and 1992 and with respect to the Company's    
financial position as of December 31, 1991, 1992 and 1993 has been derived from 
audited financial statements of the Company that are not included in this       
Prospectus. The selected consolidated financial data for each of the nine-month 
periods ended September 30, 1995 and 1996 are derived from the Company's        
unaudited financial statements, which, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a   
fair presentation of the results of such periods, adjusted as described in the  
notes below. The results for the nine-month period ended September 30, 1996 are 
not necessarily indicative of results for the full year, or any future period.  
The selected historical financial data should be read in conjunction with the   
Consolidated Financial Statements of the Company and Notes thereto,             
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" and the other financial information included elsewhere in this      
Prospectus or incorporated by reference herein.                                 

                                                        [Enlarge/Download Table]

                                                                                                   NINE MONTHS ENDED    
                                                   YEAR ENDED DECEMBER 31,                           SEPTEMBER 30,      
                                 ------------------------------------------------------------  ------------------------ 
                                   1991 (1)   1992 (1)    1993 (1)      1994          1995         1995         1996    
                                  ---------  ---------  -----------  -----------  -----------  -----------  ----------- 
                                              (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)               
                                                                                                                        
INCOME STATEMENT DATA:                                                                                                  
Revenues                                                                                                                
  Pari-mutuel revenues                                                                                                  
    Penn National races........  $  26,490  $  31,967  $     29,224   $    23,428  $    21,376  $    16,578  $    14,495
    Import simulcasting........      3,921      5,764         9,162        16,968       27,254       20,412       23,596
    Export simulcasting........         --        306           383         1,187        2,142        1,447        2,479
    Admissions, programs and                                                                                            
      other racing revenues....      2,252      2,502         2,485         2,563        3,704        2,978        3,403
    Concession revenues........        671      1,285         1,410         1,885        3,200        2,478        2,501
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
    Total revenues.............     33,334     41,824        42,664        46,031       57,676       43,893       46,474
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Operating expenses                                                                                                      
  Purses, stakes and                                                                                                    
    trophies...................      8,704      9,581         9,719        10,674       12,091        9,329        9,744
  Direct salaries, payroll                                                                                              
    taxes and employee                                                                                                  
    benefits...................      5,329      5,939         6,394         6,707        7,699        5,823        6,211
  Simulcast expenses...........      7,576     10,403        10,136         8,892        9,084        6,905        6,920
  Pari-mutuel taxes............      2,930      3,504         3,568         4,054        4,963        3,773        3,954
  Other direct meeting                                                                                                  
    expenses...................      4,876      5,835         6,046         6,375        8,214        6,249        6,932
  OTW concession expenses......         --        541           806         1,231        2,221        1,689        1,766
  Management fees paid to                                                                                               
    related entity.............        882      1,366         1,208           345           --           --           --
  Other operating expenses.....      1,911      2,354         2,331         3,329        5,149        3,750        3,710
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
    Total operating expenses...     32,208     39,523        40,208        41,607       49,421       37,518       39,237
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Income from operations.........      1,126      2,301         2,456         4,424        8,255        6,375        7,237
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Other income (expenses)                                                                                                 
  Interest income (expense),                                                                                            
    net........................       (910)      (917)         (962)         (340)         198          146          185
  Other........................         89         56             6            15           10            4           --
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
    Total other income                                                                                                  
      (expenses)...............       (821)      (861)         (956)         (325)         208          150          185
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Income before income taxes and                                                                                          
  extraordinary item...........        305      1,440         1,500         4,099        8,463        6,525        7,422
Taxes on income................         76        150            42         1,381        3,467        2,680        3,016
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Income before extraordinary                                                                                             
  item.........................        229      1,290         1,458         2,718        4,996        3,845        4,406
Extraordinary item loss on                                                                                              
  early extinguishment of debt,                                                                                         
  net of income taxes of $83...         --         --            --           115           --           --           --
                                 ---------  ---------  ------------   -----------  -----------  -----------  -----------
Net income.....................  $     229  $   1,290  $      1,458   $     2,603  $     4,996  $     3,845  $     4,406
                                 =========  =========  ============   ===========  ===========  ===========  ===========
Net income per share...........                                                    $       .38  $       .29  $       .32
                                                                                   ===========  ===========  ===========
Weighted average common shares                                                                                          
  outstanding..................                                                     13,104,000   13,044,000   13,754,000
                                                                                   ===========  ===========  ===========
SUPPLEMENTAL PRO FORMA INCOME                                                                                           
  STATEMENT DATA (2):                                                                                                   
Net income.....................                        $      1,819   $     2,724                                       
Net income per share...........                                0.15          0.22                                       
Weighted average common shares                                                                                          
  outstanding..................                          12,249,000(3) 12,663,000                                       
                                                       ============   ===========                                       

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SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED) 

                                                        [Enlarge/Download Table]

                                                                                           NINE MONTHS ENDED  
                                                   YEAR ENDED DECEMBER 31,                   SEPTEMBER 30,    
                                --------------------------------------------------------  --------------------
                                  1991 (1)  1992 (1)   1993 (1)      1994        1995       1995        1996  
                                 --------- ---------  ----------  ---------  -----------  ---------  ---------
                                             (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)      

                                                                                                              
OTHER DATA (UNAUDITED):                                                                                       
Total paid attendance (4)......   636,944    785,569     799,625    848,482    1,051,803    813,823    802,948
Pari-mutuel wagering                                                                                          
  Penn National races.......... $ 128,551  $ 153,332  $  138,939  $ 111,248  $   102,145  $  79,235  $  69,200
  Import simulcasting..........    28,660     42,159      58,252     93,461      142,499    106,664    122,960
  Export simulcasting..........        --     10,202      12,746     40,337       72,252     48,327     84,228
                                ---------  ---------  ----------  ---------  -----------  ---------  ---------
    Total pari-mutuel                                                                                         
      wagering................. $ 157,211  $ 205,693  $  209,937  $ 245,046  $   316,896  $ 234,226  $ 276,388
                                =========  =========  ==========  =========  ===========  =========  =========
    Gross profit from wagering                                                                                
      (5)...................... $  11,201  $  14,549  $   15,346  $  17,963  $    24,634  $  18,430  $  19,952

                                                        [Enlarge/Download Table]

                                                        DECEMBER 31,                          SEPTEMBER 30,   
                                --------------------------------------------------------  --------------------
                                  1991       1992        1993       1994        1995         1995       1996  
                                ---------  ---------  ----------  ---------  -----------  ---------  ---------
                                                                    (IN THOUSANDS)                            
                                                                                                              
BALANCE SHEET DATA:                                                                                           
Cash........................... $      88  $     937  $    1,002  $   5,502  $     7,514  $   6,865  $   5,602
Working capital (deficiency)...    (4,120)    (4,700)     (4,549)     2,074        4,134      2,762      2,994
Total assets...................    14,602     18,071      18,373     21,873       27,532     26,579     33,733
Total debt.....................    10,181     11,716      10,422        516          390        425        302
Shareholders' equity...........     1,224      2,516       3,418     15,627       20,802     19,472     26,694

------------------                                                              
(1) The Consolidated Financial Statements of the Company include entities which,
prior to a reorganization which occurred in 1994 shortly before the     
 Company's initial public offering (the "Reorganization"), were affiliated
through common ownership and control. See Note 1 of the Notes to the    
   Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.                                                             
(2) Supplemental pro forma amounts for the years ended December 31, 1993 and    
  1994 reflect (i) the elimination of $1,208,000 and $345,000, respectively,
   in management fees paid to a related entity, (ii) the inclusion of $320,000
    and $133,000, respectively, in executive compensation, (iii) the elimination
    of $946,000 and $413,000, respectively, of interest expenses on Company debt
  which was repaid with the proceeds of the initial public offering in 1994,
(iv) the elimination of $0 and $198,000, respectively, of loss on early 
    extinguishment of debt, and (v) a provision for income taxes of $701,000 and
    $377,000, respectively, as if the S corporations and partnerships comprising
   part of the Company prior to the Reorganization in 1994 had been taxed as C
corporations. There were no supplemental pro forma adjustments for any  
subsequent periods.                                                     
(3) Based on 8,400,000 shares of Common Stock outstanding before the initial    
    public offering in May 1994 plus 4,500,000 shares sold by the Company in the
initial public offering.                                                
(4) Does not reflect attendance at the Thoroughbred Track for wagering on       
    simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May 
1992, April 1994, March 1995 and July 1996, respectively.               
(5) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,     
  taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.                                               

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve     
risks and uncertainties. The Company's actual results could differ materially   
from those anticipated in these forward-looking statements as a result of       
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.                                                                

GENERAL                                                                         

     Penn National's pari-mutuel revenues have been derived from (i) wagering on
Penn National races at the Thoroughbred Track, Penn National's OTWs, other      
Pennsylvania racetracks and OTWs and through Telebet, as well as wagering at the
Thoroughbred Track on certain stakes races run at out-of-state racetracks       
(referred to in the Company's financial statements as "pari-mutuel revenues from
Penn National races"), (ii) wagering on full cards of import simulcast races at 
the Thoroughbred Track, Penn National's OTWs and through Telebet (referred to in
the Company's financial statements as "pari-mutuel revenues from import         
simulcasting") and (iii) fees from wagering on export simulcasting Penn National
races at out-of-state locations (referred to in the Company's financial         
statements as "pari-mutuel revenues from export simulcasting"). Penn National's 
other revenues have been derived from admissions, program sales and certain     
other ancillary activities and food and beverage sales and concessions.         

    The amount of revenue to Penn National from a wager depends upon where the
race is run and where the wagering takes place. Pari-mutuel revenues from Penn  
National races and import simulcasting of out-of-state races has consisted of   
the total amount wagered, less the amount paid as winning wagers. Pari-mutuel   
revenues from wagering at the Thoroughbred Track or Penn National's OTWs on     
import simulcasting from other Pennsylvania racetracks has consisted of the     
total amount wagered, less the amounts paid as winning wagers, amounts payable  
to the host racetrack and pari-mutuel taxes to Pennsylvania. Pari-mutuel        
revenues from export simulcasting has consisted of amounts payable to Penn      
National by the out-of-state racetracks with respect to wagering on live races  
at the Thoroughbred Track.                                                      

Operating expenses have included purses payable to the Thoroughbred   
Horsemen, commissions to other racetracks with respect to wagering at their     
facilities on races at the Thoroughbred Track, pari-mutuel taxes on Penn        
National races and export simulcasting and other direct and indirect operating  
expenses.                                                                       

The Pennsylvania Racing Act specifies the maximum percentages of each 
dollar wagered on horse races in Pennsylvania which may be retained by Penn     
National (prior to required payments to the Thoroughbred Horsemen and applicable
taxing authorities). The percentages vary, based on the type of wager; the      
average percentage is approximately 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues     
derived from wagers at the Thoroughbred Track or the Penn National OTWs, Penn   
National's revenues on each race are determined pursuant to such maximum        
percentage and agreements with the other racetracks and OTWs at which wagering  
is taking place. Amounts payable to the Thoroughbred Horsemen are determined    
under agreements with the Thoroughbred Horsemen and vary depending upon where   
the wagering is conducted and the racetrack at which such races take place. The 
Thoroughbred Horsemen receive their share of such wagering as race purses. Penn 
National retains a higher percentage of wagers made at its own facilities than  
of wagers made at other locations. See "Business -- Purses; Agreements with     
Horsemen."                                                                      

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RECENT DEVELOPMENTS                                                             

   Based on preliminary results, the Company expects that its net income for
the fourth quarter ending December 31, 1996 will approximate $1,100,000,        
compared to net income of $1,140,000 for the fourth quarter ending December 31, 
1995. The decrease in net income is due primarily to higher interest expense,   
net, which is related to short-term borrowings in connection with the Pocono    
Downs Acquisition, and less than expected net income from the Company's         
Lancaster OTW, which opened in July 1996 after a court challenge and strenuous  
opposition from local groups averse to gaming.                                  

RESULTS OF OPERATIONS                                                           

The following table sets forth certain data from the Consolidated     
Statements of Income of the Company as a percentage of total revenues:          

                                                        [Enlarge/Download Table]

                                                                                     NINE MONTHS ENDED  
                                                       YEAR ENDED DECEMBER 31,         SEPTEMBER 30,    
                                                   ------------------------------   ------------------- 
                                                     1993        1994       1995       1995       1996  
                                                   --------    --------   --------   --------   --------
                                                                                                        
Revenues                                                                                                
  Pari-mutuel revenues                                                                                  
    Penn National races...........................   68.5%       50.9%      37.1%      37.8%      31.2% 
    Import simulcasting...........................   21.5        36.9       47.3       46.5       50.8  
    Export simulcasting...........................    0.9         2.6        3.7        3.3        5.3  
  Admissions, programs and other                                                                        
    racing revenues...............................    5.8         5.5        6.4        6.8        7.3  
  Concession revenues.............................    3.3         4.1        5.5        5.6        5.4  
                                                    -----       -----      -----      -----      -----  
      Total revenues..............................  100.0       100.0      100.0      100.0      100.0  
                                                    -----       -----      -----      -----      -----  
Operating expenses                                                                                      
  Purses, stakes and trophies.....................   22.8        23.2       21.0       21.3       21.0  
  Direct salaries, payroll taxes and                                                                    
    employee benefits.............................   15.0        14.6       13.3       13.3       13.3  
  Simulcast expenses..............................   23.8        19.3       15.8       15.7       14.9  
  Pari-mutuel taxes...............................    8.3         8.8        8.6        8.6        8.5  
  Other direct meeting expenses...................   14.2        13.8       14.2       14.2       14.9  
  OTW concession expenses.........................    1.9         2.7        3.9        3.9        3.8  
  Management fees paid to related entity..........    2.8         0.8         --         --         --  
  Other operating expenses........................    5.4         7.2        8.9        8.5        8.0  
                                                    -----       -----      -----      -----      -----  
      Total operating expenses....................   94.2        90.4       85.7       85.5       84.4  
                                                    -----       -----      -----      -----      -----  
Income from operations............................    5.8         9.6       14.3       14.5       15.6  
                                                    -----       -----      -----      -----      -----  
Other income (expenses)                                                                                 
  Interest income (expense), net..................   (2.3)       (0.7)       0.4        0.4        0.4  
  Other...........................................    0.1          --         --         --         --  
                                                    -----       -----      -----      -----      -----  
      Total other income (expenses)...............   (2.2)       (0.7)       0.4        0.4        0.4  
                                                    -----       -----      -----      -----      -----  
Income before income taxes and                                                                          
  extraordinary item..............................    3.6         8.9       14.7       14.9       16.0  
                                                    =====       =====      =====      =====      =====  
Net income........................................    3.4         5.7        8.7        8.8        9.5  
                                                    =====       =====      =====      =====      =====  

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED              
SEPTEMBER 30, 1995                                                              

  Total revenue increased by approximately $2.6 million or 5.9% from $43.9
million for the nine months ended September 30, 1995 to $46.5 million for the   
nine months ended September 30, 1996. The increase was attributable to an       
increase in import and export simulcasting revenues, offset in part by a        
decrease in pari-mutuel revenues on Penn National races. Revenues also increased
due to the opening of the Lancaster OTW on July 11, 1996. The increase in export
simulcasting revenues of $1.0 million or 71.3% from $1.4 million to $2.5 million
resulted from Penn National's races being broadcast to additional out-of-state  
locations. The decrease in pari-mutuel revenues on Penn National races was due  
to increased import simulcasting revenue from wagering on other racetracks at   
Company                                                                         

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facilities. For the nine-month period in 1996, Penn National was scheduled to   
run 165 live race days but canceled 11 days in the first quarter due to weather.
In the comparable period in 1995, Penn National ran 154 live race days.         

  Total operating expenses increased by approximately $1.7 million or 4.6%
from $37.5 million for the nine months ended September 30, 1995 to $39.2 million
for the nine months ended September 30, 1996. The increase in operating expenses
resulted from an increase in purses, stakes and trophies, pari-mutuel taxes, and
simulcast expenses resulting from an increase in revenue from import            
simulcasting, nine months of operating expenses for the York OTW in 1996        
compared to six months of expenses in 1995, and three months of operating       
expenses for the new Lancaster OTW.                                             

 Income from operations increased by approximately $0.9 million or 13.5%
from $6.4 million to $7.2 million due to the factors described above.           

 Net income from operations increased by approximately $561,000 or 14.6%
from $3.8 million for the nine months ended September 30, 1995 to $4.4 million  
for the nine months ended September 30, 1996. Income tax expense increased from 
$2.7 million to $3.0 million, primarily due to the increase in income for the   
period.                                                                         

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994           

     Total revenues increased by approximately $11.6 million or 25.3% from $46.0
million to $57.7 million in 1995. This increase was primarily attributable to an
increase in import and export simulcasting revenues, admissions programs, other 
racing revenues and concession revenues. The increase in revenues resulted from 
a full year of operations at the Chambersburg OTW compared to eight months of   
operations in 1994, the opening of the York OTW in March 1995, and an increase  
of approximately $955,000 or 80.5% from $1.2 million to $2.1 million in export  
simulcasting revenues due to Penn National races being broadcast to additional  
out-of-state locations. The decrease in pari-mutuel revenues from live races at 
the Thoroughbred Track was due to the decrease in the number of live race days  
from 219 race days in 1994 to 204 race days in 1995.                            

   Total operating expenses increased by approximately $7.8 million or 18.8%
from $41.6 million to $49.4 million in 1995. The increase in operating expenses 
resulted from a full year of operations at the Chambersburg OTW, the opening of 
the York OTW and the expansion of the corporate staff and office facility in    
Wyomissing. The decrease in management fees was a result of the management fees 
being discontinued when Penn National completed its initial public offering in  
1994.                                                                           

 Income from operations increased by approximately $3.8 million or 86.6%
from $4.4 million to $8.3 million due to the factors described above.           

     Total other income (expense) increased by approximately $533,000 due to the
investment of available cash reserves and the decrease in interest expense as a 
result of repayment of all bank debt with the proceeds of Penn National's       
initial public offering in May 1994.                                            

Net income increased by approximately $2.4 million or 91.9% from $2.6 
million to $5.0 million reflecting the factors described above. Income tax      
expenses increased from $1.4 million to $3.5 million due to the increased income
for the year.                                                                   

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993           

Total revenues increased by $3.4 million or 7.9% from $42.7 million to
$46.0 million in 1994. This increase was primarily attributable to an increase  
in import and export simulcasting revenues, which was partially offset by a     
decrease in pari-mutuel revenues from live races at the Thoroughbred Track. The 
increase in import simulcasting revenues resulted from a full year of full-card 
import simulcasting and the opening of the Chambersburg OTW in April 1994. The  
decrease in wagering on live races at the Thoroughbred Track was attributable to
a decrease in live racing days because of inclement weather and competition from
full-card import simulcasting. The increase in export simulcasting revenues     
resulted from Penn National races being broadcast to additional out-of-state    
locations.                                                                      

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    Total operating expenses increased $1.4 million or 3.5% from $40.2 million
to $41.6 million in 1994. The increase was attributable to an increase in       
purses, stakes and trophies, direct salaries, payroll taxes and employee        
benefits, pari-mutuel taxes, other direct meeting expenses, off-track wagering  
concession expenses and other operating expenses. These increases were partially
offset by a decrease in simulcast expenses and management fees paid to a related
entity. Direct salaries, payroll taxes and employee benefits, other direct      
meeting expenses and offtrack wagering concession expenses increased due to the 
April 26, 1994 opening of the Chambersburg OTW. The increases in purses, stakes 
and trophies, and pari-mutuel taxes was directly related to the increase in     
pari-mutuel revenues. The decrease in simulcast expenses was a result of the    
decrease in wagering on Penn National Races at other Pennsylvania racetracks.   
When Penn National completed its initial public offering in May 1994, it ceased 
to pay management fees to a related entity which resulted in a decrease in these
fees. The increase in other operating expenses was attributable to the opening  
of the Chambersburg OTW and the increase in officers' salaries and wages after  
the initial public offering.                                                    

     Income from operations increased by $2.0 million or 80.1% from $2.4 million
to $4.4 million in 1994, reflecting the factors described above.                

Total other (expenses) decreased by $631,000 or 66.0% from $956,000 to
$325,000 primarily because of a decrease in interest expense as a result of Penn
National repaying all of its bank debt with the proceeds of the initial public  
offering in May 1994.                                                           

  Net income increased by $1.1 million, or 78.5% from $1.5 million to $2.6
million in 1994 reflecting the factors described above. The increase in income  
before extraordinary item was offset in part by an increase in loss on early    
extinguishment of debt of $115,000 net of income taxes in 1994.                 

LIQUIDITY AND CAPITAL RESOURCES                                                 

Historically, Penn National's primary sources of liquidity and capital
resources have been cash flow from operations and borrowings from banks and     
related parties. During the nine months ended September 30, 1996, Penn          
National's cash position decreased by approximately $1.9 million from $7.5      
million at December 31, 1995 to $5.6 million at September 30, 1996, as a result 
of expenditures for improvements and equipment at the Thoroughbred Track,       
construction of the Lancaster OTW, the start of construction of the Williamsport
OTW and prepaid acquisition costs in connection with the Acquisitions. During   
the year ended December 31, 1995, the Company's cash position increased to $7.5 
million from $5.5 million at December 31, 1994.                                 

Net cash provided from operating activities totaled approximately $4.5
million for the nine months ended September 30, 1996, of which $5.3 million came
from net income and non-cash expenses, which was offset by other operating      
activity items. Net cash provided from operating activities totaled $5.9 million
during 1995, of which substantially all came from net income and non-cash       
expenses.                                                                       

     Cash flows used in investing activities for the nine months ended September
30, 1996 totaled approximately $7.8 million. Capital expenditures totaled $4.8  
million for improvements and equipment at the Thoroughbred Track, the           
construction of the Lancaster OTW and the start of construction of the          
Williamsport OTW. Prepaid acquisition costs totaled $1.9 million for the Charles
Town Acquisition and $1.1 million for the Pocono Downs Acquisition. Cash flows  
used in investing activities totaled $4.0 million for capital expenditures      
during the year ended December 31, 1995. Capital expenditures were primarily for
improvements and equipment at the Thoroughbred Track and the cost of            
construction of the York OTW.                                                   

  Cash flows from financing activities for the nine months ended September
30, 1996 totaled approximately $1.5 million from the exercise of warrants and   
the issuance of 385,290 shares of Common Stock.                                 

   The Company is subject to possible liabilities arising from environmental
conditions at the Landfill adjacent to the Harness Track. Specifically, the     
Company may incur expenses in connection with the Landfill in the future, which 
expenses may not be reimbursed by the four municipalities which are parties to  
the Settlement Agreement. The Company is unable to estimate the amount, if any, 
that it may                                                                     

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be required to expend. Any such expenses could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Environmental Liability."                                  

In May 1994, the Company completed an initial public offering which   
generated proceeds of $13.0 million after payment of commissions and other      
offering expenses. A portion of the proceeds was used to repay substantially all
of the Company's bank debt and other indebtedness outstanding at that time,     
which aggregated approximately $11.0 million. In addition, the Company made S   
corporation distributions of $3.0 million during the year ended December 31,    
1994 to the shareholders of the S corporations partially comprising the Company 
immediately prior to the initial public offering. Approximately $2.0 million of 
these distributions were not paid out in cash, but were offset against and      
applied to repay debts owed by the shareholders or their affiliates to the      
Company.                                                                        

In November 1996, the Company entered an agreement with a syndicate of
banks for which Bankers Trust Company acts as agent (the "Agent"), providing for
a $75.0 million Credit Facility. Amounts outstanding under the Credit Facility  
bear interest, at the Company's option, at the Agent's base rate plus an        
applicable margin of up to 2.0% or a eurodollar rate plus an applicable margin  
of up to 3.0%. The Credit Facility includes (i) a $47.0 million term loan, which
was used to finance the consummation of the Pocono Downs Acquisition, (ii) a    
$23.0 million term loan a portion of which was used to finance the Charles Town 
Acquisition and the balance of which will be used to finance a portion of the   
refurbishment of the Charles Town Facility and (iii) a $5.0 million revolving   
loan, including a $2.0 million letter of credit sub-limit, of which $1.4 million
was outstanding as of December 31, 1996. The Company's existing credit facility 
was repaid and terminated simultaneously with the closing of the Credit         
Facility. The Credit Facility is secured by the assets of the Company and       
contains customary covenants, including financial covenants with respect to the 
Company's leverage and interest coverage ratios, payments of dividends and sales
of assets, and customary default provisions, including provisions related to    
non-payment of principal and interest, default under other debt agreements and  
bankruptcy. Pursuant to the terms of the credit agreement under which such      
borrowings were made, the Company is obligated to apply to repayment of amounts 
outstanding under the Credit Facility 100% of the net proceeds to the Company of
any public offering of its equity securities or of any funded indebtedness      
issued by the Company if the aggregate amount of the remaining commitments and  
amounts outstanding under the Credit Facility exceeds $50.0 million, and 50% of 
the net proceeds to the Company of any public offering of its equity securities 
or of any funded indebtedness issued by the Company if the aggregate amount of  
the remaining commitments and amounts outstanding under the Credit Facility is  
between $25.0 million and $50.0 million or if the Company's leverage ratio is   
greater than 2-to-1; however, the credit agreement permits the Company to retain
up to the first $8.0 million of proceeds from the initial offering of its equity
securities after the date of the credit agreement. The Company must pay a fee of
$250,000 if the Company applies less than $19.0 million of the proceeds of such 
initial offering to repayment of amounts outstanding under the Credit Facility. 
The Credit Facility requires the Company to obtain the syndicate's consent prior
to making additional investments in new or existing businesses, subject to      
certain exceptions. The Company and the Charles Town Joint Venture have applied 
to the West Virginia State Racing Commission for confirmation of the Company's  
preliminary license to conduct racing and pari-mutuel wagering and to the West  
Virginia Lottery Commission for a license to install and operate Gaming Machines
at the refurbished Charles Town Facility; failure by the Company to obtain a    
license from the West Virginia Lottery Commission by June 1, 1997 or to retain  
both licenses constitutes an event of default under the Credit Facility. As of  
January 20, 1997, the principal amount outstanding under the Credit Facility was
$63.5 million, all of which was used to pay the purchase price for the Pocono   
Downs Acquisition and the Charles Town Acquisition and related transaction      
costs, and the average interest rate applicable to such borrowings was          
approximately 8.625%.                                                           

    During 1997, the Company anticipates capital expenditures of approximately
$4.0 million to construct the Downingtown OTW, approximately $3.0 million to    
complete the Williamsport OTW, approximately $4.0 million towards the           
construction of two additional OTWs and approximately $1.0 million for          
miscellaneous capital expenditures and improvements. Under the Credit Facility, 
the                                                                             

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Company is permitted to make capital expenditures (not including the            
refurbishment of the Charles Town Facility or the cost of Gaming Machines) of   
$12.0 million in 1997, $4.0 million in 1998 and $2.0 million in 1999 and        
thereafter. The Company anticipates expending approximately $16.0 million on the
refurbishment of the Charles Town Facility (excluding the cost of Gaming        
Machines).                                                                      

   In December 1995, the Company agreed in principle to form a joint venture
to develop, manage and operate pari-mutuel racing facilities in a state other   
than Pennsylvania or West Virginia. The actual formation of the joint venture is
subject to numerous contingencies, including receipt of regulatory approval from
that state's Horse Racing Commission and approval of the Company's lenders. The 
Company intends to fund, if successful, the joint venture's operations through  
additional borrowings and the Company's working capital.                        

On February 26, 1996, construction began on the Lancaster OTW. The    
construction costs totaled approximately $2.7 million and were funded from the  
Company's cash reserves. The Lancaster OTW opened July 11, 1996.                

 On May 13, 1996, the Company loaned $400,000 to an unrelated company in
Downingtown in connection with an option to acquire land upon which the Company 
may construct an OTW. The loan bears interest at a rate of 10% per annum and    
matures on May 13, 1997.                                                        

    Effective June 4, 1996, the Charles Town Joint Venture entered into a Loan
and Security Agreement with Charles Town Races, Inc. The Loan and Security      
Agreement provided for a working capital line of credit in the amount of        
$1,250,000. Upon consummation of the Charles Town Acquisition, Charles Town     
Races, Inc. repaid the loan and the purchase price for the Charles Town Facility
was to be reduced by $1.60 for each dollar borrowed. The parties agree that     
$936,000 of the amount borrowed was eligible for the $1.60 purchase price       
reduction and are negotiating the applicability of the purchase price reduction 
to the remaining $219,000 that was borrowed. Approximately $350,000 has been    
escrowed pending resolution of this issue.                                      

 The Company currently estimates that the net proceeds of this offering,
together with cash generated from operations and borrowings under the Credit    
Facility, will be sufficient to finance its current operations, potential       
obligations relating to the Acquisitions and planned capital expenditure        
requirements at least through 1997. There can be no assurance, however, that the
Company will not be required to seek additional capital at an earlier date. The 
Company may, from time to time, seek additional funding through public or       
private financing, including equity financing. There can be no assurance that   
adequate funding will be available as needed or, if available, on terms         
acceptable to the Company. If additional funds are raised by issuing equity     
securities, existing shareholders may experience dilution.                      

EFFECT OF INCLEMENT WEATHER AND SEASONALITY                                     

     Because horse racing is conducted outdoors, variable weather contributes to
the seasonality of the Company's business. Weather conditions, particularly     
during the winter months, may cause races to be canceled or may curtail         
attendance. During the year ended December 31, 1995, the Company lost six       
scheduled racing days due to weather conditions and during the nine month period
ended September 30, 1996, the Company lost 11 scheduled racing days due to      
weather conditions. Over the previous five years, the Company lost an average of
four days per year due to inclement weather. Because a substantial portion of   
the Company's Thoroughbred Track and Harness Track expenses are fixed, the loss 
of scheduled racing days could have a material adverse effect on the Company's  
business, financial condition and results of operations.                        

The severe winter weather in 1996 also resulted in the closure of the 
Company's OTW facilities for two days in January 1996. Although weather         
conditions reduced attendance at OTWs, the reduction in attendance at OTWs on   
days when both the Thoroughbred Track and the OTWs were open was proportionately
less than the reduction in attendance at the Thoroughbred Track. Because of the 
Company's growing dependence upon OTW operations, severe weather that causes the
Company's                                                                       

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OTWs to close could have a material adverse effect on the Company's business,   
financial condition and results of operations.                                  

 Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a 
result, the Company's revenues and net income have been greatest in the second  
and third quarters of the year and lowest in the first and fourth quarters of   
the year.                                                                       

OTHER MATTERS                                                                   

During 1995, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting   
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company adopted the provisions of SFAS 121 during the year ended       
December 31, 1995. SFAS 121 establishes accounting standards for the impairment 
of long-lived assets, certain identifiable intangibles and goodwill related to  
those assets to be held and used and for long-lived assets and certain          
identifiable intangibles to be disposed of.                                     

    The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in         
circumstances indicate that the carrying amount of the assets may not be        
recoverable. Any long-lived assets held for disposal are reported at the lower  
of their carrying amounts or fair value less cost to sell.                      

During 1995, the FASB also adopted Statement of Financial Accounting  
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
has recognition provisions that establish a fair value based method of          
accounting for stock-based employee compensation plans and established fair     
value as the measurement basis for transactions in which an entity acquires     
goods or services from nonemployees in exchange for equity instruments. SFAS 123
also has certain disclosure provisions. Adoption of the recognition provisions  
of SFAS 123 with regard to these transactions with nonemployees was required for
all such transactions entered into after December 15, 1995 and the Company      
adopted these provisions as required. The recognition provision with regard to  
the fair value based method of accounting for stock-based employee compensation 
plans is optional. The Company has decided to continue to apply Accounting      
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to     
Employees," for its stock-based employee compensation arrangements. APB 25 uses 
what is referred to as an intrinsic value based method of accounting. The       
disclosure provisions of SFAS 123 are effective for fiscal years beginning after
December 15, 1995. The Company will provide these disclosures when required.    

