

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

              X: ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1999
                                -----------------

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                         Commission File Number 0-24206

                           PENN NATIONAL GAMING, INC.

             (Exact name of registrant as specified in its charter)

                         Wyomissing Professional Center
                         825 Berkshire Blvd., Suite 200

       PENNSYLVANIA               23-2234473      Wyomissing, Pennsylvania 19610
       ----------------------     ----------     ------------------------- -----
(State or other jurisdiction of (I.R.S. Employer (Address of principal executive
 incorporation or organization) Identification No.) offices)          (Zip Code)


         Registrant's telephone number, including area code 610-373-2400
                                  ------------

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

                                      None

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

                               Title of Each Class

                      Common stock par value .01 per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ___
<PAGE>

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

Aggregate  market value of the voting common stock held by  nonaffiliates of the
Registrant as of March 14, 2000 was approximately $111,809,813.

Number of Shares of Common Stock outstanding as of March 14, 2000 - 14,907,975

                       Documents Incorporated by Reference

Registrants  Definitive  Proxy  Statement  with  respect  to annual  meeting  of
Shareholders to be held on May 17, 2000.

THIS REPORT INCLUDES "FORWARD-LOOKING  STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.  ALL STATEMENTS  OTHER THAN STATEMENTS OF HISTORICAL  FACTS
INCLUDED  IN THIS  REPORT  LOCATED  ELSEWHERE  HEREIN  REGARDING  THE  COMPANY'S
OPERATIONS,   FINANCIAL   POSITION  AND  BUSINESS   STRATEGY,   MAY   CONSTITUTE
FORWARD-LOOKING   TERMINOLOGY  SUCH  AS  "MAY",  "WILL",   "EXPECT",   "INTEND",
"ESTIMATE",  "ANTICIPATE",  "BELIEVE" OR "CONTINUE"  OR THE NEGATIVE  THEREOF OR
VARIATIONS  THEREON OR SIMILAR  TERMINOLOGY.  ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING  STATEMENTS ARE REASONABLE AT
THIS TIME, IT CAN GIVE NO ASSURANCE  THAT SUCH  EXPECTATIONS  WILL PROVE TO HAVE
BEEN  CORRECT.  IMPORTANT  FACTORS  THAT COULD  CAUSE  ACTUAL  RESULTS TO DIFFER
MATERIALLY  FROM  THE  COMPANY'S  EXPECTATIONS  ("CAUTIOUNARY  STATEMENTS")  ARE
DISCLOSED IN THIS REPORT AND IN OTHER  MATERIALS  FILED WITH THE  SECURITIES AND
EXCHANGE COMMISSION.  ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE  TO THE  COMPANY  OR PERSONS  ACTING ON ITS  BEHALF  ARE  EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

References to "Penn National Gaming" or the "Company" include Penn National
Gaming, Inc. and its subsidiaries.

                                       2
<PAGE>



                                     PART 1

ITEM 1                     BUSINESS

GENERAL

         The Company,  which began  operations in 1972, is a diversified  gaming
and pari-mutuel  wagering  company that owns an 89% interest in the Charles Town
entertainment  complex which includes  1,500 gaming  machines and a thoroughbred
racetrack in Charles Town, West Virginia. The Company also owns and operates two
racetracks and ten off-track wagering facilities ("OTWs") in Pennsylvania, and a
50% owned joint venture, Pennwood Racing Group, which owns and operates Freehold
Raceway and under a long-term  lease  operates  Garden State Park in New Jersey.
The Company's Pennsylvania racetracks include Penn National Race Course, located
outside  Harrisburg,  one of two thoroughbred  racetracks in  Pennsylvania,  and
Pocono Downs,  located outside  Wilkes-Barre,  one of two harness  racetracks in
Pennsylvania.  The Company  intends to develop one  additional OTW that has been
allocated to it under Pennsylvania law, after which it will operate 11 of the 23
OTWs currently  authorized in  Pennsylvania.  Between 1994 and 1999, the Company
increased total wagers at a compound annual growth rate of 8.4% by expanding its
simulcast and OTW operations.

STRATEGY

         The Company has been a leading  operator  in the  pari-mutuel  wagering
industry through its horse racing expertise and its numerous wagering locations.
In developing its existing  locations,  the Company will, when possible,  expand
them to include gaming machines, entertainment facilities and other amenities to
increase  customer   satisfaction  and  broaden  market   penetration  of  these
facilities.  The Company plans to increase revenue  significantly by focusing on
the following strategic objectives:

         Focus on Gaming  Machine  Operations.  The  Company  continues  to seek
legislation to permit it to operate gaming machines at its racetracks where they
are not now  permitted  and to expand  legislation  in West  Virginia  to create
additional  gaming  opportunities.  Legislation has been passed in West Virginia
which  allows for coin out and reel slot  machines at race  tracks.  In December
1999 the Company installed an additional 565 coin out, reel slot machines at the
Charles Town Entertainment  Complex.  The Company intends to convert some or all
of its  current  machines  to coin out and,  as demand  dictates,  increase  the
maximum number of machines with reel slot machines.

         Continue Development of Existing Facilities. Based on increasing demand
at the Company's  Charles Town  Entertainment  Complex,  the Company  intends to
implement a master planned  development of this facility in an effort to further
penetrate  the primary  market for this  facility and to broaden its appeal as a
destination based  entertainment  facility serving the  Baltimore/Washington  DC
metropolitan area.

     Acquisitions.  The Company  intends to grow it's  gaming and  entertainment
industry presence through select acquisitions of regional properties in emerging
gaming markets.  In evaluating  acquisition  candidates,  the Company intends to
focus its  resources on  under-developed  properties  which,  with  management's
focus,  can generate  improved  operating  performance by  encouraging  customer
loyalty among value conscious  regional customers and by upgrading the amenities
offered at these  facilities.  In expanding the Company's gaming and destination
based entertainment offerings, the Company expects to diversify its revenue base
and to broaden its geographical  presence.  In implementing  this strategy,  the
Company  intends to complete the recently  announced  acquisitions of the Casino
Magic Bay St. Louis and the Boomtown  Biloxi  properties  in  Mississippi.  (See
pending Mississippi acquisition below.)

         Expand  Pari-mutuel  Operations.  The  Company  plans  (subject  to the
receipt of remaining regulatory approvals, including site approvals) to open and
operate an additional OTW in East Stroudsburg,  Pennsylvania.  We also intend to
seek  legislation  in other  jurisdictions,  principally  New Jersey through the
Company's investment in Pennwood Group to operate additional OTWs. Additionally,
during the past five years, the Company has expanded its simulcasting operations
and  taken   advantage  of  favorable   changes  in  pari-mutuel   wagering  and
simulcasting  laws in  various  states  and  the  expanded  use of  simulcasting
                                       3
<PAGE>

technology.  In order to promote wagering, the Company has increased and expects
to continue to increase full-card import simulcasts from premier racetracks. The
Company also intends to increase export simulcasting of races from Company-owned
tracks to out-of-state racetracks, OTWs, casinos and other gaming facilities.

PENDING MISSISSIPPI ACQUISITION

         On  December  10,  1999,  the  Company   entered  into  two  definitive
agreements to purchase all of the assets of the Casino Magic hotel, casino, golf
resort,  recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi
and  the  Boomtown   Biloxi  casino  in  Biloxi,   Mississippi,   from  Pinnacle
Entertainment,  Inc., formerly known as Hollywood Park, Inc. (NYSE:PNK) for $195
million. The agreements are contingent upon each other. In addition to acquiring
all of the operating  assets and related  operations of the Casino Magic Bay St.
Louis and Boomtown  Biloxi  properties,  the Company will enter into a licensing
agreement to use the Boomtown and Casino Magic names and marks at the properties
being  acquired.  The  transaction  is  subject to  certain  closing  conditions
including  the approval of the  Mississippi  Gaming  Commission,  financing  and
expiration of the applicable  Hart-Scott-Rodino  waiting period.  As part of the
agreement,  the Company paid a deposit of $5 million to an escrow account, which
is refundable if certain  conditions  are not met. In connection  with financing
the  Mississippi  acquisition,  the Company  will  explore a number of financing
alternatives, which may include repaying or redeeming its existing debt.

         Casino Magic Bay St. Louis started  operations  in September  1992 on a
permanently  moored  barge in a 17 acre  marina  with the  adjoining  land based
facilities  situated  on 591  acres.  The  facility  in  Bay  St.  Louis  offers
approximately  39,500 square feet of gaming space,  with 1,132 slot machines and
42 table games.  The land based  building is three  stories  with a  restaurant,
buffet, snack bar, gift shop, and a live entertainment lounge. In December 1994,
Casino  Magic Bay St.  Louis also opened the Casino Magic Inn; a 201 room hotel,
including four deluxe and 20 junior suites.  The property also contains an 1,800
seat arena, which hosts  approximately 50 events annually,  including  televised
boxing matches,  concerts and other special events.  With the late 1997 addition
of the 18 hole Bridges Golf Resort,  Casino Magic Bay St. Louis is positioned as
a full vacation resort destination.

         Boomtown  Biloxi,  which  occupies nine acres on Biloxi,  Mississippi's
back bay,  is  located  one-half  mile from  Interstate  110,  the main  highway
connecting  Interstate  10  (the  main  thoroughfare   connecting  New  Orleans,
Louisiana and Mobile,  Alabama) and the Gulf of Mexico.  Boomtown Biloxi,  began
operations  in July 1994,  and  consists of a  land-based  facility  that houses
non-gaming  operations and 33,000 square foot casino  constructed on a 400 x 100
foot barge  permanently  moored to the  land-based  building.  The casino offers
1,030  slot  machines,  37 table  games and  other  gaming  amenities  including
restaurants,  a western  dance  hall/cabaret  and a 20,000  square  foot  family
entertainment center.

TRACKPOWER

     In July 1999, the Company entered into an agreement with  Trackpower,  Inc.
(OTC BB: TPWR) ("Trackpower") to serve as the exclusive pari-mutuel wagering hub
operator for Trackpower.  Trackpower provides  direct-to-home  digital satellite
transmissions  of horse racing to its  subscriber  base. The initial term of the
contract is for five years with an additional  five-year option  available.  The
Company  pays  Trackpower a  commission  on all new  revenues  earned from their
subscriber  base.  As an additional  incentive to enter into the  contract,  the
Company  received  warrants  to  purchase  5,000,000  shares of common  stock of
Trackpower  at prices  ranging  from  $1.58 per  share to $2.58 per  share.  The
warrants  vest at 20% per year and expire on April 30,  2004.  The fair value of
the warrants  issued will be amortized  over the vesting period or one year from
the  anniversary  date  of the  agreement.  As a  result  of the  transition  of
operations  in 1999,  the amount to be amortized  as a reduction of  commissions
earned in 1999 by Trackpower was not material.

     In March 2000, the Company  entered into a letter of intent with Trackpower
and eBet Limited  ("eBet")  which that,  if a definitive  agreement is executed,
will replace and restate the above  agreement.  Under the terms of the letter of
intent,  the  Company  and  eBet  will  contribute  various  assets,  equipment,
management  agreements  relating to our telephone  account  wagering systems and
business  operations to Trackpower.  Under the proposed  agreement,  the Company
will  continue to receive  the same level of income as in 1999.  The Company and
eBet will each receive  18,000,000  shares of Trackpower common stock as well as
warrants to purchase  additional  shares  exercisable  at $1.00 per share.  Upon
completion of the proposed  transaction the Company and eBet will each own 26.5%
of Trackpower  prior to  considering  the exercises of options or warrants.  The
agreement is subject to due diligence, regulatory and other approvals.
                                       4
<PAGE>

ACQUISITIONS

New Jersey Joint Venture

     On January 28, 1999,  pursuant to a First  Amendment  to an Asset  Purchase
Agreement by and among Greenwood New Jersey, Inc.  ("Greenwood"),  International
Thoroughbred  Breeders  Inc.,  Garden State Race Track,  Inc.,  Freehold  Racing
Association,  Atlantic City  Harness,  Inc. and Circa 1850,  Inc.,  the original
parties to an Asset Purchase  Agreement entered into as of July 2, 1998, and the
Company  (the  "Agreement"),  and  pursuant to which the Company  entered into a
joint  venture  ("Joint  Venture"),  the Company,  along with its Joint  Venture
partner,  Greenwood,  agreed to purchase certain assets of the Garden State Race
Track and Freehold Raceway, both located in New Jersey (the "Acquisition").

