SEC Filing | PENN Entertainment

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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.

[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.

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.

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).

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

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

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

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

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

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(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.

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."

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

(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.

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."

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

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

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(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."

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

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.

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,

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

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

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
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-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

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

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

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."

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.

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.

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.

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.

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."

PENN NATIONAL GAMING, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET

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)

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.

PENN NATIONAL GAMING, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

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
========= =========

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.

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

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:

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:

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:

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:

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%:

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:

YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(IN THOUSANDS)

Minority interest.................................... $ 1,571 $ 874
Income tax provision................................. 660 367

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

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:

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:

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%:

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:

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:

YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(IN THOUSANDS)

Other income......................................... $ (200) $ (200)

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.

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
============ ===========

SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)

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

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.

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."

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:

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

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.

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

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

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

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

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.

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.

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.

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.

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.

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:

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.

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:

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.

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

TRACKS

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)

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

(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-

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

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

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

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.

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

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.

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.

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.

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-

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

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.

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."

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.

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.

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

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 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 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."

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.

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.

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.

INDEX TO FINANCIAL STATEMENTS

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

F-1

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

F-2

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

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

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.

F-3

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

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

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.

F-4

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

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

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.

F-5

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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.

F-6

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.

F-7

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:

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
======== ======== ======== ======== ========

F-8

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.

F-9

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.

F-10

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:

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
==== ==== ====

F-11

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:

(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.

F-12

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.

F-13

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)

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

F-14

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:

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:

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
=== ==== ==== ==== ====

F-15

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:

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:

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.

F-16

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:

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.

F-17

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:

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.

F-18

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

F-19

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.

F-20

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

F-21

THE PLAINS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

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.

F-22

THE PLAINS COMPANY AND SUBSIDIARIES

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

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.

F-23

THE PLAINS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)

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.

F-24

THE PLAINS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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.

F-25

THE PLAINS COMPANY 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: 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.

F-26

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)

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;

F-27

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)

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.

F-28

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)

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.

F-29

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)

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:

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.

F-30

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)

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.

F-31

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)

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.

F-32

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)

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:

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
==== ====

F-33

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)

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
==== ====== ======

F-34

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)

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.

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.

F-35

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)

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.

F-36

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:

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.

F-37

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

F-38

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

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.

F-39

CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.

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

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.

F-40

CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.

COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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.

F-41

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

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.

F-42

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:

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.

F-43

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

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

F-44

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

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.

F-45

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.

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.

F-46

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.

F-47

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

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

[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.

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

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

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."