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BUSINESS

GENERAL                                                                         

    Penn National Gaming, which began operations in 1972, operates the largest
number of pari-mutuel wagering locations in Pennsylvania. The Company provides  
pari-mutuel wagering opportunities on both live and simulcast thoroughbred and  
harness horse races at two racetracks and six OTWs located principally in       
Eastern and Central Pennsylvania. Prior to the consummation of the Acquisitions,
the Company owned and operated the Thoroughbred Track outside Harrisburg,       
Pennsylvania and four OTWs in Chambersburg, Lancaster, Reading and York,        
Pennsylvania. On November 27, 1996, the Company consummated the Pocono Downs    
Acquisition, and as a result acquired the Harness Track outside Wilkes-Barre,   
Pennsylvania and two OTWs in Allentown and Erie, Pennsylvania. The Company now  
operates one of the two thoroughbred tracks in Pennsylvania and one of the two  
harness tracks in Pennsylvania. The Company has received approval for, and will 
open on February 13, 1997, an OTW in Williamsport, Pennsylvania. The Company    
intends to develop four additional OTWs that have been allocated to it under    
Pennsylvania law, after which it would operate a total of 11 of the 23 OTWs     
currently authorized in Pennsylvania.                                           

   Following the consummation of the Charles Town Acquisition on January 15,
1997, the Company operates, and has reached an agreement with its joint venture 
partner to hold an 89% interest in, Charles Town Races, a thoroughbred racing   
facility located in Jefferson County, West Virginia. The Charles Town Facility  
is approximately a 60-minute drive from Baltimore, Maryland and approximately a 
70-minute drive from Washington, D.C. After refurbishment, the Company expects  
to reopen Charles Town Races as an entertainment complex that will feature live 
racing, dining, simulcast wagering and Gaming Machines. On November 5, 1996,    
Jefferson County approved a referendum permitting the installation of Gaming    
Machines at the Charles Town Facility. Approval for the installation of 400     
Gaming Machines has been applied for and is expected to be obtained from the    
West Virginia Lottery Commission within 90 to 120 days after the January 15,    
1997 consummation of the Charles Town Acquisition. The Company expects that     
these machines will be installed and operational in mid-1997. The installation  
of additional Gaming Machines at the Charles Town Facility is subject to        
approval by the West Virginia Lottery Commission after application and a public 
hearing. The Company anticipates that the Charles Town Joint Venture will apply 
for approval of the installation and operation of a total of 1,000 Gaming       
Machines within the first year after the opening of the Charles Town Facility.  

The Company conducts pari-mutuel wagering at all of its locations on  
thoroughbred and harness races run at its own tracks and on thoroughbred and    
harness races import simulcast from other racetracks. The Company also export   
simulcasts races run at its own tracks for wagering at other racetracks and OTWs
in Pennsylvania and at other locations throughout the United States. The        
Company's customers can also wager on Company Races and on races import         
simulcast from other racetracks through Telebet.                                

INDUSTRY OVERVIEW                                                               

    Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering,
in which a totalisator system totals the amounts wagered and adjusts the payouts
to reflect the relative amounts bet on different horses and various possible    
outcomes. Portions of the pooled wagers are retained by the wagering facility,  
paid to the applicable regulatory or taxing authorities and distributed to the  
track's horsemen in the form of "purses" which encourage owners and trainers to 
enter their horses in that track's live races. The balance of the pooled wagers 
is paid out to bettors as winnings in accordance with the payoffs determined by 
the totalisator system. Pari-mutuel wagering is currently authorized in more    
than 40 states in the United States, all provinces in Canada and approximately  
100 other countries around the world.                                           

     Gaming and wagering companies such as the Company that focus on pari-mutuel
horse race wagering derive revenue through wagers placed at their own tracks, at
their OTWs and on their own races at the tracks and OTWs of others. While some  
states, such as New York, operate off-track betting locations that are          
independent of racetracks, in other states racetrack ownership and operation is 
typically a precondition to OTW ownership and operation. A racetrack in such a  
state, then, is akin to an "admission ticket" to the OTW business.              

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Over the past several years, attendance at live racing has generally  
declined. Prior to the inception of OTWs, declining live racing attendance at a 
track translated directly into lower purses at that track. As the size of the   
purses declined, the quality of live racing at the track would suffer, leading  
in turn to further reductions in attendance. The Company believes that increased
contributions to the purse pool from wagers placed at OTWs affiliated with      
racetracks have significantly offset the effects of declining live racing       
attendance on race quality, and thereby improved the marketability of many      
tracks' export simulcast products. Indeed, despite declining live racing        
attendance, total pari-mutuel wagering on horse races in the United States has  
remained relatively constant in recent years, increasing slightly from          
approximately $14.1 billion in 1992 to approximately $14.6 billion in 1995,     
according to the Association of Racing Commissioners International, Inc.; an    
increase in simulcast, inter-track, off-track and telephone wagering from       
approximately $7.0 billion to approximately $10.1 billion during that period has
offset declining wagering at tracks on live races. Moreover, a number of states 
have recently begun to authorize the installation of slot machines, video       
lottery terminals or other gaming machines at live racing venues such as        
thoroughbred horse tracks, harness tracks and dog tracks. The revenue from these
gaming opportunities and from the higher volume of wagers placed at these venues
has not only increased total revenues for the tracks at which they are          
installed, but has generally further increased purse size and thereby resulted  
in higher quality races that can command higher simulcast revenues. Given that  
many pari-mutuel wagering companies, such as the Company, face the necessary    
precondition of conducting live racing operations as their entree into the      
industry, the Company believes that its opportunities for success can be        
maximized through OTW operations, import simulcasting and export simulcasting   
and the operation of Gaming Machines, to the extent permitted.                  

STRATEGY                                                                        

     The Company intends to be a leading participant in the wagering industry by
capitalizing upon its horse racing expertise and its numerous wagering          
locations. The Company's strategy is to focus on:                               

Opening Additional OTWs                                               

    The Company intends to expand its operations and increase its OTW revenues
by opening the five additional OTWs which it has been allocated under the       
Pennsylvania Racing Act. The Company has obtained approval for, and will open on
February 13, 1997, an additional OTW in Williamsport, Pennsylvania, and has     
applied for approval of and is evaluating possible sites for an OTW in          
Downingtown, Pennsylvania. The Company expects to move expeditiously to select  
appropriate locations, apply for and obtain regulatory approvals and open its   
three remaining allocated OTWs in Pennsylvania. In addition, the Company will   
consider opening OTWs in other states to the extent that market conditions and  
the regulatory environment may present opportunities for it to leverage its OTW 
operating experience. West Virginia law currently does not permit the operation 
of OTWs.                                                                        

Developing the Charles Town Facility and Operating Gaming Machines    

     The Company intends to refurbish the Charles Town Facility and reopen it as
an entertainment complex integrating Gaming Machines with the Company's core    
business strengths of live racing and simulcast wagering. The refurbishment will
include the renovation of the Charles Town Facility's thoroughbred track and    
barns, the remodeling of its clubhouse and dining facilities and the initial    
installation of 400 Gaming Machines; the cost of purchasing or leasing the      
Gaming Machines is not included in the $16.0 million estimated cost of the      
refurbishment. The installation of the initial 400 Gaming Machines and any      
additional Gaming Machines at the Charles Town Facility is subject to the       
approval of the West Virginia Lottery Commission after application and a public 
hearing. The Company has applied for, but has not yet obtained, approval for the
installation of the initial 400 Gaming Machines and anticipates that it will    
apply for approval of the installation and operation of a total of 1,000 Gaming 
Machines within the first year after the opening of the Charles Town Facility.  
The Company expects that increased revenues at the Charles Town Facility from   
live and simulcast wagering and from Gaming Machines will result in             
significantly higher purse sizes and in a corresponding improvement in both the 
quality of live races and their marketability as an export simulcast product. In
addition, the Company intends to explore opportunities to provide additional    
forms of entertainment at land adjacent to the Charles Town Facility in order to
attract additional patrons.                                                     

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    Maintaining Quality Import Simulcasting and Increasing Export Simulcasting

    The Company intends to maintain the quality of import simulcast races that
it makes available for wagering by customers at its tracks and OTWs and to      
increase the volume of export simulcasting of Company Races for wagering at the 
facilities of others. The Company believes that by import simulcasting high     
quality races from nationally known racetracks it can increase the number of    
wagerers as well as the size of the average wager. Subject to applicable        
regulations, the Company also will seek to increase export simulcasting of races
from the Thoroughbred Track and the Harness Track, and introduce export         
simulcasting from the refurbished Charles Town Facility, for wagering at        
out-of-state racetracks, OTWs, casinos and other gaming facilities, and to      
improve the quality of its export simulcast products by increasing purse sizes  
where practicable and to the fullest extent that changing laws and regulations  
may make possible. The Company believes that the minimal direct costs associated
with export simulcasting make it a particularly desirable source of revenue.    

Exploring Other Gaming Opportunities                                  

    The Company intends to continue identifying strategic opportunities in the
pari-mutuel wagering and gaming industry which complement the Company's core    
operations and leverage its pari-mutuel management and operating strengths. The 
Company intends to explore other opportunities to capitalize upon any changes in
gaming legislation, in Pennsylvania, West Virginia and other states, including  
legislation relating to Gaming Machines and riverboat gaming. In December 1995, 
the Company agreed in principle with an unrelated party to form a joint venture 
to develop, manage and operate pari-mutuel racing facilities in a state other   
than Pennsylvania or West Virginia, and will seek further such opportunities as 
they may present themselves. Moreover, the Company is also closely monitoring   
possible legislation to authorize Gaming Machines in Pennsylvania.              

ACQUISITIONS                                                                    

Pocono Downs Acquisition                                              

  On November 27, 1996, the Company acquired Pocono Downs for an aggregate
purchase price of $47.0 million plus approximately $525,000 in                  
acquisition-related fees and expenses. In addition, pursuant to the terms of the
purchase agreement, the Company will be required to pay the sellers of Pocono   
Downs an additional $10.0 million if, within five years after the consummation  
of the Pocono Downs Acquisition, Pennsylvania authorizes any additional form of 
gaming in which the Company may participate. The $10.0 million payment is       
payable in annual installments of $2.0 million a year for five years, beginning 
on the date that the Company first offers such additional form of gaming.       

   Pocono Downs conducts harness racing at the Harness Track located outside
Wilkes-Barre, Pennsylvania, export simulcasting of Harness Track races to       
locations throughout the United States, pari-mutuel wagering at the Harness     
Track and at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and 
on import simulcast races from other racetracks and telephone account wagering  
on live and import simulcast races. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, Pocono Downs had revenues of approximately
$33.9 million and $25.7 million, respectively, and EBITDA of approximately $8.0 
million and $5.5 million, respectively.                                         

Charles Town Acquisition                                              

    On January 15, 1997, the Charles Town Joint Venture acquired substantially
all of the assets of Charles Town relating to the Charles Town Facility for an  
aggregate net purchase price of approximately $16.5 million plus approximately  
$2.0 million in acquisition-related fees and expenses. The Charles Town Facility
conducts live thoroughbred horse racing, on-site pari-mutuel wagering on live   
races run at the Charles Town Facility and wagering on import simulcast races.  
The Company expects to refurbish the Charles Town Facility as an entertainment  
complex that will feature live racing, dining, simulcast wagering and, in       
mid-1997, upon completion of the interior refurbishment, 400 Gaming Machines.   
The estimated cost of the refurbishment, exclusive of the cost of the purchase  
or lease of the Gaming Machines, is approximately $16.0 million. For the year   
ended December 31, 1995 and the nine months ended September 30, 1996, Charles   
Town had revenues of approximately $11.0 million and $8.7 million, respectively,
and net losses of approximately $2.2 million and $1.9 million, respectively.    

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 Pursuant to the original operating agreement governing the Charles Town
Joint Venture, the Company currently holds an 80% ownership interest in the     
Charles Town Joint Venture and was obligated to contribute 80% of the purchase  
price of the Charles Town Acquisition and 80% of the cost of refurbishing the   
Charles Town Facility. In fact, the Company contributed 100% of the purchase    
price of the Charles Town Acquisition and expects to contribute 100% of the cost
of refurbishing the Charles Town Facility. The Company has reached an agreement 
with Bryant pursuant to which the parties will amend the operating agreement to 
increase the Company's ownership interest in the Charles Town Joint Venture to  
89% and decrease Bryant's interest to 11%. In addition, the amendment will      
provide that the entire amount the Company has contributed, and will contribute,
to the Charles Town Joint Venture for the acquisition and refurbishment of the  
Charles Town Facility would be treated, as between the parties, as a loan to the
Charles Town Joint Venture from the Company. The proposed changes in the        
ownership of the Charles Town Joint Venture are subject to the review of        
applicable West Virginia racing and lottery regulatory authorities.             

    The Charles Town Joint Venture acquired its option to purchase the Charles
Town Facility from Bryant; Bryant, in turn, acquired the option from Showboat.  
Showboat has retained an option to operate any casino at the Charles Town       
Facility in return for a management fee (to be negotiated at the time, based on 
rates payable for similar properties). Showboat has also retained a right of    
first refusal to purchase or lease the site of any casino at the Charles Town   
Facility proposed to be leased or sold and to purchase any interest proposed to 
be sold in any such casino (on the same terms offered by a third party or       
otherwise negotiated with the Charles Town Joint Venture). The rights retained  
by Showboat extend for a period of five years from the date that the Charles    
Town Joint Venture exercises its option to purchase the Charles Town Facility   
and expire thereafter unless legislation to permit casino gaming at the Charles 
Town Facility has been adopted prior to the end of the five-year period. If such
legislation has been adopted prior to such time, then the rights of Showboat    
continue for a reasonable time (not less than 24 months) to permit completion of
negotiations.                                                                   

   While the agreement with Showboat does not specify what activities at the
Charles Town Facility would constitute operation of a casino, Showboat has      
agreed that the installation and operation of video lottery terminals (like the 
Gaming Machines the Company intends to install) at the Charles Town Facility's  
race track would not trigger the Showboat Option. If West Virginia law were to  
permit casino gaming at the Charles Town Facility and if Showboat were to       
exercise the Showboat Option, the Company would be required to pay a management 
fee to Showboat for the operation of the casino.                                

RACING AND WAGERING OPERATIONS                                                  

   The Company's revenues are derived from: (i) wagering on Company Races at
Company facilities; (ii) wagering on non-Company Races import simulcast to      
Company facilities; (iii) fees from wagering on export simulcasting of Company  
Races to non-Company wagering venues; (iv) admissions, program sales and certain
other ancillary activities; and (v) food and beverage sales and concessions.    

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 The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations related to the Thoroughbred Track for the year 
ended December 31:                                                              

                                                        [Enlarge/Download Table]


                                        1991           1992           1993           1994           1995     
                                    -------------  -------------  -------------  -------------  -------------
                                                                                                             
Number of live racing days.........           245            247            238            219            204
Paid attendance:                                                                                             
  At the Thoroughbred Track........       636,944        619,359        548,085        485,224        430,128
  At Reading OTW...................            --        166,210        251,540        253,183        246,012
  At Chambersburg OTW..............            --             --             --        110,075        143,554
  At York OTW......................            --             --             --             --        232,109
                                    -------------  -------------  -------------  -------------  -------------
  Total paid attendance (1)........       636,944        785,569        799,625        848,482      1,051,803
                                    -------------  -------------  -------------  -------------  -------------
Wagering on Penn National                                                                                    
  races (2):                                                                                                 
  At the Thoroughbred Track........ $  64,941,583  $  62,661,360  $  53,558,980  $  44,650,714  $  36,833,992
  At Reading OTW...................            --      8,246,778     10,503,690      8,022,458      7,140,405
  At Chambersburg OTW..............            --             --             --      3,550,529      4,193,087
  At York OTW......................            --             --             --             --      8,542,707
  Telebet..........................     6,957,480      7,733,190      6,790,381      4,483,324      4,047,377
Simulcasts:                                                                                                  
  At other PA racetracks...........    31,897,564     32,172,368     25,918,754     18,058,438     14,895,086
  At other PA OTWs.................    24,754,654     42,518,067     42,167,129     32,481,721     26,492,679
Export simulcasting................            --     10,201,902     12,745,934     40,337,450     72,251,622
                                    -------------  -------------  -------------  -------------  -------------
Total wagers on Penn National                                                                                
  races............................   128,551,281    163,533,665    151,684,868    151,584,634    174,396,955
                                    -------------  -------------  -------------  -------------  -------------
Wagering by Simulcast on Non-Penn                                                                            
  National races (2):                                                                                        
  At the Thoroughbred Track:                                                                                 
      Other PA races...............    28,660,122     29,576,594     23,326,210     14,429,800     10,370,871
    Out-of-state races.............            --             --     10,599,425     32,817,789     38,455,811
  By Telebet:                                                                                                
    Other PA races.................            --             --        795,054      1,232,123      1,267,306
    Out-of-state races.............            --             --        517,850      2,251,377      2,966,226
  At Reading OTW:                                                                                            
    Other PA races.................            --     12,582,339     17,263,753     10,411,832      8,611,521
    Out-of-state races.............            --             --      5,750,123     21,279,647     27,058,178
  At Chambersburg OTW:                                                                                       
    Other PA races.................            --             --             --      2,548,691      3,193,185
    Out-of-state races.............            --             --             --      8,489,914     16,978,414
  At York OTW:                                                                                               
    Other PA races.................            --             --             --             --      5,716,279
    Out-of-state races.............            --             --             --             --     27,881,082
                                    -------------  -------------  -------------  -------------  -------------
Total wagers on non-Penn National                                                                            
  races............................    28,660,122     42,158,933     58,252,415     93,461,173    142,498,873
                                    -------------  -------------  -------------  -------------  -------------
Total wagers on Penn National and                                                                            
  non-Penn National races.......... $ 157,211,403  $ 205,692,598  $ 209,937,283  $ 245,045,807  $ 316,895,828
                                    =============  =============  =============  =============  =============
Average daily purses                                                                                         
  Penn National races.............. $      35,613  $      38,746  $      40,834  $      48,560  $      57,897
Gross margin from wagering (3):                                                                              
  Wagering on Penn National                                                                                  
    races..........................     8,092,000      9,711,000      8,850,000      8,313,000      8,513,000
  Wagering on non-Penn National                                                                              
    races..........................     3,109,000      4,838,000      6,496,000      9,650,000     16,121,000
                                    -------------  -------------  -------------  -------------  -------------
    Total gross margin from                                                                                  
      wagering..................... $  11,201,000  $  14,549,000  $  15,346,000  $  17,963,000  $  24,634,000
                                    =============  =============  =============  =============  =============


------------------                                                              
(1) Does not reflect attendance at the Thoroughbred Track for wagering on       
    simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May 
1992, April 1994, March 1995, and July 1996, respectively.              

(2) Wagering on certain imported stakes races is included in Wagering on Penn   
National races.                                                         

(3) Amounts equal total pari-mutuel revenues, less purses paid to the           
Thoroughbred Horsemen, taxes payable to Pennsylvania and simulcast      
commissions or host track fees paid to other racetracks.                

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 The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations related to the Harness Track for the year ended
December 31:                                                                    

                                                        [Enlarge/Download Table]

                                         1991           1992           1993           1994           1995     
                                     -------------  -------------  -------------  -------------  -------------
                                                                                                              
Number of live racing days:                    150            149            147            143            135
Paid attendance:                                                                                              
  At the Harness Track.............        279,683        257,249        211,629        253,521        242,870
  At Erie OTW......................        101,411        141,108        135,617        129,074        116,367
  At Allentown OTW.................             --             --        136,620        275,118        272,491
                                     -------------  -------------  -------------  -------------  -------------
  Total paid attendance (1)........        381,094        398,357        483,866        657,713        631,728
                                     -------------  -------------  -------------  -------------  -------------
Wagering on Pocono Downs                                                                                      
  races (2):                                                                                                  
  At the Harness Track.............  $  24,612,036  $  21,327,604  $  18,895,856  $  17,758,559  $  15,672,606
  At Erie OTW......................        942,647      1,311,185      1,392,676      1,014,707        653,745
  At Allentown OTW.................             --             --      1,432,042      2,455,269      2,025,988
Simulcasts:                                                                                                   
  At other PA racetracks...........      7,765,756      7,196,291      7,122,072      5,241,868      4,063,992
  At other PA OTWs.................      6,998,177     13,674,763     13,050,534      9,645,719      7,690,019
Export simulcasting................             --             --             --     10,835,744     18,366,920
                                     -------------  -------------  -------------  -------------  -------------
Total wagers on Pocono Downs                                                                                  
  races............................  $  40,318,616  $  43,509,843  $  41,893,180  $  46,951,866  $  48,473,270
                                     -------------  -------------  -------------  -------------  -------------
Wagering by Simulcast on Non-Pocono                                                                           
  Downs races (2):                                                                                            
  At the Harness Track:                                                                                       
    Other PA races.................  $  21,785,756  $  24,536,505  $  21,243,244  $  12,252,776  $  13,261,224
    Out-of-state races.............             --             --      5,816,721     21,968,275     28,849,841
  By Dial-A-Bet:                                                                                              
    Other PA races.................             --             --             --             --         40,925
    Out-of-state races.............             --             --             --             --         34,141
  At Erie OTW:                                                                                                
    Other PA races.................     10,911,442     17,049,662     14,412,508      8,232,309      7,034,298
    Out-of-state races.............             --             --      4,646,966     17,157,155     21,690,819
  At Allentown OTW:                                                                                           
    Other PA races.................             --             --     12,998,716     17,697,563     15,289,894
    Out-of-state races.............             --             --      6,699,300     32,523,258     39,123,872
                                     -------------  -------------  -------------  -------------  -------------
Total wagers on non-Pocono Downs                                                                              
  races............................  $  32,697,198  $  41,586,167  $  65,817,455  $ 109,831,336  $ 125,325,014
                                     -------------  -------------  -------------  -------------  -------------
Total wagers on Pocono Downs and                                                                              
  non-Pocono Downs races...........  $  73,015,814  $  85,096,010  $ 107,710,635  $ 156,783,202  $ 173,798,284
                                     =============  =============  =============  =============  =============
Average daily purses                                                                                          
  Pocono Downs races...............  $      24,205  $      22,448  $      26,022  $      35,790  $      42,314
Gross margin from                                                                                             
  wagering (3).....................  $   7,204,591  $   8,100,860  $  10,918,491  $  16,652,676  $  17,838,231
                                     =============  =============  =============  =============  =============

------------------                                                              
(1) Does not reflect attendance at the Harness Track for wagering on simulcasts 
  when live racing is not conducted, but does reflect attendance at the Erie
 and Allentown OTWs, which opened in May 1991 and July 1993, respectively.

(2) Wagering on certain imported stakes races is included in Wagering on Pocono 
Downs races.                                                            

(3) Amounts equal total pari-mutuel revenues, less purses paid to the Harness   
 Horsemen, taxes payable to Pennsylvania and simulcast commissions or host
track fees paid to other racetracks.                                    

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 The following table summarizes the Company's operations and facilities:

TRACKS

                                                        [Enlarge/Download Table]

      FACILITY               LOCATION                DATE OPENED/STATUS                OPERATIONS CONDUCTED       
---------------------  ---------------------  ---------------------------------  ---------------------------------
                                                                                                                  
Penn National Race     Grantville, PA         Constructed in 1972; operated by   Live thoroughbred racing;        
Course                                        Penn National since 1972           simulcast wagering; dining;      
                                                                                 telephone account wagering       

Pocono Downs           Plains Township, PA    Constructed in 1965; operated by   Live harness racing; simulcast   
Racetrack                                     Penn National since 1996           wagering; dining; telephone      
                                                                                 account wagering                 

Charles Town Races     Charles Town, WV       Constructed in 1933; acquired by   When reopened: live thoroughbred 
                                              Charles Town Joint Venture on      racing; simulcast wagering;      
                                              January 15, 1997; to be            dining; Gaming Machines          
                                              refurbished in 1997                                                 

OTWS(1) 

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                                                                           SIZE                                    
      FACILITY               LOCATION           DATE OPENED/STATUS      (SQ. FT.)      COST(2)         LICENSEE    
---------------------  ---------------------  -----------------------  ------------  ------------  ----------------
                                                                                                                   
Allentown              Allentown, PA          Opened July 1993            28,500     $  5,207,000  Pocono Downs    
Chambersburg           Chambersburg, PA       Opened April 1994           12,500        1,500,000  Penn National   
Erie                   Erie, PA               Opened May 1991             22,500        3,575,000  Pocono Downs    
Lancaster              Lancaster, PA          Opened July 1996            24,000        2,700,000  Penn National   
Reading                Reading, PA            Opened May 1992             22,500        2,100,000  Penn National   
York                   York, PA               Opened March 1995           25,000        2,200,000  Penn National   
Williamsport           Williamsport, PA       Approval obtained;          14,000        3,000,000  Penn National   
                                              to open on                               (estimated)                 
                                              February 13, 1997                                                    
Downingtown            Downingtown, PA        Proposed                    20,000        4,000,000  Penn National   
                                                                       (estimated)     (estimated)                 

------------------                                                              
(1) This table does not include three additional Pennsylvania OTWs which the    
Company is authorized to operate under Pennsylvania law.                
(2) Consists of construction costs, equipment and, for owned properties, the    
cost of land and building.                                              

Live Racing                                                           

     The Company has conducted live racing at the Thoroughbred Track since 1972,
and has held at least 204 days of live racing at the facility in each of the    
last five years. The Thoroughbred Track is one of only two thoroughbred         
racetracks in Pennsylvania. Although other regional racetracks offer nighttime  
thoroughbred racing, the Thoroughbred Track is the only racetrack in the Eastern
time zone conducting year-round nighttime thoroughbred horse racing, which the  
Company believes increases its opportunities to export simulcast its races      
during periods in which other racetracks are not conducting live racing. Post   
time at the Thoroughbred Track is 7:30 p.m. on Wednesdays, Fridays and          
Saturdays, and 1:30 p.m. on Sundays and holidays.                               

The Pocono Downs Acquisition was consummated following the last day of
racing at the Harness Track for the 1996 season. The Company expects to resume  
live racing at the Harness Track in April 1997 and plans to conduct 135 days of 
live harness racing at the facility in the 1997 season. Post time at the Harness
Track is expected to be 7:30 p.m. The Charles Town Facility is currently closed.
The Company has received preliminary approval for, and plans to conduct, 159    
days of thoroughbred racing at the facility in the 1997 season following the    
reopening of the Charles Town Facility's racetrack                              

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(currently anticipated to be in April 1997). Post time at the Charles Town      
Facility is expected to be 7:30 p.m. on Fridays and Saturdays and 1:30 p.m. on  
Wednesdays and Sundays.                                                         

   Revenues from Company Races consist of the total amount wagered, less the
amount paid as winning wagers. Of the amount not returned to bettors as winning 
wagers, a portion is paid to the state in which the track is located and the    
balance is divided between the Company and purses for the horsemen at that      
track. The Pennsylvania Racing Act specifies the maximum percentages of each    
dollar wagered on horse races in Pennsylvania which can be retained by the      
Company (prior to required payments to the Pennsylvania Horsemen and applicable 
taxing authorities). The percentages vary, based on the type of wager; the      
average percentage is approximately 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues     
derived from wagers at the Thoroughbred Track or the Company's OTWs, the        
Company's revenues on each race are determined pursuant to such maximum         
percentage and agreements with the other racetracks and OTWs at which wagering  
is taking place. Amounts payable to the Pennsylvania Horsemen are determined    
under agreements with the Pennsylvania Horsemen and vary depending upon where   
the wagering is conducted and the racetrack at which such races take place. The 
Pennsylvania Horsemen receive their share of such wagering as race purses. The  
Company retains a higher percentage of wagers made at its own facilities than of
wagers made at other locations. The West Virginia Racing Act provides for a     
similar disposition of pari-mutuel wagers placed at the Charles Town Facility,  
with the average percentage of wagers retained by Charles Town having been      
approximately 20% (prior to required payments to the Charles Town Horsemen and  
to applicable West Virginia taxing authorities and other mandated beneficiary   
organizations).                                                                 

OTW Wagering                                                          

At OTWs, as at the Company's racetracks, customers place wagers on    
thoroughbred and harness races simulcast from the Company's racetracks and on   
import simulcast races from other tracks around the country. Under the          
Pennsylvania Racing Act, only licensed thoroughbred and harness racing          
associations, such as the Company, can operate OTWs or accept customer wagers on
simulcast races at Pennsylvania racetracks. Each OTW is required by the         
Pennsylvania Racing Act to provide various amenities, including dining and other
services designed to attract a wide range of patrons. The Company operates six  
of the 16 OTWs now open in Pennsylvania, located in Allentown, Chambersburg,    
Erie, Lancaster, Reading and York, Pennsylvania, and has the right (subject to  
applicable regulatory approvals) to open and operate an additional five         
Pennsylvania OTWs, which would give the Company a total of 11 of the 23 OTWs    
currently authorized by Pennsylvania law. Of its five additional allocated OTWs,
one new OTW located in Williamsport, Pennsylvania has been approved and will    
open on February 13, 1997, and regulatory approval has been sought for a new OTW
in Downingtown, Pennsylvania. The Company expects to move expeditiously to      
select appropriate locations, apply for and obtain regulatory approvals and open
the remaining three allocated OTWs. The Company believes that expansion through 
the opening of the five additional Pennsylvania OTWs which the Company has been 
allocated will increase its customer wagering base. The Company intends to open 
its OTWs outside of large metropolitan areas and away from the Thoroughbred     
Track and the Harness Track and other existing OTWs; the Company thus believes  
that it will be offering a new form of entertainment to the communities that it 
enters.                                                                         

Simulcasting                                                          

     The Company has been transmitting simulcasts of its races to other wagering
locations and receiving simulcasts of races from other locations for wagering by
its customers at Company facilities year-round, for more than five years. When  
customers place wagers on import simulcast races, the Company receives revenue  
and incurs expense in substantially the same manner as it would if the race had 
been run at one of the Company's own tracks: of the amount not returned to      
bettors as winning wagers, a portion is paid to the state in which the Company  
wagering facility is located, a portion is paid to the purse fund for the horse 
owners or trainers (thoroughbred or harness) of the Company's racetrack with    
which the wagering facility is associated, and the balance is retained by the   
Company. The Company believes that full card import simulcasting, in which all  
of the races at a non-                                                          

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Company track are import simulcast to a Company wagering facility, has improved 
the wagering opportunities for its customers and thereby increased the amount   
wagered at Company facilities. When the Company export simulcasts Company Races 
for wagering at non-Company locations, it receives a fixed percentage of the    
amounts wagered on that race from the location to which the simulcast is        
exported, while incurring minimal additional expense. During the year ended     
December 31, 1996, the Company received import simulcasts from approximately 57 
racetracks (including Belmont Park, Saratoga, Gulfstream Park, Santa Anita and  
Arlington International Racecourse) and transmitted export simulcasts of Company
Races to 63 locations.                                                          

Pursuant to an agreement among the members of the Pennsylvania Racing 
Association, the Company and the two other Pennsylvania racetracks provide      
simulcasts of all their races to all of each other's facilities and set the     
commissions payable on such races. In addition, the Company has short-term      
agreements with various racetracks throughout the United States to import       
simulcast from, and export simulcast to, their facilities; these agreements     
include import simulcasts of major stakes races.                                

   Wagering at the Company's facilities on import simulcasting of races from
other tracks, especially from nationally-known tracks in other states, competes 
with wagering on Company Races. The Company believes, however, that import      
simulcasting of out-of-state races, including full card import simulcasting, is 
beneficial economically to the Company because it makes available wagering on   
higher quality races and thus increases the size of the average wager.          

Telebet                                                               

In 1983, the Company pioneered Telebet, Pennsylvania's first telephone
account wagering system. Telebet customers open an account by depositing funds  
with the Company at one of its locations. Account holders can then place wagers 
by telephone on Company Races and import simulcast races to the extent of the   
funds on deposit in the account; any winnings are posted to the account and are 
available for future wagers. In December 1995, the Harness Track instituted     
Dial-A-Bet, a similar telephone account betting system.                         