     The  purchase  price for the  Acquisition  was  approximately  $46  million
(subject to reduction of certain  disputed  items,  for which  amounts have been
placed in escrow).  On July 29, 1999,  after  receiving the necessary  approvals
from the New  Jersey  Racing  Commission  and the  necessary  consents  from the
holders of its 10.625%  Senior Notes due 2004,  Series B, the Company  completed
its investment in the Joint Venture,  pursuant to which Pennwood Inc. was formed
with Greenwood New Jersey, Inc. (a wholly-owned  subsidiary of Greenwood Racing,
Inc. the owner of Philadelphia  Park Race Track).  Pursuant to the Joint Venture
Agreement,  the  Company  agreed to  guarantee  severally:  (i) up to 50% of the
obligation of the Joint Venture under its Put Option  Agreement  ($17.5 million)
with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of
the Joint  Venture  obligation  for the seven year lease at Garden  State  Park;
(iii) up to 50% of the Joint Venture  obligation to  International  Thoroughbred
Breeders,  Inc. for the contingent purchase price notes ($10.0 million) relating
to the operation, subject to passage by the New Jersey legislature, by the Joint
Venture of OTWs and  telephone  wagering  accounts in New  Jersey.  The Owner of
Garden  State Park,  International  Thoroughbred  Breeders,  Inc.,  announced on
January  25,  2000 that it had  entered  into an  agreement  for the sale of the
Garden  State  Park  property,  excluding  a 10-acre  parcel  owned by our joint
venture, to Turnbury/Cherry  Hill, LLC. The closing of this agreement of sale is
scheduled to occur on or before April 15, 2000. If the sale of Garden State Park
is  completed,  our  lease at Garden  State  Park  will be  terminated  180 days
following the closing of the sale. In conjunction with the closing,  the Company
entered into a Debt Service  Maintenance  Agreement with Commerce Bank, N.A. for
the funding of a $23.0 million credit  facility to the Joint Venture.  The Joint
Venture  Agreement  provides  for a limited  obligation  of the Company of $11.5
million  subject to  limitations  provided for in the Company's  10.625%  Senior
Notes Indenture.  The Company's investment in the Joint Venture is accounted for
under the equity method,  original investments are recorded at cost and adjusted
by the Company's  share of income or losses of the Joint Venture.  The income or
loss of the Joint Venture is included in earnings of  unconsolidated  affiliates
in the  accompanying  Consolidated  Statements  of  Income  for the  year  ended
December 31, 1999.

GAMING MACHINE OPERATIONS AT CHARLES TOWN ENTERTAINMENT COMPLEX

     On November 5, 1996,  Jefferson County, West Virginia approved a referendum
authorizing  the  installation  and operation of gaming  machines at the Charles
Town Entertainment  Complex.  As a result,  the Company  consummated the Charles
Town  Acquisition on January 15, 1997. In April 1997,  the Company  reopened the
Charles Town Entertainment Complex,  featuring live racing, dining and simulcast
wagering.  In September 1997, the Company  expanded  wagering  opportunities  by
installing gaming machines at the Charles Town Entertainment Complex. Since that
time,  we have  increased the number of slot machines from 400 machines to 1,500
machines as of March 14, 2000. We intend to increase the number of slot machines
if demand  warrants  and if approved by the West  Virginia  Lottery  Commission.
Presently,  there is no statutory cap on the number of slot machines that may be
installed at a location. Of the 1,500 machines,  565 machines are coin out, reel
slot machines that we installed  following  the passage of  legislation  in West
Virginia in April 1999 permitting this type of gaming machine. The remaining 935
slot machines are dollar bill-fed video slot machines that replicate traditional
spinning reel slot machines and also feature video card games, such as blackjack
and poker.  We intend to convert  some or all of the 935 video slot  machines to
coin out to increase the number of machines with reel slot machines.
                                       5
<PAGE>
RACING AND PARI-MUTUEL OPERATIONS

     Pari-mutuel  wagering on  thoroughbred or harness racing is pooled wagering
in which a pari-mutuel  wagering  system totals the amounts  wagered and adjusts
the payouts to reflect the relative  amounts bet on different horses and various
possible outcomes.  The pooled wagers are (i) paid out to bettors as winnings in
accordance with the payoffs determined by the pari-mutuel  wagering system, (ii)
paid to the applicable regulatory or taxing authorities and (iii) 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 retained by the wagering facility.  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  (such as  Pennsylvania)
racetrack  ownership  and  operation  is a  precondition  to OTW  ownership  and
operation.  Owning 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;  however the decline in revenues from live racing
has been more than  offset  by an  increase  in  telephone  wagering,  off-track
wagering and gaming machine operations.

     The Company's  racing and  pari-mutuel  revenues have been derived from (i)
wagering on the Company's live races (a) at the Company's racetracks, (b) at the
Company's  OTWs, (c) at other  Pennsylvania  racetracks and OTWs and (d) through
telephone wagering,  as well as wagering at the Company's  racetracks on certain
stakes races run at out-of-state  racetracks  (collectively,  referred to in the
Company's financial statements as "pari-mutuel  revenues from live races"), (ii)
wagering on full-card import simulcasts at the Company's racetracks and OTWs and
through telephone wagering (collectively, referred to in the Company's financial
statements as "pari-mutuel  revenues from import  simulcasting")  and (iii) fees
from wagering on export  simulcasting  Company races at  out-of-state  locations
(referred to in the Company's financial statements as "pari-mutuel revenues from
export  simulcasting").  The  Company's  other  revenues  have been derived from
admissions,  program sales,  food and beverage sales and concessions and certain
other ancillary activities.

Pari-Mutuel Revenues

     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,  a portion
is distributed  to the track's  horsemen in the form of "purses" and the balance
is retained by the wagering facility.  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 horse owners
(the  "Horsemen")  in  Pennsylvania  and  applicable  taxing  authorities).  The
percentages  vary, based on the type of wager;  the average  percentage which is
retained by the Company has approximated 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 Company's racetracks and 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 ("Horsemen
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
Entertainment  Complex,  with the average  percentage of wagers  retained by the
Company 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).

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
                                       6
<PAGE>
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,  a portion is paid to the racetrack
from which the race is simulcast 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 years ended
December 31, 1998 and 1999, respectively, the Company received import simulcasts
from  approximately  77  and  89  racetracks,  respectively,  including  premier
racetracks such as Belmont Park, Church Hill Downs,  Gulfstream Park,  Hollywood
Park,  Santa Anita and Saratoga and  transmitted  export  simulcasts  of Company
races to 126 and 108 locations, respectively.

     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.  The Company  believes 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 which tends to increase the size of
the average wager.

Telephone Wagering

     In 1983, the Company  pioneered  Telebet,  Pennsylvania's  first  telephone
account wagering system. A telebet customer opens an account by depositing funds
with the Company.  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 withdrawal
or future wagers. In December 1995, Pocono Downs instituted Dial-A-Bet, a
similar telephone account betting system.

OTWs

     The Company  operates ten of the 20 OTWs now open in  Pennsylvania  and has
the right to operate one of the three  remaining OTWs that have been  authorized
in  Pennsylvania.  The  Company's  OTWs are  located in  Allentown,  Carbondale,
Chambersburg,  Erie, Hazleton,  Johnstown,  Lancaster, Reading, Williamsport and
York,  Pennsylvania.  At OTWs,  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  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.

                                       7
<PAGE>

Operating Data of the Company

     The following  table  summarizes  certain key operating  statistics for the
Company's  pari-mutuel  operations and their respective OTWs,  including the pro
forma  presentation of data assuming the acquisition of Pocono Downs occurred on
January 1, 1995:
<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31

                                      -------------------------------------------------------------------
                                               1995          1996          1997         1998        1999
                                      -------------------------------------------------------------------
                                             (DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES)
<S>                                      <C>        <C>           <C>           <C>          <C>
NUMBER OF LIVE RACING DAYS:
Penn National Race Course                       204           206           212          206         153
Pocono Downs                                    135           134           134          135         130
Charles Town Races                                -             -           159          206         213
TOTAL ATTENDANCE: (4)

Penn National Race Course (1)               430,128        370,898      339,487      304,220     209,364
Pocono Downs (1)                            242,870        377,830      370,090      263,591     200,368
Reading OTW                                 246,012        214,314      178,237      159,818     123,126
Chambersburg OTW                            143,554        132,447      125,448      105,384      86,894
York OTW                                    232,109        238,610      225,672      213,929     170,677
Lancaster OTW                                     -         92,641      158,003      142,027     115,519
Williamsport OTW                                  -             -        81,797       66,378      54,257
Johnstown OTW                                     -             -             -       25,411      68,794
Erie OTW                                    116,367       113,169        94,429       99,726      96,543
Allentown OTW                               272,491       271,706       252,909      258,237     228,933
Carbondale OTW                                    -             -             -       62,757      77,580
Hazleton OTW                                      -             -             -       60,706      66,328
                                      -------------------------------------------------------------------
Total paid attendance (1)                 1,683,531     1,811,615     1,826,072    1,762,184   1,498,383
                                      ===================================================================

TOTAL WAGERING: (1) (2)
Penn National Race Course                $   85,661 $      75,708 $      69,687 $     70,155 $    60,018
Pocono Downs                                 57,784        53,190        47,217       38,867      33,134
Charles Town Races                                -             -        40,195       69,659      79,847
Reading OTW                                  42,810        41,320        30,811       29,178      25,312
Chambersburg OTW                             24,365        25,024        24,899       22,336      21,083
York OTW                                     42,140        49,864        45,245       43,873      38,470
Lancaster OTW                                     -        13,079        29,292       29,131      24,964
Williamsport OTW                                  -             -         9,684       10,461       8,865
Johnstown OTW                                     -             -             -        3,977      10,931
Erie OTW                                     29,379        27,200        21,767       20,737      19,795
Allentown OTW                                56,440        56,216        58,681       56,719      53,397
Carbondale OTW                                    -             -             -       10,284      16,430
Hazleton OTW                                      -             -             -        9,926      13,474
Penn National Telebet                         8,281         8,423         9,473       10,333      11,839
Pocono Downs Dial-A-Bet                          75         5,510         8,179        9,088      12,145

Export simulcasting:
    Penn National Race Course               113,639       148,702       181,281      194,939     130,719
    Pocono Downs                             30,121        32,493        26,426       23,986      17,764
    Charles Town Races                            -             -             -            -      22,876
                                      -------------------------------------------------------------------
Total wagering                           $  490,695 $     536,729 $     602,836 $    653,649 $   601,063
                                      ===================================================================
</TABLE>
                                       8
<PAGE>


<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                      -------------------------------------------------------------------
                                               1995          1996          1997         1998        1999
                                      -------------------------------------------------------------------
                                             (DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES)
<S>                                      <C>           <C>           <C>          <C>          <C>
AVERAGE DAILY PURSES:
Penn National Race Course                $   57,897    $   62,328    $   60,623   $   63,374   $  74,523

Pocono Downs                                 42,314        42,313        40,149       41,363      42,677

Charles Town Races                                -             -        25,805       50,985      67,329
                                      -------------------------------------------------------------------
Total average daily purse                $  100,211    $  104,641    $  126,577   $  155,722   $ 184,529
                                      ===================================================================

GROSS MARGIN FROM WAGERING: (3)
Penn National Race Course                $   24,915    $   27,955    $   28,669   $   29,068   $  24,761

Pocono Downs                                 17,838        17,805        16,920       18,820      19,151

Charles Town Races                                -             -         3,099        5,878       6,995
                                      -------------------------------------------------------------------

Total gross margin from wagering         $   42,753    $   45,760    $   48,688   $   53,766   $  50,907
                                      -------------------------------------------------------------------
--------------------------------------
</TABLE>

(1)      Does not reflect attendance for wagering on simulcasts when live racing
         is not  conducted  (i) for all periods  presented,  in the case of Penn
         National Race Course (ii) for the year ended  December 31, 1995, in the
         case of Pocono Downs.

(2)      Wagering on certain stakes races is included in wagering on the Penn
         National Race Course races.

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

(4)      Does not include attendance for Charles Town Races.

Live Racing

     The following  table  summarizes the Company and its affiliates live racing
facilities:
<TABLE>
<CAPTION>

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

Pocono Downs                  Plains Township, PA    Constructed in 1965;            Live harness racing;
                                                     operated by the Company         simulcast wagering; dining;
                                                     since November 1996             telephone account wagering

Charles Town Races            Charles Town, WV       Charles Town Races was          Gaming operations;
at the Charles Town                                  constructed in 1933;            Live thoroughbred racing;
Entertainment Complex                                acquired by Charles Town        simulcast wagering; dining
                                                     Joint Venture on January
                                                     15, 1997; refurbished in
                                                     1997 and reopened as the
                                                     Charles Town Entertainment
                                                     Complex
</TABLE>
<TABLE>
<CAPTION>

AFFILIATE FACILITY            LOCATION               DATE OPENED/STATUS                  OPERATIONS CONDUCTED
-------------------------------------------------------------------------------------------------------------
<S>                          <C>                   <C>                               <C>
Freehold Raceway             Freehold, NJ          Freehold Raceway was              Live harness racing; simulcast
                                                   constructed in 1986;              wagering; dining
                                                   acquired by Pennwood
                                                   Racing, our 50% owned
                                                   Joint Venture

Garden State Park            Cherry Hill, NJ       Constructed in 1985; Leased by    Live thoroughbred and harness racing;
                                                   Pennwood Racing, our 50%          simulcast wagering; dining
                                                   owned Joint Venture
</TABLE>
                                       9
<PAGE>

         The Penn  National  Race Course 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 35 mile  radius and  approximately  2.2  million
persons within a 50-mile  radius of the Penn National Race Course.  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 Penn
National Race Course which are available for future expansion or development.

         The   Penn    National    Race    Course'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 Penn National Race Course 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 backstretch area and water and sewage treatment plants.  Parking  facilities
for approximately 6,500 vehicles adjoin the Penn National Race Course.

         The Company has  conducted  live  racing at Penn  National  Race Course
since  1972,  and has held at least 204 days of live  racing at the  facility in
each of the last five years except  1999,  in which only 153 days of live racing
were held as a result of a Horsemen  action.  The Horsemen action was settled on
March 23,  1999.  Penn  National  Race  Course  is one of only two  thoroughbred
racetracks in Pennsylvania.  Post time at Penn National Race Course is 7:30 p.m.
on Wednesdays, Fridays and Saturdays and 5:00 p.m. on Sundays and holidays.