Gaming Machine Operations                                             

    On November 5, 1996, Jefferson County, West Virginia approved a referendum
authorizing the installation and operation of Gaming Machines at the Charles    
Town Facility. As a result, the Company consummated the Charles Town Acquisition
on January 15, 1997. In mid-1997, the Company intends to reopen the Charles Town
Facility as an entertainment complex that will feature live racing, dining,     
simulcast wagering and Gaming Machines. The Charles Town Joint Venture has      
applied to the West Virginia Lottery Commission for approval to operate         
initially 400 Gaming Machines, and expects to obtain such approval within 90 to 
120 days after the January 15, 1997 consummation of the Charles Town            
Acquisition. The machines will be slot-machine-style video machines that depict 
spinning reels and video card games such as blackjack and poker. The West       
Virginia Gaming Machine Act specifies the maximum percentage of each dollar     
wagered on Gaming Machines which can be retained by the Company; the maximum    
statutory rate is 20%. The balance of each dollar wagered must be paid out to   
the public as winning wagers. Of the portion retained by the Company, a portion 
is paid to taxing authorities and other beneficiary organizations mandated by   
the State of West Virginia and a portion is paid to the Charles Town Horsemen in
the form of purses. The installation of additional Gaming Machines at the       
Charles Town Facility is subject to approval by the West Virginia Lottery       
Commission after application and a public hearing. The Company anticipates that 
the Charles Town Joint Venture will apply for approval of the installation and  
operation of a total of 1,000 Gaming Machines at the Charles Town Facility      
within the first year after the opening of the Charles Town Facility.           

Other Gaming Opportunities                                            

   In December 1995, the Company agreed in principle with an unrelated party
to form a joint venture for the purpose of developing, managing and operating   
pari-mutuel racing facilities in a state other than Pennsylvania or West        
Virginia. The actual formation of the joint venture is subject to numerous      
contingencies including receipt of regulatory approval from that state's Horse  
Racing Commission. Additional investments by the Company in new or existing     
businesses are subject to the                                                   

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consent of the Company's lenders under the Credit Facility. See "Management's   
Discussion and Analysis of Financial Condition and Results of Operations --     
Liquidity and Capital Resources." To date, the Company has not invested a       
material amount and the joint venture has conducted no operations.              

MARKETING                                                                       

    The Company seeks to increase wagering by broadening its customer base and
increasing the wagering activity of its existing customers. To attract new      
customers, the Company seeks to increase the racing knowledge of its customers  
through its television programming, and by providing "user friendly" automated  
wagering systems and comfortable surroundings. The Company also seeks to attract
new customers by offering various types of promotions including family fun days,
premium give-away programs, contests and handicapping seminars.                 

Televised Racing Program                                              

   The Company's Racing Alive program is televised by satellite transmission
commencing approximately one hour before post time on each live racing day at   
the Thoroughbred Track. The program provides color commentary on the races at   
the Thoroughbred Track (including wagering odds, past performance information   
and handicapper analysis), general education on betting and handicapping,       
interviews with racing personalities and featured races from other thoroughbred 
racetracks across the country. The Racing Alive program is shown at the         
Thoroughbred Track and on various cable television systems in Pennsylvania and  
is transmitted to all OTWs that receive Penn National Races. The Company intends
to expand Racing Alive and/or to create additional televised programming to     
cover racing at the Harness Track and at other harness racing venues throughout 
the United States. The Company's satellite transmissions are encoded so that    
only authorized facilities can receive the program.                             

Automated Wagering Systems                                            

    To make wagering more "user friendly" to the novice and more efficient for
the expert, the Company leases Autotote Corporation's automated wagering        
equipment. These wagering systems enable the customer to choose a variety of    
ways to place a bet through touch-screen interactive terminals and personalized 
portable wagering terminals, provide current odds information and enable        
customers to place bets and credit winning tickets to their accounts. Currently,
more than 35% of all wagers at the Thoroughbred Track are processed through     
these self-service terminals and Telebet.                                       

Modern Facilities                                                     

The Company provides a comfortable, upscale environment at each of its
OTWs, including a full bar, a range of restaurant services and an area devoted  
to televised sporting events. The Company believes that its attractive          
facilities appeal to its current customers and to new customers, including those
who have not previously visited a racetrack.                                    

PURSES; AGREEMENTS WITH HORSEMEN                                                

The Horsemen Agreements set forth the amounts to be paid to the       
Pennsylvania Horsemen as racing purses. Revenues from wagering at the           
Thoroughbred Track and the Harness Track, except for wagering on races simulcast
from outside Pennsylvania, are divided approximately equally between the Company
and the Pennsylvania Horsemen. Revenues from all other sources (all wagering at 
the Company's OTWs and on races simulcast from outside Pennsylvania) are shared 
such that the Pennsylvania Horseman generally receive between 3% and 7.5% of    
total wagering at the OTWs.                                                     

The Company sets the purses paid on Company Races, based on projected 
wagering and in accordance with the terms of the Horsemen Agreements. Because   
the amount of the purses is based on projections, at any given point in time the
Pennsylvania Horsemen will have either been overpaid or underpaid. The agreement
with the Thoroughbred Horsemen also permits the Thoroughbred Horsemen to require
immediate purse adjustments should the amount of revenues to be paid to them    

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as purses, and remaining unpaid, exceed $100,000. The amount of underpaid or    
overpaid purses varies from time to time, and the Company believes that further 
action to reduce the amount of underpaid purses will not affect its ability to  
increase purses in an orderly manner. In setting future purses the Company      
seeks, over time, to adjust for the under or over-payments, but no assurance can
be given that any such adjustment will be accurate or adequate.                 

   During the years ended December 31, 1993, 1994 and 1995, the Thoroughbred
Horsemen earned an aggregate of approximately $9.7 million, $10.7 million and   
$12.0 million in purses, respectively. The average daily purses at the          
Thoroughbred Track during the three-year period increased from approximately    
$40,800 to approximately $57,900. During the nine months ended September 30,    
1995 and 1996, the Thoroughbred Horsemen earned an aggregate of approximately   
$9.3 million and $9.7 million in purses, respectively. The Company believes that
the increases in daily purses have contributed to an incremental increase in the
quality of horses racing at the Thoroughbred Track. The average daily purses at 
the Thoroughbred Track for calendar 1996 were approximately $59,600 per day.    
During the years ended December 31, 1993, 1994 and 1995, the Harness Horsemen   
earned an aggregate of approximately $4.7 million, $6.0 million and $6.5 million
in purses, respectively. The average daily purses at the Harness Track during   
the three-year period increased from approximately $26,000 to approximately     
$42,300. During the nine months ended September 30, 1995 and 1996, the Harness  
Horsemen earned an aggregate of approximately $5.2 million and $5.0 million in  
purses, respectively. The average daily purses earned at the Harness Track for  
calendar 1996 were approximately $42,300 per day.                               

The Thoroughbred Horsemen Agreement was entered into in February 1996,
expires in February 1999 and is subject to automatic renewal for successive one 
year terms unless either party gives notice of termination at least 90 days     
prior to the end of any such period. The Harness Horsemen Agreement was entered 
into in November 1994, became effective in January 1995 and expires in January  
2000. Currently, there is no agreement with the Charles Town Horsemen. The      
Company has entered into discussions with the Charles Town Horsemen toward      
obtaining an agreement. The future success of the Company depends, in part, on  
its ability to maintain a good relationship with the Horsemen and to obtain     
renewal of the Horsemen Agreements and required approvals for import simulcast  
wagering from the Charles Town Horsemen on satisfactory terms.                  

COMPETITION                                                                     

   The Company faces significant competition for wagering dollars from other
racetracks and OTWs in Pennsylvania and neighboring states (some of which also  
offer other forms of gaming), other gaming venues such as casinos and           
state-sponsored lotteries, including the Pennsylvania Lottery. The Company may  
also face competition in the future from new OTWs or from new racetracks. From  
time to time, Pennsylvania has considered legislation to permit other forms of  
gaming. Although Pennsylvania has not authorized any form of casino or other    
gaming, if additional gaming opportunities become available in or near          
Pennsylvania, such gaming opportunities could have a material adverse effect on 
the Company's business, financial condition and results of operations.          

 Company Races compete for wagering dollars and simulcast fees with live
races and races simulcast from other racetracks both inside and outside         
Pennsylvania (including several in New York, New Jersey, West Virginia, Ohio,   
Maryland and Delaware). The Company's ability to compete successfully for       
wagering dollars is dependent, in part, upon the quality of its live horse      
races. The quality of horse races at some racetracks that compete with the      
Company, either by live races or simulcasts, is higher than the quality of      
Company Races. The Company believes that there has been some improvement over   
the last several years in the quality of the horses racing at the Thoroughbred  
Track, due to incrementally higher purses being paid as a result of the         
Company's increased simulcasting activities. However, increased purses may not  
result in a continued improvement in the quality of racing at the Thoroughbred  
Track or in any material improvement in the quality of racing at the Harness    
Track or the Charles Town Facility.                                             

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    The Company's OTWs compete with the OTWs of other Pennsylvania racetracks,
and new OTWs may compete with the Company's existing or proposed wagering       
facilities. Competition between OTWs increases as the distance between them     
decreases. For example, the Company believes that its Allentown OTW, which was  
acquired in the Pocono Downs Acquisition and which is approximately 50 miles    
from the Thoroughbred Track and 35 miles from the Company's Reading OTW, has    
drawn some patrons from the Thoroughbred Track, the Reading OTW and Telebet and 
that its Lancaster OTW, which is approximately 31 miles from the Thoroughbred   
Track and 25 miles from the Company's York OTW, has drawn some patrons from the 
Thoroughbred Track, the York OTW and Telebet. Moreover, the Company believes    
that a competitor's new OTW in King of Prussia, Pennsylvania, which is          
approximately 23 miles from the Reading OTW, has drawn some patrons from the    
Reading OTW. The opening of new OTWs in close proximity to the Company's        
existing or future OTWs could have a material adverse effect on the Company's   
business, financial condition and results of operations.                        

      If the Company obtains approval for the installation of Gaming Machines at
the Charles Town Facility, the Company's Gaming Machine operations will face    
competition from other Gaming Machine venues in West Virginia and in neighboring
states (including Dover Downs in Dover, Delaware, Delaware Park in northern     
Delaware, Harrington Raceway in southern Delaware and the casinos in Atlantic   
City, New Jersey). Venues in Delaware and New Jersey, in addition to video      
gaming machines, currently offer mechanical slot machines that feature physical 
spinning reels, pull-handles and the ability to both accept and pay out coins.  
West Virginia has not authorized, and may never approve, such mechanical slot   
machines. The failure to attract or retain Gaming Machine customers at the      
Charles Town Facility, whether arising from such competition or from other      
factors, could have a material adverse effect upon the Company's business,      
financial condition and results of operations.                                  

EFFECT OF INCLEMENT WEATHER AND SEASONALITY                                     

     Because horse racing is conducted outdoors, variable weather contributes to
the seasonality of the Company's business. Weather conditions, particularly     
during the winter months, may cause races to be canceled or may curtail         
attendance. Because a substantial portion of the Company's Thoroughbred Track   
and Harness Track expenses are fixed, the loss of scheduled racing days could   
have a material adverse effect on the Company's business, financial condition   
and results of operations.                                                      

    The severe winter weather in 1996 resulted in the closure of the Company's
OTW facilities for two days in January 1996. Because of the Company's growing   
dependence upon OTW operations, severe weather that causes the Company's OTWs to
close could have a material adverse effect upon the Company's business,         
financial condition and results of operations.                                  

 Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a 
result, the Company's revenues and net income have been greatest in the second  
and third quarters of the year, and lowest in the first and fourth quarters of  
the year. See "Management's Discussion and Analysis of Financial Condition and  
Results of Operations -- Effect of Inclement Weather and Seasonality."          

REGULATION AND TAXATION                                                         

General                                                               

     The Company is authorized to conduct thoroughbred racing and harness racing
in Pennsylvania under the Pennsylvania Racing Act. The Company is also          
authorized, under the Pennsylvania Racing Act and the Federal Horseracing Act,  
to conduct import simulcast wagering. The Company is also subject to the        
provisions of the West Virginia Racing Act, which governs the conduct of        
horseracing in West Virginia, and West Virginia Gaming Machine Act, which       
governs the operation of Gaming Machines in West Virginia. The Company's live   
racing, pari-mutuel wagering and Gaming Machine operations are contingent upon  
the continued governmental approval of such operations as forms of legalized    
gaming. All of the Company's current and proposed operations are subject to     
extensive                                                                       

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regulations and could be subjected at any time to additional or more restrictive
regulations, or banned entirely.                                                

Sunset Provisions in Gaming Machine Legislation                       

     The Company has applied for approval to install and operate Gaming Machines
at the refurbished Charles Town Facility pursuant to the West Virginia Gaming   
Machine Act. The West Virginia Gaming Machine Act was adopted in 1994, and will 
terminate on June 30, 1997 unless extended or reenacted. If the West Virginia   
Gaming Machine Act terminates, then the Company will be required to discontinue 
any Gaming Machine operations for which it may obtain approval. There can be no 
assurance that the West Virginia legislature will extend or reenact the West    
Virginia Gaming Machine Act beyond June 30, 1997. If the Company obtains        
approval for the installation of Gaming Machines at the Charles Town Facility   
and the West Virginia Gaming Machine Act is not extended or reenacted, then the 
Company's business, financial condition and results of operations would be      
materially and adversely affected.                                              

Pennsylvania Racing Regulations                                       

 The Company's horse racing operations at the Thoroughbred Track and the
Harness Track are subject to extensive regulation under the Pennsylvania Racing 
Act, which established the Pennsylvania Racing Commissions. The Pennsylvania    
Racing Commissions are responsible for, among other things, (i) granting        
permission annually to maintain racing licenses and schedule race meets, (ii)   
approving, after a public hearing, the opening of additional OTWs, (iii)        
approving simulcasting activities, (iv) licensing all officers, directors,      
racing officials and certain other employees of the Company and (v) approving   
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.                                                             

As in most states, the regulations and oversight applicable to the    
Company's operations in Pennsylvania are intended primarily to safeguard the    
legitimacy of the sport and its freedom from inappropriate or criminal          
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain      
acquisitions following their consummation or withhold permission for a proposed 
OTW site for a variety of reasons, including community opposition. For example, 
the Pennsylvania State Thoroughbred Racing Commission withheld approval for the 
Company's initial site for its Lancaster OTW, but the Company applied and was   
ultimately approved for another site in Lancaster, which opened in July 1996.   
The Pennsylvania legislature also has reserved the right to revoke the power of 
the Pennsylvania Racing Commissions to approve additional OTWs and could, at any
time, terminate pari-mutuel wagering as a form of legalized gaming in           
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse  
effect upon the Company's business, financial condition and results of          
operations.                                                                     

The Company may not be able to obtain all necessary approvals for the 
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania 
State Horse Racing Commission to conduct live racing at the Thoroughbred Track  
since it commenced operations in 1972, and has obtained permission from the     
Pennsylvania State Harness Racing Commission to conduct live racing at the      
Harness Track beginning with the 1997 season. Currently, the Company has        
approval from the Pennsylvania Racing Commissions to operate seven OTWs and the 
right, under the Pennsylvania Racing Act, to operate four additional OTWs,      
subject to approval by the Pennsylvania Racing Commissions. A Commission may    
refuse to grant permission to open additional OTWs or to continue to operate    
existing facilities. The failure to obtain required regulatory approvals would  
have a material adverse effect upon the Company's business, financial condition 
and results of operations.                                                      

The Pennsylvania Racing Act provides that no corporation licensed to  
conduct thoroughbred racing shall be licensed to conduct harness racing and that
no corporation licensed to conduct harness racing shall be licensed to conduct  
thoroughbred racing. The Company's harness and                                  

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thoroughbred licenses are held by separate corporations, each of which is a     
wholly owned subsidiary of the Company. Moreover, the Pennsylvania State Harness
Racing Commission has reissued the Pocono Downs harness racing license and has  
found, in connection with the reissuance, that it is not "inconsistent with the 
best interests, convenience or necessity or with the best interests of racing   
generally," that a subsidiary of the Company beneficially owns Pocono Downs. The
Company thus believes that the arrangement under which it holds both a harness  
and a thoroughbred license complies with applicable regulations.                

West Virginia Racing and Gaming Regulation                            

The Company's operations at the Charles Town Facility are subject to  
regulation by the West Virginia Racing Commission under the West Virginia Racing
Act, and by the West Virginia Lottery Commission under the West Virginia Gaming 
Machine Act. The powers and responsibilities of the West Virginia Racing        
Commission under the West Virginia Racing Act are substantially similar in scope
and effect to those of the Pennsylvania Racing Commissions and extend to the    
approval and/or oversight of all aspects of racing and pari-mutuel wagering     
operations. The Charles Town Joint Venture has applied to the West Virginia     
Racing Commission for a license to conduct racing and pari-mutuel wagering at   
the Charles Town Facility. The West Virginia Racing Commission has issued this  
license, subject to its review and approval of the documents pursuant to which  
the Charles Town Acquisition was consummated and financing therefor was obtained
and to its review and approval of any changes in the ownership of the Charles   
Town Joint Venture, among other conditions. The Charles Town Joint Venture has  
also applied to the West Virginia Lottery Commission for approval to install and
operate 400 Gaming Machines at the refurbished Charles Town Facility; this      
approval has not yet been granted. The Company anticipates, but cannot assure,  
that it will obtain approval for the installation and operation of the 400      
Gaming Machines within 90 to 120 days after the January 15, 1997 consummation of
the Charles Town Acquisition. The Charles Town Joint Venture may not receive or 
retain all of the regulatory approvals necessary from time to time to conduct   
racing and pari-mutuel wagering operations at the Charles Town Facility. The    
failure to receive or retain a delay in receiving such approvals could cause the
reduction or suspension of racing and pari-mutuel wagering, as well as of Gaming
Machine operations, at the Charles Town Facility and have a material adverse    
effect upon the Company's business, financial condition and results of          
operations.                                                                     

The installation and operation of Gaming Machines at the Charles Town 
Facility are subject to the provisions of the West Virginia Gaming Machine Act  
and the regulatory authority of the West Virginia Lottery Commission. Pursuant  
to the West Virginia Gaming Machine Act and regulatory approval currently being 
sought by the Company thereunder, the Company plans, following the completion of
the interior refurbishment of the Charles Town Facility in mid-1997, to install 
initially 400 Gaming Machines at the Charles Town Facility. The installation of 
additional Gaming Machines at the Charles Town Facility is subject to approval  
by the West Virginia Lottery Commission after application and a public hearing. 
The Company anticipates that the Charles Town Joint Venture will apply for      
approval of the installation and operation of a total of 1,000 Gaming Machines  
at the Charles Town Facility within the first year after the opening of the     
Charles Town Facility. The West Virginia Lottery Commission may not approve the 
installation of the initial or any additional Gaming Machines, however, or may  
not do so in a timely manner, or may ultimately approve the installation of a   
smaller number of Gaming Machines than requested.                               

   Moreover, the West Virginia Gaming Machine Act requires that the operator
of the Charles Town Facility enter into a written agreement with the Charles    
Town Horsemen in order to conduct Gaming Machine operations. The West Virginia  
Gaming Machine Act also requires that the Charles Town Joint Venture enter into 
a written agreement with the pari-mutuel clerks in order to operate Gaming      
Machines. Currently there is no agreement between the Charles Town Joint Venture
and either the Charles Town Horsemen or the pari-mutuel clerks. The Company has 
entered into discussions with both the Charles Town Horsemen and the pari-mutuel
clerks toward obtaining such agreements. The absence of an agreement with the   
Charles Town Horsemen or the pari-mutuel clerks at the Charles Town Facility, or
the termination or non-renewal of such agreement, would have a material adverse 
effect on the Company's business, financial condition and results of operations.

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State and Federal Simulcast Regulation                                

  Both the Federal Horseracing Act and the Pennsylvania Racing Act require
that the Company have a written agreement with the Thoroughbred Horsemen and    
with the Harness Horsemen in order to simulcast races. The Company has entered  
into the Horsemen Agreements, and in accordance therewith has agreed upon the   
allocations of the Company's revenues from import simulcast wagering to the     
purse funds for the Thoroughbred Track and the Harness Track. Because the       
Company cannot conduct import simulcast wagering in the absence of the Horsemen 
Agreements, the termination or non-renewal of either Horsemen Agreement could   
have a material adverse effect on the Company's business, financial condition   
and results of operations.                                                      

    The Federal Horseracing Act requires that the operator of the Charles Town
Facility obtain the approval of the Charles Town Horsemen before import         
simulcast wagering can be conducted there. While such approval has been obtained
by Charles Town in the past, there is no written agreement with the Charles Town
Horsemen providing for such approval in the future. The Company has entered into
discussions with the Charles Town Horsemen toward obtaining an agreement        
evidencing such approval. The failure to obtain such approval could have a      
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

Taxation                                                              

     The Company believes that the prospect of significant additional revenue is
one of the primary reasons that jurisdictions permit legalized gaming. As a     
result, gaming companies are typically subject to significant taxes and fees in 
addition to normal federal and state income taxes, and such taxes and fees are  
subject to increase at any time. The Company pays substantial taxes and fees    
with respect to its operations. From time to time, federal legislators and      
officials have proposed changes in tax laws, or in the administration of such   
laws, affecting the gaming industry. It is not possible to determine with       
certainty the likelihood of changes in tax laws or in the administration of such
laws. Such changes, if adopted, could have a material adverse effect on the     
Company's business, financial condition and results of operations.              

Compliance with Other Laws                                            

   The Company and its OTWs are also subject to a variety of other rules and
regulations, including zoning, construction and land-use laws and regulations in
Pennsylvania and West Virginia governing the serving of alcoholic beverages.    
Currently, Pennsylvania laws and regulations permit the construction of         
off-track wagering facilities, but may affect the selection of a particular OTW 
site because of parking, traffic flow and other similar considerations, any of  
which may serve to delay the opening of future OTWs in Pennsylvania. By         
contrast, West Virginia law does not permit the operation of OTWs. The Company  
derives a significant portion of its other revenues from the sale of alcoholic  
beverages to patrons of its facilities. Any interruption or termination of the  
Company's existing ability to serve alcoholic beverages would have a material   
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

Restrictions on Share Ownership and Transfer                          

The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an     
affidavit with the Company setting forth certain information about the proposed 
transfer and transferee, a copy of which the Company is required to furnish to  
the Pennsylvania Racing Commission. The certificates representing the Company   
shares owned by 5% beneficial shareholders are required to bear certain legends 
prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania  
Racing Act, the Pennsylvania Racing Commission has the authority to order a 5%  
beneficial shareholder of the Company to dispose of his Common Stock of the     
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing        
generally. The West Virginia Gaming Machine Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia      
Gaming Machine Act or which transfer has been pre-                              

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approved by the West Virginia Lottery Commission. Any transfer that does not    
comply with this requirement voids the license. See "Description of Capital     
Stock -- Certain Restrictions on Share Ownership and Transfer."                 

PROPERTIES                                                                      

Thoroughbred Track                                                    

    The Thoroughbred Track is located on approximately 225 acres approximately
15 miles northeast of Harrisburg, 100 miles west of Philadelphia and 200 miles  
east of Pittsburgh. There is a total population of approximately 1.4 million    
persons within a radius of approximately 35 miles around the Thoroughbred Track 
and approximately 2.2 million persons within a 50-mile radius. The property     
includes a one mile all-weather thoroughbred racetrack and a 7/8-mile turf      
track. The property also includes approximately 400 acres surrounding the       
Thoroughbred Track which are available for future expansion or development.     

   The Thoroughbred Track's main building is the grandstand/clubhouse, which
is completely enclosed and heated and, at the clubhouse level, fully            
air-conditioned. The building has a capacity of approximately 15,000 persons    
with seating for approximately 9,000, including 1,400 clubhouse dining seats.   
Several other dining facilities and numerous food and beverage stands are       
situated throughout the facility. Television sets for viewing live racing and   
simulcasts are located throughout the facility. The pari-mutuel wagering areas  
are divided between those available for on-track wagering and those available   
for simulcast wagering.                                                         

   The Thoroughbred Track includes stables for approximately 1,250 horses, a
blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock building,
living quarters for grooms, a cafeteria and recreational building in the back   
stretch area and water and sewage treatment plants. Parking facilities for      
approximately 6,500 vehicles adjoin the Thoroughbred Track.                     

Harness Track                                                         

     The Harness Track is located on approximately 400 acres in Plains Township,
outside Wilkes-Barre, Pennsylvania. There is a total population of approximately
785,000 persons within a radius of approximately 35 miles around the Harness    
Track and approximately 1.5 million persons within a 50-mile radius. The        
property includes a 5/8-mile all-weather, lighted harness track. The Harness    
Track's main buildings are the grandstand and the clubhouse. The clubhouse is   
completely enclosed and heated and fully air-conditioned. The grandstand has    
enclosed, heated and air-conditioned seating for approximately 500 persons and  
permanent open-air stadium-style seating for approximately 2,500 persons. The   
clubhouse is a tiered dining and wagering facility that seats approximately     
1,000 persons. The clubhouse dining area seats 500 persons. Television sets for 
viewing live racing and simulcasts are located throughout the facility along    
with pari-mutuel wagering areas.                                                

A two-story 14,000 square foot building which houses the Pocono Downs 
offices is located on the property. The Harness Track also includes stables for 
approximately 950 horses, five paddock stables, quarters for grooms, two        
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities   
for approximately 5,000 vehicles adjoin the track.                              

The Landfill is on a parcel of land adjacent to the Harness Track. The
Landfill Authority, which operated the Landfill from 1970 until 1982, disposed  
of municipal waste on behalf of four municipalities. The Landfill is currently  
subject to a closure order issued by the PADER. According to the Company's      
environmental consulting firm, the Landfill closure is substantially complete.  
To date, the municipalities obligated to implement the closure order pursuant to
the Settlement Agreement, have been fulfilling their obligations. However, there
can be no assurance that the municipalities will continue to meet their         
obligations under the Settlement Agreement or that the terms of the Settlement  
Agreement will not be amended in the future. In addition, the Company may be    
liable for future claims with respect to the Landfill under CERCLA and analogous
state laws. The Company may incur expenses in connection with the Landfill in   
the future, which expenses may not be reimbursed by the                         

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municipalities. Any such expenses could have a material adverse effect on the   
Company's business, financial condition and results of operations.              

Charles Town Facility                                                 

   The Charles Town Facility is located on a portion of a 250-acre parcel in
Charles Town, West Virginia, which is approximately a 60-minute drive from      
Baltimore, Maryland and a 70-minute drive from Washington, D.C. There is a total
population of approximately 3.1 million persons within a 50-mile radius and     
approximately 9.0 million persons within a 100-mile radius of the Charles Town  
Facility. The property includes a 3/4-mile thoroughbred racetrack. The Charles  
Town Facility's main building is the grandstand/clubhouse, which is completely  
enclosed and heated. The clubhouse dining room has seating for 600. Additional  
food and beverage areas are situated throughout the facility. The property      
surrounding the Charles Town Facility, including the site of the former         
Shenandoah Downs Racetrack, is available for future expansion or development. In
addition, the Company has a right of first refusal for an additional 250 acres  
that are adjacent to the Charles Town Facility.                                 

   The Charles Town Facility also includes stables, an indoor paddock, ample
parking and water and sewage treatment facilities.                              

OTWs                                                                  

The Company's OTWs provide areas for viewing import simulcasts and    
televised sporting events, placing pari-mutuel wagers and dining. The facilities
also provide convenient parking.                                                

    The Company's current OTW properties are described in the following chart:

                                                OWNED OR
LOCATION                                                LEASED        
--------                                               --------       
Allentown.........................................       Owned        
Chambersburg......................................      Leased        
Erie..............................................       Owned        
Lancaster.........................................      Leased        
Reading...........................................      Leased        
York..............................................      Leased        

The Company has purchased the land for and constructed an OTW in      
Williamsport, Pennsylvania. The Company plans to open the facility on February  
13, 1997.                                                                       

    The Company has an agreement to purchase land for its proposed Downingtown
OTW facility. The agreement is subject to numerous contingencies including      
approval from the Pennsylvania State Horse Racing Commission. On March 26, 1996,
the Company submitted an application to the Pennsylvania State Horse Racing     
Commission for approval of the Downingtown OTW facility. The application is     
pending.                                                                        

Other Property and Equipment                                          

     The Company currently leases 2,100 square feet of office space in an office
building in Wyomissing, Pennsylvania for the Company's executive offices. The   
lease is for a five-year term expiring April 2000 with an annual minimum rental 
of $23,320. The office building is owned by an affiliate of Peter M. Carlino.   

    The Company considers its properties adequate for its present purposes. In
addition to the anticipated openings of the Williamsport and Downingtown OTWs,  
the Company intends to open three additional OTWs for which sites have not been 
selected. The Company believes, but cannot assure, that suitable sites will be  
available on satisfactory terms.                                                

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LEGAL PROCEEDINGS                                                               

On December 11, 1996, GTECH commenced an action in the United States  
District Court for the Northern District of West Virginia against Charles Town, 
the Company, Penn National Gaming of West Virginia, Inc., a wholly owned        
subsidiary of the Company, and Bryant. The complaint filed by GTECH alleges that
Charles Town and AmTote were parties to the October 20, 1994 AmTote Agreement,  
pursuant to which AmTote was granted an exclusive right to install and operate a
"video lottery system" at the Charles Town Facility. When the AmTote Agreement  
was entered into, AmTote was a subsidiary of GTECH; GTECH has since divested    
itself of AmTote, but is purportedly the assignee of certain of AmTote's rights 
under the AmTote Agreement pursuant to an assignment and assumption agreement   
dated February 22, 1996. The complaint seeks (i) preliminary and permanent      
injunctive relief enjoining Charles Town, Bryant, the Company and its subsidiary
from consummating the Charles Town Acquisition or any similar transaction unless
the purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH 
has the right to be the exclusive installer, operator, provider and servicer of 
a video lottery system at the Charles Town Facility and that any party buying   
the stock or assets of Charles Town must accept and assume the AmTote Agreement 
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv) 
legal fees and costs and (v) such other further legal and equitable relief as   
the court deems just and appropriate. On December 23, 1996, the court denied    
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court  
noted that GTECH may pursue its claim for damages and, if warranted, pursue     
other injunctive relief in the future. The Company consummated the Charles Town 
Acquisition on January 15, 1997, at which time Charles Town assigned to the     
Charles Town Joint Venture all legally valid and binding obligations, if any,   
under the AmTote Agreement. In addition, the Company has agreed to indemnify    
Charles Town for any damages Charles Town may suffer as a result of a claim that
Charles Town failed to fulfill its obligations under the AmTote Agreement. On   
January 13, 1997, Charles Town filed a motion to dismiss GTECH's complaint; the 
court has not yet ruled on this motion. The Company believes the allegations of 
the complaint to be without merit and intends to contest the action vigorously. 