         On  November  27,  1996,  the  Company  acquired  Pocono  Downs  for an
aggregate  purchase  price of  $48.2  million  plus  approximately  $730,000  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 acquisition of Pocono Downs,  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.  As of
March 7,  2000,  no such  additional  form of  gaming in  Pennsylvania  has been
adopted, therefore no such payment is due at this time.

         Pocono Downs 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 35 mile radius and  approximately  1.5 million persons
within a 50-mile  radius of Pocono  Downs.  The  property  includes  a  5/8-mile
all-weather,  lighted  harness  track.  Pocono  Downs's main  buildings  are the
grandstand and the clubhouse.  The clubhouse is completely enclosed,  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.  Pocono  Downs 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 acquisition of Pocono Downs was consummated  following the last day
of racing at Pocono Downs for the 1996 season.  The Company  resumed live racing
at Pocono Downs in April 1997.  The Company  conducted  135 and 130 days of live
harness   racing  at  the  facility   during  1998  and  1999  racing   seasons,
respectively. Post time at Pocono Downs is 7:15 p.m.

         On  January  15,  1997,   the  Charles  Town  Joint  Venture   acquired
substantially  all of the assets of  Charles  Town  Races for an  aggregate  net
purchase price of approximately $16.0 million plus approximately $2.2 million in
acquisition-related  fees and expenses.  Prior to its acquisition by the Charles
Town Joint Venture, Charles Town Races conducted live thoroughbred horse racing,
                                       10
<PAGE>

on-site  pari-mutuel  wagering  on live  races  run at  Charles  Town  Races and
wagering on import simulcast races. The Company has refurbished and reopened the
facility as the Charles Town Entertainment  Complex, which features live racing,
dining,  simulcast wagering and, effective September 1997, gaming machines.  The
cost of the  refurbishment,  exclusive of the cost of the gaming  machines,  was
approximately $27.8 million.

     The  Charles  Town  Entertainment  Complex  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  Entertainment  Complex.  The  property  includes  a 3/4-mile
thoroughbred  racetrack.  The Charles Town Entertainment Complex'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
Entertainment  Complex,  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   Entertainment   Complex.   The  Charles  Town
Entertainment Complex also includes stables,  ample parking and water and sewage
treatment facilities.

         The Charles Town Races  reopened in April 1997.  The Company  conducted
206 and 213 days of  thoroughbred  racing at the  facility  during 1998 and 1999
racing seasons,  respectively.  Post time at the Charles Town Races is 7:15 p.m.
on Thursdays,  Fridays and Saturdays  and 1:00 p.m. on Sundays.  Although  other
regional  racetracks  offer nighttime  thoroughbred  racing,  Penn National Race
Course and Charles Town Races are the only  racetracks  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.

         The Freehold  Raceway was  constructed in 1986 and the grandstand is an
approximately  150,000 square foot,  five level,  steel frame,  enclosed,  fully
heated and air conditioned facility. The grandstand can accommodate up to 10,000
spectators,  including  seating for approximately  2,500  spectators,  and has a
sit-down  restaurant  as  well  as  seven  food  concession  stands.  Additional
facilities  include receiving barns with an adjacent paddock area,  parking lots
to accommodate 2,500 vehicles and a two story administration building.

         The Garden  State Park was  constructed  in 1985 and the  reconstructed
grandstand and clubhouse is an  approximately  500,000 square foot, seven level,
steel frame, glass enclosed,  fully heated and air-conditioned  facility with an
adjacent   multi-level  glass  thoroughbred  paddock  area.  The  clubhouse  can
accommodate up to 24,000 spectators,  including seating for approximately  9,500
spectators,  and  contains  three  sit-down  restaurants  as  well  as  17  food
concession stands. The Company is not currently using a portion of the clubhouse
due to a  decrease  in  business  levels at Garden  State Park over the last few
years as a result of  year-round  simulcasting  and less  live  racing at Garden
State Park.  The  backstretch  area  includes  27 barns and  stables  capable of
accommodating  approximately  1,500 horses, a harness paddock, a training track,
dormitories,  cafeteria and recreation buildings for backstretch  personnel,  an
administration  building  and  other  service  buildings.   Reconstruction  also
included restoration of the main dirt and turf tracks,  installation of lighting
for nighttime racing, paving of parking facilities to accommodate  approximately
4,000 automobiles,  landscaping,  fencing and other amenities. The approximately
56,000  square  foot,  1-1/2  story  pavilion  is used by the Company for closed
circuit  television  events  (racing  as  well  as  other  sporting  events  and
non-sporting events), wagering,  concerts, special events, concessions and other
conveniences.   The  pavilion  has  seating  capacity  for  approximately  1,500
spectators.

                                       11
<PAGE>



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.
<TABLE>
<CAPTION>

FACILITY/LOCATION             DATE OPENED/STATUS                       SIZE (SQ.FT.)     COST (1)       OWNED/LEASED
-----------------             ------------------                       -------------     --------       ------------
<S>                           <C>                                      <C>               <C>             <C>
Penn National Facilities
Lancaster, PA                 Opened 7/96                              24,000            $  2,700,000    Leased
Reading, PA                   Opened 5/92                              22,500            $  2,100,000    Leased
Williamsport, PA              Opened 2/97                              14,000            $  3,000,000    Owned
York, PA                      Opened 3/95                              25,000            $  2,200,000    Leased
Chambersburg, PA              Opened 4/94                              12,500            $  1,500,000    Leased
Johnstown, PA                 Opened 9/98                              14,220            $  1,300,000    Leased
Pocono Downs Facilities
Allentown, PA                 Opened 7/93                              28,500            $  5,207,000    Owned
Carbondale, PA                Opened 3/98                              13,000            $  2,661,000    Owned
Erie, PA                      Opened 5/91                              22,500            $  3,575,000    Owned
Hazleton, PA                  Opened 3/98                              13,000            $  1,868,000    Leased
East Stroudsburg, PA          License authorized; approval to          12,000            $  2,000,000    Leased (2)
                              operate pending; site selected                                             (estimated)
</TABLE>


(1)   Consists of original construction costs, equipment and, for owned
      properties, the cost of land and building.

(2)   The Company is licensed to operate one additional OTW and has identified a
      site to operate the OTW facility in Stroudsburg,  Pennsylvania, subject to
      receipt of all applicable approvals to operate this site.

         The  Company  considers  its  properties  adequate  for  its  presently
anticipated purposes.

MARKETING AND ADVERTISING

         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.

Charles Town Gaming Machine Marketing and Player Tracking Programs

         Our  marketing  efforts,  at the  Charles  Town  Entertainment  Complex
include print and radio  advertising  and are focused on the  Washington,  D.C.,
Baltimore,  Maryland,  Northern  Virginia,  Eastern  West  Virginia and Southern
Pennsylvania  markets.  In 1999,  we installed a  computerized  player  tracking
system, called Player's Choice, at the Charles Town Entertainment Complex, which
has helped to further  refine our  marketing  efforts.  This system is the first
player  tracking  system  installed in West Virginia.  Our database  consists of
approximately  70,000  players as of March 3 2000.  Our  marketing  efforts also
include a bus program and numerous cash and merchandise give-aways.

Pari-mutuel Player Tracking Program

         In 1999,  we installed a  computerized  player  tracking for all of the
Company's  pari-mutuel  locations.  This system,  called Player's Choice, allows
customer to accumulate points, at any of our facilities which are redeemable for
admission,   programs,   food  and  beverage  etc.  Our  database   consists  of
approximately 15,000 players as of March 3, 2000.
                                       12
<PAGE>

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  Penn  National  Race  Course.  The  program  provides  color
commentary  on the races at the Penn National  Race Course  (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  Penn  National  Race  Course  and on  various  cable
television  systems in Pennsylvania  and is transmitted to all OTWs that receive
the Penn National Race Course races.  The Company has expanded  Racing Alive and
created additional televised  programming to cover racing at Pocono Downs 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 Penn  National  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  agreements  with the Horsemen at each of the Company's  racetracks set
forth the purses.  The continuation of these agreements is required to allow the
Company to conduct live racing and export and import simulcasting.  (See "Racing
and Pari-Mutuel Operations").

     The Penn National Race Course  Thoroughbred  Horsemen Agreement was entered
into in February 1996, and expired on February 15, 1999.  After failing to reach
an agreement,  the  Pennsylvania  Thoroughbred  Horsemen  stopped racing at Penn
National Race Course on February 16, 1999 and withdrew their  permission for the
Company to import  simulcast races from other  racetracks.  This resulted in the
closure of Penn  National  Race  Course and its six OTW  facilities  at Reading,
Chambersburg, York, Lancaster, Williamsport and Johnstown. The Company continued
its efforts to  negotiate a new  agreement  with the  Pennsylvania  Thoroughbred
Horsemen and on March 23, 1999 the Company signed a new Horsemen  agreement with
the  Pennsylvania  Thoroughbred  Horsemen  with an initial  term that expires on
January 1, 2004. As a result of the action the Company  incurred a non-recurring
$1,250,000  expense,  primarily related to costs incurred to maintain the closed
facilities  inclusive of employee  salaries  and rents,  for  Horsemen's  Action
Expense. Live racing at the Penn National Race Course resumed on April 23, 1999.
We  believe  that  this new  agreement  will not have a  material  impact on our
operating  expenses  at  the  Penn  National  Race  Course  and  its  OTWs.  The
Pennsylvania  Harness  Horsemen  Agreement  was entered  into in November  1994,
became  effective in January 1995 and expired in January  2000.  On December 17,
1999 the Company signed a new Horsemen  Agreement with the Pennsylvania  Harness
Horsemen  which  became  effective  January  16, 2000 and expires on January 16,
2003.  The Company has an agreement with the Charles Town Horsemen which expires
on December 31, 2000. On February 24, 2000 the Charles Town  Horsemen  agreed to
extend the  contract to December  31,  2002.  See  Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations  -  "Liquidity  and
Capital Resources."
                                       13
<PAGE>

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  and the West
Virginia  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.

     The Company's  live 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, on 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 Penn National Race Course,  due
to higher purses being paid as a result of the Company's increased  simulcasting
activities,  however,  there can be no  assurance  that the Company can continue
such improvement.

     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 acquisition of Pocono Downs and which is  approximately 50 miles
from the Penn National Race Course and 35 miles from the Company's  Reading OTW,
has drawn some patrons from the Penn National  Race Course,  the Reading OTW and
the Company's telephone wagering system; and, the Company's Lancaster OTW, which
is  approximately  31 miles from the Penn National Race Course and 25 miles from
the  Company's  York OTW,  has drawn some patrons  from the Penn  National  Race
Course, the York OTW and the Company's telephone wagering system.  Moreover, the
Company believes that a competitor's OTW in King of Prussia, Pennsylvania, which
is  approximately 23 miles from the Reading OTW, has drawn some patrons from the
Reading OTW.  Although  only two  competing  OTWs remain  authorized  by law for
future  opening,  the opening of a new OTW 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.

     The Company's gaming machine  operations 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.  Legislation  has been passed in
West Virginia,  which allows for coin out and reel slot machines at race tracks.
In December  1999, the Company  installed 565 coin out, reel slot machines.  The
Company  intends to convert some or all of its current  machines to coin out and
increase the maximum number of machines with reel slot machines.  The failure to
attract or retain  gaming  machine  customers at the Charles Town  Entertainment
Complex, 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  racetrack 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.

     For the year ended  December 31, 1999,  the Company  canceled a total of 15
racing days  because of inclement  weather.  The severe  winter  weather in 1996
                                       14
<PAGE>

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 an 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  heavier  racing  schedule
throughout  the country  during the second and third  quarter of the year.  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.

REGULATION AND TAXATION

General

     Certain  of  the   Company's   subsidiaries   are   authorized  to  conduct
thoroughbred  racing and harness racing in Pennsylvania  under the  Pennsylvania
Racing Act. Such subsidiaries are also authorized, under the Pennsylvania Racing
Act and the Federal Horseracing Act, to conduct import simulcast  wagering.  The
Charles Town Joint  Venture is subject to the  provisions  of the West  Virginia
Racing  Act,  which  governs the conduct of  thoroughbred  horse  racing in West
Virginia,  and the West Virginia  Video Lottery 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.

Pennsylvania Racing Regulations

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

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

     The  Company  may not be able to obtain  all  necessary  approvals  for the
continued 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 Penn
National  Race Course since it commenced  operations  in 1972,  and has obtained
permission from the Pennsylvania State Harness Racing Commission to conduct live
racing  at  Pocono  Downs.   Currently,   the  Company  has  approval  from  the
Pennsylvania  Racing Commissions to operate the ten OTWs that are currently open
and the one additional OTW the Company proposes to open. 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.
                                       15

<PAGE>

West Virginia Racing and Gaming Regulation

     The  Company's  operations  at the Charles Town  Entertainment  Complex 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 Video Lottery 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 obtained from the West
Virginia Racing Commission a license to conduct racing and pari-mutuel  wagering
at the Charles Town Entertainment  Complex.  Pursuant to the West Virginia Video
Lottery  Act,  the  Company  has  obtained  approval  for the  installation  and
operation of a total of 1,500 gaming machines at the Charles Town  Entertainment
Complex.  The  Company  purchased  and  installed  565 reel  spinning,  coin-out
machines,  which were open to the  public on  December  16,  1999  bringing  the
Company's  total gaming  machines at the Charles Town  Entertainment  Complex to
1,500.  Installing  and operating  additional  machines  would require  approval
pursuant to the West Virginia Lottery act.