EMPLOYEES AND LABOR RELATIONS                                                   

  At November 30, 1996, the Company had 1,298 permanent employees, of whom
390 were full-time and 908 part-time. Of the total 1,298 employees, 417 were    
employed at the Thoroughbred Track, 292 were employed at the Harness Track and  
589 were employed at the Company's OTWs. Employees of the Company who work in   
the admissions department and pari-mutuels department at the Thoroughbred Track,
the Harness Track and the OTWs are represented under collective bargaining      
agreements between the Company and Sports Arena Employees' Union Local 137. The 
agreements extend until October 3, 1999 for track employees and until May 20,   
1998 for OTW employees. The Company believes that its relations with its        
employees are satisfactory.                                                     

During the 1996 racing season at the Charles Town Facility, there were
approximately 113 full-time and 215 part-time employees. Charles Town employees 
who work as pari-mutuel clerks were represented under a collective bargaining   
agreement between Charles Town and the West Virginia Union of Mutuel Clerks,    
Local No. 553. The agreement expired December 31, 1996. The Company has entered 
into discussions with the pari-mutuel clerks toward entering into an agreement. 
Entering into such an agreement is a requirement under the West Virginia Gaming 
Machine Act to operate Gaming Machines. See "-- Regulation -- West Virginia     
Racing and Gaming Regulation."                                                  

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS                                                

The directors and executive officers of the Company are:              

NAME                      AGE                 POSITION                          
----                      ---                 --------                          

Peter M. Carlino........  50   Chairman of the Board and Chief Executive Officer

William J. Bork.........  63   President, Chief Operating Officer and Director  

Robert S. Ippolito......  45   Chief Financial Officer, Secretary and Treasurer 

Philip T. O'Hara, Jr....  43   Vice President and General Manager               

Harold Cramer...........  69   Director                                         

David A. Handler........  32   Director                                         

Robert P. Levy..........  65   Director                                         

John M. Jacquemin.......  50   Director                                         

Peter M. Carlino.  Mr. Carlino has served as Chairman of the Board and
Chief Executive Officer of the Company since April 1994, and has devoted a      
significant amount of time to the activities of the Company as a director since 
1991. From 1984 to 1994, Mr. Carlino devoted a substantial portion of his       
business time to developing, building and operating residential and commercial  
real estate projects located primarily in Central Pennsylvania. He has been     
President of Carlino Financial Corporation ("Carlino Financial"), a holding     
company which owns and operates various Carlino family businesses, since 1976,  
in which capacity he has been continuously active in strategic planning for the 
Company and monitoring its operations. From 1972 until 1976, Mr. Carlino served 
as President of Mountainview Thoroughbred Racing Association ("Mountainview"), a
predecessor in interest of the Company.                                         

   William J. Bork.  Mr. Bork was elected President, Chief Operating Officer
and a director in June 1995. From 1987 to June 1995 he was Vice President for   
Ladbroke Racing Corporation. Prior to working with Ladbroke, Mr. Bork served as 
Vice President of Operations of racetracks previously owned by Ogden Corporation
including Fairmount Park in Collinsville, Illinois; Mountaineer Park in Chester,
West Virginia; Wheeling Downs in Wheeling, West Virginia; and Suffolk Downs in  
Boston, Massachusetts.                                                          

Robert S. Ippolito.  Mr. Ippolito, a certified public accountant, was 
elected Chief Financial Officer, Secretary and Treasurer of the Company in April
1994. He was Corporate Controller and Secretary of Carlino Financial and certain
of its affiliates between June 1987 and May 1994, and from 1979 to 1987 was     
engaged in public accounting.                                                   

Philip T. O'Hara, Jr.  Mr. O'Hara has been Vice President and General 
Manager since January 1989. Mr. O'Hara joined the Company in April 1985 and has 
served in various management capacities, including Director of Marketing and    
Assistant General Manager. He has been a Director of the Thoroughbred Racing    
Association since 1990.                                                         

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   Harold Cramer.  Mr. Cramer has been a director of the Company since 1994.
Since November 1996, Mr. Cramer has been of counsel to Mesirov, Gelman, Jaffe,  
Cramer & Jamieson, a Philadelphia law firm which provides legal services to the 
Company. From November 1995 until November 1996, Mr. Cramer was Chairman of the 
Board and Chief Executive Officer of HSI Management Co., Inc. From 1989 until   
November 1995, Mr. Cramer was Chairman of the Board and Chief Executive Officer 
of Graduate Health System, Inc. ("GHS"), and has been a Director of GHS since   
November 1996. He also serves as a director of Mountainview and as a director of
Pennsylvania National Turf Club, Inc., a subsidiary of Penn National.           

 David A. Handler.  Mr. Handler has been a director of the Company since
1994. From 1995 to the present, Mr. Handler has been an investment banker and is
currently a Senior Vice President of Corporate Finance at Jefferies & Company,  
Inc. From 1991 to 1995, Mr. Handler was a Vice President at Fahnestock & Co.,   
Inc.                                                                            

     Robert P. Levy.  Mr. Levy has been a director of the Company since 1995. He
is Chairman of the Board of the Atlantic City Racing Association and served a   
two-year term as President from 1989 to 1990 of the Thoroughbred Racing         
Association. Mr. Levy has served as the Chairman of the Board of DRT Industries,
Inc., a diversified business based in the Philadelphia metropolitan area, since 
1960. Mr. Levy owns the Robert P. Levy Stable, a thoroughbred racing and        
breeding operation which has bred and owned several award-winning horses,       
including the 1987 Belmont Stakes winner, Bet Twice.                            

    John M. Jacquemin.  Mr. Jacquemin has been a director of the Company since
1995 and is President of Mooring Financial Corporation, a financial services    
group specializing in the purchase and administration of commercial loan        
portfolios and equipment leases. Mr. Jacquemin joined Mooring Financial         
Corporation in 1982 and has served as its President since 1987.                 

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DESCRIPTION OF CAPITAL STOCK

GENERAL                                                                         

  The Company's authorized capital stock consists of 21,000,000 shares, of
which 20,000,000 shares are Common Stock and 1,000,000 shares are preferred     
stock, par value $.01 per share (the "Preferred Stock"). As of December 31,     
1996, there were 13,355,290 shares of Common Stock outstanding held of record by
approximately 261 persons, 1,179,750 shares of Common Stock reserved for        
issuance upon the exercise of outstanding stock options and 195,000 shares      
reserved for issuance upon the exercise of outstanding warrants.                

COMMON STOCK                                                                    

     The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders and do not have       
cumulative voting rights. Holders of Common Stock are entitled to receive       
ratably those dividends, if any, as may be declared from time to time by the    
Board of Directors, in its discretion, out of funds legally available therefor, 
subject to any preferential dividend rights of outstanding Preferred Stock. In  
the event of a liquidation, dissolution or winding up of the Company, the       
holders of Common Stock are entitled to share ratably in all assets remaining   
after the payment of all liabilities of the Company and subject to the          
liquidation preferences of any outstanding Preferred Stock. The Common Stock    
does not carry preemptive rights, is not redeemable, does not have any          
conversion rights, is not subject to further calls and is not subject to any    
sinking fund provisions. The outstanding shares of Common Stock are and the     
shares offered by the Company in this offering will be, when issued and paid    
for, fully paid and nonassessable. Except in certain circumstances as discussed 
below under "-- Possible Antitakeover Effect of Certain Charter, By-Law and     
Other Provisions," the Common Stock is not subject to discriminatory provisions 
based on ownership thresholds.                                                  

The rights, preferences and privileges of holders of Common Stock are 
subject to, and may be adversely affected by, the rights of the holders of      
shares of any series of Preferred Stock which the Company may designate and     
issue in the future. See "-- Preferred Stock."                                  

PREFERRED STOCK                                                                 

The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations         
prescribed by law, without further shareholder approval, to issue such shares of
Preferred Stock in one or more series, with such rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,  
redemption privileges and liquidation preferences, as shall be established by   
the Board of Directors at the time of issuance.                                 

   The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of      
shares of Preferred Stock could result in securities outstanding that would have
preference over the Common Stock with respect to dividends and in liquidation   
and that could (upon conversion or otherwise) enjoy all of the rights of the    
Common Stock.                                                                   

    The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain     
control of the Company through merger, tender offer, proxy or consent           
solicitation or otherwise, by making such attempts more difficult to achieve or 
more costly. The Board of Directors may issue Preferred Stock without           
shareholder approval and with voting rights that could adversely affect the     
voting power of holders of Common Stock. There are no                           

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agreements or understandings for the issuance of Preferred Stock, and the       
Company has no plans to issue any shares of Preferred Stock. See "-- Possible   
Antitakeover Effect of Certain Charter, By-Law and Other Provisions."           

WARRANTS                                                                        

In connection with its initial public offering, the Company issued to 
Fahnestock & Co. Inc. and Brenner Securities Corporation and their assignees    
(together, the "Warrantholders") warrants to purchase shares of Common Stock, of
which warrants to purchase 195,000 shares (the "Warrants") remain outstanding as
of December 31, 1996. The Warrants are exercisable, at a price of $4.00 per     
share, for a period expiring on May 31, 2000. The Warrantholders are entitled to
certain registration rights under the Securities Act in connection with the     
issuance of the underlying shares of Common Stock received upon the exercise of 
the Warrants. The exercise price and the number of shares of Common Stock which 
may be purchased are subject to adjustment pursuant to anti-dilution provisions 
of the Warrants.                                                                

CERTAIN RESTRICTIONS ON SHARE OWNERSHIP AND TRANSFER                            

The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an     
affidavit with the Company setting forth certain information about the proposed 
transfer and transferee, a copy of which the Company is required to furnish to  
the Pennsylvania Racing Commissions. The certificates representing shares owned 
by 5% beneficial shareholders are required to bear certain legends prescribed by
the Pennsylvania Racing Act. In addition, each Pennsylvania Racing Commission   
has the authority to order a 5% beneficial shareholder of the Company to dispose
of its Common Stock if the commission determines that continued ownership would 
be inconsistent with the public interest, convenience or necessity or the best  
interest of racing generally.                                                   

The Pennsylvania Racing Act also specifies certain reporting and      
notification requirements to the Company or the Pennsylvania Racing Commissions 
relating to transfers of beneficial ownership of stock (i) comprising 5% or more
of a corporation licensed to conduct racing or any corporation which leases a   
racetrack to a corporation licensed to conduct racing or (ii) comprising 5% or  
more of a corporation which owns 25% or more of the stock of a corporation      
licensed to conduct racing, such as the Company.                                

    The West Virginia Gaming Machine Act provides that a transfer of more than
5% of the voting stock of a corporation which controls the license may only be  
to persons who have met the licensing requirements of the West Virginia Gaming  
Machine Act or which transfer has been pre-approved by the West Virginia Lottery
Commission. Any transfer that does not comply with this requirement voids the   
license.                                                                        

POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND OTHER PROVISIONS    

  The Company's Amended and Restated Articles of Incorporation and By-Laws
provide that the Board of Directors is to consist of three classes of directors,
each comprised as nearly as practicable of one-third of the Board, and that     
one-third of the Board is to be elected each year. At each annual meeting, only 
directors of the class whose term is expiring are voted upon, and upon election 
each such director serves a three-year term. The Company's Amended and Restated 
Articles of Incorporation provide that a director may be removed with or without
cause only by the affirmative vote of the holders of 75% of the voting power of 
all shares of the Company entitled to vote generally in the election of         
directors, voting as a single class; the Company's By-Laws provide that a       
director may only be removed without cause by written consent of the            
shareholders and not at a meeting.                                              

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   The Company's Amended and Restated Articles of Incorporation provide that
shareholder-proposed nominations for election of directors and                  
shareholder-proposed business at meetings of shareholders shall be subject to   
such advance notice requirements as may be contained in the By-Laws, which may  
be amended by the directors.                                                    

The provisions of the Company's Amended and Restated Articles of      
Incorporation with respect to classification of the Board of Directors and      
shareholder approval of the removal of directors with or without cause may not  
be altered, amended or repealed without the affirmative vote of the holders of  
at least 75% of the voting power of all shares of the Company entitled to vote  
generally in the election of directors, voting as a single class.               

The Pennsylvania Business Corporation Law ("BCL") contains a number of
interrelated provisions which are designed to support the validity of actions   
taken by the Board of Directors in response to takeover bids, including         
specifically the Board's authority to "accept, reject or take no action" with   
respect to a takeover bid, and permitting the unfavorable disparate treatment of
a takeover bidder. One provision requires that mergers with or sales of assets  
to an "interested shareholder" (which includes a shareholder who is a party to  
the proposed transaction) be approved by a majority of voting shares            
outstanding, other than those held by the interested shareholder, unless the    
transaction has been approved by a majority of the corporation's directors who  
are not affiliated with the interested shareholder, or the transaction results  
in the payment to all other shareholders of an amount not less than the highest 
amount paid for shares by the interested shareholder. Another provision of the  
BCL gives the directors broad discretion in considering the best interests of   
the corporation, including a provision which permits the Board, in taking any   
action, to consider various corporate interests, including employees, suppliers,
clients and communities in which the corporation is located, the short and      
long-term interests of the corporation, and the resources, intent and conduct of
any person seeking to acquire control of the corporation. Another provision     
prohibits, subject to certain exceptions, a "business combination" with a       
shareholder or group of shareholders beneficially owning more than 20% of the   
voting power of a public corporation (excluding certain shares) for a five-year 
period following the date on which the holder became an interested shareholder. 

     The effect of the BCL's antitakeover provisions may be to deter unsolicited
takeover attempts or other attempts to accumulate stock in the Company. This may
promote stability in the business, management and control, and in the price of  
stock, of the Company. However, by discouraging open market accumulation of     
stock in the Company and non-solicited, non-negotiated takeover attempts,       
shareholders may be disadvantaged by foregoing the opportunity to participate in
such transactions, which may be in excess of the prevailing market price for the
Company's stock. In addition, while the antitakeover provisions may encourage a 
party considering accumulating stock in or acquiring the Company to negotiate   
with the Board, and place the Board in a better position to defend against      
actions it believes not to be in the best interests of the Company and its      
shareholders, the provisions may also make it more difficult to accomplish a    
transaction requiring shareholder approval if the Board disapproves (even if the
shareholders may be in favor of such a transaction).                            

The restrictions of the Pennsylvania Racing Act on share ownership and
transfer may also discourage or make it more difficult for a party to accumulate
stock in or acquire the Company, as the Pennsylvania Racing Commission has broad
discretion in approving the activities of the Company and approving its         
shareholders. The restrictions of the West Virginia Gaming Machine Act on share 
ownership and transfer may also discourage or make it more difficult for a party
to accumulate stock in or acquire the Company, as the West Virginia Lottery     
Commission has broad discretion in approving the activities of the Company and  
approving its shareholders. See "-- Certain Restrictions on Share Ownership and 
Transfer."                                                                      

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     Peter M. Carlino may, by virtue of his ability to vote shares of the Common
Stock, be able significantly to influence the election of directors and the     
business and affairs of the Company. The trustees of the Carlino Family Trust   
may, by virtue of their ability to vote the shares of Common Stock held in the  
Carlino Family Trust in certain circumstances, be able significantly to         
influence the approval or disapproval of the sale of all or substantially all of
the assets of the Company, a merger, consolidation or liquidation of the        
Company. In addition, in the event the Carlino Family Trust proposes to sell    
Common Stock representing more than 3% of the Company's outstanding Common      
Stock, Peter M. Carlino and other Carlino siblings have the right to acquire    
such Common Stock on the price and terms proposed. Peter M. Carlino's control   
position and certain other provisions of the Carlino Family Trust could deter   
unsolicited takeover attempts to the same or greater extent than the BCL or the 
Pennsylvania Racing Act. See "Risk Factors -- Concentration of Ownership."      

TRANSFER AGENT                                                                  

 The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company.                                                                  

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UNDERWRITING

    Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and the underwriters named   
below (the "Underwriters"), for whom Salomon Brothers Inc, Gerard Klauer        
Mattison & Co., Inc. and Jefferies & Company, Inc. are acting as representatives
(the "Representatives"), the Company has agreed to sell to each of the          
Underwriters, and each of the Underwriters severally has agreed to purchase from
the Company, the shares of Common Stock set forth opposite its name below:      

                                                             NUMBER OF
UNDERWRITERS                                                       SHARES       
------------                                                      ---------     
Salomon Brothers Inc.........................................       472,500     
Gerard Klauer Mattison & Co., Inc............................       330,750     
Jefferies & Company, Inc.....................................       141,750     
BT Securities Corporation....................................       100,000     
Dean Witter Reynolds Inc.....................................       100,000     
A.G. Edwards & Sons, Inc.....................................       100,000     
Montgomery Securities........................................       100,000     
Smith Barney Inc.............................................       100,000     
Burnham Securities Inc.......................................        35,000     
Chatsworth Securities, LLC...................................        35,000     
Everen Securities, Inc.......................................        35,000     
Friedman, Billings, Ramsey & Co., Inc........................        35,000     
Gabelli & Company, Inc.......................................        35,000     
Hoefer & Arnett Inc..........................................        35,000     
Pennsylvania Merchant Group Ltd..............................        35,000     
Roney & Co., LLC.............................................        35,000     
                                                             ---------
Total...................................................     1,725,000
                                                             =========

In the Underwriting Agreement, the several Underwriters have agreed,  
subject to the terms and conditions set forth therein, to purchase all of the   
shares of Common Stock offered hereby (other than those subject to the          
over-allotment option described below) if any such shares are purchased. In the 
event of a default by an Underwriter, the Underwriting Agreement provides that, 
in certain circumstances, the purchase commitments of the nondefaulting         
Underwriters may be increased or the Underwriting Agreement may be terminated.  

The Company has been advised by the Representatives that the several  
Underwriters initially propose to offer the shares of Common Stock directly to  
the public at the public offering price set forth on the cover page of this     
Prospectus, and to certain dealers at such price less a concession not in excess
of $0.48 per share. The Underwriters may allow, and such dealers may reallow, a 
concession not in excess of $0.10 per share. After the initial public offering, 
the public offering price and such concessions may be changed from time to time 
by the Underwriters.                                                            

The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day subsequent to the date of this Prospectus, to 
purchase up to 258,750 additional shares of Common Stock at the public offering 
price set forth on the cover page of this Prospectus, less the underwriting     
discount. The Underwriters may exercise such option only to cover               
over-allotments, if any, incurred in the sale of the shares of Common Stock. To 
the extent that the Underwriters exercise such option, each Underwriter will be 
obligated, subject to certain conditions, to purchase approximately the same    
percentage of such additional shares as the percentage it is required to        
purchase of the total number of shares of Common Stock in the above table.      

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  The Company and its directors and executive officers, certain members of
the Carlino family, the Carlino Family Trust and Carlino Financial have agreed  
that they will not offer, sell or contract to sell or otherwise dispose of,     
directly or indirectly, or announce the offering of, any shares of Common Stock 
or any securities convertible into, or exchangeable for, shares of Common Stock 
for a period of 120 days after the date of this Prospectus, except for (i) the  
shares of Common Stock offered hereby, (ii) the issuance of shares by the       
Company pursuant to stock options, (iii) the issuance of shares or options by   
the Company pursuant to employee benefit, stock option or ownership plans of the
Company outstanding or in effect on the date of this Prospectus, (iv) the       
issuance of options pursuant to an employee stock option plan that is adopted   
during such 120-day period on substantially the same terms as any such plan in  
effect on the date of this Prospectus (so long as such options may not be       
exercised prior to the end of such 120-day period) and (v) distributions by the 
Carlino Family Trust to the beneficiaries thereof, provided that such           
beneficiaries agree to be bound by the foregoing restrictions, without the prior
written consent of the Representatives.                                         

 The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the       
Securities Act, or contribute to payments the Underwriters may be required to   
make in respect thereof.                                                        

LEGAL MATTERS 

  Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP,      
Pittsburgh, Pennsylvania. Certain legal matters relating to this offering will  
be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New  
York, New York.                                                                 

EXPERTS 

The consolidated financial statements of the Company included and     
incorporated by reference in this Prospectus and in the Registration Statement  
have been audited by BDO Seidman, LLP, independent certified public accountants,
to the extent and for the periods set forth in their report included and        
incorporated herein by reference, and are included and incorporated herein in   
reliance upon such report given upon the authority of said firm as experts in   
accounting and auditing.                                                        

 The consolidated financial statements of The Plains Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Robert Rossi & Co., independent certified public accountants, to the extent and 
for the periods set forth in their report appearing elsewhere herein and in the 
Registration Statement and have been included herein in reliance upon such      
report given upon the authority of said firm as experts in accounting and       
auditing.                                                                       

The consolidated financial statements of Charles Town included in this
Prospectus and elsewhere in the Registration Statement have been audited by     
Leonard J. Miller & Associates, Chartered, independent certified public         
accountants, to the extent and for the periods set forth in their report        
appearing elsewhere herein and in the Registration Statement and have been      
included herein in reliance upon such report given upon the authority of said   
firm as experts in accounting and auditing.                                     

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INDEX TO FINANCIAL STATEMENTS 

                                                        [Enlarge/Download Table]


                                                                                             PAGE
                                                                                             ----
                                                                                                 
PENN NATIONAL GAMING, INC.                                                                       
  Report of Independent Certified Public Accountants........................................ F-2 
  Consolidated Balance Sheets............................................................... F-3 
  Consolidated Statements of Income......................................................... F-4 
  Consolidated Statements of Shareholders' Equity........................................... F-5 
  Consolidated Statements of Cash Flows..................................................... F-6 
  Notes to Consolidated Financial Statements................................................ F-7 

THE PLAINS COMPANY                                                                               
  Report of Independent Certified Public Accountants........................................ F-21
  Consolidated Balance Sheets............................................................... F-22
  Consolidated Statements of Income and Retained Earnings................................... F-24
  Consolidated Statements of Cash Flows..................................................... F-25
  Notes to Consolidated Financial Statements................................................ F-26

CHARLES TOWN RACING LIMITED PARTNERSHIP AND CHARLES TOWN RACES, INC.                             
  Report of Independent Certified Public Accountants........................................ F-38
  Combined Balance Sheets................................................................... F-39
  Combined Statements of Income and Equity (Deficit)........................................ F-40
  Combined Statements of Cash Flows......................................................... F-41
  Notes to Combined Financial Statements.................................................... F-42

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Penn National Gaming, Inc.                                                      
and Subsidiaries                                                            
Wyomissing, Pennsylvania                                                        

We have audited the accompanying consolidated balance sheets of Penn  
National Gaming, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows 
for each of the three years in the period ended December 31, 1995. These        
consolidated financial statements are the responsibility of the Company's       
management. Our responsibility is to express an opinion on these consolidated   
financial statements based on our audits.                                       

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the consolidated financial statements are    
free of material misstatement. An audit includes examining, on a test basis,    
evidence supporting the amounts and disclosures in the consolidated financial   
statements. An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall     
consolidated financial statement presentation. We believe that our audits       
provide a reasonable basis for our opinion.                                     

 In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the financial position of Penn National
Gaming, Inc. and Subsidiaries at December 31, 1994 and 1995, and the results of 
their operations and their cash flows for each of the three years in the period 
ended December 31, 1995 in conformity with generally accepted accounting        
principles.                                                                     
                                                                BDO SEIDMAN, LLP

Philadelphia, Pennsylvania                                                      
February 2, 1996                                                                

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                              DECEMBER 31,                     
                                                                          --------------------  SEPTEMBER 30,  
                                                                             1994      1995         1996       
                                                                          ---------  ---------  ---------------
                                                                                                 (UNAUDITED)   
                                                                                                               
ASSETS                                                                                                         
Current assets                                                                                                 
  Cash..................................................................  $   5,502  $   7,514     $   5,602   
  Accounts receivable...................................................      1,256      1,618         1,968   
  Prepaid expenses and other current assets.............................        442        600         1,332   
  Deferred income taxes.................................................         49        104            62   
                                                                            -------    -------       -------   

    Total current assets................................................      7,249      9,836         8,964   
                                                                            -------    -------       -------   
Property, plant and equipment, at cost                                                                         
  Land and improvements.................................................      3,253      3,336         4,225   
  Building and improvements.............................................      7,867      8,651         8,740   
  Furniture, fixtures and equipment.....................................      2,802      4,696         5,660   
  Transportation equipment..............................................        240        309           322   
  Leasehold improvements................................................      2,814      4,363         6,388   
  Leased equipment under capitalized lease..............................        934        824           824   
  Construction in progress..............................................        566        255         1,059   
                                                                            -------    -------       -------   
                                                                             18,476     22,434        27,218   
  Less accumulated depreciation and amortization........................      5,914      6,728         7,589   
                                                                            -------    -------       -------   
  Net property and equipment............................................     12,562     15,706        19,629   
                                                                            -------    -------       -------   
Other assets                                                                                                   
  Excess of cost over fair market value of net assets acquired (net of                                         
    accumulated amortization of $646, $713 and $763, respectively)......      1,965      1,898         1,848   
  Prepaid acquisition costs.............................................         --         --         3,001   
  Miscellaneous.........................................................         97         92           291   
                                                                            -------    -------       -------   
    Total other assets..................................................      2,062      1,990         5,140   
                                                                            -------    -------       -------   
                                                                          $  21,873  $  27,532     $  33,733   
                                                                            =======    =======       =======   

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                           
Current liabilities                                                                                            
  Current maturities of long-term debt and capital lease obligations....  $     258  $     250     $     222   
  Accounts payable......................................................      1,410      1,395         1,868   
  Purses due horsemen...................................................        996      1,293         1,329   
  Uncashed pari-mutuel tickets..........................................        520        704           617   
  Accrued expenses......................................................      1,078        702           618   
  Customer deposits.....................................................        299        315           515   
  Income taxes..........................................................        607        797           328   
  Taxes, other than income taxes........................................          7        246           473   
                                                                            -------    -------       -------   
    Total current liabilities...........................................      5,175      5,702         5,970   
                                                                            -------    -------       -------   
Long-term liabilities                                                                                          
  Long-term debt and capital lease obligations, net of current                                                 
    maturities..........................................................        258        140            80   
  Deferred income taxes.................................................        813        888           989   
                                                                            -------    -------       -------   
    Total long-term liabilities.........................................      1,071      1,028         1,069   
                                                                            -------    -------       -------   
Commitments and contingencies                                                                                  
Shareholders' equity                                                                                           
  Preferred stock, $.01 par value: authorized 1,000,000 shares;                                                
    issued none.........................................................         --         --            --   
  Common stock, $.01 par value: authorized 20,000,000 shares; issued and                                       
    outstanding 12,900,000, 12,945,000 and 13,330,290, respectively.....         43         43           133   
  Additional paid-in capital............................................     12,642     12,821        14,217   
  Retained earnings.....................................................      2,942      7,938        12,344   
                                                                            -------    -------       -------   
    Total shareholders' equity..........................................     15,627     20,802        26,694   
                                                                            -------    -------       -------   

                                                                            $21,873    $27,532       $33,733   
                                                                            =======    =======       =======   

See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF INCOME 
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) 

                                                        [Enlarge/Download Table]


                                                                                          NINE MONTHS ENDED     
                                                       YEAR ENDED DECEMBER 31,              SEPTEMBER 30,       
                                                -------------------------------------  ------------------------ 
                                                   1993         1994         1995         1995         1996     
                                                -----------  -----------  -----------  -----------  ----------- 
                                                                                       (UNAUDITED)              
                                                                                                                
Revenues                                                                                                        
  Pari-mutuel revenues                                                                                          
    Penn National races.......................  $    29,224  $    23,428  $    21,376  $    16,578  $    14,495 
    Import simulcasting.......................        9,162       16,968       27,254       20,412       23,596 
    Export simulcasting.......................          383        1,187        2,142        1,447        2,479 
  Admissions, programs and other racing                                                                         
    revenues..................................        2,485        2,563        3,704        2,978        3,403 
  Concession revenues.........................        1,410        1,885        3,200        2,478        2,501 
                                                -----------  -----------  -----------  -----------  ----------- 
      Total revenues..........................       42,664       46,031       57,676       43,893       46,474 
                                                -----------  -----------  -----------  -----------  ----------- 
Operating expenses                                                                                              
  Purses, stakes and trophies.................        9,719       10,674       12,091        9,329        9,744 
  Direct salaries, payroll taxes and employee                                                                   
    benefits..................................        6,394        6,707        7,699        5,823        6,211 
  Simulcast expenses..........................       10,136        8,892        9,084        6,905        6,920 
  Pari-mutuel taxes...........................        3,568        4,054        4,963        3,773        3,954 
  Other direct meeting expenses...............        6,046        6,375        8,214        6,249        6,932 
  Off-track wagering concession expenses......          806        1,231        2,221        1,689        1,766 
  Management fees paid to related party.......        1,208          345           --           --           -- 
  Other operating expenses....................        2,331        3,329        5,149        3,750        3,710 
                                                -----------  -----------  -----------  -----------  ----------- 
      Total operating expenses................       40,208       41,607       49,421       37,518       39,237 
                                                -----------  -----------  -----------  -----------  ----------- 
Income from operations........................        2,456        4,424        8,255        6,375        7,237 
                                                -----------  -----------  -----------  -----------  ----------- 
Other income (expenses)                                                                                         
  Interest (expense)..........................         (989)        (465)         (71)         (55)         (44)
  Interest income.............................           27          125          269          201          229 
  Other.......................................            6           15           10            4           -- 
                                                -----------  -----------  -----------  -----------  ----------- 
      Total other income (expense)............         (956)        (325)         208          150          185 
                                                -----------  -----------  -----------  -----------  ----------- 
Income before income taxes and extraordinary                                                                    
  item........................................        1,500        4,099        8,463        6,525        7,422 
Taxes on income...............................           42        1,381        3,467        2,680        3,016 
                                                -----------  -----------  -----------  -----------  ----------- 
Income before extraordinary item..............        1,458        2,718        4,996        3,845        4,406 
Extraordinary item                                                                                              
  Loss on early extinguishment of debt, net of                                                                  
    income taxes of $83.......................           --          115           --           --           -- 
                                                -----------  -----------  -----------  -----------  ----------- 
Net income....................................  $     1,458  $     2,603  $     4,996  $     3,845  $     4,406 
                                                ===========  ===========  ===========  ===========  =========== 
Net income per share..........................                            $       .38  $       .29  $       .32 
                                                                          ===========  ===========  =========== 

Supplemental pro forma                                                                                          
  Historical net income before taxes on                                                                         
    income....................................        1,500        4,099                                        
  Supplemental pro forma adjustments..........        1,834          625                                        
                                                -----------  -----------                                        
Supplemental pro forma income before taxes on                                                                   
  income......................................        3,334        4,724                                        
Supplemental pro forma taxes on income........        1,515        2,000                                        
                                                -----------  -----------                                        
Supplemental pro forma net income.............  $     1,819  $     2,724                                        
                                                ===========  ===========                                        
Supplemental pro forma net income                                                                               
  per share...................................  $       .15  $       .22                                        
                                                ===========  ===========                                        
Weighted average common shares                                                                                  
  outstanding.................................   12,249,000   12,663,000   13,104,000   13,044,000   13,754,000 
                                                ===========  ===========  ===========  ===========  =========== 


See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
(IN THOUSANDS, EXCEPT SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                             COMMON STOCK         ADDITIONAL                         
                                                       -------------------------    PAID-IN     RETAINED             
                                                          SHARES       AMOUNT       CAPITAL     EARNINGS      TOTAL  
                                                       ------------  -----------  -----------  -----------  ---------
                                                                                                                     
Balance, January 1, 1993..............................    8,400,000     $ 28    $       2      $ 2,486     $ 2,516   
Net income for the year ended December 31, 1993.......           --       --           --        1,458       1,458   
Distributions to shareholders.........................           --       --           --         (556)       (556)  
                                                         ----------     ----      -------      -------     -------   
Balance, December 31, 1993............................    8,400,000       28            2        3,388       3,418   
Deferred income taxes of S corporations and                                                                          
  partnerships........................................           --       --         (302)          --        (302)  
Distributions to shareholders.........................           --       --           --       (3,049)     (3,049)  
Issuance of common stock..............................    4,500,000       15       12,942           --      12,957   
Net income for the year ended December 31, 1994.......           --       --           --        2,603       2,603   
                                                         ----------     ----      -------      -------     -------   
Balance, December 31, 1994............................   12,900,000       43       12,642        2,942      15,627   
Issuance of common stock..............................       45,000       --          179           --         179   
Net income for the year ended December 31, 1995.......           --       --           --        4,996       4,996   
                                                         ----------     ----      -------      -------     -------   
Balance, December 31, 1995............................   12,945,000       43       12,821        7,938      20,802   
Issuance of common stock (unaudited)..................      385,290        3        1,483           --       1,486   
Stock splits (unaudited)..............................           --       87          (87)          --          --   
Net income for the nine months ended September 30,                                                                   
  1996 (unaudited)....................................           --       --           --        4,406       4,406   
                                                         ----------     ----      -------      -------     -------   
Balance, September 30, 1996 (unaudited)                  13,330,290     $133      $14,217      $12,344     $26,694   
                                                         ==========     ====      =======      =======     =======   