State and Federal Simulcast Regulation

     The Federal Interstate Horseracing Act, the Pennsylvania Racing Act and the
West Virginia Racing Act require that the Company have a written  agreement with
each applicable horsemen's organization in order to simulcast races. The Company
has entered into the Horsemen Agreements, and in accordance therewith has agreed
on the allocations of the Company's  revenues from import simulcast  wagering to
the purse funds for the Penn National Race Course, Charles Town Races and Pocono
Downs.  Because the Company  cannot  conduct  import  simulcast  wagering in the
absence of the Horsemen  Agreements,  the  termination  or  non-renewal  of such
Horsemen  Agreements  could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

Taxation and Fees

     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 Commissions.  The certificates  representing the Company
                                       16
<PAGE>

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 Commissions have 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 Video Lottery 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 Video
Lottery 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.

Internal Revenue Service Regulations

     The Internal Revenue Service, or IRS, requires operators of casinos located
in the United States to file information  returns for U.S.  citizens,  including
names and addresses of winners,  for keno and slot machine winnings in excess of
certain  amounts.  The IRS also requires  operators to withhold taxes on certain
keno,  bingo and slot machine winnings of nonresident  aliens.  We are unable to
predict  the extent,  if any, to which such  requirements,  if  extended,  might
impede or otherwise  adversely  affect  operations of, and/or income from,  such
other games.

     Regulations  adopted by the  Financial  Crimes  Enforcement  Network of the
United States  Treasury  Department  and the gaming  regulatory  authorities  in
certain domestic  jurisdictions in which we operate casinos, or in which we have
applied for  licensing  to operate a casino,  require the  reporting of currency
transactions  in excess of  $10,000  occurring  within a gaming  day,  including
identification of the patron by name and social security number.  This reporting
obligation  commenced  in May 1985 and may have  resulted  in the loss of casino
revenues to  jurisdictions  outside the United States which are exempt from such
regulations.

ITEM 2  PROPERTIES

See, ITEM 1 - BUSINESS - "RACING AND PARI-MUTUEL OPERATIONS"

     A solid waste landfill  ("Landfill")  is on a parcel of land we own that is
adjacent  to Pocono  Downs.  The East Side  Landfill  Authority  (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   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
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 under the Settlement
Agreement. In addition, the Company may be liable for future claims with respect
to  the  Landfill  under  the  federal  Comprehensive   Environmental  Response,
Compensation  and Liability Act 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.

Other Property and Equipment

     The Company currently leases 5,974 square feet of office space in an office
building in Wyomissing,  Pennsylvania for the Company's  executive offices.  The
lease  expires  in April  2000 and  provides  for an  annual  minimum  rental of
$97,968.  The office building is owned by an affiliate of Peter M. Carlino,  the
Chairman and Chief Executive  Officer of the Company.  The Company believes that
the lease  terms are not less  favorable  than lease  terms that could have been
obtained from an unaffiliated third party.

     The  Company  currently  leases an  aircraft  from a company  owned by John
Jacquemin,  a director of the Company.  The lease expires in September  2007 and
provides for monthly  payments of $8,356.  The Company  believes  that the lease
terms are not less favorable than lease terms that could have been obtained from
an unaffiliated third party.
                                       17
<PAGE>

EMPLOYEES AND LABOR RELATIONS

     At March 1, 2000, the Company had 1,870 permanent employees,  of whom 1,252
were  full-time  and 618  part-time.  Employees  of the  Company who work in the
admissions  department  and  pari-mutuels  department  at the Penn National Race
Course,  Pocono Downs and the OTWs are represented  under collective  bargaining
agreements  between the Company and Sports Arena Employees' Union Local 137. The
agreements extend until September 30, 2002 for track employees and September 30,
2001 for OTW employees. The pari-mutuel clerks at Pocono Downs voted to unionize
in June 1997. The Company has held  negotiations  with this union,  but does not
have a contract to date.  Failure to reach  agreement  with this union would not
result in the suspension or termination of the Company's license to operate live
racing  at  Pocono  Downs  or  to  conduct  simulcast  or  OTW  operations.  The
pari-mutuel  clerks and racing  valets at Charles Town are  represented  under a
collective  bargaining  agreement  with the West  Virginia  Division  of  Mutuel
Clerks,  which expires on December 31, 2000. The West Virginia Video Lottery Act
also  requires  that the operator of the Charles Town  Entertainment  Complex be
subject to a written  agreement with the pari-mutuel  clerks in order to operate
gaming  machines,  this  agreement  expires on December  31,  2000.  The Company
believes that its relations with its employees are satisfactory.

ITEM 3  LEGAL PROCEEDINGS

         In December  1997,  Amtote  international,  Inc.  ("Amtote"),  filed an
action  against the Company  and the  Charles  Town Joint  Venture in the United
States  District  Court  for the  Northern  District  of West  Virginia.  In its
complaint, Amtote (i) states that the Company and the Charles Town Joint Venture
allegedly  breached  certain  contracts with Amtote and its  affiliates  when it
entered into a wagering  services  contract with a third party (the "Third Party
Wagering Services  Contract"),  and not with Amtote,  effective January 1, 1998,
(ii) sought  preliminary and injunctive  relief through a temporary  restraining
order  seeking to prevent  Charles Town Joint  Venture from (a) entering  into a
wagering services contract with a party other than Amtote and (b) having a third
party provide such wagering  services,  (iii) sought  declaratory relief through
September 2004 and (iv) sought unspecified  compensatory damages, legal fees and
costs  associated  with the action and other legal and  equitable  relief as the
Court deemed just and appropriate. On December 24, 1997, a temporary restraining
order was issued,  which prescribed  performance  under the Third Party Wagering
Contract.  On  January  14,  1998,  a  hearing  was  held to rule on  whether  a
preliminary  injunction  should  have  been  issued  or  whether  the  temporary
restraining  order should have been lifted.  On February 20, 1998, the temporary
restraining  order was lifted by the  court.  The  Company  then  pursued  legal
remedies in order to terminate Amtote and proceed under the Third Party Wagering
Services Contract. This matter was tried before the State Court of West Virginia
on June 17, 1999. On September 30, 1999 the United States District Court for the
Northern District of West Virginia  rendered a decision in favor of Amtote.  The
Court  awarded  liquidated  damages to Amtote in  connection  with the Company's
cancellation of the Amtote contract,  which cancellation  enabled the Company to
enter into a computerized  pari-mutuel  wagering  service  contract with another
company  to  provide  such  services  to  three  of its  racetracks  and its ten
off-track  wagering  facilities.  On February 11,  2000,  the Company and Amtote
entered  into a  settlement  agreement  in which the Company paid Amtote in full
satisfaction of the judgment the sum of $1.5 million.

         The Company  submitted an  application  to the  Tennessee  State Racing
Commission (the  "Tennessee  Commission") in October 1997 for an initial license
for the development and operation of a harness track and an OTW at a site in the
city of Memphis (the "Tennessee  Development  Project"). A land use plan for the
construction  of a 5/8-mile  harness track,  clubhouse and  grandstand  area was
approved in October  1997 by the Land Use Hearing  Board for the City of Memphis
and County of Shelby. Tennessee Downs, Inc. ("Tennessee Downs"), a subsidiary of
the  Company,  was  determined  to be  financially  suitable  by  the  Tennessee
Commission and a public comment hearing before the Tennessee Commission was held
in November 1997. In December 1997,  the Company  received the necessary  zoning
and land development approvals from the Memphis City Council. In April 1998, the
Tennessee Commission granted a license to Tennessee Downs, which would expire on
the  earlier  of: (i)  December  31, 2000 or (ii) the  expiration  of  Tennessee
Commission's  term on June  30,  1998,  if such  term  was not  extended  by the
Tennessee  State  Legislature.  The Tennessee  State  Legislature  voted against
extending  the  life  of  the  Tennessee  Commission,   allowing  the  Tennessee
Commission's  term to expire on June 30, 1998. The Tennessee  Commission  held a
meeting on May 29, 1998 at which it rejected the Company's request: (i) to grant
Tennessee  Downs an  extended  timeframe  for the  effectiveness  of its  racing
license;  and (ii) to operate a temporary simulcast facility.  On July 28, 1998,
                                       18
<PAGE>

Tennessee Downs filed for a preliminary  injunction and a declaratory  ruling on
the legal status of racing in Memphis.  On November  23,  1998,  the court ruled
that the  Tennessee  Racing  Control  Act had not been  repealed  and  cannot be
repealed by  implication  by  dissolving  the Tennessee  Commission.  It was the
opinion of the court that because the Tennessee  Racing  Control Act is still in
force,  horse-racing and pari-mutuel betting is a legal unregulated  activity in
Tennessee.  This decision was appealed by the Tennessee  Attorney  General and a
hearing was held before the Court of Appeals on June 21, 1999. On July 30, 1999,
the Court of Appeals in Tennessee dissolved the injunction.  The appellate court
reversed the lower court ruling on the basis of  jurisdiction.  On September 28,
1999,  Tennessee  Downs filed its application for Permission to Appeal and brief
to the Supreme Court of Tennessee.  Tennessee  Downs took a direct appeal to the
Supreme  Court of the State of  Tennessee so that it may continue its efforts to
develop and operate a harness track in Tennessee. In the appeal, Tennessee Downs
asked the Supreme Court to take the  jurisdictional  question from the appellate
court and to review the  substantive  issue of whether  pari-mutuel  wagering on
horse  racing is lawful in  Tennessee  under the  existing  statute  without the
Tennessee  Commission.  Costs  incurred as of December  31, 1999  regarding  the
Tennessee  license  amounted to $534,135.  On February 11, 2000,  the  Tennessee
Supreme Court denied Tennessee  Down's  application for permission to appeal the
decision of the Court of Appeals. As a result of this decision,  Tennessee Downs
has taken a charge  against  earnings in 1999 of $535,000 for costs incurred for
its Tennessee  racing  license and does not  anticipate  future  involvement  in
Tennessee.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

                                     PART II

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

         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.
<TABLE>
<CAPTION>

                                                                            HIGH                         LOW
<S>               <C>                                                  <C>                         <C>
                  1997

                  First Quarter                                        $  18.250                   $  14.000
                  Second Quarter                                          19.625                      13.750
                  Third Quarter                                           20.125                      14.625
                  Fourth Quarter                                          19.250                       8.750

                  1998

                  First Quarter                                        $  13.125                    $  8.875
                  Second Quarter                                          12.000                       6.813
                  Third Quarter                                            9.125                       5.125
                  Fourth Quarter                                          10.313                       5.500

                  1999

                  First Quarter                                        $  10.000                    $  5.813
                  Second Quarter                                           9.938                       7.250
                  Third Quarter                                           10.375                       8.250
                  Fourth Quarter                                           9.563                       7.500

</TABLE>


         The closing sale price per share of Common Stock on The Nasdaq National
Market on March 14,  2000,  was  $7.50.  As of March 14,  2000,  there  were 692
holders of record of Common Stock.
                                       19
<PAGE>

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.  Moreover,  the Company's  existing  credit  facility (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  financing  arrangements may prohibit the payment of dividends
under certain conditions.

                                       20
<PAGE>



ITEM 6  SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected  consolidated  financial data of the Company for
the years  ended  December  31,  1995,  1996,  1997,  1998 and 1999,  except for
Operating Data, are derived from financial  statements that have been audited by
BDO Seidman, LLP independent certified public accountants, adjusted as described
in the notes below. The selected  consolidated  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 herein.
<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31
                                                          ------------------------------------------------------------
                                                                   1995       1996     1997 (1)       1998       1999
                                                          ------------------------------------------------------------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>         <C>         <C>          <C>        <C>
INCOME STATEMENT DATA
Revenue
    Pari-mutuel revenues
      Live races                                             $   21,376  $  18,727   $ 27,653     $  26,893  $ 20,760
      Import simulcasting                                        27,254     27,653     59,810        68,136    71,369
      Export simulcasting                                         2,142      3,347      5,279         5,810     4,733
  Gaming revenue                                                      -          -      5,712        37,396    55,125
  Admissions, programs and other racing revenue                   3,704      4,379      5,678         6,280     6,256
  Concessions revenues                                            3,200      3,389      7,404         9,550    12,117
Earnings from unconsolidated affiliates                             -            -          -             -     1,098
                                                          ------------------------------------------------------------
Total revenues                                                   57,676     62,834     111,536      154,065   171,458
                                                          ------------------------------------------------------------
OPERATING EXPENSES
  Purses, stakes, and trophies                                   12,091     12,874      22,335       29,141    31,290
  Direct salaries, payroll taxes and employee benefits            7,699      8,669      16,200       19,134    19,519
  Simulcast expenses                                              9,084      9,215      12,982       13,809    13,422
  Pari-mutuel taxes                                               4,963      5,356       9,506        9,281     8,895
  Lottery taxes and administration                                    -          -       1,874       14,749    21,545
  Other direct meeting expenses                                   7,576      8,536      18,087       24,029    22,916
  Concessions expenses                                            2,125      2,349       5,605        7,929    11,030
  Other operating expenses                                        5,002      4,942       8,735       10,787    13,060
  Horsemen's action expenses                                          -          -           -            -     1,250
  Depreciation and amortization                                     881      1,433       4,040        5,748     8,679
  Litigation expense                                                  -          -           -            -     1,500
Site development and restructuring changes                            -          -       2,437            -       535
                                                          ------------------------------------------------------------
Total operating expenses                                         49,421     53,374     101,801      134,607   153,641
                                                          ------------------------------------------------------------
Income from operations                                            8,255      9,460       9,735       19,458    17,817
                                                          ------------------------------------------------------------
Other income (expenses)
  Interest income (expense), net                                    198       (156)     (3,656)      (7,549)   (7,299)
  Other                                                              10          -          (2)         113        (8)
                                                          ------------------------------------------------------------
Total other income (expenses)                                       208       (156)     (3,658)      (7,436)   (7,307)
                                                          ------------------------------------------------------------
Income before income taxes and extraordinary item                 8,463      9,304       6,077       12,022    10,510
Taxes on income                                                   3,467      3,794       2,308        4,519     3,777
                                                          ------------------------------------------------------------

Income before extraordinary item                                  4,996      5,510       3,769        7,503     6,733

Extraordinary item - loss on early extinquishment of debt,
   net of income taxes of $1,001.                                     -          -           -        1,482         -
                                                          ------------------------------------------------------------
</TABLE>
                                       21

<PAGE>

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31
                                                      ------------------------------------------------------------
                                                               1995       1996     1997 (1)       1998        1999
                                                      ------------------------------------------------------------
                                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                       <C>        <C>          <C>         <C>        <C>
Net income                                                $   4,996  $   5,510    $   2,287   $  7,503   $   6,733
                                                       ============================================================
PER SHARE DATA:
Basic  income per share before extraordinary item         $    0.39  $    0.41    $    0.25   $   0.50    $    .45
Basic net income per share                                $    0.39  $    0.41    $    0.15   $   0.50    $    .45

Diluted income per share before extraordinary item        $    0.38  $    0.40    $    0.24   $   0.49    $    .44
Diluted net income per share                              $    0.38  $    0.40    $    0.15   $   0.49    $    .44

WEIGHTED SHARES OUTSTANDING:
Basic                                                        12,906     13,302       14,925     15,015      14,889
Diluted                                                      13,017     13,822       15,458     15,374      15,223

OPERATING DATA: (Unaudited)
Pari-mutuel wagering
Live races                                                $ 102,145  $  89,327   $  128,090  $ 122,686   $  96,238
Import simulcasting                                         142,499    170,814      298,459    336,191     345,650
Export simulcasting                                          72,252    112,871      176,287    194,772     159,175
                                                      ------------------------------------------------------------

Total pari-mutuel wagering                                $ 316,896  $ 373,012   $  602,836  $ 653,649   $ 601,063
                                                       ============================================================

Gross profit from wagering (2)                            $  24,915  $  27,955   $   48,688  $  53,766   $  50,907
                                                       ============================================================
BALANCE SHEET DATA as of DECEMBER 31:
Cash and cash equivalents                                 $   7,514  $   5,634   $   21,854  $   6,826   $   9,434
Working capital (deficiency)                                  4,134       (509)      15,226      1,911      (7,369)
Total assets                                                 27,532     96,723      158,878    160,798     190,600
Total debt                                                      390     47,517       80,336     78,256      91,213
Shareholders' equity                                         20,802     27,881       53,856     59,036      66,272

------------------------------------------
</TABLE>

Management believes that the following  calculation of Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") and adjusted EBITDA are relevant
to shareholders:
<TABLE>
<S>                                                       <C>         <C>         <C>        <C>         <C>
Income from operations                                    $  8,255    $  9,460    $  9,735   $  19,458   $  17,817
add back depreciation and amortization                         881       1,433       4,040       5,748       8,679
                                                        ----------- ----------- ----------- ----------- ----------

EBITDA                                                       9,136      10,893      13,775      25,206      26,496
add back Horsemens action expense                               --          --          --          --       1,250
Litigation expense                                              --          --          --          --       1,500
Site development and restructuring charges                      --          --       2,437          --         535
                                                        ----------- ----------- ----------- ----------- ----------

Adjusted EBITDA                                           $  9,136    $ 10,893   $  16,212   $  25,206   $  29,781
                                                        =========== =========== =========== =========== ==========
</TABLE>

              EBITDA is not a measure of financial  performance  under Generally
Accepted  Accounting  Principles  ("GAAP"),  but is used by  some  investors  to
determine  a  company's  ability to service  or incur  indebtedness.  EBITDA and
Adjusted  EBITDA are not  calculated  by all  entities  in the same  fashion and
accordingly,  may not be an appropriate  measure of performance.  Neither EBITDA
nor Adjusted  EBITDA should be considered in isolation  from, or as a substitute
for, net income (loss),  cash flows from operations,  or cash flow data prepared
in accordance with GAAP.

(1)   Reflects the November 27, 1996  acquisition of Pocono Downs and the
      January 15, 1997  acquisition of a joint venture  interest in
      the Charles Town Entertainment Complex.  See "Business-Acquisitions."

(2)   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.  Figures for the years ended  December 31, 1995
      and 1996 do not include purses paid at Penn National Speedway.

                                       22
<PAGE>


 ITEM 7  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                  OF OPERATIONS

RESULTS OF OPERATIONS

The  percentage  of the Company's  revenue  derived from gaming  operations  has
increased  over the last few years as a result of the gaming  operations  at the
Charles Town  Entertainment  Complex.  The Company  expects that the Mississippi
Acquisition  and the  continued  expansion  of the  Charles  Town  Entertainment
Complex will cause this trend to continue.  In the future the Company expects to
alter the presentation of certain of its financial information to better capture
this trend. An example of a type of  presentation  that the Company is likely to
use is presented below.

The results of operations by property level are summarized as follows:
<TABLE>
<CAPTION>

                   Charles Town Racing and Gaming       Penn National and OTWs            Pocono Downs and OTWs
                      1997       1998        1999       1997       1998       1999       1997       1998      1999
                      ----       ----        ----       ----       ----       ----       ----       ----      ----
<S>                <C>        <C>         <C>       <C>         <C>        <C>        <C>        <C>       <C>
Revenues
Gaming             $ 5,739    $37,716     $55,564   $      -    $     -    $     -    $     -    $     -   $     -
Racing               9,211     15,382      18,954     60,261     60,281     51,302     31,203     33,121    33,767
Other                1,533      3,785       5,254      3,302      3,339      4,308      2,255      2,455     2,555
                 --------------------------------- -------------------------------- -------------------------------
Total revenues      16,483     56,883      79,772     63,563     63,620     55,610     33,458     35,576    36,322

Expenses
Gaming               5,446     28,958      38,672          -          -          -          -          -         -
Racing               9,566     15,585      18,766     45,815     45,276     41,441     22,203     22,748    23,169
Other*               2,111      5,237       6,554      5,329      5,305      6,334      3,784      4,109     4,199
                 --------------------------------- -------------------------------- -------------------------------

Total expenses      17,123     49,780      63,992     51,144     50,581     47,775     25,987     26,857    27,368

EBITDA
Gaming                 293      8,758      16,892          -          -          -          -          -         -
Racing                (355)      (203)        188     14,446     15,005      9,861      9,000     10,373    10,598
Other                 (578)    (1,452)     (1,300)    (2,027)    (1,966)    (2,026)    (1,529)    (1,654)   (1,644)
                ---------------------------------- -------------------------------- -------------------------------

Total EBITDA       $  (640)   $ 7,103     $15,780   $ 12,419    $13,039    $ 7,835    $ 7,471    $ 8,719   $ 8,954
                ================================== ================================ ===============================
----------------
</TABLE>

*Other expenses includes property level general and administrative  expenses and
excludes corporate overhead and non-recurring expenses.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         Revenues in 1999 increased by  approximately  $17.4 million or 11.3% to
$171.5 million from $154.1 million in 1998. Operating expenses in 1999 increased
by approximately $19.0 million or 14.1% to $153.6 million from $134.6 million in
1998. Included in operating expenses were non-recurring expenses in 1999 for the
Horsemen's  strike  ($1.3  million)  at Penn  National  Race  Course,  Tennessee
development and licensing  expenses ($.5 million) and litigation  expenses ($1.5
million) to settle a lawsuit with a totalisator company.  Income from operations
decreased by $1.6 million or 8.4% to $17.8 million in 1999 from $19.4 million in
1998 due to the Horsemen's strike and non-recurring expenses. Other expenses for
the year ended  December  31,  1999 and 1998  consisted  of  approximately  $7.3
million and $7.4  million,  respectively,  of net interest  primarily due to the
10.625%  Senior  Notes  and the  Revolving  Credit  Facility.  Taxes  on  income
decreased  by $.7 million to $3.8  million in 1999 from $4.5 million in 1998 and
net income  decreased  by $.8 million or 10.3% to $6.7 million in 1999 from $7.5
million in 1998 due substantially to the factors described.
                                       23
<PAGE>

Charles Town Entertainment Complex

         Revenues  increased at Charles Town by  approximately  $22.9 million or
40.2% to $79.8  million  in 1999 from  $56.9  million  in 1998.  Gaming  revenue
increased by $17.8  million or 47.3% to $55.6 million in 1999 from $37.7 million
in 1998 due to the addition of 136 new video  lottery  machines and 565 new reel
spinning,  coin-out slot machines  during the year. At year-end there were 1,500
gaming  machines  in  operation  compared to 799  machines in 1998.  The average
number of machines increased to 923 in 1999 from 704 in 1998 and the average win
per  machine  increased  to $163 in 1999  from  $145  in  1998.  Racing  revenue
increased by $3.5 million or 23.0% to $18.9  million in 1999 from $15.4  million
in 1998.  The live meet  consisted of 213 race days in 1999 compared to 206 race
days in 1998  and a change  in the  schedule  from a  Wednesday  afternoon  race
program to a Thursday evening race program to accommodate  export  simulcasting.
Charles Town began  exporting its live race program to tracks across the country
on June 5, 1999 and generated  export  simulcasting  revenues of $.9 million for
the year.  Concession  revenues increased by approximately $1.5 million or 40.0%
to $5.3 million in 1999 from $3.8  million in 1998 due to  increased  attendance
for gaming,  racing, and the expansion of the concession areas,  dining room and
buffet area.  Operating  expenses  increased by $14.2  million or 28.6% to $64.0
million in 1999 from $49.8  million in 1998 due to the  increase in direct costs
associated with additional wagering on horse racing and gaming machine play, the
addition of gaming  machines and floor space (new  temporary  gaming  facility),
export  simulcast  expenses and expanded  concession  and dining  capability and
capacity.   In  addition  to  the  operating   expenses,   Charles  Town  had  a
non-recurring  expense of $1.5 million in litigation settlement expenses for the
settlement of a lawsuit involving a former totalisator company vendor.

Penn National Race Course and its OTW Facilities  (Penn National Race Course)

         Penn  National  Race Course had a decrease in revenue of  approximately
$8.0 million or 12.6% to $55.6 million in 1999 from $63.6  million in 1998.  The
decrease was due primarily to the  expiration of the  Horsemen's  Agreement that
resulted in the closure of the  facilities  from  February 16 to March 24, 1999.
Penn National  re-opened  for  simulcast  wagering on March 25, live racing on a
limited  basis on April 23 and resumed a full live racing  schedule  the week of
June 26, 1999. For the year 1999,  Penn National ran 153 live race days compared
to 206 live race days in 1998 and has run  nine-race  cards  instead of ten-race
cards since the April  reopening.  Of the  scheduled 210 live races for 1999, 46
race days were lost due to the strike and 11 days were  cancelled due to weather
compared  to 4 days  cancelled  due to weather in 1998.  Expenses  decreased  by
approximately  $2.8 million or 5.6% to $47.8  million in 1999 from $50.6 million
in 1998.  Included  in the 1999  expenses  is $1.3  million  for the  Horsemen's
strike.  The results of operations  also includes the operation of the Johnstown
OTW facility for 12 months in 1999 compared to 3 months in 1998.

Pocono Downs and its OTW Facilities (Pocono Downs)

         Pocono  Downs  live  race  meet,  which  runs from  April to  November,
consisted of 130 race days in 1999 compared to 135 races days in 1998.  Revenues
at Pocono Downs  increased by $.7 million or 2.1% to $36.3  million in 1999 from
$35.6 million in 1998.  The increase  resulted from a full year of operations at
the Carbondale ($1.4 million) and Hazleton ($.8 million) OTWs that was offset by
a decrease in revenue at the Pocono Downs Racetrack ($1.0 million). The decrease
was due to the close  proximity  of the two new OTWs to the track.  Revenue also
decreased at the racetrack due to a 7.1% decrease in export  simulcast  wagering
on Pocono live races due to the  temporary  closing of the barn area last winter
due to the Company  making  improvements  to the track that resulted in starting
the racing season with a shortage of horses. Expenses increased by approximately
$.5 million or 1.9% to $27.4 million in 1999 from $26.9 million in 1998.