See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                      NINE MONTHS ENDED     
                                                         YEAR ENDED DECEMBER 31,         SEPTEMBER 30,      
                                                      ------------------------------  --------------------- 
                                                        1993       1994       1995     1995          1996   
                                                      -------    --------    -------  -------       ------- 
                                                                                          (UNAUDITED)       
                                                                                                            
Cash flows from operating activities                                                                        
  Net income......................................... $ 1,458    $ 2,603    $ 4,996   $ 3,845       $ 4,406 
  Adjustments to reconcile net income to net cash                                                           
    provided by operating activities                                                                        
      Depreciation and amortization..................     640        699        881       648           911 
      Extraordinary loss related to early                                                                   
        extinguishment of debt, before income tax                                                           
        benefit......................................      --        198         --        --            -- 
      Deferred income taxes..........................      61        493         20        (2)          144 
      Decrease (increase) in                                                                                
        Accounts receivable..........................    (114)      (309)      (362)       16          (350)
        Prepaid expenses and other                                                                          
           current assets............................     (73)       (60)      (158)     (263)         (732)
        Miscellaneous other assets...................      (2)       (56)         5       (29)         (197)
      Increase (decrease) in                                                                                
        Accounts payable.............................     281       (228)       (15)      182           473 
        Purses due horsemen..........................     107         85        297       701            36 
        Uncashed pari-mutuel tickets.................      94        (12)       184        14           (88)
        Accrued expenses.............................     151        196       (376)     (539)          (85)
        Customer deposits............................      12        (10)        16       205           200 
        Taxes other than income taxes................      21       (147)       239       132            81 
        Income taxes.................................     (62)       607        190       234          (324)
                                                      -------    -------    -------   -------       ------- 
Net cash provided by operating activities............   2,574      4,059      5,917     5,144         4,475 
                                                      -------    -------    -------   -------       ------- 
Cash flows from investing activities                                                                        
  Expenditures for property and equipment............    (412)    (2,852)    (3,958)   (3,690)       (4,784)
  Decrease (increase) in advances to related                                                                
    parties..........................................    (210)     3,688         --        --            -- 
  (Increase) in prepaid acquisition costs............      --         --         --        --        (3,001)
                                                      -------    -------    -------   -------       ------- 
Net cash (used) provided by investing activities.....    (622)       836     (3,958)   (3,690)       (7,785)
                                                      -------    -------    -------   -------       ------- 
Cash flows from financing activities                                                                        
  Proceeds from sale of common stock.................      --     12,957        179        --         1,486 
  Principal payments on notes payable, banks.........      (6)    (1,289)        --        --            -- 
  Proceeds from notes payable, related party.........      64        178         --        --            -- 
  Principal payments on notes payable, related                                                              
    party............................................    (381)      (361)        --        --            -- 
  Proceeds of long-term debt.........................      --        800         --        --            -- 
  Principal payments on long-term debt and                                                                  
    capitalized lease obligations....................  (1,024)    (9,433)      (126)      (91)          (88)
  Increase in unamortized financing cost.............      --       (182)        --        --            -- 
  Distributions to shareholders......................    (556)    (3,049)        --        --            -- 
  (Decrease) increase in advances from related                                                              
    parties..........................................      16        (16)        --        --            -- 
                                                      -------    -------    -------   -------       ------- 
Net cash (used) provided by financing activities.....  (1,887)      (395)        53       (91)        1,398 
                                                      -------    -------    -------   -------       ------- 
Net increase (decrease) in cash......................      65      4,500      2,012     1,363        (1,912)
Cash, at beginning of period.........................     937      1,002      5,502     5,502         7,514 
                                                      -------    -------    -------   -------       ------- 
Cash, at end of period............................... $ 1,002    $ 5,502    $ 7,514   $ 6,865       $ 5,602 
                                                      =======    =======    =======   =======       ======= 


See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                                  

PRINCIPLES OF CONSOLIDATION AND REORGANIZATION                                  

 The consolidated financial statements include the following entities of
Penn National Gaming, Inc. (collectively, the "Company") prior to the           
reorganization, as described below, and which were affiliated through common    
ownership and control.                                                          

Mountainview Thoroughbred Racing Association ("Mountainview")           
Pennsylvania National Turf Club, Inc. ("Turf Club")                     
PNRC Reading, Inc. (An S corporation)                                   
PNRC Chambersburg, Inc. (An S corporation)                              
PNRC Limited Partnership                                                
Carlino Family Partnership                                              
 Penn National Gaming, Inc., formerly called PNRC Corp. (An S corporation)

The consolidated financial statements for the periods prior to the    
reorganization have been prepared as if the entities had operated as a single   
consolidated group assuming that the reorganization had taken place. After the  
reorganization, the consolidated financial statements include Penn National     
Gaming, Inc. and its wholly owned subsidiaries Turf Club, Mountainview, Penn    
National Speedway, Inc. (formed in 1995) and Sterling Aviation, Inc. (formed in 
1995). All significant intercompany accounts and transactions have been         
eliminated in consolidation.                                                    

REORGANIZATION                                                                  

     The Company completed an initial public offering on May 25, 1994 by selling
4,500,000 shares of its common stock.                                           

On April 11, 1994, the Company entered into an agreement and plan of  
reorganization, pursuant to which, on May 24, 1994: (1) Penn National Gaming,   
Inc. ("Penn National") acquired all of the outstanding stock of Mountainview,   
Turf Club, PNRC Reading, Inc. and PNRC Chambersburg, Inc., (2) Penn National    
Gaming, Inc. acquired the limited partners' interests in PNRC Limited           
Partnership and all of the partnership interests in Carlino Family Partnership, 
and these partnerships were liquidated into the Company. In exchange for the    
stock and assets acquired in the transactions, the Company issued 8,400,000     
shares of its common stock. Pursuant to the reorganization, Turf Club,          
Mountainview, PNRC Reading, Inc. and PNRC Chambersburg, Inc. became wholly-owned
subsidiaries of Penn National. Subsequent to the reorganization, the Company    
merged PNRC Reading, Inc. and PNRC Chambersburg, Inc. into Mountainview in      
accordance with a statutory merger, leaving Turf Club and Mountainview as the   
only subsidiaries of the Company.                                               

The transaction was treated similar to a pooling of interests and the 
exchange of stock and partnership interests was a tax-free exchange.            

DESCRIPTION OF BUSINESS                                                         

    The Company, which began operations in 1972, provides pari-mutuel wagering
opportunities on both live and simulcast thoroughbred and harness horse races at
two racetracks and six off-track wagering facilities ("OTWs") located           
principally in Eastern and Central Pennsylvania. Prior to the consummation of   
the acquisition of Pocono Downs (see Note 11), the Company owned and operated   
Penn National Race Course located outside Harrisburg, Pennsylvania (the         
"Thoroughbred Track"), and four OTWs in Chambersburg, Lancaster, Reading and    
York, Pennsylvania. On November 27, 1996, the Company consummated the Pocono    
Downs Acquisition, and as a result acquired Pocono Downs Racetrack, located     
outside Wilkes-Barre, Pennsylvania (the "Harness Track"), and OTWs in Allentown 
and Erie, Pennsylvania.                                                         

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

  On January 15, 1997, a joint venture in which the Company has reached an
agreement to hold an 89% interest acquired substantially all of the assets      
relating to Charles Town Races, a thoroughbred racing facility in Jefferson     
County, West Virginia. The Company expects to refurbish the Charles Town        
facility as an entertainment complex that will feature live racing, dining,     
simulcast wagering and, upon completion of the interior refurbishment in        
mid-1997, 400 Gaming Machines.                                                  

     The Company conducts wagering at its tracks and at its OTWs on thoroughbred
and harness races which it runs at its tracks and on thoroughbred and harness   
races simulcast from other racetracks. The Company also simulcasts its races for
wagering at other racetracks and OTWs, including all Pennsylvania racetracks and
OTWs and locations outside Pennsylvania. Wagering on Company races and races    
simulcast from other racetracks also occurs through the Company's telephone     
account betting network.                                                        

GLOSSARY OF TERMINOLOGY                                                         

 The following is a listing of terminology used throughout the financial
statements:                                                                     

OTW -- Off-track wagering location.                                     

   Pari-mutuel wagering -- All wagering at Penn National's racetracks, at Penn
National's OTWs and all wagering on Penn National's races at other      
racetracks and their OTWs.                                              

Telebet -- Telephone account wagering.                                  

Totalisator Services -- Computer services provided to Penn National by  
Autotote Enterprises, Inc. for processing pari-mutuel betting odds and  
wagering proceeds.                                                      

Pari-mutuel Revenues:                                                   

            Penn National Races -- Penn National's share of pari-mutuel wagering
           on Penn National races within Pennsylvania and certain stakes races
           from racetracks outside of Pennsylvania after payment of the amount
returned as winning wagers.                             

        Import Simulcasting -- Penn National's share of wagering at Penn
        National racetrack, at the Company's OTWs and by Telebet on full
cards of races simulcast from other racetracks.         

   Export Simulcasting -- Penn National's share of wagering at
out-of-state locations on Penn National races.          

    A summary of pari-mutuel wagering for the periods indicated is as follows:

                                                        [Enlarge/Download Table]


                                                          YEAR ENDED                  NINE MONTHS ENDED    
                                                         DECEMBER 31,                   SEPTEMBER 30,      
                                                ----------------------------------   --------------------- 
                                                  1993         1994         1995       1995          1996  
                                                --------     --------     --------   --------      --------
                                                                     (IN THOUSANDS)                        
                                                                                                           
Pari-mutuel wagering in Pennsylvania on Penn                                                               
  National races............................... $138,939     $111,248     $102,145   $ 79,235     $ 69,200 
                                                --------     --------     --------   --------     -------- 
Pari-mutuel wagering on simulcasting                                                                       
  Import simulcasting from other Pennsylvania                                                              
     race tracks...............................   41,385       28,622       29,159     22,018       17,704 
  Import simulcasting from out of Pennsylvania                                                             
     race tracks...............................   16,867       64,839      113,340     84,646      105,256 
  Export simulcasting to out of Pennsylvania                                                               
     wagering facilities.......................   12,746       40,337       72,252     48,327       84,228 
                                                --------     --------     --------   --------     -------- 
                                                  70,998      133,798      214,751    154,991      207,188 
                                                --------     --------     --------   --------     -------- 
     Total pari-mutuel wagering................ $209,937     $245,046     $316,896   $234,226     $276,388 
                                                ========     ========     ========   ========     ======== 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

RACING MEET                                                                     

  The Company's racing seasons for the years ended December 31, 1993, 1994
and 1995 totaled 238, 219 and 204 live race days, respectively. The Company's   
racing seasons for the nine month periods ended September 30, 1995 and 1996     
totaled 154 live race days for each period.                                     

   The Reading OTW commenced simulcasting operations on May 15, 1992. During
the years ended December 31, 1993, 1994 and 1995, this facility was open 359,   
363 and 364 calendar days, respectively. During the nine month periods ended    
September 30, 1995 and 1996, this facility was open 273 and 272 calendar days,  
respectively.                                                                   

   The Chambersburg OTW commenced simulcasting operations on April 25, 1994.
During the years ended December 31, 1994 and 1995, this facility was open 249   
and 364 calendar days, respectively. During the nine month periods ended        
September 30, 1995 and 1996, this facility was open 273 and 272 calendar days,  
respectively.                                                                   

  The York OTW commenced simulcasting operations on March 20, 1995. During
the year ended December 31, 1995, this facility was open 286 calendar days.     
During the nine months ended September 30, 1995 and 1996, this facility was open
195 and 272 calendar days, respectively.                                        

The Lancaster OTW commenced simulcasting operations on July 11, 1996. 
During the nine months ended September 30, 1996, this facility was open 82      
calendar days.                                                                  

DEPRECIATION AND AMORTIZATION                                                   

Depreciation of property and equipment and amortization of leasehold  
improvements are computed by the straight-line method at rates adequate to      
allocate the cost of applicable assets over their estimated useful lives.       
Depreciation and amortization for the years ended December 31, 1993, 1994 and   
1995 amounted to $553,000, $612,000 and $814,000, respectively. Depreciation and
amortization for the nine month periods ended September 30, 1995 and 1996       
amounted to $598,000 and $861,000, respectively.                                

The excess of cost over fair value of net assets acquired is being    
amortized on the straight-line method over a forty year period. Amortization    
expense for 1993, 1994 and 1995 amounted to $67,000 in each year. Amortization  
expense for the nine month periods ended September 30, 1995 and 1996 amounted to
$50,250 in each period. The Company evaluates the recoverability of the goodwill
quarterly, or more frequently whenever events and circumstances warrant revised 
estimates, and considers whether the goodwill should be completely or partially 
written off or the amortization period accelerated.                             

 The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived     
Assets and for Long-Lived Assets to Be Disposed Of" during the year ended       
December 31, 1995. SFAS 121 establishes accounting standards for the impairment 
of long-lived assets, certain identifiable intangibles and goodwill related to  
those assets to be held and used and for long-lived assets and certain          
indentifiable intangibles to be disposed of.                                    

    The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in         
circumstances indicate that the carrying amount of the assets may not be        
recoverable. Any long-lived assets held for disposal are reported at the lower  
of their carrying amounts or fair value less cost to sell.                      

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

INCOME TAXES                                                                    

Mountainview had historically joined in filing a consolidated federal 
income tax return with Carlino Financial Corporation, its previous parent       
company. Prior to the reorganization, federal income taxes were paid to or      
recovered from Carlino Financial Corporation, based upon the terms of a tax     
sharing agreement and the provision for federal income taxes was computed on a  
separate return basis.                                                          

Turf Club had filed its income tax returns as a separate entity.      

Prior to the reorganization, the other entities included within these 
financial statements were partnerships and "S" corporations. Therefore, no      
provision had been made for income taxes since such taxes, if any, were the     
liabilities of the individual partners and shareholders.                        

 The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") effective January 
1, 1993. SFAS 109 requires a company to recognize deferred tax liabilities and  
assets for the expected future tax consequences of events that have been        
recognized in a company's financial statements or tax returns. Under this       
method, deferred tax liabilities and assets are determined based on the         
difference between the financial statement carrying amounts and tax bases of    
assets and liabilities using enacted tax rates in effect in the years in which  
the differences are expected to reverse.                                        

CASH AND CASH EQUIVALENTS                                                       

    The Company considers all cash balances and highly liquid investments with
original maturities of three months or less to be cash equivalents.             

EARNINGS PER COMMON SHARE (SUPPLEMENTAL)                                        

Supplemental pro forma earnings per share is calculated by dividing   
supplemental pro forma net income by the weighted average number of common stock
outstanding (see Note 7) adjusted by the dilutive effect of common stock        
equivalents, which consist of stock options (using the treasury stock method)   
and warrants. All earnings per share calculations reflect all stock splits (see 
Note 9).                                                                        

CONCENTRATION OF CREDIT RISK                                                    

    Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable.                            

   The Company's policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions         
evaluated as being creditworthy, or in short-term (less than seven days) money  
market and tax free bond funds which are exposed to minimal interest rate and   
credit risk. At December 31, 1995 and September 30, 1996, the Company had bank  
deposits which exceeded federally insured limits by approximately $248,000 and  
$517,000, respectively, and money market and tax free bond funds of             
approximately $6,400,000 and $5,100,000, respectively. Concentration of credit  
risk, with respect to accounts receivable, is limited due to the Company's      
credit evaluation process. The Company does not require collateral from its     
customers. The Company's receivables consist principally of amounts due from    
other race tracks and OTWs. Historically, the Company has not incurred any      
significant credit related losses.                                              

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

FAIR VALUE OF FINANCIAL INSTRUMENTS                                             

   As of December 31, 1995 and September 30, 1996, the following methods and
assumptions were used to estimate the fair value of each class of financial     
instruments for which it is practical to estimate:                              

        Cash and Cash Equivalents: The carrying amount approximates the fair
value due to the short maturity of the cash equivalents.              

       Long-Term Debt and Capital Lease Obligations: The fair value of the
   Company's long-term debt and capital lease obligations is estimated based
on the quoted market prices for the same or similar issues or on the  
current rates offered to the Company for debt of the same remaining   
     maturities. The carrying amount approximates fair value since the Company's
interest rates approximate current interest rates.                    

USE OF ESTIMATES                                                                

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 date of the financial    
statements and the reported amounts of revenues and expenses during the         
reporting period. Actual results could differ from those estimates.             

2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:                                

                                                        [Enlarge/Download Table]


                                                                     DECEMBER 31,                     
                                                                   ---------------       SEPTEMBER 30,
                                                                   1994       1995           1996     
                                                                   ----       ----       -------------
                                                                         (IN THOUSANDS)               
                                                                                                      
Long-Term Debt                                                                                        
  Notes are payable to former minority stockholders of                                                
     Pennsylvania National Turf Club, Inc. upon demand............ $136       $132           $132     
  Other...........................................................    6         --             --     
Capital Lease Obligations                                                                             
  Various leases are payable in monthly installments ranging from                                     
     $213 to $5,431 including interest between 8.5% to 18.96% per                                     
     annum. The leases are collateralized by equipment and the                                        
     final payments are due in 1999...............................  374        258            170     
                                                                   ----       ----           ----     
                                                                    516        390            302     
Less current maturities...........................................  258        250            222     
                                                                   ----       ----           ----     
                                                                   $258       $140           $ 80     
                                                                   ====       ====           ====     


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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: -- (CONTINUED)                 

The following is a schedule of future minimum lease payments under    
capitalized leases as of December 31, 1995:                                     

                                                        [Enlarge/Download Table]


                                                                             (IN THOUSANDS)
                                                                             --------------
                                                                                           
1996........................................................................      $146     
1997........................................................................        92     
1998........................................................................        49     
1999........................................................................         9     
                                                                                  ----     
Total minimum lease payments................................................       296     
Less amount representing interest...........................................        38     
                                                                                  ----     
Present value of net minimum lease payments.................................      $258     
                                                                                  ====     


  The net book value of property under capitalized lease obligations as of
December 31, 1995 and September 30, 1996 was $323,000 and $222,000 respectively.

3. RELATED PARTY TRANSACTIONS:                                                  

    Management fees of $345,000 and $1,028,000 were paid in 1993 and 1994 to a
related company.                                                                

 PCC Builders, Inc., a company owned by the chairman and chief executive
officer of Penn National Gaming, Inc., was engaged in 1993 to serve as the      
general contractor to renovate the building in which the Company's Chambersburg 
OTW is located. The contract provided for a fixed fee contract price of         
$1,020,871. The renovation was completed on April 22, 1994.                     

   In August 1994, the Company signed a consulting agreement with its former
Chairman expiring in August 1999 at an annual payment of $125,000.              

4. CUSTOMER DEPOSITS:                                                           

Customer deposits represent amounts held by the Company for telephone 
wagering.                                                                       

5. COMMITMENTS AND CONTINGENCIES:                                               

    Mountainview and Turf Club are jointly liable for Totalisator Services and
equipment under a five-year agreement expiring March 31, 1998. The agreement    
provides for annual payments based on a specified percentage of the total amount
wagered at the track, with a minimum annual payment of $300,000.                

     The Company is also liable under numerous operating leases for automobiles,
other equipment and buildings, which expire through 2004. Total rental expense  
under these agreements was $492,000, $636,000 and $672,000 for the years ended  
December 31, 1993, 1994 and 1995, respectively. Total rental expense under these
agreements was $504,000 and $578,000 for the nine month periods ended September 
30, 1995 and 1996, respectively.                                                

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)                                

     The future lease commitments relating to non-cancelable operating leases as
of December 31, 1995 are as follows:                                            

                                                          (IN THOUSANDS)
                                                           ---------------
1996....................................................      $  703    
1997....................................................         698    
1998....................................................         453    
1999....................................................         330    
2000....................................................         315    
Thereafter..............................................       1,005    
                                                          ------
                                                          $3,504
                                                          ======

On July 11, 1996, the Company opened its Lancaster OTW facility. The  
Company entered into a ten-year lease agreement for the 24,050 square feet      
Lancaster OTW facility. The Lancaster OTW lease provides for minimum annual     
lease payments of $192,400 in years one through five and $211,640 in years six  
through ten. The table presented above does not reflect this lease commitment.  

  In March 1996, the Company assumed an agreement to purchase land for its
proposed Downingtown OTW facility. The agreement which provides for a purchase  
price of $1,696,000, is subject to numerous contingencies including approval    
from the Pennsylvania State Horse Racing Commission.                            

    On April 12, 1994, the Company entered into employment agreements with its
Chairman and Chief Financial Officer at annual base salaries of $225,000 and    
$95,000, respectively. The agreements became effective June 1, 1994 and, as     
amended, terminate on June 30, 1999. Each agreement prohibits the employee from 
competing with the Company during its term and for one year thereafter, and     
requires a death benefit payment by the Company equal to 50% of the employee's  
annual salary in effect at the time of his death.                               

    On June 1, 1995, the Company entered into an employment agreement with its
President and Chief Operating Officer at an annual base salary of $210,000. The 
agreement terminates on June 12, 1998. The agreement prohibits the employee from
competing with the Company during its term and for two years thereafter, and    
requires a death benefit payment by the Company equal to 50% of the employee's  
annual salary in effect at the time of his death.                               

     Under an agreement between the Company and its former president, the former
president received options to purchase 150,000 shares of common stock at $3.33  
per share expiring May 31, 2000.                                                

    Effective January 1, 1990, the Company adopted a profit sharing plan under
the provisions of Section 401(k) of the Internal Revenue Code covering all      
eligible employees who are not members of a bargaining unit. The Company's      
contributions are set at 50% of employees' elective salary deferrals which may  
be made up to a maximum of 6% of employee compensation. The Company made        
contributions to the plan of approximately $48,000, $60,000 and $70,000 for the 
years ended December 31, 1993, 1994 and 1995, respectively. The Company made    
contributions to the plan of approximately $57,000 and $64,000 for the nine     
month periods ended September 30, 1995 and 1996, respectively.                  

   In December 1995, the Company agreed in principal with an unrelated party
to form a joint venture for the purpose of developing, managing and operating   
pari-mutuel racing facilities in a state other than Pennsylvania or West        
Virginia. The joint venture is subject to numerous contingencies, including     
receipt of regulatory approvals from that state's horse racing commission.      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)                                

  In February 1996, the Company entered into an agreement to purchase land
for its proposed Williamsport OTW facility. The agreement provides for a        
purchase price of $555,000 and is subject to numerous contingencies including   
approval from the Pennsylvania State Horse Racing Commission. On May 22, 1996,  
the Company received tentative approval from the Pennsylvania State Horse Racing
Commission for the Williamsport OTW facility which is expected to open on       
February 13, 1997.                                                              

CREDIT FACILITIES                                                               

     Prior to November 1996, the Company had a $4,200,000 credit facility with a
commercial bank. The facility provided for a working capital line of credit in  
the amount of $2,500,000 at various interest rates and a letter of credit       
facility for $1,700,000. The credit facility was unsecured and contained various
covenants, such as tangible net worth, debt to tangible net worth and debt      
coverage ratio. At both December 31, 1995 and September 30, 1996, the Company   
was contingently obligated under the letter of credit facility with face amounts
aggregating $1,436,000. The $1,436,000 consisted of $1,336,000 relating to the  
horsemens' account balances and $100,000 for Pennsylvania pari-mutuel taxes.    
This entire credit facility was repaid and terminated in November 1996,         
simultaneously with the closing of the Company's new credit facilities.         

   In November 1996, the Company entered into an agreement with a bank group
which provides an aggregate of $75 million of credit facilities ("Credit        
Facility Agreement"). The credit facilities consist of two term loan facilities 
of $47 million and $23 million (together, the "Term Loans") which were used for 
the Pocono Downs and Charles Town acquisitions (see Note 11), respectively, and 
which will be used for a portion of the cost of refurbishment of the Charles    
Town Facility, and a revolving credit facility of $5 million (together, the     
"Loans"). The Loans, which mature in November 2001, are secured by substantially
all of the assets of the Company. The Credit Facility Agreement provides for    
certain covenants, including those of a financial nature.                       

    Funding of the first $47 million Term Loan facility took place on November
27, 1996. On January 15, 1997, the Charles Town Acquisition was consummated and,
in accordance with the terms of the Credit Facility Agreement, the second $23   
million Term Loan was made available for utilization by the Company. The Company
borrowed $16.5 million of the $23 million Term Loan on January 15, 1997.        

Commencing on December 31, 1997, the Term Loans will amortize on a    
quarterly basis with payments thereunder to be split proportionately between the
two Term Loans in annual aggregate amounts as follows (assuming the Term Loans  
are fully drawn):                                                               

YEAR             AMOUNT 
 ----          -----------
 1997          $ 2,000,000
 1998            8,000,000
 1999           20,000,000
 2000           20,000,000
 2001           20,000,000

The $5 million revolving credit facility (the "Revolving Facility")   
includes a $2 million sublimit for standby letters of credit for periods of up  
to twelve months. $3 million of the Revolving Facility was made available on    
November 27, 1996. In accordance with the terms of the Credit Facility          
Agreement, the remaining $2 million became available upon consummation of the   
Charles Town Acquisition on January 15, 1997.                                   

   At the Company's option, the Loans may be maintained from time to time as
Base Rate Loans, which bear interest at the highest of: (1) 1/2 of 1% in excess 
of the federal reserve reported certificate of deposit rate, (2) the rate that  
the bank group announces from time to time as its prime lending rate and        

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)                                

(3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of  
up to 2%. The Loans may also be maintained as Reserve Adjusted Eurodollar Loans,
which bear interest at a rate tied to a eurodollar rate plus an applicable      
margin of up to 3%.                                                             

Mandatory repayments of the Term Loans and the Revolving Facility are 
required in an amount equal to a percentage of the net cash proceeds from any   
issuance or incurrence of equity or funded debt by the Company, that percentage 
to be dependent upon the then outstanding balances of the Term Loans and the    
Revolving Facility and the Company's leverage ratio; however, the Credit        
Facility Agreement permits the Company to retain up to the first $8 million of  
proceeds from the initial offering of the Company's equity securities after the 
date of the Credit Facility Agreement. The Company must pay a fee of $250,000 if
the Company applies less than $19 million of the proceeds of such initial       
offering to repayment of amounts outstanding under the Credit Facility.         
Mandatory repayments of varying percentages are also required in the event of   
either asset sales in excess of stipulated amounts or defined excess cash flow. 

6. INCOME TAXES:                                                                

The provision for income taxes charged to operations was as follows:  

                                                        [Enlarge/Download Table]

                                                                                         NINE MONTHS ENDED 
                                                            YEAR ENDED DECEMBER 31,         SEPTEMBER 30,  
                                                           -------------------------      -----------------
                                                           1993      1994       1995       1995      1996  
                                                           ----     -----      -----      ------     ------
                                                                         (IN THOUSANDS)                    
                                                                                                           
Current tax expense (benefit)                                                                              
  Federal................................................. $(28)    $  495     $2,580     $2,000     $2,166
  State...................................................   17        377        842        653        707
                                                           ----     ------     ------     ------     ------
     Total current........................................  (11)       872      3,422      2,653      2,873
                                                           ----     ------     ------     ------     ------
Deferred tax expense                                                                                       
  Federal.................................................   37        501         34         20        108
  State...................................................   16          8         11          7         35
                                                           ----     ------     ------     ------     ------
     Total deferred.......................................   53        509         45         27        143
                                                           ----     ------     ------     ------     ------
     Total provision...................................... $ 42     $1,381     $3,467     $2,680     $3,016
                                                           ====     ======     ======     ======     ======

In 1993, the Company adopted the provisions of Statement of Financial 
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")        
effective January 1, 1993 (see Note 1). The adoption of the new standard had an 
immaterial effect on the tax provision for 1993 and on periods ending prior to  
January 1, 1993. The nature of deferred tax adjustments and their effect on     
income tax expense are as follows:                                              

                                                        [Enlarge/Download Table]


                                                                                            NINE MONTHS ENDED
                                                              YEAR ENDED DECEMBER 31,         SEPTEMBER 30,  
                                                           ----------------------------      --------------- 
                                                           1993        1994       1995       1995       1996 
                                                           -----      -----       -----      ----       ---- 
                                                                             (IN THOUSANDS)                  
                                                                                                             
Depreciation methods......................................  $61        $ 74       $126       $ 81       $101 
Reserve for debit balances of horsemens' accounts, bad                                                       
  debts and litigation....................................   (8)        (11)       (81)       (54)        42 
Net operating loss........................................   --         446         --         --         -- 
                                                            ---        ----       ----       ----       ---- 
                                                            $53        $509       $ 45       $ 27       $143 
                                                            ===        ====       ====       ====       ==== 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

6. INCOME TAXES: -- (CONTINUED)                                                 

Deferred tax assets and liabilities are comprised of the following:   

                                                        [Enlarge/Download Table]

                                                                                DECEMBER 31,                     
                                                                             ----------------       SEPTEMBER 30,
                                                                             1994        1995           1996     
                                                                             ----        ----        ------------
                                                                                     (IN THOUSANDS)              
                                                                                                                 
Deferred tax assets                                                                                              
  Reserve for debit balances of horsemens' accounts, bad debts and                                               
     litigation.............................................................  $ 24       $104           $ 62     
  Loss carryforwards........................................................    25         --             --     
                                                                              ----       ----           ----     
                                                                              $ 49       $104           $ 62     
                                                                              ====       ====           ====     
Deferred tax liabilities                                                                                         
  Depreciation..............................................................  $813       $888           $989     
                                                                              ====       ====           ====     


    The following is a reconciliation of the statutory federal income tax rate
to the actual effective income tax rate:                                        

                                                        [Enlarge/Download Table]


                                                                                              NINE MONTHS ENDED 
                                                                  YEAR ENDED DECEMBER 31,       SEPTEMBER 30,   
                                                                 -------------------------     ---------------  
                                                                 1993       1994      1995     1995       1996  
                                                                 -----      ----      ----     ----       ----  
                                                                                                                
PERCENT OF PRETAX INCOME                                                                                        

Federal tax rate..............................................   34.0%      34.0%      34.0%    34.0%      34.0%
Increase in taxes resulting from state and local income taxes,                                                  
  net of federal tax benefit..................................    1.5        6.2        6.7      6.8        6.4 
Net change attributable to adoption of SFAS No. 109...........    2.5         --         --       --         -- 
Permanent difference relating to amortization of goodwill.....    1.9        0.6        0.3      0.3        0.2 
Entities previously taxed as S corporations                                                                     
  and partnerships............................................  (45.3)      (9.2)        --       --         -- 
Other.........................................................    8.2        2.1         --       --         -- 
                                                                -----       ----       ----     ----       ---- 
                                                                  2.8%      33.7%      41.0%    41.1%      40.6%
                                                                =====       ====       ====     ====       ==== 

7. SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE:                                 

  Supplemental pro forma amounts for the years ended December 31, 1993 and
1994 reflect: (i) the elimination of $1,208,000 and $345,000, respectively, in  
management fees paid to a related entity; (ii) the inclusion of $320,000 and    
$133,000, respectively, in executive compensation; (iii) the elimination of     
$946,000 and $413,000, respectively, of interest expenses on Company debt which 
was repaid with the proceeds of the initial public offering, (iv) the           
elimination of $0 and $198,000, respectively, of loss on early extinguishment of
debt, and (v) a provision for income taxes of $701,000 and $377,000,            
respectively, as if the S corporations and partnerships comprising part of the  
Company had been taxed as a C corporation. There were no supplemental pro forma 
adjustments for any subsequent periods.                                         

     Supplemental pro forma earnings per share are based on the weighted average
number of shares of common stock outstanding, plus the number of shares the     
Company would have needed to sell to fund the retirement of debt and the number 
of shares the Company would have needed to sell to fund $1,190,000 of           
distributions of undistributed S corporation earnings.                          