New Jersey Joint Venture

         On July 29, 1999, after receiving the necessary  approvals from the New
Jersey  Racing  Commission  and the  necessary  consents from the holders of its
10.625% Senior Notes due 2004, Series B, the Company completed its investment in
the Joint Venture.  The Joint Venture operates Freehold Raceway and Garden State
Race Track. Summarized results of operations of the unconsolidated Joint Venture
(commencing  on July 30,  1999) for the period  ended  December 31, 1999 include
$28.0 million in revenue,  $23.0  million in operating  expenses $5.0 million in
EBITDA and net income of $2.2 million. The Company's 50% share of the net income
or $1.1 million is recorded as "Earnings from unconsolidated  affiliates" on the
income statement.
                                       24
<PAGE>

Capital Expenditures

         The Company had capital  expenditures of $13.2 million in 1999 compared
to  $22.3  million  in  1998.   Capital   expenditures   at  Charles  Town  were
approximately  $12.1 million for the construction of a new outdoor paddock,  the
purchase and construction of a new temporary  gaming facility,  and the purchase
of additional  gaming  machines and player  tracking  system and other projects.
Capital  expenditures  at Penn National and its OTW facilities ($.6 million) and
Pocono Downs and its OTW  facilities  ($.5  million)  were for normal  equipment
replacement  and  leasehold   improvements.   As  a  result,   depreciation  and
amortization  increased  $2.9 million or 51.0% to $8.7 million in 1999 from $5.8
million in 1998.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Revenue in 1998  increased by  approximately  $42.5 million or 38.1% to
$154.0 million in 1998 from $111.5 million in 1997.  Operating  expenses in 1998
increased by approximately  $32.8 million or 32.2% to $134.6 million from $101.8
million in 1997.  Included in operating expenses were non-recurring  charges for
site development and restructuring expenses of $2.4 million in 1997. Income from
operations  increased by approximately  $9.7 million or 100.0 % to $19.4 million
in 1998 from $9.7 million in 1997.  Other  expenses  increased by  approximately
$3.8 million of 106.4 % to $7.4  million in 1998 from $3.6 million in 1997.  Net
interest expense increased by $3.9 million  (primarily due to the 10 5/8% Senior
Notes issued  December  1997).  Other income in 1998 of $113,000  consisted of a
gain on the sale of Casino Magic  Corporation stock of $148,000 offset by a loss
on the repurchase of the Company's Senior Notes in the amount of $35,000.  Taxes
on income increased by  approximately  $2.2 million to $4.5 million in 1998 from
$$2.3 million in 1997. The extraordinary item in 1997 consisted of a loss on the
early  extinquishment of debt in the amount of $1,482,000,  net of income taxes.
The loss consists  primarily of write-offs of deferred  finance costs associated
with the  retired  bank  notes and legal  and bank  fees  relating  to the early
extinquishment  of the debt. Net income increased by approximately  $5.2 million
to $7.5 million in 1998 from $2.3  million in 1997 due to the factors  described
above.

Charles Town Races

         Charles  Town Races was  purchased  in January of 1997 and began racing
operations on April 30, 1997 and video lottery  machine  operations on September
10, 1997. Revenues at Charles Town increased by $40.4 million or 276.3% to $56.9
million in 1998 from $15.1 million in 1997. Video lottery machines  increased by
$32.0 million as a result of a full year of operations in 1998 compared to three
and one-half  months of operations in 1997.  Racing  revenues  increased by $6.2
million due to a racing  season of 206 live race days at the Charles  Town Races
in 1998  compared  to 159 live  races  days in 1997 and the  opening  of the new
simulcast-racing center in January 1998. Concession and other revenues increased
by $2.2  million  due to the  increased  attendance  and the  opening of the new
buffet area during the year.  Operating expenses increased at Charles Town Races
by $32.6  million or 190.7% to $49.8 million in 1998 from $17.1 million in 1997.
The increase was due primarily to the video lottery  operations ($23.5 million),
racing  operations  ($6.0 million) and concession and other  operating  expenses
($3.1 million).

Penn National Race Course and its OTW Facilities (Penn National Race Course)

         Penn  National  Race  Course  had  a  small   increase  in  revenue  of
approximately  $57,000 or .1% to $63.6  million  in 1998 from  $63.5  million in
1997.  Revenues  increased  at the track ($.3  million)  due to an  increase  in
on-track wagering and export simulcast  wagering and the purchase and opening of
the Johnstown OTW ($.9 million) on September 1, 1998.  The increases were offset
by a decrease in revenues at  Chambersburg  OTW ($.6 million) due to the opening
of the Charles Town Facility, Reading ($.3 million) and York ($.3 million). Penn
National Race Course had a net decrease in operating  expenses of $.6 million or
1.1% to $50.6  million in 1998 from $51.1  million in 1997.  The net decrease in
operating  expenses was due to an increase in expenses at the new  Johnstown OTW
($.8  million)  offset by a decrease in operating  expenses at the racetrack and
other OTW facilities ($1.4 million).

Pocono Downs and its OTW Facilities (Pocono Downs)

         Revenues at Pocono Downs  resulted in a net increase of $2.1 million or
6.3% to $35.6  million  in 1998 from  $33.5  million in 1997.  The  increase  in
revenue was  primarily due to the opening of new  facilities  in Hazleton  ($2.2
                                       25
<PAGE>

million) and  Carbondale  ($2.4  million).  This was offset by a decrease at the
Wilkes-Barre  racetrack  ($2.1  million) due to the proximity of the two new OTW
facilities  and  decreases  at  Allentown  OTW ($.3  million)  and Erie OTW ($.2
million).  Pocono Downs had a net increase in operating  expenses of $.9 million
or 3.3% to $26.9 million in 1998 from $26.0 million in 1997. The net increase in
operating expenses was due to the opening of the Hazleton OTW ($1.9 million) and
the  Carbondale  OTW ($1.8  million).  The  increase was offset by a decrease in
operating expenses at the Wilkes-Barre  racetrack ($1.8 million),  Allentown OTW
($.6 million) and Erie OTW ($.4 million).

Capital Expenditures

         The Company had capital  expenditures of $22.3 million in 1998 compared
to $29.4 million in 1997.  Capital  expenditures in 1998 consisted of renovation
and  refurbishment  of the Charles Town facility and racetrack  ($1.1  million),
completion of the Hazleton and  Carbondale OTW facilities  ($3.2  million),  the
purchase of the Johnstown  facility  ($1.3  million),  the purchase of the GTech
video lottery machines and central  monitoring system ($13.0 million),  and $3.7
million  in  capital   expenditures  at  other   facilities.   Depreciation  and
amortization  increased  by $1.7  million or 42.3% to $5.7  million in 1998 from
$4.0 million in 1997. The increase was due primarily to depreciation  associated
with new  facilities  for Charles  Town Gaming  (September  1997),  Charles Town
Simulcast Center (January 1998),  Hazleton and Carbondale OTW facilities  (March
1998) and Johnstown OTW (September 1998).

LIQUIDITY AND CAPITAL RESOURCES

     Historically,  the  Company's  primary  sources of  liquidity  and  capital
resources  have  been  cash  flow from  operations,  borrowings  from  banks and
proceeds from issuance of equity securities.

     Net cash provided from operating  activities was $22.5 million for the year
ended  December 31,  1999.  This  consisted of net income and non-cash  expenses
($14.3  million),  an increase in accounts  receivable  ($1.0  million) due from
other  tracks,  an  increase in accounts  payable  and accrued  expenses  due to
construction at Charles Town ($5.6 million),  an increase in purses due horsemen
($1.2 million) an increase in taxes,  other than income taxes ($1.0 million) due
to a change in payment  schedules for Pennsylvania  pari-mutuel  taxes and other
changes in certain assets and liabilities (-$.6 million).

     Cash flows used in  investing  activities  for the year ended  December 31,
1999 ($29.8 million) consisted of the Company's investment in and advance to the
New Jersey Joint Venture ($11.7 million), a cash escrow deposit for the purchase
of the Mississippi casinos ($5.0 million),  capital expenditures at Charles Town
for the  outdoors  paddock and jockey  quarters  ($.9  million),  new  temporary
structure for slot machines  ($1.8  million)  additional  gaming  machines ($4.9
million) player tracking system ($1.3 million) and other projects ($3.1 million)
and  equipment  replacement  and building  improvements  at Penn  National  ($.6
million) and Pocono Downs ($.5 million) facilities.

     Cash flows provided by financing  activities  ($9.9  million)  consisted of
borrowings  under the credit  facility  ($24.3 million) for the New Jersey Joint
Venture ($11.5 million), Charles Town expansion ($9.7 million), and to fund part
of the escrow deposit ($3.1 million) for the purchase of the Mississippi assets,
proceeds from the exercise of stock options and warrants ($.5 million). This was
offset by principal payments on long-term debt ($11.4 million),  and an increase
in  financing  costs  ($3.5  million)  for  amending  the  credit  facility  and
bondholder agreement.

     The  Company  is  subject  to  possible   liabilities   arising   from  the
environmental condition at the Landfill adjacent to Pocono Downs.  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.

     In 2000, the Company  anticipates  spending  approximately $21.5 million on
capital   expenditures  at  its  racetrack  and  OTW  facilities.   The  Company
anticipates   expending   approximately   $18.2  million  at  the  Charles  Town
Entertainment  Complex for player tracking ($.7 million),  new slot machines and
conversion kits ($2.1 million),  paddock casino and interior  renovations  ($7.4
million),  machinery and equipment  ($2.0 million) and other projects  including
structured parking facility, design and planning for a new hotel ($6.0 million).
The Company also plans to spend approximately $261,000 at Pocono Downs, $550,000
at Penn National,  $400,000 at the OTW facilities for building  improvements and
equipment  and $2.0 million on building  improvements  and equipment for its new
OTW facility in East Stroudsburg, Pennsylvania. 26
<PAGE>

         The  Company  entered  into its  Credit  Facility  with  Bankers  Trust
Company,  as Agent in 1996.  This credit  facility  was amended and  restated on
January 29, 1999 with First Union National Bank replacing Bankers Trust Company,
as Agent. The Credit Facility, as amended,  provides for a $20 million revolving
Credit Facility,  including a $3 million sub-limit for standby letters of credit
and a $5 million term loan. Under the terms of the credit facility,  as amended,
the Company  borrowed an additional  $11.5 million which was used to finance its
share of the New  Jersey  Joint  Venture  (see  Note 4).  The  revolving  credit
facility is secured by  substantially  all of the assets of the Company,  except
for the assets of the Charles Town Entertainment  Complex.  The revolving Credit
Facility provides for certain covenants,  including those of a financial nature.
The $5.0 million term loan was repaid on December  16,  1999.  At the  Company's
option,  the revolving  facility may 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 (3) 1/2 of 1% in excess of the  federal  funds rate plus an  applicable
margin of up to 2% or the  revolving  facility may also bear  interest at a rate
tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding
amount under this Credit  Facility as of December 31, 1999 was $12.9  million at
an interest rate of 8.93%.  Mandatory  repayments of 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  balance of the revolving facility and
the Company's leverage ratio.  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.

         On December 13, 1999,  the Company  entered into a $20.0 million Senior
Secured  Multiple  Draw Term Loan with Bank of  America,  as an Agent for a bank
group.  The term loan is  payable  in  quarterly  installments  of $1.3  million
principle  plus  interest.   The  loan  is  secured  by  gaming   equipment  and
improvements at the Charles Town facility.  The term loan is being used to repay
the $5.0  million  First  Union  term  loan and  finance  gaming  equipment  and
improvements at the Charles Town facility. At the Company's option the term loan
may 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 (3) 1/2 of 1% in
excess of the federal funds rate plus an applicable margin of up to 1.75% or the
facility  may also bear  interest  at a rate tied to a  eurodollar  rate plus an
applicable  margin of up to 2.75%.  The  outstanding  amount  under this  credit
facility as of December 31, 1999 was $ 9.1 million at an interest rate of 8.91%.

         On  March  23,  1999,  the  Company  signed  a new  agreement  with the
Pennsylvania  Thoroughbred  Horsemen,  replacing  the  previous  agreement  that
expired on February  16, 1999.  This new contract  will result in an increase in
future operating  expenses,  which expenses may be offset in whole or in part by
changes in revenue mix or revenue increases going forward.  These  developments,
therefore,  may decrease  earnings  before  interest,  taxes,  depreciation  and
amortization  ("EBITDA") in future periods;  however,  management  believes that
such decreases, if any, will not result in any material decrease in EBITDA.

         In connection with the Company's agreement to acquire all of the assets
of Casino Magic Bay St. Louis and  Boomtown  Biloxi,  the Company will explore a
number of financing  alternatives,  which may involve  repaying or redeeming its
existing  debt.  The Company  would expect to use part of the proceeds  from the
refinancing to make certain improvements to the Mississippi properties.

         The Company currently estimates that the cash generated from operations
and  available  borrowings  under the credit  facilities  will be  sufficient to
finance its current  operations and planned  capital  expenditure  requirements.
There can be no  assurance,  however,  that the Company  will not be required to
seek  additional  capital,  in addition  to that  available  from the  foregoing
sources.  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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of the Company's  debt  obligations at December 31, 1999 were fixed
rate obligations,  and Management,  therefore, does not believe that the Company
has any material market risk from its debt obligations.

                                       27
<PAGE>






ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
                                                            Page No.