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                           

   Cash paid during the year for interest was $905,000, $535,000 and $71,000
in 1993, 1994 and 1995, respectively. Cash paid during the nine month periods   
ended September 30, 1995 and 1996 for interest was $55,000 and $44,000,         
respectively.                                                                   

Cash paid during the year for income taxes was $920,000, $250,000 and 
$2,839,000 in 1993, 1994 and 1995, respectively. Cash paid during the nine month
periods ended September 30, 1995 and 1996 for income taxes was $2,475,000 and   
$3,196,000, respectively.                                                       

Non-cash investing and financing activities were as follows:          

  During 1993 and 1994, capital lease obligations of $53,000 and
$199,000, respectively, were incurred to lease new equipment.         

9. SHAREHOLDERS' EQUITY:                                                        

COMMON STOCK                                                                    

 On June 3, 1994, the Company completed its initial public offering. The
proceeds, net of expenses, amounted to $12,957,000 for 4,500,000 shares of      
common stock issued. The initial public offering price per share was $3.33.     

STOCK OPTIONS AND WARRANTS                                                      

  In April 1994, the Company's Board of Directors and shareholders adopted
and approved the Stock Option Plan ("Plan"). The Plan permits the grant of      
options to purchase up to 1,290,000 shares of Common Stock, subject to          
antidilution adjustments, at a price per share no less than 100% of the fair    
market value of the Common Stock on the date the option is granted with respect 
to incentive stock options only. The price would be no less than 110% of fair   
market value in the case of an incentive stock option granted to any individual 
who owns more than 10% of the total combined voting power of all classes of     
outstanding stock. The Plan provides for the granting of both incentive stock   
options intended to qualify under Section 422 of the Internal Revenue Code of   
1986, and non-qualified stock options which do not so qualify. Unless the Plan  
is terminated earlier by the Board of Directors, the Plan will terminate in     
April 2004. As of December 31, 1995 and September 30, 1996, the Company had     
480,000 and 466,250 options, respectively, still permitted to be granted under  
the Plan.                                                                       

   Stock options that expire between May 26, 2000 and 2003 have been granted
to officers and directors to purchase Common Stock at prices ranging from $3.33 
to $5.58 per share.                                                             

  All options were granted at market prices. A summary of the stock option
transactions follows:                                                           

                                                        [Enlarge/Download Table]

                                                                                OPTION PRICE                
                                                                     SHARES       PER SHARE      AGGREGATE  
                                                                    --------   ---------------  ----------- 
                                                                                                            
Outstanding at January 1, 1994.....................................   --       $     --         $        -- 
Granted............................................................  765,000         3.33         2,550,000 
Cancelled.......................................................... (300,000)        3.33        (1,000,000)
                                                                    --------                     ---------- 
Outstanding at December 31, 1994...................................  465,000         3.33         1,550,000 
Granted............................................................  345,000     3.33 to 5.58     1,548,750 
                                                                    --------                     ---------- 
Outstanding at December 31, 1995...................................  810,000     3.33 to 5.58     3,098,750 
Granted............................................................   99,000         5.58           552,915 
Exercised..........................................................  (85,250)        3.33          (284,309)
                                                                    --------                     ---------- 
Outstanding at September 30, 1996..................................  823,750     3.33 to 5.58    $3,367,356 
                                                                    ========                     ========== 

   Options to purchase 270,000 shares at $3.33 per share were exercisable at
December 31, 1995.                                                              

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

9. SHAREHOLDERS' EQUITY: -- (CONTINUED)                                         

 On May 25, 1994, the Compensation Committee granted options to purchase
765,000 shares of Common Stock to officers and directors of the Company at an   
exercise price of $3.33, the fair market value on the day of the grant. On      
December 20, 1994, the Company cancelled options to purchase 300,000 shares of  
Common Stock granted to a former officer of the Company.                        

     Warrants outstanding have been granted to the underwriters of the Company's
initial public offering and certain officers and directors to purchase Common   
Stock at prices ranging from $3.33 to $4.00 per share which expire on June 2,   
1999 and May 31, 2000. During 1995, the Company cancelled warrants to purchase  
150,000 shares which were granted to a former officer of the Company at a price 
of $3.33 per share and were to expire on May 31, 2000. The cancelled warrants   
were replaced with options to purchase 150,000 shares of common stock at an     
exercise price of $3.33 per share. A summary of the warrant transactions        
follows:                                                                        

                                                        [Enlarge/Download Table]


                                                                               WARRANT PRICE                
                                                                      SHARES      PER SHARE      AGGREGATE  
                                                                     --------  --------------   ----------- 
                                                                                                            
Warrants outstanding at January 1, 1994.............................   --      $      --       $        --  
Warrants granted....................................................  690,000    3.33 to 4.00     2,660,000 
                                                                     --------                   ----------- 
Warrants outstanding at December 31, 1994...........................  690,000    3.33 to 4.00     2,660,000 
Warrants cancelled.................................................. (150,000)      3.33           (500,000)
Warrants exercised..................................................  (45,000)      4.00           (180,000)
                                                                     --------                   ----------- 
Warrants outstanding at December 31, 1995...........................  495,000       4.00          1,980,000 
Warrants exercised.................................................. (300,000)      4.00         (1,200,000)
                                                                     --------                   ----------- 
Warrants outstanding at September 30, 1996..........................  195,000       4.00        $   780,000 
                                                                     ========                   =========== 


   During 1995, the FASB adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which has      
recognition provisions that establish a fair value based method of accounting   
for stock-based employee compensation plans and established fair value as the   
measurement basis for transactions in which an entity acquires goods or services
from nonemployees in exchange for equity instruments. SFAS 123 also has certain 
disclosure provisions. Adoption of the recognition provisions of SFAS 123 with  
regard to these transactions with nonemployees was required for all such        
transactions entered into after December 15, 1995, and the Company adopted these
provisions as required. The recognition provision with regard to the fair value 
based method of accounting for stock-based employee compensation plans is       
optional. The Company has decided to continue to apply Accounting Principles    
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," for
its stock-based employee compensation arrangements. APB 25 uses what is referred
to as an intrinsic value based method of accounting. The disclosure provisions  
of SFAS 123 are effective for fiscal years beginning after December 15, 1995.   
The Company will provide the disclosures when required.                         

STOCK SPLITS                                                                    

    The Board of Directors authorized a three-for-two stock split on April 18,
1996 on its Common Stock to shareholders of record on May 3, 1996, which was    
paid on May 23, 1996. On November 13, 1996, the Board of Directors authorized a 
two-for-one stock split on its Common Stock to shareholders of record on        
November 22, 1996, which was paid on December 20, 1996. In addition, authorized 
shares of Common Stock were increased from 10,000,000 to 20,000,000. All        
references in the financial statements to number of shares, per share amounts   
and market prices of the Company's Common Stock have been retroactively restated
to reflect the stock splits and the increased number of shares of Common Stock  
outstanding.                                                                    

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

10. LOSS FROM RETIREMENT OF DEBT:                                               

     In 1994, the Company recorded an extraordinary loss of $115,000 after taxes
for the early retirement of debt. The extraordinary loss consists primarily of  
the write-off of deferred finance costs associated with the retired notes, and  
legal and bank fees relating to the early extinguishment of the debt.           

11. ACQUISITIONS:                                                               

     On November 27, 1996, the Company purchased all of the capital stock of The
Plains Company and the limited partnership interests in The Plains Company's    
affiliated entities (together, "Pocono Downs") for an aggregate purchase price  
of $47 million plus acquisition-related fees and expenses (the "Pocono Downs    
Acquisition"). Pocono Downs conducts live harness racing at the harness         
racetrack located outside Wilkes-Barre, Pennsylvania (the "Harness Track"),     
export simulcasting of Harness Track races to locations throughout the United   
States, pari-mutuel wagering at the Harness Track and at OTWs in Allentown and  
Erie, Pennsylvania on Pocono Downs races and on import simulcast races from     
other racetracks, and telephone account wagering on live and import simulcast   
races. In addition, pursuant to the terms of the purchase agreement, the Company
will be required to pay the sellers of Pocono Downs an additional $10 million   
if, within five years after the consummation of the Pocono Downs Acquisition,   
Pennsylvania authorizes any additional form of gaming in which the Company may  
participate. The $10 million payment is payable in annual installments of $2    
million a year for five years, beginning on the date that the Company first     
offers such additional form of gaming.                                          

  On February 26, 1996, the Company entered into a joint venture agreement
(the "Charles Town Joint Venture") with Bryant Development Company, the holder  
of an option to purchase substantially all of the assets of Charles Town Racing 
Limited Partnership and Charles Town Races, Inc. (together, "Charles Town")     
relating to the Charles Town Race Track and Shenandoah Downs (together, the     
"Charles Town Facility") in Jefferson County, West Virginia. In connection with 
the Charles Town Joint Venture agreement, Bryant Development Company assigned   
the option to the Charles Town Joint Venture. In November 1996, the Charles Town
Joint Venture and Charles Town entered into an amended and restated option      
agreement. On November 5, 1996, Jefferson County, West Virginia approved a      
referendum permitting installation of gaming machines at the Charles Town       
Facility. On January 15, 1997 the Charles Town Joint Venture acquired           
substantially all of the assets of Charles Town (the "Charles Town Acquisition")
for approximately $16.5 million plus acquisition-related fees and expenses.     
Pursuant to the original operating agreement governing the Charles Town Joint   
Venture, the Company held an 80% ownership interest in the Charles Town Joint   
Venture and was obligated to contribute 80% of the purchase price of the Charles
Town Acquisition and 80% of the cost of refurbishing the Charles Town Facility. 
In fact, the Company contributed 100% of the purchase price of the Charles Town 
Acquisition and expects to contribute 100% of the cost of refurbishing the      
Charles Town Facility. The Company has reached an agreement with its joint      
venture partner, Bryant Development Company ("Bryant"), pursuant to which the   
parties have agreed to amend the operating agreement to increase the Company's  
ownership interest to 89% and decrease Bryant's ownership interest to 11%. In   
addition, the amendment will provide that the entire amount the Company has     
contributed, and will contribute, to the Charles Town Joint Venture for the     
acquisition and refurbishment of the Charles Town Facility would be treated, as 
between the parties, as a loan to the Charles Town Joint Venture from the       
Company. The proposed changes in the ownership of the Charles Town Joint Venture
are subject to the review of applicable West Virginia racing and regulatory     
authorities.                                                                    

     The Charles Town Joint Venture has developed plans for the refurbishment of
the Charles Town Facility as an entertainment complex that will feature live    
racing, dining, simulcast wagering and the                                      

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

11. ACQUISITIONS: -- (CONTINUED)                                                

installation of gaming machines; the estimated cost of the refurbishment is     
approximately $16 million exclusive of the costs of gaming machines.            

    Effective June 4, 1996, the Charles Town Joint Venture entered into a Loan
and Security Agreement with Charles Town. The Loan and Security Agreement       
provided for a working capital line of credit in the amount of $1,250,000 and a 
requisite reduction of the purchase price under the option, by $1.60 for each   
dollar borrowed under that line. Upon consummation of the Charles Town          
Acquisition, Charles Town Races, Inc. repaid the loan. The parties agreed that  
$936,000 of the amount borrowed was eligible for the $1.60 purchase price       
reduction and are negotiating the applicability of the purchase price reduction 
to the remaining $219,000 that was borrowed.                                    

  On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia     
against Charles Town, the Company, Penn National Gaming of West Virginia, Inc., 
a wholly owned subsidiary of the Company, and Bryant. The complaint filed by    
GTECH alleges that Charles Town and AmTote International, Inc. ("AmTote") were  
parties to an October 20, 1994 agreement (the "AmTote Agreement"), pursuant to  
which AmTote was allegedly granted an exclusive right to install and operate a  
"video lottery system" at the Charles Town Facility. When the AmTote Agreement  
was entered into, AmTote was a subsidiary of GTECH; GTECH has since divested    
itself of AmTote, but is purportedly the assignee of certain of AmTote's rights 
under the AmTote Agreement pursuant to an assignment and assumption agreement   
dated February 22, 1996. The complaint seeks (i) preliminary and permanent      
injunctive relief enjoining Charles Town, Bryant, the Company and its subsidiary
from consummating the Charles Town Acquisition or any similar transaction unless
the purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH 
has the right to be the exclusive installer, operator, provider and servicer of 
a video lottery system at the Charles Town Facility and that any party buying   
the stock or assets of Charles Town must accept and assume the AmTote Agreement 
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv) 
legal fees and costs and (v) such other further legal and equitable relief as   
the court deems just and appropriate. On December 23, 1996, the court denied    
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court  
noted that GTECH may pursue its claim for damages and, if warranted, pursue     
other injunctive relief in the future. The Company consummated the Charles Town 
Acquisition on January 15, 1997. On January 13, 1997, Charles Town filed a      
motion to dismiss GTECH's complaint; the court has not yet ruled on this motion.
The Company believes the allegations of the complaint to be without merit and   
intends to contest the action vigorously.                                       

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of The Plains Company                                       

    We have audited the accompanying consolidated balance sheets of The Plains
Company and its subsidiaries as of December 31, 1994 and 1995 and the related   
consolidated statements of income and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1995. These consolidated    
financial statements are the responsibility of the Company's management. Our    
responsibility is to express an opinion on these consolidated financial         
statements based on our audits.                                                 

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit  
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement       
presentation. We believe that our audits provide a reasonable basis for our     
opinion.                                                                        

 In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Plains  
Company and its subsidiaries at December 31, 1994 and 1995, and the results of  
their operations and cash flows for each of the three years in the period ended 
December 31, 1995 in conformity with generally accepted accounting principles.  

                                                              Robert Rossi & Co.
Olyphant, Pennsylvania                                                          
December 6, 1996                                                                

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THE PLAINS COMPANY AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                            DECEMBER 31,                 
                                                                        ------------------  SEPTEMBER 30,
                                                                          1994      1995       1996      
                                                                        -------    -------    -------    
                                                                                            (UNAUDITED)  
                                                                                                         
ASSETS                                                                                                   
Current Assets                                                                                           
  Cash and Cash Equivalents............................................ $ 6,116    $ 5,490    $ 4,521    
  Marketable Securities................................................   2,142      4,701      6,001    
  Accounts Receivable..................................................     258        499        981    
  Inventories..........................................................      65         65         69    
  Due from Related Parties.............................................      41         41         41    
  Prepaid Insurance & Other Current Assets.............................     283        256        466    
                                                                        -------    -------    -------    

    Total Current Assets...............................................   8,905     11,052     12,079    
                                                                        -------    -------    -------    

Property and Equipment                                                                                   
  Land.................................................................   4,131      4,146      4,146    
  Land Improvements....................................................   1,612      1,612      1,612    
  Buildings & Improvements.............................................   6,004      6,362      6,362    
  Equipment............................................................   3,348      3,698      3,749    
  Race Track...........................................................      22         22         22    
  Property Held Under Capital Lease....................................   1,172      1,326      1,326    
  Construction in Progress.............................................      64         --         --    
                                                                        -------    -------    -------    
    Total..............................................................  16,353     17,166     17,217    
  Less: Accumulated Depreciation.......................................   3,046      3,852      4,505    
                                                                        -------    -------    -------    

    Net Property and Equipment.........................................  13,307     13,314     12,712    
                                                                        -------    -------    -------    

Other Assets                                                                                             
  Marketable Securities................................................     102         --         --    
  Deferred Expenses....................................................     443        324        235    
  Other Assets.........................................................      27         27         --    
                                                                        -------    -------    -------    

    Total Other Assets.................................................     572        351        235    
                                                                        -------    -------    -------    

      Total Assets..................................................... $22,784    $24,717    $25,026    
                                                                        =======    =======    =======    


See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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THE PLAINS COMPANY AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

                                                        [Enlarge/Download Table]

                                                                             DECEMBER 31,                 
                                                                         ------------------  SEPTEMBER 30,
                                                                           1994      1995        1996     
                                                                         -------    -------   ----------- 
                                                                                              (UNAUDITED) 
                                                                                                          
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                      
Current Liabilities                                                                                       
  Accounts Payable.....................................................  $ 1,828    $ 1,693     $ 2,215   
  Underpaid Purses.....................................................      501        936         530   
  Payroll & Sales Taxes Payable........................................       57         50         105   
  Accrued Expenses.....................................................      292        332         154   
  Deferred Income......................................................       57         19           5   
  Income Taxes Payable.................................................    1,308         19          86   
  Deferred Income Taxes................................................      543        364         331   
  Current Portion of Long-Term Liabilities.............................      602        656       1,020   
                                                                         -------    -------     -------   

    Total Current Liabilities..........................................    5,188      4,069       4,446   
                                                                         -------    -------     -------   

Long-Term Liabilities, Net of Current Portion..........................    8,863      8,345       7,159   
                                                                         -------    -------     -------   

Limited Partner Interest in Controlled Limited Partnership                                                
  Investments..........................................................    2,078      2,689       1,880   
                                                                         -------    -------     -------   

Commitments and Contingencies                                                                             

Shareholders' Equity                                                                                      
  Common Stock, $50 Par Value, 1,000 Shares Authorized, 100, 0 and 0                                      
    Shares Issued and Outstanding, respectively........................        5         --          --   
  Common Stock, Class A Voting, $1 Par Value, 100 Shares Authorized, 0,                                   
    10 and 10 Shares Issued and Outstanding, respectively..............       --         --          --   
  Common Stock, Class B Non-Voting, $1 Par Value, 300,000 Shares                                          
    Authorized, 0, 30,000 and 30,000 Shares Issued and Outstanding,                                       
    respectively.......................................................       --         30          30   
  Additional Paid In Capital...........................................    1,009        984         984   
  Retained Earnings....................................................    5,641      8,600      10,527   
                                                                         -------    -------     -------   

    Total Shareholders' Equity.........................................    6,655      9,614      11,541   
                                                                         -------    -------     -------   

      Total Liabilities and Shareholders' Equity.......................  $22,784    $24,717     $25,026   
                                                                         =======    =======     =======   


See accompanying summary of significant accounting policies and 
notes to consolidated financial statements. 

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 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)

                                                        [Enlarge/Download Table]


                                                                                       NINE MONTHS ENDED  
                                                          YEAR ENDED DECEMBER 31,        SEPTEMBER 30,    
                                                       -----------------------------   ------------------ 
                                                         1993       1994       1995      1995       1996  
                                                       -------    -------    -------   -------    ------- 
                                                                                           (UNAUDITED)    
                                                                                                          
Operating Income                                                                                          
  Pari-Mutuel Commissions and Breakage, Net........... $18,159    $26,244    $28,444   $22,348    $22,187 
  Purse Income........................................     234        199        155       133        103 
  Operating Income from Programs, Admissions,                                                             
    Concessions, Parking, and Other Sources...........   1,983      2,531      2,586     2,016      1,861 
  Rental Income.......................................   1,226      2,431      2,669     1,653      1,595 
                                                       -------    -------    -------   -------    ------- 
      Total Operating Income..........................  21,602     31,405     33,854    26,150     25,746 
                                                       -------    -------    -------   -------    ------- 

Operating Expenses                                                                                        
  Purses..............................................   4,721      6,038      6,500     5,225      5,003 
  Rent................................................   1,226      2,431      2,669     1,653      1,595 
  Operating Fees & Expenses...........................   4,118      5,667      6,235     4,755      4,997 
  Salaries............................................   4,377      5,321      5,779     3,810      4,476 
  Payroll Taxes, Benefits, and                                                                            
    Union Dues........................................     553        756        671       575        612 
  Advertising & Promotions............................     700        684        937       746        867 
  Utilities...........................................     517        600        593       456        451 
  Repairs & Maintenance...............................     800      1,032      1,136       970        964 
  Real Estate Taxes...................................     268        251        247       188        185 
  Insurance...........................................     341        364        403       268        336 
  General & Administrative............................     903      1,023      1,150       828      1,079 
  Depreciation and Amortization.......................     732        927        941       628        741 
                                                       -------    -------    -------   -------    ------- 

      Total Operating Expenses........................  19,256     25,094     27,261    20,102     21,306 
                                                       -------    -------    -------   -------    ------- 

Income Before Other Income & (Expenses)...............   2,346      6,311      6,593     6,048      4,440 
                                                       -------    -------    -------   -------    ------- 

Other Income & (Expenses)                                                                                 
  Interest & Dividend Income..........................     158        208        396       287        334 
  Interest Expense....................................    (695)      (934)      (957)     (723)      (640)
  Miscellaneous Income................................      --         58        100        --         -- 
  Bad Debt Expense....................................      --         --         --        --        (10)
                                                       -------    -------    -------   -------    ------- 

      Total Other Income & (Expenses).................    (537)      (668)      (461)     (436)      (316)
                                                       -------    -------    -------   -------    ------- 

Income Before Limited Partner Share of Income from                                                        
  Controlled Limited Partnership Investment...........   1,809      5,643      6,132     5,612      4,124 

Limited Partner Pro-Rata Share of Income                                                                  
  from Controlled Limited Partnership                                                                     
  Investment..........................................    (571)    (1,361)    (1,571)     (831)      (874)
                                                       -------    -------    -------   -------    ------- 

Income Before Provision for Income Taxes..............   1,238      4,282      4,561     4,781      3,250 

Provision for Income Taxes............................     477      1,708      1,602     1,937      1,323 
                                                       -------    -------    -------   -------    ------- 

Income before Extraordinary Item......................     761      2,574      2,959     2,844      1,927 

Extraordinary Item (Net of Income Taxes)..............    (175)        --         --        --         -- 
                                                       -------    -------    -------   -------    ------- 

Net Income............................................     586      2,574      2,959     2,844      1,927 
Retained Earnings, Beginning of Period................   2,481      3,067      5,641     5,641      8,600 
                                                       -------    -------    -------   -------    ------- 
Retained Earnings, End of Period...................... $ 3,067    $ 5,641    $ 8,600   $ 8,485    $10,527 
                                                       =======    =======    =======   =======    ======= 


 See accompanying summary of significant accounting policies and
 notes to consolidated financial statements.

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 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

                                                        [Enlarge/Download Table]
                                                                                                             
                                                                                         NINE MONTHS ENDED   
                                                          YEARS ENDED DECEMBER 31,         SEPTEMBER 30,     
                                                         --------------------------------------------------- 
                                                           1993       1994       1995       1995       1996  
                                                         -------    -------    -------    -------    ------- 
                                                                                             (UNAUDITED)     
                                                                                                             
Cash Flows from Operating Activities                                                                         
  Net Income............................................  $  586    $ 2,574    $ 2,959    $ 2,844    $ 1,927 
  Adjustments to Reconcile Net Income to Net Cash                                                            
    Provided by Operating Activities                                                                         
    Depreciation and Amortization.......................     732        927        941        628        741 
    Extraordinary Item..................................     300         --         --         --         -- 
    Limited Partner Interest in Net Income of                                                                
      Consolidated Limited Partnerships.................     571      1,361      1,571        831        874 
    (Increase) Decrease in Accounts Receivable..........      89       (115)      (241)      (533)      (482)
    (Increase) Decrease in Inventories..................     (30)        16         --         (4)        (4)
    (Increase) Decrease in Prepaid Insurance and Other                                                       
      Current Assets....................................      12       (111)        27         16       (210)
    (Increase) Decrease in Other Assets.................      --        (27)        --         27         27 
    (Decrease) Increase in Accounts Payable.............     595        678       (135)       (30)       522 
    (Decrease) Increase in Underpaid Purses.............     270        101        435        198       (406)
    (Decrease) Increase in Payroll and Sales                                                                 
      Tax Payable.......................................      12        (19)        (7)        20         55 
    (Decrease) Increase in Accrued Expenses.............      74        136         40       (138)      (178)
    (Decrease) Increase in Deferred Income..............     (78)       (53)       (38)       (29)       (14)
    (Decrease) Increase in Income Taxes Payable.........      31      1,277     (1,289)      (767)        67 
    (Decrease) Increase in Deferred Income Taxes........      88        103       (179)       (33)       (33)
                                                         -------    -------    -------    -------    ------- 

Net Cash Provided by Operating Activities...............   3,252      6,848      4,084      3,030      2,886 
                                                         -------    -------    -------    -------    ------- 

Cash Flows from Investing Activities                                                                         
  Investment in Marketable Securities...................      --     (2,244)    (4,701)    (1,001)    (3,000)
  Proceeds from Sale of Marketable Securities...........   2,266         --      2,244      2,244      1,700 
  Purchase of Property and Equipment....................  (3,476)      (818)      (829)      (691)       (51)
  Investment of Proceeds from Long-Term Borrowing.......    (289)        --         --         --         -- 
                                                         -------    -------    -------    -------    ------- 

Net Cash (Used in) Provided by Investing Activities.....  (1,499)    (3,062)    (3,286)       552     (1,351)
                                                         -------    -------    -------    -------    ------- 

Cash Flows from Financing Activities                                                                         
  Proceeds Received on Long-Term Debt...................     815         --        154        154         -- 
  Payments Made on Short-Term Borrowings................     (50)        --         --         --         -- 
  Payments Made on Long-Term Debt.......................    (712)      (873)      (618)      (465)      (821)
  Loan Acquisition Costs................................     (19)        --         --         --         -- 
  Distribution to Limited Partners......................      --        (80)      (960)      (960)    (1,683)
                                                         -------    -------    -------    -------    ------- 

Net Cash (Used in) Provided by Financing Activities.....      34       (953)    (1,424)    (1,271)    (2,504)
                                                         -------    -------    -------    -------    ------- 

Net Increase (Decrease) in Cash & Cash Equivalents......   1,787      2,833       (626)     2,311       (969)

Cash and Cash Equivalents at Beginning of Period........   1,496      3,283      6,116      6,116      5,490 
                                                         -------    -------    -------    -------    ------- 

Cash and Cash Equivalents at End of Period.............. $ 3,283    $ 6,116    $ 5,490    $ 8,427    $ 4,521 
                                                         =======    =======    =======    =======    ======= 

Supplemental Cash Flow Disclosures:                                                                          
  Cash Paid During the Period for:                                                                           
    Interest............................................ $   695    $   934    $   957    $   723    $   640 
    Income Taxes........................................     247        323      3,049      2,757      1,428 

Schedule of Non-Cash Investing & Financing Activities:                                                       
    Financing Property and Equipment....................      13         --         --         --         -- 
    Investment in Property and Equipment................     (13)        --         --         --         -- 
    Release of Restricted Cash Applied Against Related                                                       
      Mortgage Note Payable.............................      --        200         --         --         -- 
    Reduction in Mortgage Note Payable..................      --       (200)        --         --         -- 

 See accompanying summary of significant accounting policies and
 notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                                  

    Principles of Consolidation: The consolidated financial statements include
the following subsidiaries and controlled enterprises of The Plains Company     
(collectively, "The Plains Company").                                           

   Pocono Downs, Inc. (a Pennsylvania corporation), a wholly-owned
     subsidiary of The Plains Company, holds the Pennsylvania racing license and
conducts harness race meets with pari-mutuel wagering.                

      The Downs Off-Track Wagering, Inc. (a Pennsylvania corporation), a
   wholly-owned subsidiary of Pocono Downs, Inc. and sole general partner of
Lehigh Off-Track Wagering, L.P., operates both the Erie and Lehigh    
off-track wagering facilities.                                        

Northeast Concessions, Inc. (a Pennsylvania corporation), a 
    wholly-owned subsidiary of Pocono Downs, Inc., operates the concessions at
the Company's racetrack and off-track wagering facilities.            

Audio Video Concepts, Inc. (a Pennsylvania corporation), a  
wholly-owned subsidiary of Pocono Downs, Inc., supplies audio-video   
services to the Company's racetrack and off-track wagering facilities.

      Mill Creek Land, Inc. (a Pennsylvania corporation), a wholly-owned
   subsidiary of Pocono Downs, Inc., holds title to a certain parcel of land
    adjoining the racetrack, which land was previously operated as a landfill.

          Backside, Inc. (a Pennsylvania corporation), a wholly-owned subsidiary
 of Pocono Downs, Inc., operates the horsemen's cafeteria located at the
Plains Township racetrack facility.                                   

       Peach Street Ltd. Partnership (a Pennsylvania limited partnership),
    which is controlled by Pocono Downs, Inc., its sole general partner, holds
 title to the off-track wagering facility located in Erie, Pennsylvania.

         Lehigh Off-Track Wagering, L.P. (a Pennsylvania limited partnership),
     which is controlled by the Downs Off-Track Wagering, Inc., its sole general
  partner, held title to the off-track wagering facility located in Lehigh
County, Pennsylvania. In the acquisition of The Plains Company and its
   affiliated entities on November 27, 1996, Lehigh Off-Track Wagering, L.P.
was dissolved into The Downs Off-Track Wagering, Inc., which now holds
title to the Lehigh County facility.                                  

All intercompany accounts and transactions have been eliminated in    
consolidation. The limited partnership interests in Peach Street Limited        
Partnership and Lehigh Off-Track Wagering, L.P. have been recorded in the       
accompanying financial statements as consolidated subsidiaries as described in  
Note 10.                                                                        

   Nature of Operations: The Plains Company conducts harness race meets with
pari-mutuel wagering at its race track in Plains Township, Luzerne County,      
Pennsylvania. The racing license must be obtained annually from the Pennsylvania
Harness Racing Commission. In addition to pari-mutuel wagering on the The Plains
Company's live harness race meet, The Plains Company also conducts simulcasted  
racing programs from other Pennsylvania licensed racetracks and interstate      
simulcasted racing programs from racetracks located outside Pennsylvania. The   
Plains Company also simulcasts racing programs from its two off-track wagering  
facilities (non-primary locations) located in Erie and Lehigh County,           
Pennsylvania. The Erie off-track wagering facility was opened on May 1, 1991,   
and the Lehigh off-track wagering facility began operating on July 28, 1993.    
During December 1995, The Plains Company commenced acceptance of pari-mutuel    
wagering through telephone account wagering.                                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

 Use of Estimates: 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 date of  
the financial statements and the reported amounts of revenues and expenses      
during the reporting period. Actual results could differ from those estimates.  

  Marketable Securities: Marketable securities are accounted for using the
accounting provisions of Statement of Financial Accounting Standards No. 115,   
"Accounting for Investments in Debt and Equity Securities" ("SFAS 115"), whereby
debt securities which The Plains Company has the ability and intent to hold to  
maturity are classified as held to maturity and are carried at cost. All other  
marketable securities are classified as available for sale and are carried at   
fair value. Unrealized gains and losses on securities available for sale are    
recognized as direct increases or decreases in shareholders' equity. Cost of    
securities sold is recognized using the specific identification method.         

Accounts Receivable: Accounts receivable are written off to an expense
account in the year determined by management to be uncollectible. It is         
management's position that the reserve method is not necessary because of the   
current status and nature of the accounts.                                      

     Inventories: Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.                                      

Property & Equipment: Property and equipment are carried at cost.     
Depreciation is provided for over the estimated useful life of the assets       
principally using the straight line and declining balance method for financial  
purposes and the straight line method and accelerated cost recovery system for  
income tax purposes.                                                            

    Deferred Expenses: Costs associated with debt financing are amortized over
the term of the related obligation; and costs associated with the activities of 
organizing newly created entities are amortized over a five year period.        

Deferred Income: Deferred mortgage discount is recognized as interest 
income using the interest method.                                               

  Income Taxes: The Plains Company files a consolidated federal income tax
return, and each entity files a separate state income tax return. The provision 
for federal and state income taxes has been computed on such basis.             

The income and deductions of The Plains Company's affiliated limited  
partnerships are passed through and reported on the tax returns of the limited  
partnerships' partners in accordance with their respective percentage shares of 
ownership. Accordingly, federal and state income taxes have been provided on The
Plains Company's pro-rata share of partnership income incurred during the years 
ended December 31, 1993, 1994 and 1995.                                         

In January 1993, The Plains Company adopted Statement of Financial    
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS  
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events   
that have been recognized in The Plains Company's financial statements or tax   
returns. In estimating future tax consequences, SFAS 109 generally considers all
expected future events other than the enactment of changes in tax laws or rates.