         Report of Independent Certified Public Accountants      29
         Consolidated financial statements
             Balance sheets                                   30-31
             Statements of income                             32-33
             Statements of shareholders' equity                  34
             Statements of cash flows                         35-36
         Notes to consolidated financial statements           37-38

                                       28
<PAGE>


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, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended  December 31,  1999.  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  respects,  the  financial  position of Penn  National
Gaming,  Inc. and Subsidiaries at December 31, 1998 and 1999, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1999 in  conformity  with  generally  accepted  accounting
principles.

Philadelphia, Pennsylvania                   \s\ BDO Seidman, LLP
                                             --------------------
February 29, 2000  except                        BDO Seidman, LLP
for Note 11 which is as of
March 7, 2000

                                       29
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>

December 31,                                                                              1998           1999
                                                                                 -----------------------------
<S>                                                                                <C>           <C>
Assets

Current assets

     Cash and cash equivalents                                                     $     6,826   $      9,434
     Accounts receivable                                                                 3,840          4,779
     Prepaid expenses and other current assets                                           2,131          1,793
     Deferred income taxes                                                                 458            888
     Prepaid income taxes                                                                  859          1,088
                                                                                 -----------------------------

Total current assets                                                                    14,114         17,982
                                                                                 -----------------------------

Property, plant and equipment, at cost
     Land and improvements                                                              26,969         27,988
     Building and improvements                                                          66,918         70,870
     Furniture, fixtures and equipment                                                  29,772         36,195
     Transportation equipment                                                              527            860
     Leasehold improvements                                                              9,579          9,802
     Leased equipment under capitalized lease                                              824              -
     Construction in progress                                                            1,847          1,980
                                                                                 -----------------------------

                                                                                       136,436        147,695
     Less accumulated depreciation and amortization                                     15,684         20,824
                                                                                 -----------------------------

Net property, plant and equipment                                                      120,752        126,871
                                                                                 -----------------------------

Other assets

     Investment in and advances to unconsolidated affiliate                                  -         12,862
     Cash in escrow                                                                          -          5,000
     Excess of cost over fair market value of net assets acquired
         (net of accumulated amortization of $2,002 and $2,611,
         respectively)                                                                  22,442         21,582
     Deferred financing costs                                                            2,403          5,014
     Miscellaneous                                                                       1,087          1,289
                                                                                 -----------------------------

Total other assets                                                                      25,932         45,747
                                                                                 -----------------------------

                                                                                   $   160,798   $    190,600
                                                                                 -----------------------------
</TABLE>

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

                                       30
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>

December 31,                                                                             1998          1999
                                                                                 ---------------------------
<S>                                                                               <C>           <C>
Liabilities and Shareholders' Equity

Current liabilities

     Current maturities of long-term debt and
         capital lease obligations                                                $       168   $     5,160
     Accounts payable                                                                   6,217        10,210
     Purses due horsemen                                                                  887         2,114
     Uncashed pari-mutuel tickets                                                       1,597         1,351
     Accrued expenses                                                                   1,063         2,694
     Accrued interest                                                                     468           433
     Accrued salaries and wages                                                           752         1,098
     Customer deposits                                                                    548           800
     Taxes, other than income taxes                                                       503         1,491
                                                                                 ---------------------------
Total current liabilities                                                              12,203        25,351
                                                                                 ---------------------------

Long-term liabilities

     Long-term debt and capital lease obligations,
         net of current maturities                                                     78,088        86,053
     Deferred income taxes                                                             11,471        12,924
                                                                                 ---------------------------

Total long-term liabilities                                                            89,559        98,977
                                                                                 ---------------------------

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 15,164,080 and 15,314,175, respectively                   152           153
     Treasury stock, 424,700 shares at cost                                            (2,379)       (2,379)
     Additional paid-in capital                                                        38,025        38,527
     Retained earnings                                                                 23,238        29,971
                                                                                 ---------------------------
Total shareholders' equity                                                             59,036        66,272
                                                                                 ---------------------------
                                                                                  $   160,798   $   190,600
                                                                                 ---------------------------
</TABLE>

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

                                       31
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries
                        Consolidated Statements of Income
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
Year ended December 31,                                                         1997          1998           1999
                                                                      --------------------------------------------
<S>                                                                      <C>           <C>            <C>
Revenues
     Pari-mutuel revenues

         Live races                                                      $    27,653   $    26,893    $    20,760
         Import simulcasting                                                  59,810        68,136         71,369
         Export simulcasting                                                   5,279         5,810          4,733
     Gaming revenue                                                            5,712        37,396         55,125
     Admissions, programs and other racing revenues                            5,678         6,280          6,256
     Concessions revenues                                                      7,404         9,550         12,117
       Earnings from unconsolidated affiliates                                     -             -          1,098
                                                                      --------------------------------------------

Total revenues                                                               111,536       154,065        171,458
                                                                      --------------------------------------------

Operating expenses

     Purses, stakes and trophies                                              22,335        29,141         31,290
     Direct salaries, payroll taxes and employee benefits                     16,200        19,134         19,519
     Simulcast expenses                                                       12,982        13,809         13,422
     Pari-mutuel taxes                                                         9,506         9,281          8,895
     Lottery taxes and administration                                          1,874        14,749         21,545
     Other direct meet expenses                                               18,087        24,029         22,916
     Concessions expenses                                                      5,605         7,929         11,030
     Other operating expenses                                                  8,735        10,787         13,060
     Horsemen's action expenses                                                    -             -          1,250
     Depreciation and amortization                                             4,040         5,748          8,679
     Litigation settlement                                                         -             -          1,500
     Site development and restructuring charges                                2,437             -            535
                                                                      --------------------------------------------

Total operating expenses                                                     101,801       134,607        153,641
                                                                      --------------------------------------------

Income from operations                                                         9,735        19,458         17,817
                                                                      --------------------------------------------

Other income (expenses)
     Interest (expense)                                                       (4,591)       (8,374)        (8,667)
     Interest income                                                             935           825          1,368
     Other                                                                        (2)          113             (8)
                                                                      --------------------------------------------

Total other (expenses)                                                        (3,658)       (7,436)        (7,307)
                                                                      --------------------------------------------
</TABLE>

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

                                       32
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries
                        Consolidated Statements of Income
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
Year ended December 31,                                                         1997          1998           1999
                                                                      --------------------------------------------
<S>                                                                      <C>           <C>            <C>
Income before income taxes and extraordinary item                        $     6,077   $    12,022    $    10,510
Taxes on income                                                                2,308         4,519          3,777
                                                                      --------------------------------------------
Income before extraordinary item                                               3,769         7,503          6,733
Extraordinary item
     Loss on early extinguishment of debt,
         net of income taxes of $1,001                                         1,482             -              -
                                                                      --------------------------------------------
Net income                                                               $     2,287   $     7,503    $     6,733
                                                                      --------------------------------------------
Per share data
     Basic
         Income before extraordinary item                                $       .25   $       .50    $       .45
         Extraordinary item                                                      .10             -              -
                                                                      --------------------------------------------

         Net income                                                      $       .15   $       .50    $       .45
                                                                      --------------------------------------------
     Diluted
         Income before extraordinary item                                $       .24   $       .49    $       .44
         Extraordinary item                                                      .09             -              -
                                                                      --------------------------------------------
         Net income                                                      $       .15   $       .49    $       .44
                                                                      --------------------------------------------
Weighted shares outstanding
     Basic                                                                    14,925        15,015         14,837
     Diluted                                                                  15,458        15,374         15,196
</TABLE>

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

                                       33
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                                                 Additional
                                                 Common Stock       Treasury        Paid-In         Retained
                                             ----------------------
                                                   Shares   Amount     Stock        Capital         Earnings         Total
                                             ------------------------------------------------------------------------------
<S>                                            <C>          <C>     <C>          <C>                <C>          <C>
Balance, January 1, 1997                       13,355,290   $  134  $      -     $   14,299         $ 13,448     $ 27,881
Issuance of common stock                        1,725,000       17         -         22,914                -        22,931
Exercise of stock options and warrants             72,290        1         -            154                -           155
Tax benefit related to                                                     -
     stock options exercised                            -        -                      602                -           602
Net income for the year                                 -        -         -              -            2,287         2,287
                                             ------------------------------------------------------------------------------
Balance, December 31, 1997                     15,152,580      152         -         37,969           15,735        53,856
Exercise of stock options and warrants             11,500        -         -             56                -            56
Acquisition of treasury stock                           -        -    (2,379)             -                -        (2,379)
Net income for the year                                 -        -         -              -            7,503         7,503
                                             ------------------------------------------------------------------------------
Balance, December 31, 1998                     15,164,080      152    (2,379)        38,025           23,238        59,036
Exercise of stock options and warrants            150,095        1        -             502                -           503
Net income for the year                                 -        -        -               -            6,733         6,733
                                             ------------------------------------------------------------------------------
Balance, December 31, 1999                     15,314,175   $  153  $ (2,379)    $   38,527         $ 29,971     $  66,272
                                             ------------------------------------------------------------------------------
</TABLE>

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

                                       34
<PAGE>


                   Penn National Gaming, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>
Year ended December 31,                                                         1997          1998           1999
                                                                      --------------------------------------------
<S>                                                                      <C>           <C>            <C>
Cash flows from operating activities
     Net income                                                          $     2,287   $     7,503    $     6,733
     Adjustments to reconcile net income to net cash
         provided by operating activities
              Depreciation and amortization                                    4,040         5,748          8,679
              Write-off of deferred financing costs                                -           376              -
              Income from unconsolidated affiliates                                -             -         (1,098)
              Extraordinary loss relating to early
                  extinguishment of debt, before income
                  tax benefit                                                  2,483             -              -
              Deferred income taxes (benefit)                                    (97)          390          1,023
              Decrease (increase) in
                  Accounts receivable                                          2,036        (1,583)          (939)
                  Prepaid expenses and other current assets                      111          (690)           338
                  Prepaid income taxes                                        (3,003)        2,144           (229)
                  Miscellaneous other assets                                    (258)         (463)          (202)
              Increase (decrease) in
                  Accounts payable                                             2,339        (1,188)         3,993
                  Purses due horsemen                                         (1,421)          887          1,227
                  Uncashed pari-mutuel tickets                                   168            93           (246)
                  Accrued expenses                                             1,155        (1,364)         1,631
                  Accrued interest                                               225           142            (35)
                  Accrued salaries and wages                                     306           (61)           346
                  Customer deposits                                               50            78            252
                  Taxes, other than income taxes                                 257          (146)           988
                                                                      --------------------------------------------
Net cash provided by operating activities                                     10,678        11,866         22,461
                                                                      --------------------------------------------
Cash flows from investing activities
     Expenditures for property, plant and equipment                          (29,196)      (22,333)       (13,243)
     Acquisition of business, net of cash acquired                           (18,248)            -              -
     (Increase) in prepaid acquisition costs                                    (176)            -              -
       Investment in and advances to unconsolidated affiliate                      -             -        (11,764)
       Cash in escrow                                                              -             -         (5,000)
       Other                                                                       -             -            251
                                                                      --------------------------------------------
Net cash (used in) investing activities                                      (47,620)      (22,333)       (29,756)
                                                                      --------------------------------------------
</TABLE>

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

                                       35
<PAGE>



                   Penn National Gaming, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>
Year ended December 31,                                                         1997          1998           1999
                                                                      --------------------------------------------
<S>                                                                      <C>           <C>            <C>
Cash flows from financing activities
     Proceeds from sale of common stock                                  $    23,086   $        56    $       503
     Acquisition of treasury stock                                                 -        (2,379)             -
     Tax benefit related to stock options exercised                              602             -              -
     Proceeds from long-term debt                                            111,167         9,000         24,350
     Principal payments on long-term debt
         and capital lease obligations                                       (78,348)      (11,080)       (11,393)
     (Increase) in unamortized financing costs                                (3,345)         (158)        (3,557)
                                                                      --------------------------------------------
Net cash provided by (used in) financing activities                           53,162        (4,561)         9,903
                                                                      --------------------------------------------
Net (decrease) increase in cash and cash equivalents                          16,220       (15,028)         2,608
Cash and cash equivalents at beginning of period                               5,634        21,854          6,826
                                                                      --------------------------------------------
Cash and cash equivalents at end of period                               $    21,854   $     6,826    $     9,434
                                                                      --------------------------------------------
</TABLE>

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

                                       36
<PAGE>

1.      Summary of                 Basis of Presentation
        Significant
        Accounting
        Policies

               The  consolidated  financial  statements  include the accounts of
               Penn National Gaming, Inc. and its subsidiaries (collectively the
               "Company").    All   significant    intercompany   accounts   and
               transactions have been eliminated in consolidation. Certain prior
               years'  amounts  have been  reclassified  to  conform to the 1999
               presentation.

               Description of Business

               The Company provides pari-mutuel  wagering  opportunities on live
               and  simulcast  thoroughbred  and  harness  horse  races  at  two
               racetracks and ten off-track wagering facilities ("OTWs") located
               in Pennsylvania and pari-mutuel wagering  opportunities and video
               gaming  machines at Charles  Town Races,  the  Company's  Charles
               Town, West Virginia  thoroughbred  racetrack.  The Company's sole
               operating segment is gaming activities.

               At each of its three racetracks, the Company conducts pari-mutuel
               wagering on  thoroughbred  and harness  races from the  Company's
               racetracks and simulcasts from other racetracks. The Company also
               simulcasts  its Penn  National Race Course and Pocono Downs races
               for  wagering  at  other  racetracks  and  OTWs,   including  all
               Pennsylvania   racetracks   and   OTWs  and   locations   outside
               Pennsylvania.  Wagering on Penn  National  Race Course and Pocono
               Downs races and races simulcast from other racetracks also occurs
               through the Company's Pennsylvania  racetracks' telephone account
               betting network.