 Deferred income taxes are provided for in the accompanying consolidated
financial statements based on differences in the financial accounting basis of  
property and equipment over their tax basis;                                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                   

depreciation is computed under the straight line and declining balance method   
for financial purposes and under the straight line and accelerated cost recovery
system for income tax purposes; and based upon the timing differences relative  
to recognition of deferred mortgage discount.                                   

  Cash Equivalents: For purposes of reporting cash flows, cash equivalents
include cash on hand, certificates of deposit and all highly liquid investments 
with original maturities of three months or less.                               

2. COMMITMENTS AND CONTINGENCIES:                                               

Concentration of Credit Risk: Financial instruments that potentially  
subject The Plains Company to significant concentrations of credit risk consist 
principally of cash investments, marketable securities and trade accounts       
receivable.                                                                     

The Plains Company maintains its cash investments and certain other   
financial instruments with various financial institutions located throughout    
Pennsylvania. At December 31, 1994 and 1995, these investments included         
$2,000,000 and $4,700,000 of municipal debt securities and cash balances in     
excess of the $100,000 federal deposit insurance limits amounting to $5,158,741 
and $4,563,261, respectively. Concentration of credit risk, with respect to     
accounts receivable, is limited due to The Plains Company's credit evaluation   
and collection process. The Plains Company does not require collateral from it's
customers. The Plains Company's accounts receivable are mainly concentrated in  
the horse racing industry and consist principally of amounts due from other     
racetracks and off-track wagering facilities located in various parts of the    
country. Historically, The Plains Company has not incurred any significant      
credit related losses in regard to its trade accounts receivable.               

   Harness Horsemen's Agreement: In January 1995, The Plains Company entered
into an agreement with the Pennsylvania Harness Horsemen's Association (PHHA)   
which expires January 15, 2000. The agreement requires that The Plains Company  
distribute to its horsemen a racing purse determined on varying percentages of  
handle or commission and breakage as stipulated in the agreement. For the years 
ended December 31, 1993 and 1994, a similar agreement with the Pennsylvania     
Harness Horsemen's Association was also in force which expired in January 1995. 

Purse expense as determined in accordance with The Plains Company's   
agreement with the PHHA and with the Pennsylvania statute for off-track wagering
locations usually do not equal the actual purses paid. Any resulting overpayment
or underpayment of purses is applied to future race meets. The amount of purses 
underpaid at December 31, 1994 and 1995 was $500,528 and $936,314, respectively.

     The total purse expense under the aforementioned agreements was $4,721,366,
$6,038,421 and $6,499,979 for the years ended December 31, 1993, 1994 and 1995, 
respectively.                                                                   

     Leases: In December 1993, The Plains Company entered into a lease agreement
for certain totalisator equipment. The agreement provides for a five-year term  
expiring on December 31, 1998 and requires an annual fee determined by the      
greater of a specified percentage of gross handle wagered plus a flat per item  
rental charge computed on a daily basis for equipment used at The Plains        
Company's two off-track wagering locations, or a minimum annual payment of      
$200,000. For the year ended December 31, 1993, a similar agreement was also in 
force which expired in December 1993.                                           

Totalisator equipment rentals charged to The Plains Company under the 
aforementioned lease agreements were $564,676, $636,890 and $735,844 for the    
years ended December 31, 1993, 1994 and 1995, respectively. Minimum future      
rental payments under this agreement are $200,000 for each of the years ending  
December 31, 1996, 1997 and 1998.                                               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

2. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)                                

The Plains Company entered into a transponder service agreement during
1993, 1994 and 1995 with an unrelated service provider to utilize a satellite   
system for distribution of a horse racing television service. The agreements are
negotiated on an annual basis and expire at the end of each harness racing year.
Such agreements require monthly payments based on the hours the transponder is  
accessed at a rate specified in the agreement. The total fees charged to expense
for the years ended December 31, 1993, 1994 and 1995 were $136,246, $244,184 and
$128,369, respectively.                                                         

   Pocono Downs, Inc. leases its Erie off-track wagering facility from Peach
Street Ltd. Partnership, an affiliate as described in Note 1, under a long-term 
operating lease agreement through April 27, 2005. Such lease requires Pocono    
Downs, Inc. to pay an annual rent equal to the debt service required to finance 
the construction of the premises, plus the payment of all taxes, utilities and  
expenses associated with the premises, and a contingent rental based on a       
percentage of gross handle in excess of a minimum handle as defined within the  
lease. Rent charged to expense for the years ended December 31, 1993, 1994 and  
1995 was $552,568, $672,770 and $730,350, which included contingent rents of    
$88,168, $208,370 and $265,950, for each respective year.                       

Pocono Downs, Inc. leases its Lehigh off-track wagering facility from 
Lehigh Off-Track Wagering, L.P., an affiliate as described in Note 1, under a   
long-term operating lease agreement through July 27, 2008. The lease requires   
Pocono Downs, Inc. to pay an annual rent equal to the debt service required to  
finance the construction of the premises, plus the payment of all taxes,        
utilities and expenses associated with the premises, and a contingent rental    
based on a percentage of gross handle in excess of a minimum handle as defined  
within the lease. Pursuant to the lease agreement, Pocono Downs, Inc. has       
guaranteed the repayment of the mortgage notes issued by Lehigh Off-Track       
Wagering, L.P. as described in Note 6. Rent charged to expense for the years    
ended December 31, 1993, 1994 and 1995 was $673,928, $1,758,568 and $1,938,362, 
which included contingent rents of $405,277, $1,113,805 and $1,293,599, for each
respective year.                                                                

Minimum future rental payments under the aforementioned non-cancelable
operating leases which have a remaining term in excess of one year as of        
December 31, 1995 and for each of the next five periods are as follows:         

DECEMBER 31,                                                         AMOUNT     
------------                                                       ----------   
1996...........................................................    $1,109,400   
1997...........................................................     1,109,400   
1998...........................................................     1,109,400   
1999...........................................................     1,109,400   
2000...........................................................     1,109,400   
Subsequent to 2000.............................................     6,010,332   

 Restricted Cash: The Plains Company was required to maintain a $200,000
cash balance as additional collateral for the term loan at the local bank which 
provided the financing to purchase the original mortgage held on Pocono Downs,  
Inc. as described in Notes 6 and 8. During the year ended December 31, 1994, the
bank released the $200,000 cash balance and The Plains Company applied the      
proceeds to reduce the outstanding balance of the related debt.                 

    Guarantee of Debt Obligation: The Plains Company's racetrack facilities in
Plains Township were pledged on a secondary lien mortgage to provide additional 
collateral on a $3.4 million mortgage note payable by Peach Street Limited      
Partnership.                                                                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

2. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)                                

Consulting Agreement: In March 1989, The Plains Company entered into a
consulting agreement with a former officer and director of The Plains Company.  
The agreement, which would have expired in December 2003, included an agreement 
not to compete in any business similar to The Plains Company's operations and   
required monthly payments of $12,500. On November 27, 1996, The Plains Company's
obligations under this consulting agreement were terminated by The Plains       
Company pursuant to the terms of the sale agreement described in Note 14. The   
termination of The Plains Company's obligations required a payment of $1.8      
million as stipulated by the terms of the consulting and non-compete agreement. 

401(k) Plan: The Plains Company has an employee retirement plan under 
Section 401(k) of the Internal Revenue Code, which covers all eligible employees
who are not members of a bargaining unit. The retirement plan enables employees 
choosing to participate to defer a portion of their salary in a retirement fund 
to be administered by The Plains Company. The Plains Company has no obligation  
to contribute to such plan. However, for the year ended December 31, 1995, The  
Plains Company made a discretionary contribution based upon a percentage of the 
employee elective deferrals. The Plains Company's contributions to the plan     
amounted to $0, $0 and $40,334, for the year ended December 31, 1993, 1994 and  
1995, respectively.                                                             

Employment Agreements: During February 1996 and March 1996, The Plains
Company entered into employment agreements with two of its corporate officers.  
Both agreements provided for minimum salary and benefits subject to scheduled   
annual increases through March 1999 and March 2006. These agreements were       
terminated on November 27, 1996 by The Plains Company at a cost of approximately
$1,083,000 as stipulated in the agreement of sale described in Note 14.         

3. MARKETABLE SECURITIES:                                                       

    At December 31, 1994 and 1995, marketable securities consist of The Plains
Company's investment in debt and equity securities which management has         
classified in accordance with SFAS 115. The carrying amount and approximate fair
value of theses securities included in the accompanying classified balance sheet
are as follows:                                                                 

                                                        [Enlarge/Download Table]


                                                                    DECEMBER 31, 1994       DECEMBER 31, 1995  
                                                                   -------------------      ------------------ 
                                                                   CARRYING      FAIR       CARRYING     FAIR  
                                                                    AMOUNT       VALUE       AMOUNT      VALUE 
                                                                   --------      -----      --------     ----- 
                                                                                   (IN THOUSANDS)              
                                                                                                               
Current:                                                                                                       
     Equity Securities --                                                                                      
       Available for Sale.........................................   $  142      $  142      $    1      $    1
     Obligation of State and Political Subdivisions --                                                         
       Available for Sale.........................................    2,000       2,000       4,700       4,700
                                                                     ------      ------      ------      ------
                                                                     $2,142      $2,142      $4,701      $4,701
                                                                     ======      ======      ======      ======

Non-Current:                                                                                                   
     U.S. Government Securities Held to Maturity..................   $  102      $  102      $   --      $   --
                                                                     ======      ======      ======      ======

At December 31, 1994 and 1995, the fair value of The Plains Company's 
investment in marketable securities equaled their cost basis; accordingly, there
is no unrealized holding gains or losses associated with such investments.      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

3. MARKETABLE SECURITIES: -- (Continued)                                        

   Gross proceeds from the sale or maturity of marketable securities for the
years ended December 31, 1994 and 1995 were $0 and $2,244,009, respectively.    
There were no realized gain or losses on the sale or maturity of The Plains     
Company's investment in marketable securities for the years ended December 31,  
1994 and 1995.                                                                  

4. INVENTORIES:                                                                 

Inventories valued at the lower of cost or market are summarized as   
follows:                                                                        

                                                  DECEMBER 31,
                                                 -----------------
                                                 1994         1995
                                                 ----         ----
                                                  (IN THOUSANDS)
Food and Beverage Products..........................     $63          $63       
Audio-Video Equipment & Parts.......................       2            2       
                                                  ---          ---
                                                  $65          $65
                                                  ===          ===

5. DUE FROM RELATED PARTIES:                                                    

  At December 31, 1994 and 1995, The Plains Company's sole shareholder was
indebted to The Plains Company on a non-interest bearing unsecured advance with 
no stated maturity date in the amount of $41,000. Such indebtedness was         
subsequently repaid during November 1996.                                       

6. LONG-TERM LIABILITIES:                                                       

Long-term liabilities consist of the following:                       

                                                        DECEMBER 31,
                                                       -----------------
                                                       1994       1995
                                                       ------     ------
                                                        (IN THOUSANDS)
 Promissory Note Payable..........................     $1,077     $  958
 Mortgage Payable.................................      2,670      2,460
 Mortgage Notes Payable...........................      5,000      4,995
 Capitalized Lease Obligations....................        718        588
                                                       ------     ------
                                                        9,465      9,001
 Less: Current Portion............................        602        656
                                                       ------     ------
                                                       $8,863     $8,345
                                                       ======     ======

  Promissory Note Payable: The Plains Company was indebted to a local area
bank on a term loan which was secured by the assignment of a related party      
mortgage on the Plains Township racetrack facilities between Pocono Downs, Inc. 
and The Plains Company as described in Note 8 and by land with a carrying value 
of $750,000 as of December 31, 1994 and 1995.                                   

The promissory note payable bore interest at a rate of 1% above the   
national prime lending rate and required monthly payments of principal and      
interest in the amount of $18,085. Such amount was fixed for the succeeding     
twelve month period at which time the monthly payment would have been           
recalculated to an amount necessary to amortize the then outstanding principal  
amount over the remaining amortization term. The promissory note was being      
amortized over a 15-year period and had a due date of January 1997. The note was
paid in November 1996 in conjunction with the sale of The Plains Company to Penn
National Gaming, Inc. as described in Note 14.                                  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

6. LONG-TERM LIABILITIES: -- (CONTINUED)                                        

 Mortgage Payable: Peach Street Ltd. Partnership was indebted to a local
bank on a mortgage obligation which financed the acquisition and construction of
an off-track wagering facility located in Erie, Pennsylvania. The debt was      
secured by the off-track wagering facility, a first lien on all machinery,      
equipment and fixtures located at the facility, a secondary mortgage on The     
Plains Company's racetrack facility located in Plains Township and the personal 
guarantee of an officer of The Plains Company. The loan agreement required      
monthly payments of $38,700, which included principal and interest computed at  
1% over the prime rate, for a 10-year term through December 2001. The note was  
paid in November 1996 in conjunction with the sale of The Plains Company to Penn
National Gaming, Inc., as described in Note 14.                                 

     Mortgages Notes Payable: During 1992, Lehigh Off-Track Wagering, L.P. filed
a registration statement with the Pennsylvania Securities Commission under which
the partnership would offer for sale from time to time up to $5,000,000 of      
secured mortgage notes pursuant to the Pennsylvania Securities Act of 1972, as  
amended. Proceeds from the sale of such mortgage notes were used to acquire     
property located in Lehigh County, Pennsylvania and to finance the construction 
of an off-track wagering facility at this location. The mortgage notes would    
have matured five years from the date of issuance and required quarterly        
interest payments computed at a rate of 2% above the national prime rate of a   
local area bank. Additionally, the rate of interest paid on these notes was     
further restricted to a floor and ceiling of 10% and 15%, respectively. These   
mortgage obligations were secured by a first lien mortgage on the Lehigh County 
property, the off-track wagering facility and the corporate guarantee of Pocono 
Downs, Inc. through the terms of the lease agreement with Lehigh Off-Track      
Wagering, L.P. The note was paid in November 1996 in conjunction with the sale  
of The Plains Company to Penn National Gaming, Inc., as described in Note 14.   

Capitalized Lease Obligations: The Plains Company leased various      
audio-video, camera, telecommunication and computer equipment installed at the  
Plains Township racetrack facility, and the Erie and Lehigh off-track wagering  
facilities, under six capital leases which would have expired between November  
1995 and January 2000. The assets and liabilities under capital leases were     
recorded at the present value of the minimum lease payments. The Plains Company 
was obligated to pay insurance, maintenance and expenses related to the leased  
property. The leases were paid in November 1996 in conjunction with the sale of 
The Plains Company to Penn National Gaming, Inc., as described in Note 14.      

   Depreciation expense of $135,325, $176,681 and $186,714 has been recorded
on these assets held under capital lease for the years ended December 31, 1993, 
1994 and 1995, respectively. Such depreciation has been recorded based on the   
estimated useful life of the equipment.                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

6. LONG-TERM LIABILITIES: -- (CONTINUED)                                        

  Minimum future lease payments under these capital leases for each of the
five years succeeding December 31, 1995 and in the aggregate were as follows:   

                                                                (IN THOUSANDS)
                                                                --------------
1996......................................................           $ 329      
1997......................................................             193      
1998......................................................             127      
1999......................................................              38      
2000......................................................               3      
                                                               -----
Total Minimum Lease Payments..............................             690      
Less: Amount Representing Interest........................             102      
                                                               -----
Present Value of Net Minimum Lease Payments...............           $ 588      
                                                               =====

     Maturities of long-term liabilities including minimum future lease payments
under capital lease for each of the five years succeeding December 31, 1995 were
as follows:                                                                     

                                                                (IN THOUSANDS)
                                                                --------------
1996......................................................           $  656     
1997......................................................            5,837     
1998......................................................              807     
1999......................................................              356     
2000......................................................              355     

7. DEFERRED EXPENSES:                                                           

Deferred expenses net of accumulated amortization consists of the     
following:                                                                      

                                                                [Download Table]


                                                                  DECEMBER 31, 
                                                                ---------------
                                                                1994       1995
                                                                ----       ----
                                                                 (IN THOUSANDS)
                                                                               
Loan Acquisition Costs, Net of Accumulated Amortization of                     
  $555,689 in 1994 and $672,798 in 1995........................ $438       $321
Organization Costs, Net of Accumulated Amortization of                         
  $10,056 in 1994 and $11,912 in 1995..........................    5          3
                                                                ----       ----
                                                                $443       $324
                                                                ====       ====

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

8. DEFERRED INCOME:                                                             

 Discount on Mortgage: The Plains Company holds a mortgage note from its
wholly-owned subsidiary Pocono Downs, Inc., which operates the Plains Township  
racetrack facility. Such mortgage note was originally issued by Pocono Downs,   
Inc. to the Teamsters Central States, Southeast and Southwest Areas Pension Fund
(the "Pension Fund") in the amount of $4.5 million. On May 5, 1983, as part of a
plan of reorganization of Pocono Downs, Inc., The Plains Company purchased such 
mortgage note from the Pension Fund at a cost of $2,450,000. At that time, the  
mortgage note had a balance of approximately $4.3 million including interest    
through October 30, 1974. The purchase price of the mortgage note was discounted
from the outstanding balance by the cash received by the Pension Fund in the    
reorganization as a Class IV creditor to Pocono Downs, Inc. This discount is    
being amortized over the life of the mortgage using a constant rate on the      
outstanding balance under the interest method.                                  

 The aforementioned mortgage note is secured by a mortgage on all of the
real property of the mortgagor used in connection with the Plains Township      
racing establishment, restaurant and other related business. The mortgage also  
provides for the assignment of all leases and all rental and profits of the     
mortgaged premises as further security. The mortgage has been assigned by The   
Plains Company as collateral for the promissory note payable as described in    
Note 6.                                                                         

9. INCOME TAXES:                                                                

   The provision for income taxes included in the consolidated statements of
income and retained earnings is comprised of the following components.          

                                                DECEMBER 31,
                                                --------------------------
                                               1993      1994       1995
                                                ----     ------     ------
                                                (IN THOUSANDS)
Current Tax Expense                                                             
Federal.....................................     $276     $1,145     $1,350 
State.......................................      112        461        431 
                                                ----     ------     ------
  Total Current............................      388      1,606      1,781
                                                ----     ------     ------
Deferred Tax (Benefits)/Expense                                                 
Federal.....................................       63         75       (113)
State.......................................       26         27        (66)
                                                ----     ------     ------
   Total Deferred...........................       89        102       (179)
                                                ----     ------     ------
  Total Provision for Income Taxes.........     $477     $1,708     $1,602
                                                ====     ======     ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

9. INCOME TAXES: -- (CONTINUED)                                                 

Deferred tax (assets)/liabilities are comprised of the following at   
December 31, 1994 and 1995.                                                     

                                                              DECEMBER 31,
                                                              ----------------
                                                               1994       1995
                                                              -----      -----
                                                              (IN THOUSANDS)
Deferred Tax Assets                                                             
Property and Equipment --                                                   
     Depreciation and Basis Adjustments..................      $  --      $ (86)
                                                              -----      -----
Gross Deferred Tax Asset.................................         --        (86)
 Valuation Allowance....................................         --         86
                                                              -----      -----
Net Deferred Tax Asset...................................         --         -- 
                                                              -----      -----
Deferred Tax Liabilities                                                        
Property and Equipment --                                                   
    Depreciation and Basis Adjustments..................        139         --
 Discount on Mortgage...................................        402        362
 Other..................................................          2          2
                                                              -----      -----
Gross Deferred Tax Liability.............................        543        364 
                                                              -----      -----
Net Deferred Tax Liability...............................      $ 543      $ 364 
                                                              =====      =====

The provision for income taxes differs from the amount of income tax  
determined applying the applicable U.S. statutory federal income tax rate to    
pre-tax income from continuing operations as a result of the following          
differences.                                                                    

                                                        [Enlarge/Download Table]


                                                                                   DECEMBER 31,                           
                                                            ------------------------------------------------------------- 
                                                                  1993                  1994                  1995        
                                                            ----------------      -----------------     ----------------- 
                                                                               (DOLLARS IN THOUSANDS)                     
                                                                                                                          
Federal Statutory Provision on Financial Statement                                                                        
  Income................................................... $420        34.0%     $1,456       34.0%    $1,551       34.0%
Non-Taxable Interest Income at Statutory Rates.............    0         0.0          (6)      (0.1)       (21)      (0.5)
Non-Deductible Expenses Incurred at Statutory Rates........    6         0.4           5        0.1         12        0.3 
State Income Tax, Net of Federal Income Tax Benefits.......   74         6.0         304        7.1        284        6.2 
Other, Including Tax Credits, and Deferred Income Tax                                                                     
  Expense (Benefit) Arising from Timing Differences in                                                                    
  Reporting Income & Expense...............................  (23)       (1.9)        (51)      (1.2)      (224)      (4.9)
                                                            ----        ----      ------       ----     ------       ---- 
  Provision for Income Taxes............................... $477        38.5%     $1,708       39.9%    $1,602       35.1%
                                                            ====        ====      ======       ====     ======       ==== 

  The net change in the valuation allowance for deferred tax asset for the
year ended December 31, 1995 was an increase of $85,826. The change relates to  
an increase in the provision for income taxes to which the valuation relates.   

    During the year ended December 31, 1995, Pennsylvania reinstated a statute
permitting a deduction for net operating losses. Accordingly, The Plains Company
received a tax benefit which resulted from the utilization of a net operating   
loss carryforward from an earlier year to reduce its current year state income  
tax liability.                                                                  

At December 31, 1995, The Plains Company had available a $6,519 unused
operating loss carryforward that may be applied against future state taxable    
income which expires in various years through 1997.                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

10. INVESTMENTS IN LIMITED PARTNERSHIPS:                                        

The Plains Company and subsidiaries hold the controlling general      
partnership interest in Peach Street Ltd. Partnership and Lehigh Off-Track      
Wagering L.P., which have been recorded as consolidated subsidiaries in the     
financial statements. At December 31, 1994 and 1995, the limited partnership    
interests have been recorded as liabilities in the accompanying consolidated    
balance sheets in the amount of $2,078,177 and $2,688,893, respectively.        

11. RECAPITALIZATION:                                                           

On November 28, 1995, The Plains Company approved a plan of           
recapitalization under which it converted all of the outstanding shares of      
common stock into shares of newly created classes of common stock. As a result  
of the transaction, the 100 issued and outstanding shares of common stock were  
converted into 10 shares of Class A voting common stock and 30,000 shares of    
Class B non-voting common stock.                                                

Immediately after the November 28, 1995 recapitalization, The Plains  
Company's capital consisted of:                                                 

Common Stock, Class A                                                           
Voting (10 Shares)............................................       $    10
Common Stock, Class B                                                           
Non-Voting (30,000 Shares)....................................        30,000
                                                                     -------
                                                                     $30,010
                                                                     =======

12. EXTRAORDINARY ITEM:                                                         

     In March 1993, The Plains Company dedicated a portion of its Lehigh County,
Pennsylvania real estate to Hanover Township as part of a land development      
agreement entered into by The Plains Company. An extraordinary loss of $173,745,
net of income tax benefit of $126,255, represents the cost of the land          
transferred to the municipality.                                                

13. FAIR VALUE OF FINANCIAL INSTRUMENTS:                                        

    The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate  
that value:                                                                     

          Cash and Cash Equivalents: The carrying amount approximated fair value
because of the short-term nature of those instruments.                

         Marketable Securities: The fair values for marketable debt and equity
securities are based on quoted market prices.                         

       Long Term Debt: The carrying amount approximated fair value because
    the current rates being charged The Plains Company for debt are similar to
   the borrowing rates currently available for bank loans with similar terms
and average maturities.                                               

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THE PLAINS COMPANY AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS 
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

13. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (CONTINUED)                         

The carrying amounts and fair values of The Plains Company's financial
instruments at December 31, 1994 and 1995 are as follows:                       

                                                        [Enlarge/Download Table]


                                                                    DECEMBER 31, 1994    DECEMBER 31, 1995 
                                                                   -------------------  -------------------
                                                                   CARRYING      FAIR   CARRYING      FAIR 
                                                                    AMOUNT       VALUE   AMOUNT       VALUE
                                                                   --------     ------  --------      -----
                                                                                                           
Cash and Cash Equivalents                                                                                  
  Current.........................................................  $6,116      $6,116   $5,490      $5,490
  Non-Current.....................................................      --          --       --          --
Marketable Securities:                                                                                     
  Current.........................................................   2,142       2,142    4,701       4,701
  Non-Current.....................................................     102         102       --          --
Long-Term Debt....................................................  $9,465      $9,465   $9,001      $9,001

14. SALES AGREEMENT:                                                            

   On September 13, 1996, The Plains Company's sole shareholder entered into
an agreement to sell all of the outstanding stock of The Plains Company and the 
limited partnership interests in affiliated entities to Penn National Gaming,   
Inc. As stipulated by the terms of the agreement of sale, The Plains Company was
required to retire all of its long-term liabilities described in Note 6 and     
terminate its commitment under the consulting/non-compete agreement described in
Note 2. On November 27, 1996, the stock sale was settled with change of         
ownership and control being transferred to Penn National Gaming, Inc. effective 
November 28, 1996.                                                              

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Charles Town Racing Limited Partnership                                         
Charles Town Races, Inc.                                                        
Charles Town, West Virginia                                                     

  We have audited the accompanying combined balance sheets of Charles Town
Racing Limited Partnership and Charles Town Races, Inc., as of December 31, 1994
and 1995, and the related combined statements of income and equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1995.   
These combined financial statements are the responsibility of the entities'     
management. Our responsibility is to express an opinion on these financial      
statements based on our audits.                                                 

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence   
supporting the amounts and disclosures in the combined financial statements. An 
audit also includes assessing the accounting principles used and significant    
estimates made by management, as well as evaluating the overall combined        
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Charles Town Racing 
Limited Partnership and Charles Town Races, Inc. as of December 31, 1994 and    
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally       
accepted accounting principles.                                                 

The accompanying financial statements have been prepared assuming that
Charles Town Racing Limited Partnership and Charles Town Races, Inc. will       
continue as a going concern. As discussed in Note 8 to the financial statements,
such entities' significant operating losses raise substantial doubt about their 
ability to continue as a going concern. The financial statements do not include 
any adjustments that might result from the outcome of this uncertainty.         

                                       Leonard J. Miller & Associates, Chartered

Baltimore, Maryland                                                             
April 8, 1996                                                                   

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.
COMBINED BALANCE SHEETS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                               DECEMBER 31,                     
                                                                         ----------------------   SEPTEMBER 30, 
ASSETS                                                                      1994        1995           1996     
                                                                         ---------    ---------  ---------------
                                                                                                   (UNAUDITED)  
                                                                                                                
Current Assets                                                                                                  
  Cash..................................................................  $ 1,436     $ 1,007       $   523     
  Inventory.............................................................        3           2             2     
  Accounts Receivable...................................................       43           2             8     
  Prepaid Expenses......................................................       52           8           148     
  Deposits..............................................................       26          25            32     
                                                                          -------     -------       -------     
      Total Current Assets..............................................    1,560       1,044           713     
                                                                          -------     -------       -------     

Property, Plant and Equipment (at cost)                                                                         
  Furniture and Fixtures................................................       18          31            31     
  Machinery and Equipment...............................................    1,402       1,485         1,448     
  Building and Improvements.............................................   13,423      13,493        13,581     
  Land Improvements.....................................................      962         962           962     
  Land..................................................................    1,811       1,804         1,804     
  Vehicles..............................................................       91          67            67     
  Construction in Progress..............................................       --          38            --     
                                                                          -------     -------       -------     
                                                                           17,707      17,880        17,893     
  Less: Accumulated Depreciation........................................   (7,764)     (8,334)       (8,800)    
                                                                          -------     -------       -------     
      Net Property, Plant and Equipment.................................    9,943       9,546         9,093     
                                                                          -------     -------       -------     

Other Assets                                                                                                    
  Restricted Cash.......................................................       --          29            56     
  Advances and exchanges -- Capital Improvement                                                                 
    Fund, restricted....................................................      180          --            --     
  Unamortized Loan Acquisition Costs....................................        2           1            --     
                                                                          -------     -------       -------     

      Total Other Assets................................................      182          30            56     
                                                                          -------     -------       -------     

      Total Assets......................................................  $11,685     $10,620       $ 9,862     
                                                                          =======     =======       =======     

LIABILITIES AND EQUITY (DEFICIT)                                                                                
Current Liabilities                                                                                             
  Payables..............................................................  $   296     $   845       $   542     
  Accrued Expenses and Deposits.........................................      640       1,025         1,424     
  Nominating Fees and Outstanding Mutuel Tickets........................       --          85            61     
  Demand Notes payable -- Partners......................................      767          --            --     
  Current Portion of Long-Term Debt.....................................      555          73         6,877     
                                                                          -------     -------       -------     

      Total Current Liabilities.........................................    2,258       2,028         8,904     
                                                                          -------     -------       -------     

Long-Term Liabilities                                                                                           
  Accrued Pension.......................................................       --         104            84     
  Notes Payable -- Partners.............................................      656       1,631         1,779     
  Long-Term Debt, Less Current Portion..................................    6,597       6,834           925     
                                                                          -------     -------       -------     

      Total Non-Current Liabilities.....................................    7,253       8,569         2,788     
                                                                          -------     -------       -------     

      Total Liabilities.................................................    9,511      10,597        11,692     

Commitments and Contingencies (Note 7)                                                                          

Equity (Deficit)........................................................    2,174          23        (1,830)    
                                                                          -------     -------       -------     

      Total Liabilities and Equity (Deficit)............................  $11,685     $10,620       $ 9,862     
                                                                          =======     =======       =======     

See accompanying summary of significant accounting policies and 
notes to combined financial statements. 

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

COMBINED STATEMENTS OF INCOME AND EQUITY (DEFICIT)
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                     NINE MONTHS ENDED    
                                                        YEAR ENDED DECEMBER 31,        SEPTEMBER 30,      
                                                    -----------------------------  --------------------   
                                                      1993       1994      1995       1995       1996     
                                                    ---------  --------  --------   --------   --------   
                                                                                         (UNAUDITED)      
                                                                                                          
Revenues                                                                                                  
  Pari-mutuel revenues............................. $14,240    $11,619    $10,136    $ 7,578    $ 7,231   
  Admissions, programs, parking and other racing                                                          
    revenues.......................................   1,250      1,076        875        673        605   
  Concession revenues..............................     686        312         16         15         --   
  Restaurant revenues..............................      --         --         --         --        910   
                                                    -------    -------    -------    -------    -------   
    Total revenues.................................  16,176     13,007     11,027      8,266      8,746   
                                                    -------    -------    -------    -------    -------   

Operating Expenses                                                                                        
  Purses and trophies..............................   6,330      5,194      4,332      3,263      3,053   
  Direct salaries, payroll taxes and employee                                                             
    benefits.......................................   4,669      4,008      3,455      2,470      2,654   
  Simulcast expenses...............................   1,449      1,129      1,358        943      1,104   
  State license fee -- simulcast...................     351        288        312        222        254   
  Other direct meeting expenses....................   1,869      1,708      2,000      1,490      1,564   
  Restaurant expenses..............................      --         --         --         --        679   
  Other operating expenses.........................   1,762      1,764      1,319        967      1,020   
                                                    -------    -------    -------    -------    -------   

  Total operating expenses.........................  16,430     14,091     12,776      9,355     10,328   
                                                    -------    -------    -------    -------    -------   
      (Loss) from Operations.......................    (254)    (1,084)    (1,749)    (1,089)    (1,582)  
                                                    -------    -------    -------    -------    -------   

Other Income (Expense)                                                                                    
  Interest expense.................................    (573)      (650)      (769)      (573)      (564)  
  Interest income..................................     159        132        106         85         30   
  Rent income......................................      18         57         19         18         18   
  Apartment building income........................      47         56         63         47         49   
  Apartment building expenses......................     (64)       (76)       (71)       (55)       (54)  
  Other Income -- (Note 5).........................      12         --        250        250        250   
                                                    -------    -------    -------    -------    -------   

      Total Other Income (Expense).................    (401)      (481)      (402)      (228)      (271)  
                                                    -------    -------    -------    -------    -------   

Net Loss...........................................    (655)    (1,565)    (2,151)    (1,317)    (1,853)  
Equity, beginning of period........................   4,394      3,739      2,174      2,174         23   
                                                    -------    -------    -------    -------    -------   
Equity (deficit), end of period.................... $ 3,739    $ 2,174    $    23    $   857    $(1,830)  
                                                    =======    =======    =======    =======    =======   

See accompanying summary of significant accounting policies and 
notes to combined financial statements. 

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

COMBINED STATEMENTS OF CASH FLOWS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                          NINE MONTHS ENDED
                                                             YEAR ENDED DECEMBER 31,        SEPTEMBER 30,  
                                                         -----------------------------  -------------------
                                                           1993      1994       1995      1995       1996  
                                                         --------  --------   --------  --------   --------
                                                                                             (UNAUDITED)   
                                                                                                           
Cash Flows from Operating Activities:                                                                      
  Net Loss.............................................. $ (655)   $(1,565)   $(2,151)  $(1,317)   $(1,853)
                                                         ------    -------    -------   -------    ------- 
  Adjustments to Reconcile Net Income to                                                                   
    Net Cash Provided by Operating Activities:                                                             
    Depreciation and Amortization.......................    640        630        621       474        467 
    (Gain) Loss on Disposition of Asset.................     13         --         --       (48)        -- 
    Changes in Assets and Liabilities:                                                                     
    (Increase) Decrease In Inventory....................      4          4          1         2         -- 
    (Increase) Decrease In Accounts Receivable..........    261       (153)        40        (2)        (6)
    (Increase) Decrease In Prepaid Expenses.............     41         29         44        44       (140)
    (Increase) Decrease In Deposits.....................     (7)        (1)         2       (60)        (8)
    (Increase) Decrease In Restricted Cash..............    (29)       185        (29)      121        (26)
    (Increase) Decrease In Advances and Exchanges.......     --         --        180        --         -- 
    Increase (Decrease) In Payables.....................    (20)       139        548       217       (302)
    Increase (Decrease) In Accrued Expenses.............    (59)        14        561       271        399 
    Increase (Decrease) In Nominating Fees And                                                             
      Outstanding Mutuel Tickets........................     88       (115)        85        88        (25)
    Increase (Decrease) In Reserve For Deferred                                                            
      Compensation Plan.................................     25          8         --        --        (20)
                                                         ------    -------    -------   -------    ------- 
      Total Adjustments.................................    957        740      2,053     1,107        339 
                                                         ------    -------    -------   -------    ------- 
Net Cash Provided (Used) By Operating Activities........    302       (825)       (98)     (210)    (1,514)
                                                         ------    -------    -------   -------    ------- 
Cash Flows From Investing Activities:                                                                      
  Capital Expenditures, net of Reimbursement from W.V.                                                     
    Thoroughbred Development Fund.......................   (296)        --       (294)     (280)       (13)
                                                         ------    -------    -------   -------    ------- 
Net Cash Provided (Used) By Investing Activities........   (296)        --       (294)     (280)       (13)
                                                         ------    -------    -------   -------    ------- 
Cash Flows From Financing Activities:                                                                      
  Loan Acquisition Costs................................     (3)        --         --        --         -- 
  Principal Payments on Debts...........................   (257)      (236)      (245)     (182)       (42)
  Increase (Decrease) in Demand Notes -- Partners.......   (456)      (793)      (767)      331         16 
  Borrowings............................................     --      1,020        975        --      1,069 
                                                         ------    -------    -------   -------    ------- 
Net Cash Provided (Used) by Financing Activities........   (716)        (9)       (37)      149      1,043 
                                                         ------    -------    -------   -------    ------- 
Net Increase (Decrease) in Cash and Cash Equivalents....   (710)      (834)      (429)     (341)      (484)
Cash And Cash Equivalents, Beginning of Period..........  2,980      2,270      1,436     1,436      1,007 
                                                         ------    -------    -------   -------    ------- 
Cash And Cash Equivalents, End of Period................ $2,270    $ 1,436    $ 1,007   $ 1,095    $   523 
                                                         ======    =======    =======   =======    ======= 
Supplemental Disclosures of Cash Flow Information:                                                         
  Cash Paid During the Year for:                                                                           
  Interest.............................................. $  608    $   654    $   734   $   549    $   676 

See accompanying summary of significant accounting policies and 
notes to combined financial statements. 

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 CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED

1. SUMMARY OF ACCOUNTING POLICIES                                               

ORGANIZATION                                                                    

The accompanying combined financial statements reflect the accounts of
Charles Town Racing Limited Partnership (the "Partnership") and Charles Town    
Races, Inc. (the "Corporation"). The Corporation is wholly-owned by its sole    
shareholder, the Partnership. All material intercompany transactions have been  
eliminated.                                                                     

DESCRIPTION OF BUSINESS                                                         

     The Partnership owns equipment and the real estate at Charles Town Races in
Charles Town, West Virginia, which it leases to the Corporation.                

The Corporation conducts thoroughbred horse racing with facilities for
pari-mutuel wagering at Charles Town Race Course, as well as other business     
activities related to such racing.                                              

PURSE EXPENSE                                                                   

Purses earned by the horsemen are recorded as purse expenses and are  
calculated as a percentage of the daily pari-mutuel handle as set by state law. 
Because of the manner in which purses are calculated, the Corporation may       
overpay or underpay purses earned for any individual meet during the year. Purse
overpayments are recorded as assets, while purse underpayments are recorded as  
liabilities.                                                                    

USE OF ESTIMATES                                                                

The preparation of financial statements in conformity with generally  
accepted accounting principles requires management to make estimates and        
assumptions that affect certain reported amounts and disclosures. Accordingly,  
actual results could differ from those estimates.                               

PARI-MUTUEL WAGERING                                                            

                                                        [Enlarge/Download Table]

                                                                                                NINE MONTHS      
                                                            YEARS ENDED DECEMBER 31,        ENDED SEPTEMBER 30,  
                                                       ----------------------------------  ----------------------
                                                          1993        1994        1995        1995        1996   
                                                       ----------  ----------  ----------  ----------  ----------
                                                                             (IN THOUSANDS)                      
                                                                                                                 
Pari-mutuel wagering -- live..........................   $53,129     $43,440    $23,043      $18,224     $15,095 
Pari-mutuel wagering -- simulcast.....................    26,395      20,082     29,815       21,318      22,724 

INVENTORY                                                                       

 Inventory is valued at the lower of cost (first-in, first-out basis) or
market.                                                                         

DEPRECIATION AND AMORTIZATION                                                   

Property, plant and equipment are recorded at cost. The entities, for 
financial reporting purposes, compute depreciation using the straight-line      
method over the estimated useful lives of the respective assets. Expenditures   
for additions, major renewals and betterments are capitalized and expenditures  
for maintenance and repairs are expensed as incurred. Amortization of loan      
acquisition costs are computed on the straight-line method over the life of the 
loan.                                                                           

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

1. SUMMARY OF ACCOUNTING POLICIES -- CONTINUED                                  

INCOME TAXES                                                                    

 The Partnership is a partnership; therefore, it incurs no liability for
income taxes. The profits and losses are reportable in individual income tax    
returns.                                                                        

 For tax purposes, depreciation is computed on the accelerated method in
accordance with applicable tax laws for both the Partnership and the            
Corporation.                                                                    

The Corporation accounts for income taxes using Financial Accounting  
Standard No. 109, Accounting for Income Taxes, which requires an asset and      
liability approach to financial accounting and reporting for income taxes.      
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that    
will result in taxable or deductible amounts in the future based on enacted tax 
laws and rates applicable to the periods in which the differences are expected  
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax    
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.                       

    The types of temporary differences that resulted in deferred taxes are net
operating loss carryforwards, contribution carryforwards, bad debt reserves and 
depreciation. The net deferred tax account consists of the following:           

                                                        [Enlarge/Download Table]

                                                                     DECEMBER 31,                   
                                                               ----------------------  SEPTEMBER 30,
                                                                  1994        1995          1996    
                                                               ----------  ----------  -------------
                                                                         (IN THOUSANDS)             
                                                                                                    
Deferred tax assets........................................... $  1,160     $ 1,994      $ 2,728    
Deferred tax liabilities......................................      (15)        (14)         (14)   
Valuation allowance...........................................   (1,145)     (1,980)      (2,714)   
                                                               --------     -------      -------    
Net deferred taxes............................................ $     --     $    --      $    --    
                                                               ========     =======      =======    

The Corporation has net operating losses from 1995 and prior years    
available to be carried forward in the amount of $5,782,105 expiring in the     
years 2007 through 2010.                                                        

CASH AND CASH EQUIVALENTS                                                       

   The Partnership and the Corporation consider all cash balances and highly
liquid investments with a maturity of three months or less to be cash           
equivalents.                                                                    

CONCENTRATION OF CREDIT RISKS                                                   

 The Partnership and the Corporation maintain their cash in bank deposit
accounts which at times may exceed federally insured limits. Management does not
believe that the Partnership or the Corporation is exposed to any significant   
credit risk on cash.                                                            

PRESENTATION OF PRIOR YEAR DATA                                                 

  Certain reclassifications have been made to conform prior year data with
the current presentation.                                                       

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

2. NOTES PAYABLE                                                                

                                                        [Enlarge/Download Table]

                                                                              DECEMBER 31,                    
                                                                          --------------------  SEPTEMBER 30, 
                                                                            1994       1995          1996     
                                                                          ---------  ---------  --------------
                                                                                  (IN THOUSANDS, EXCEPT       
                                                                                DESCRIPTIVE INFORMATION)      
                                                                                                              
Note payable - One Valley Bank -- secured by all real property, tangible                                      
  and intangible property and all other assets of the Partnership and                                         
  the Corporation. It is personally guaranteed by the Partners. All                                           
  principal and interest payments have been suspended until 1/10/97, the                                      
  maturity date. Accrued interest through 12/10/96 has been prepaid.                                          
  Interest is at 9%. (See Note 6).......................................  $5,631      $5,530       $5,501     

Notes payable - One Valley Bank -- secured by a second deed of trust on                                       
  all real property, tangible and intangible property and all other                                           
  assets of the Partnership and Corporation. They are personally                                              
  guaranteed by the Partners. All principal and interest payments have                                        
  been suspended until 1/10/97, the maturity date. Accrued interest                                           
  through 12/10/96 has been paid. Interest is at 9%. (See Note 6).......     447         366          366     
Note payable - One Valley Bank -- secured by a first deed of trust on an                                      
  apartment building owned by the Partnership. Payments of $3,977                                             
  including interest at 8.5% are due monthly. The note matures 12/1/00.                                       
  (See Note 6)..........................................................     324         303          287     

Notes payable - Partners -- unsecured notes with interest at 9% -                                             
  9.25%.................................................................   1,423       1,631        1,779     

PNGI Charles Town Gaming, Limited Liability Company ("PNGI") -- a line                                        
  of credit up to $1,250,000. PNGI had an option to purchase                                                  
  substantially all of the assets of the Corporation and the                                                  
  Partnership. In addition to the obligation of the Corporation to repay                                      
  the loan, the purchase price was to be reduced $1.60 for each dollar                                        
  borrowed under the line. Interest was at prime plus 1 1/2%. The loan                                        
  was secured by a second mortgage on the real estate owned by the                                            
  Partnership (guarantor) as well as the stock of the Corporation.                                            
  Principal and interest were payable in full on the earlier of the                                           
  termination date or in the event of default, the default date. The                                          
  termination date was January 15, 1997, the date PNGI purchased                                              
  substantially all of the assets of the Corporation and the                                                  
  Partnership...........................................................      --          --          936     

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

2. NOTES PAYABLE -- CONTINUED                                                   

                                                        [Enlarge/Download Table]

                                                                             DECEMBER 31,                    
                                                                         --------------------  SEPTEMBER 30, 
                                                                           1994       1995          1996     
                                                                         ---------  ---------  --------------
                                                                                 (IN THOUSANDS, EXCEPT       
                                                                               DESCRIPTIVE INFORMATION)      
                                                                                                             
Note payable - AmTote -- to be repaid in 84 monthly principal payments                                       
  of $4,166 plus interest at prime plus 1%. The loan matures March 3,                                        
  2002. Demand for immediate repayment may be made in the event of a                                         
  dispute regarding certain exclusive supply rights granted to AmTote                                        
  International, Inc. ("AmTote") or in the event of default as outlined                                      
  in the loan agreement. Past due payments are due as of September 30,                                       
  1996; however, AmTote has not sent a notice regarding these payments                                       
  (See Note 7)..........................................................    750         708           712    
                                                                         ------      ------        ------    

Total...................................................................  8,575       8,538         9,581    

Less current maturities.................................................  1,322          73         6,877    
                                                                         ------      ------        ------    

Total long-term......................................................... $7,253      $8,465        $2,704    
                                                                         ------      ------        ------    

The maturities of debt as of September 30, 1996 are as follows:       

SEPTEMBER 30                                          (IN THOUSANDS)            
------------                                          --------------            

1997..................................................    $6,877                
1998..................................................        76                
1999..................................................        79                
2000..................................................        81                
2001..................................................       226                
Thereafter............................................     2,242                
                                          ------
                                          $9,581
                                          ======

OTHER DEBT                                                                      

     As a result of a settlement agreement dated April 30, 1996, the Partnership
and Corporation have been ordered to pay $120,000 over 60 months in equal       
payments of $2,000 per month to the Future Service Pension Plan and the         
plaintiffs' attorneys. The balance at September 30, 1996 was $108,000. If the   
Corporation is sold, the unpaid balance is due in full.                         

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

3. EMPLOYEE BENEFITS                                                            

DEFERRED COMPENSATION AGREEMENT                                                 

   The Corporation has satisfied the deferred compensation agreements it had
with two participants, Donald Hudson and William Dick (see Note 7 -- Employment 
Separation Agreement). The purpose of the agreement was to provide retirement   
benefits that would have been provided by the Defined Benefit pension plan for  
key employees, which was required to be terminated December 31, 1988. The plan  
was required to be terminated due to the minimum participation rules of Tax     
Reform Act of 1986. The normal retirement benefit at age 65 is equal to 60% of  
the highest five-year consecutive earnings, minus 83.33% of the primary         
insurance amount payable from Social Security, minus the December 31, 1998      
accrued benefit from the terminated pension plan, minus the equivalent annual   
annuity which will be earned in the Future Service pension plan.                

                                                        [Enlarge/Download Table]

                                                                                  FINAL        
                                                                             VALUATION DATE    
                                                                            NOVEMBER 15, 1994  
                                                                          ---------------------
                                                                               (THOUSANDS)     
                                                                                               
Service Cost -- Value of benefits earned during year.....................         $   6        
Interest cost on projected benefit obligation............................             6        
Return on plan assets....................................................            --        
Net amortization (deferral)..............................................             2        
Net pension expense......................................................            14        
Actuarial present value of:                                                                    
  Vested benefit obligation..............................................           118        
  Accumulated benefit obligation.........................................           118        
  Projected benefit obligation...........................................           118        
Estimated assets at fair market value....................................            --        
Excess of assets over PBO................................................          (118)       
Unrecognized net (loss)..................................................           (21)       
Unrecognized net asset...................................................            --        
Prior service costs not yet recognized...................................            21        
Prepaid (accrued) pension cost...........................................         $(118)       

  The deferred compensation expense for the years ended December 31, 1993,
1994 and 1995 is $24,868, $14,423 and $3,108, respectively.                     

FUTURE SERVICE PLAN                                                             

    The Corporation has a defined contribution plan covering substantially all
of its employees. The Corporation makes monthly contributions equal to the      
amount accrued for retirement expense, which is calculated as .25% of the daily 
mutuel handle.                                                                  

  Total contributions for the years ended December 31, 1993, 1994 and 1995
are $157,883, $158,804 and $132,045, respectively. Total contributions for the  
nine months ended September 30, 1995 and 1996 are $99,038 and $94,454,          
respectively.                                                                   

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

3. EMPLOYEE BENEFITS -- CONTINUED                                               

VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION (VEBA) TRUST                         

The VEBA is a trust created to provide for payment of certain employee
benefits such as vacation and medical benefits and other insured and/or         
self-insured employee welfare benefits. The VEBA expense, net of salary         
reimbursements from the VEBA Trust, amounted to $274,591, $195,742 and $197,602 
for the years ended December 31, 1993, 1994 and 1995, respectively, and $145,900
and $139,886 for the nine months ended September 30, 1995 and 1996,             
respectively.                                                                   

4. LEASES                                                                       

     The Corporation rents totalisator equipment under the terms of an operating
lease expiring December 31, 1996, which also provides for maintenance and       
operation of the equipment. The lease agreement provides for a basic amount     
computed by multiplying .005 by all wagers processed through the system         
(exclusive of refunds) at the racetrack (including intertrack wagers), provided 
that such payment shall not be less than $1,360 per live racing program and a   
range of $595 to $1,955 per intertrack wagering program, depending on the time  
of day, number of programs and the combination of live and intertrack wagering  
programs.                                                                       

The Corporation leases from the Partnership all race track facilities,
including all real and tangible personal property owned by the Partnership. The 
lease, effective January 1, 1996 and expiring on December 31, 1996, has an      
option to renew for one additional period of one year. The lease calls for a    
minimum rent of $1,200,000 per year plus a percentage rent equal to seven       
percent (7%) of the total amount of money wagered in all of the pari-mutuel     
pools during the lease terms in excess of $100 million. The minimum rent is     
payable in twelve equal installments and the percentage rent is payable on the  
31st day of December of any renewal term.                                       

     In the event that video lottery terminals are licensed by the state of West
Virginia and placed in operation on the premises, this lease will be subject to 
renegotiation for the unexpired portion of the lease.                           

5. OTHER INCOME                                                                 

OPTION -- SEE NOTE 7 OPTION AGREEMENTS.                                         

6. RETAINED EARNINGS AND PARTNERSHIP EQUITY RESTRICTIONS                        

   The loan agreement with One Valley Bank requires that the Partnership and
the Corporation maintain a net worth of not less than $2,000,000 on a           
consolidated basis, as of the end of each semi-annual period.                   

   So long as the above minimum net worth requirement is satisfied, all debt
service payments are current, no default of any loan would be caused thereby,   
and the entities both show a positive cash flow, the Partnership may pay and    
distribute to its partners, quarterly, an aggregate amount which does not exceed
the equivalent of a 10% annual return on the Partners' equity in the Partnership
and the Corporation. As of September 30, 1996, the net deficit of these entities
was $(1,830,412).                                                               

As of August 30, 1995, the bank required that a $650,000 minimum be   
maintained in the One Valley Bank account. On March 4, 1996, One Valley Bank    
entered into an agreement amending the terms and extending the due dates of the 
debt; the minimum requirement has been reduced to zero.                         

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

7. COMMITMENTS AND CONTINGENCIES                                                

LITIGATION                                                                      

  On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia     
against the Corporation, the Partnership, Penn National Gaming, Inc., Penn      
National Gaming of West Virginia, Inc., a wholly owned subsidiary of Penn       
National Gaming, Inc., and Bryant Development Company. The complaint filed by   
GTECH alleges that the Corporation, the Partnership and AmTote were parties to  
an October 20, 1994 agreement (the "AmTote Agreement"), pursuant to which AmTote
was allegedly granted an exclusive right to install and operate a "video lottery
system" at Charles Town Races. When the AmTote Agreement was entered into,      
AmTote was a subsidiary of GTECH; GTECH has since divested itself of AmTote, but
is purportedly the assignee of certain of AmTote's rights under the AmTote      
Agreement pursuant to an assignment and assumption agreement dated February 22, 
1996. The complaint seeks (i) preliminary and permanent injunctive relief       
enjoining the Corporation, the Partnership, Bryant Development Company, Penn    
National Gaming, Inc., and its subsidiary from consummating the Charles Town    
Acquisition or any similar transaction unless the purchasing party explicitly   
accepts and assumes the AmTote Agreement, (ii) a declaratory judgment that the  
AmTote Agreement is valid and binding, that GTECH has the right to be the       
exclusive installer, operator, provider and servicer of a video lottery system  
at Charles Town Races and that any party buying the stock or assets of the      
Corporation and the Partnership must accept and assume the AmTote Agreement and 
recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)     
legal fees and costs and (v) such other further legal and equitable relief as   
the court deems just and appropriate. On December 23, 1996, the court denied    
GTECH's motion to preliminarily enjoin the Corporation and the Partnership from 
consummating the Charles Town Acquisition unless the purchaser in the Charles   
Town Acquisition accepts and assumes the AmTote Agreement. The court noted that 
GTECH may pursue its claim for damages and, if warranted, pursue other          
injunctive relief in the future. The Corporation and the Partnership consummated
the Charles Town Acquisition on January 15, 1997. On January 13, 1997, the      
Corporation and the Partnership filed a motion to dismiss GTECH's complaint; the
court has not yet ruled on this motion.                                         

    On December 16, 1996, Randall Conrad, James G. Cameron, Ben Kline, Charles
E. Walker, Nelson W. Shaw, Joseph G. Farrie and all other present and former    
employees ("Plaintiffs") of Charles Town Races, Inc. commenced an action in the 
Circuit Court of Jefferson County, West Virginia against the Corporation. The   
complaint alleges violation of the Warren Act and that the Corporation failed to
pay wages in a timely manner under the West Virginia Wage Payment and Collection
Act when the Track closed in early 1995. The complaint seeks liquidated damages 
under the West Virginia Wage Payment and Collection Act in the amount of thirty 
days wages, plus prejudgment interest, the cost of the suit, reasonable attorney
fees and such other relief as the court deems just.                             

     The Corporation and Partnership settled a case wherein they are required to
make a repair to a water pipe on a neighboring property by December 31, 1996,   
which in management's opinion could cost $250,000. This amount was revised from 
$50,000 previously estimated. This has been recorded as a liability. $200,000 is
included in expense for the nine months ended September 30, 1996 and $50,000 is 
included in the year ended December 31, 1995.                                   

   Certain other claims, suits and complaints arising in the ordinary course
of business have been filed or are pending against the Corporation and the      
Partnership. In the opinion of management, with the exception of the GTECH      
litigation described above, all such matters are adequately covered by          
insurance, or if not so covered, are without merit or are of such kind, or      
involve such amounts, as would not have a significant effect on the financial   
position or results of operations of the Corporation and the Partnership if     
disposed of unfavorably.                                                        

F-48

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CHARLES TOWN RACING LIMITED PARTNERSHIP 
CHARLES TOWN RACES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE 
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 

7. COMMITMENTS AND CONTINGENCIES -- CONTINUED                                   

EMPLOYMENT SEPARATION AGREEMENT                                                 

   An employment separation agreement was signed on August 29, 1995, between
the Corporation and Donald E. Hudson. In the agreement, the Corporation agreed  
to pay Hudson's health insurance through April 1997, and to transfer the vehicle
and house that Hudson was using while in his employ, and in exchange Hudson     
released all claims to his accrued deferred compensation and will provide ten   
hours of consulting per month through April 1997. The health insurance benefits 
have not been accrued and in the opinion of management would not have a material
effect on the financial statements.                                             

OPTION AGREEMENTS                                                               

An Option Agreement dated February 17, 1995 was signed with Showboat  
Operating Company ("Showboat") granting Showboat the right to purchase          
substantially all of the assets of the Corporation and the Partnership for a    
stated amount through April 30, 1995. The option price was $250,000. The option 
was then acquired by Bryant Development Company ("Bryant"); Bryant then         
transferred the option to PNGI. The option was extended until March 31, 1996 for
an additional $250,000. The option was renewed again until December 31, 1996 for
an additional $250,000. The option payments are non-refundable unless the       
Corporation and the Partnership fail to convey title to the property. The first 
two option payments in the amounts of $250,000 each are shown as income under   
the caption other income. As of September 30, 1996, the third option payment of 
$250,000 is included in accrued expenses and deposits. PNGI exercised the option
and, on January 15, 1997, acquired substantially all of the assets of the       
Corporation and the Partnership.                                                

During 1993, the Partnership collected a non-refundable deposit on an 
expired land option in the amount of $12,000. This is shown as other income.    

CONTRACT                                                                        

 In August 1995, a contract was signed with Sheetz, Inc. granting it the
right to purchase 100,000 square feet of track property located at Routes 340   
and 17 for $500,000. This option is subject to a feasibility study, including   
environmental audit, zoning, permits, etc. A $10,000 refundable deposit is being
held in escrow. The option under the contract was extended until February 1,    
1997.                                                                           

8. OPERATING DEFICITS AND ECONOMIC CONDITIONS                                   

     Adverse economic conditions in the racing industry have limited the ability
of the Partnership and the Corporation to cover its operating and administrative
costs. As a result, the Corporation and the Partnership incurred a combined loss
for the years ended December 31, 1993, 1994 and 1995 of $654,452, $1,565,428 and
$2,150,905, respectively, and for the nine months ended September 30, 1995 and  
1996 incurred losses of $1,316,676 and $1,853,409, respectively. The Corporation
temporarily ceased racing operations from December 31, 1994, until February 24, 
1995 and has currently ceased racing operations as of November 11, 1996. While  
the Corporation and the Partnership are seeking additional sources of capital,  
including equity capital, there can be no assurance that they will be successful
in accomplishing their objectives. See Note 2 (PNGI Charles Town Gaming, Limited
Liability Company) and Note 7 for management's plans.                           

     Because of the uncertainties surrounding the ability of the Corporation and
the Partnership to continue their operations and to satisfy their creditors on a
timely basis, there is doubt about their ability to continue as a going concern.
The financial statements do not include any adjustments that might be necessary 
should the entities be unable to continue as a going concern.                   

F-49

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[PICTURE]                                [PICTURE]    
(See Appendix A for Description)         (See Appendix A for Description)   

Pocono Downs, the Company's harness       Charles Town Races is conveniently    
racetrack outside of Wilkes-Barre, PA,    located, only a 60-minute drive       
was acquired in November 1996.            from Baltimore, Maryland, and a       
                                         70-minute drive from Washington, D.C.

[PICTURE]           
(See Appendix A for Description)        

Artist's rendering of Charles Town Races  
entertainment complex, expected to re-open
 for live racing, dining, simulcast wagering
and video gaming machines in mid-1997.    

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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY          
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS   
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS     
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE   
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY     
SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS       
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY        
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH  
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.               

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

TABLE OF CONTENTS 

                                                                [Download Table]
                                                             
                                                      PAGE   
                                                    ---------
Available Information.............................       3   
Incorporation of Certain Documents by Reference...       4   
Prospectus Summary................................       5   
Risk Factors......................................      11   
Use of Proceeds...................................      21   
Price Range of Common Stock.......................      22   
Dividend Policy...................................      22   
Capitalization....................................      23   
Pro Forma Consolidated Financial Statements.......      24   
Selected Consolidated Financial Data..............      31   
Management's Discussion and Analysis of Financial            
  Condition and Results of Operations.............      33   
Business..........................................      40   
Management........................................      58   
Description of Capital Stock......................      60   
Underwriting......................................      64   
Legal Matters.....................................      65   
Experts...........................................      65   
Index to Financial Statements.....................     F-1   

1,725,000 SHARES                                                                

PENN NATIONAL                                                                   
GAMING, INC.                                                                    

COMMON STOCK                                                                    
($.01 PAR VALUE)                                                                

SALOMON BROTHERS INC                                                            

GERARD KLAUER MATTISON                                                          
& CO., INC.                                                                     

JEFFERIES & COMPANY, INC.                                                       

PROSPECTUS                                                                      

DATED FEBRUARY 11, 1997                                                         

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APPENDIX A -- DESCRIPTION OF GRAPHICS 

INSIDE FRONT COVER--                                                            

There are four pictures on the inside front cover; each has a caption 
beneath it.                                                           

 Above the caption, "Penn National, celebrating 25 years of thoroughbred
  racing in 1997." is a picture of the Penn National Race Course facility;
the view is of the front entrance.                                    

    Above the caption, "Penn National's newest OTW facility in Lancaster, PA."
 is a picture of the inside of the Lancaster OTW. The restaurant seating
area is pictured in the foreground; televisions are in the background.

    Above the caption, "The recently renovated paddock area at Penn National."
     is a picture taken from above the new paddock area showing the paddock area
     in the foreground and the track in the background. In the picture there are
people viewing the horses in the paddock area.                        

Above the caption, "Racing on-track at Penn National since 1972." is a
 picture of a live thoroughbred horse race at Penn National Race Course.

INSIDE BACK COVER--                                                             

The inside back cover includes:                                       

  A picture of the Pocono Downs Harness Track with a view of the racetrack
   and the grandstand. The picture shows people in the grandstand and a live
 harness race taking place on the track. The caption beneath the picture
reads, "Pocono Downs, the Company's harness racetrack outside of      
Wilkes-Barre, PA was acquired in November 1996."                      

   A map depicting the location of Baltimore, Maryland, Washington, D.C. and
   Charles Town, West Virginia. The map depicts the paths of Interstates 95,
   83, 68, 66 and 81. The caption beneath the map reads, "Charles Town Races
  is conveniently located, only a 60-minute drive from Baltimore, Maryland
and a 70-minute drive from Washington, D.C."                          

   An artist's depiction of the Charles Town Facility; the view is the front
of the facility. The caption beneath the artist's depiction reads,    
   "Artist's rendering of Charles Town Races entertainment complex, expected
 to re-open for live racing, dining, simulcast wagering and video gaming
machines in mid-1997."                                                

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424B4’ Filing		Date		First		Last			Other Filings
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		11/26/01		21
		5/31/00		61		83
		5/26/00		82
		1/15/00		93
		10/3/99		57
		6/30/99		78					10-Q
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		12/31/98		93		111			10-K
		6/12/98		78
		5/20/98		57					DEF 14A
		3/31/98		77					10-Q
		12/31/97		21		93			10-K,  ARS
		6/30/97		14		52			10-Q
		6/1/97		13		37
		5/13/97		38
		2/18/97		1					424B3
		2/13/97		5		79
Filed on:		2/12/97							SC 13G/A
		2/11/97		1		116
		2/6/97		4					8-K/A,  S-3/A
		2/1/97		114
		1/30/97		4					8-K
		1/21/97		4					8-K,  S-3/A
		1/20/97		37					8-K
		1/15/97		5		114			8-K,  8-K/A
		1/13/97		14		113
		12/31/96		6		114			10-K
		12/23/96		14		113
		12/20/96		5		83
		12/16/96		113
		12/12/96		4					8-K
		12/11/96		13		113
		12/6/96		86
		11/30/96		57
		11/28/96		102
		11/27/96		5		102			8-K/A
		11/22/96		83
		11/13/96		83
		11/11/96		114
		11/5/96		5		84
		9/30/96		4		114			10-Q
		9/13/96		102
		7/11/96		34		78
		6/30/96		4					10-Q
		6/24/96		4					8-K
		6/4/96		38		85
		5/23/96		5		83			10-Q
		5/22/96		79
		5/13/96		38
		5/3/96		83
		4/30/96		110
		4/18/96		83
		4/8/96		103
		3/31/96		4		114			10-Q
		3/26/96		56
		3/4/96		112
		2/26/96		38		84
		2/22/96		14		113
		2/2/96		67
		1/1/96		112
		12/31/95		4		114
		12/15/95		39		83
		11/28/95		101
		9/30/95		9		114
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		6/1/95		78
		4/30/95		114
		3/20/95		74
		2/24/95		114
		2/17/95		114
		1/1/95		10		24
		12/31/94		9		114
		12/20/94		83
		11/15/94		111
		10/20/94		14		113
		6/30/94		22
		6/3/94		82
		6/1/94		78
		5/26/94		4
		5/25/94		72		83
		5/24/94		72
		4/26/94		36
		4/25/94		74
		4/22/94		77
		4/12/94		78
		4/11/94		72
		1/1/94		82		83
		12/31/93		9		114
		7/28/93		91
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