               Glossary of Terminology

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

               The  Company's  racetracks  -  Penn  National  Race  Course  near
               Harrisburg,   Pennsylvania,   Pocono  Downs  near   Wilkes-Barre,
               Pennsylvania  and  Charles  Town  Races  in  Charles  Town,  West
               Virginia.

               Gaming machines - Video lottery terminal and coin operated gaming
               machines.

               OTW - Off-track wagering location.

               Pari-mutuel wagering - All wagering at the Company's  racetracks,
               at the Company's OTWs and all wagering on the Company's  races at
               other racetracks and OTWs.

               Telebet - Telephone account wagering.

               Totalisator  services - Computer services provided to the Company
               by  various  totalisator  companies  for  processing  pari-mutuel
               betting odds and wagering proceeds. 37
<PAGE>

               Pari-mutuel revenues -

               Live races - The Company's share of pari-mutuel  wagering on live
               races within  Pennsylvania  and West Virginia and certain  stakes
               races from racetracks  outside of Pennsylvania  and West Virginia
               after payment of the amount returned as winning wagers.

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

               Export   simulcasting  -  The  Company's  share  of  wagering  at
               out-of-state locations on live races conducted by the Company.

               Gaming revenue - The Company's  share of net winnings from gaming
               wins and losses.

A summary of pari-mutuel wagering for the periods indicated is as follows:
<TABLE>
<CAPTION>

   Year ended December 31,                     1997           1998           1999
   -------------------------------------------------------------------------------

                                                      (in thousands)
<S>                                     <C>           <C>            <C>
   Pari-mutuel wagering on
       the Company's live races         $   128,090   $    122,686   $     96,238
   Pari-mutuel wagering on
       simulcasting
       Import simulcasting from
            other racetracks                298,459        336,191        345,650
       Export simulcasting to out
            of Pennsylvania
            wagering facilities             176,287        194,772        159,175
                                     ---------------------------------------------
   Total pari-mutuel wagering           $   602,836   $    653,649   $    601,063
                                     ---------------------------------------------
</TABLE>

    Racing Meet

    The racing  seasons  for the past three years
    consisted  of the  following  number  of live
    race days:

  Year ended December 31,          1997          1998            1999
  --------------------------------------------------------------------
  Penn National Race Course         212           206             153
  Pocono Downs                      134           135             130
  Charles Town Races                159           206             213
                                       38
<PAGE>

               Depreciation and Amortization

               Depreciation of property, plant 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  1997,  1998 and 1999,  amounted  to  $3,193,000,
               $4,705,000, and $7,124,000, 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 1997, 1998 and 1999, amounted to
               $578,000,  $613,000,  and  $609,000,  respectively.  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  reviews the carrying  values of its  long-lived  and
               identifiable  intangible assets for possible  impairment whenever
               events or changes in  circumstances  indicates  that the carrying
               amount of the assets may not be recoverable based on undiscounted
               estimated  future  operating cash flows. As of December 31, 1999,
               the Company has determined that no impairment has occurred.

               Income Taxes

               The Company  recognizes  deferred tax  liabilities and assets for
               the  expected  future tax  consequences  of events that have been
               recognized in the 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.

               Customer Deposits

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

               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.

               Net Income Per Common Share

               Basic net income per share includes no dilution and is calculated
               by dividing net income by the weighted  average  number of common
               shares outstanding for the period.  Dilutive net income per share
               reflects the potential dilution of securities that could share in
               the net income of the Company  which consist of stock options and
               warrants (using the treasury stock method).

               Deferred Financing Costs

               Deferred  financing  costs  which are  incurred by the Company in
               connection  with debt are charged to operations  over the life of
               the underlying indebtedness using the interest
                                       39
<PAGE>

               method adjusted to give effect to any early repayments.  In 1999,
               the  Company  paid a consent  fee to the  holders of its  10.625%
               Senior  Notes in the amount of  $2,243,000  for  approval  of its
               investment  in  the  New  Jersey  Joint  Venture  (see  Note  3).
               Amortization of deferred financing costs for 1997, 1998 and 1999,
               amounted to $269,000, $430,000, and $946,000, respectively.

               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 money market and tax-free bond funds which are exposed
               to minimal  interest  rate and credit risk. At December 31, 1999,
               the Company had bank deposits  which exceeded  federally  insured
               limits by approximately  $5,235,000 and money market and tax-free
               bond funds of  approximately  $400,000.  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  racetracks and their OTWs.
               Historically,  the  Company  has  not  incurred  any  significant
               credit-related losses.

               Fair Value of Financial Instruments

               The following  methods and  assumptions  are 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 revenue and expenses at the reporting period.
               Actual results could differ from those estimates.

               Recent Accounting Pronouncements

               In June 1998,  the Financial  Accounting  Standards  Board issued
               Statement of Financial  Accounting Standards No. 133, "Accounting
               for Derivative  Instruments" ("SFAS 133 as amended by SFAS 137").
               SFAS 137 delays the effective date of  implementation of SFAS 133
               by one year. SFAS 133 establishes accounting and
                                       40

<PAGE>

               reporting  standards for derivative  instruments  and for hedging
               activities.  SFAS  133  requires  that an  entity  recognize  all
               derivatives  as either  assets or  liabilities  and measure those
               instruments at fair market value. Presently, the Company does not
               use  derivative  instruments  either in hedging  activities or as
               investments.  Accordingly,  the Company believes that adoption of
               SFAS 133 will have no impact on its financial position or results
               of operations.

               The  Company  has no  comprehensive  income  items as  defined in
               Statement of Financial  Accounting  Standards No. 130, "Reporting
               Comprehensive Income".

<TABLE>
<CAPTION>

2.      Long-Term Debt             Long-term debt and capital lease obligations are as follows:
        and Capital Lease
        Obligations

                                  December 31,                                                1998         1999
                                                                                      --------------------------
                                                                                                 (In thousands)
<S>                               <C>                                                    <C>          <C>

                                  Long-term debt
                                       $80 million Senior Notes,

                                         due December 15, 2004 with interest at
                                         10.625% per annum payable semi-annually.
                                         The notes are unsecured and are
                                         unconditionally guaranteed by certain
                                         subsidiaries of the Company.
                                                                                         $  69,000    $  69,000

                                       Revolving credit facility payable to a bank
                                         group (see additional information below
                                         under Credit Facilities).                           9,000       12,900

                                       Term loan payable to a bank group due
                                         on December 31, 2002 with interest at
                                         various rates. This note is secured by certain
                                         assets of the Company (see additional
                                         information below  under Term Loan).                    -        9,100

                                       Other notes payable                                     246          213

                                  Capital lease obligations                                     10            -
                                                                                      --------------------------
                                                                                            78,256       91,213
                                  Less current maturities                                      168        5,160
                                                                                      --------------------------
                                                                                         $  78,088    $  86,053
                                                                                      --------------------------
</TABLE>

               Credit Facilities

               On January 28, 1999, the Company entered into a second  amendment
               and restatement of the Credit Facility.  The Credit Facility,  as
               amended,  provides for a $20 million  revolving  credit facility,
               including a $3 million  sublimit  for standby  letters of credit,
               which matures in December 2002 and a $5 million term loan.  Under
               the  terms  of the  Credit  Facility,  as  amended,  the  Company
               borrowed an additional  $11.5 million,  of which $11.2 million of
               the  proceeds  was used to  finance  its share of the New  Jersey
               Joint  Venture  (see Note 3). The  revolving  credit  facility is
               secured by substantially all of the assets of the Company, except
               for the assets of the Charles Town facility. The revolving credit
               facility  provides for certain  covenants,  including  those of a
               financial  nature.  The $5.0  million  term  loan was  repaid  on
               December 16, 1999. 41
<PAGE>

               At the Company's option, the revolving facility may 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
               (3)  1/2 of 1% in  excess  of the  federal  funds  rate  plus  an
               applicable margin of up to 2% or the revolving  facility may also
               bear  interest  at a rate  tied  to a  eurodollar  rate  plus  an
               applicable margin of up to 3%. The outstanding  amount under this
               credit  facility as of December 31, 1999 was $12.9  million at an
               interest rate of 8.93%.

               Mandatory repayments of 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 balance
               of the  revolving  facility  and the  Company's  leverage  ratio.
               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.

               At December  31,  1999,  the Company was  contingently  obligated
               under letters of credit with face amounts aggregating $2,015,000.
               This  amount  includes  $1,786,000  relating  to  the  horsemens'
               account  balances,  and  $100,000  for  Pennsylvania  pari-mutuel
               taxes.

               Term Loan

               On December  13, 1999 the Company  entered  into a $20.0  million
               Senior  Secured  Multiple  Draw Term Loan with Bank of America as
               Agent for a bank  group.  The term loan is payable  in  quarterly
               installments of $1.3 million principal plus interest. The loan is
               secured by gaming  equipment and improvements at the Charles Town
               Entertainment  Complex. At the Company's option the term loan may
               bear  interest  at the  highest of  (1)1/2of  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 (3)1/2of 1% in excess of the federal  funds rate
               plus an applicable margin of up to 1.75% or the facility may also
               bear  interest  at a rate  tied  to a  eurodollar  rate  plus  an
               applicable  margin of up to 2.75%.  The outstanding  amount under
               this credit facility as of December 31, 1999 was $ 9.1 million at
               an interest rate of 8.91%.

               Debt Offering

               On December 12, 1997, the Company and certain of its subsidiaries
               (as  guarantors)  entered into a purchase  agreement for the sale
               and issuance of  $80,000,000  aggregate  principal  amount of its
               10.625% Senior Notes due 2004 (the "Offering").  The net proceeds
               of the Offering were used for repayment of existing indebtedness,
               for  capital  expenditures  and for general  corporate  purposes.
               Interest  on the notes will  accrue  from their date of  original
               issuance  (the "Issue  Date") and will be payable  semi-annually,
               and commenced in 1998. The notes will be redeemable,  in whole or
               in part,  at the option of the Company in 2001 or  thereafter  at
               the redemption prices set forth in the Offering, plus accrued and
               unpaid interest to the date of redemption.

               The notes are general unsecured senior obligations of the Company
               and rank  equally in right of payment to any  existing and future
               unsubordinated indebtedness of the Company and senior in right of
               payment with
                                       42
<PAGE>

               all existing and future subordinated indebtedness of the Company.
               The notes are unconditionally  guaranteed (the "Guarantees") on a
               senior basis by certain of the  Company's  existing  subsidiaries
               (the  "Subsidiary   Guarantors").   The  Guarantees  are  general
               unsecured  obligations  of the  Subsidiary  Guarantors  and  rank
               equally in right of payment to any unsubordinated indebtedness of
               the Subsidiary  Guarantors and rank senior in right of payment to
               all other subordinated  obligations of the Subsidiary Guarantors.
               The notes are effectively subordinated in right of payment to all
               secured  indebtedness  of  the  Company,  including  indebtedness
               incurred under the amended $20 million revolving credit facility.

               On September 3, 1998, the Company  repurchased $11 million of the
               10.625%  Senior Notes due 2004 at 97.25% of the principal  amount
               ($10,697,500)  plus accrued interest of $253,229 in public market
               trading.  In conjunction  with the  repurchase of the notes,  the
               Company   recorded  a  write-off  of  deferred   financing  costs
               associated   with  this  portion  of  the  long-term   debt.  The
               extinguishment  of these notes did not result in any material net
               loss.

                                   The following is a schedule of future minimum
                                   repayments  of long-term  debt as of December
                                   31, 1999:

                                  December 31,

                                                               (In thousands)

                                      2000                       $      5,160
                                      2001                              4,138
                                      2002                             12,915
                                      2003                                  -
                                      2004                             69,000
                                                                 -------------
                                  Total minimum payments               91,213
                                  Current maturities                    5,160
                                                                 -------------
                                  Total noncurrent maturities    $     86,053
                                                                 -------------

3.      Commitments
        and
        Contingencies

               Operating Agreements

               In November 1997, the Company signed a new  Totalisator  services
               and equipment  agreement for all of its  subsidiaries.  Effective
               November 1, 1999 the terms of the  contract  were amended and the
               contract was extended through May 31, 2005. The amended agreement
               provides for annual  payments based on a specified  percentage of
               the total  amount  wagered at the  Company's  facilities  with no
               minimum annual payment.

               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 $807,000,
               $1,169,000, and $1,296,000 for the years ended December 31, 1997,
               1998, and 1999, respectively.

                                   The  future  lease  commitments  relating  to
                                   noncancelable operating leases as of December
                                   31, 1999 are as follows:

                                                                 (In thousands)

                                      2000                          $   1,468
                                      2001                              1,387
                                      2002                              1,218
                                      2003                              1,124
                                      2004                              1,069
                                        Thereafter                      1,794
                                                                      --------
                                                                    $   8,060
                                                                      --------
                                       43

<PAGE>

               On February 26, 1996,  the Company  entered into a joint  venture
               agreement   (the  "Charles  Town  Joint   Venture")  with  Bryant
               Development Company and its affiliates ("Bryant"),  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
               Entertainment  Complex")  in  Jefferson  County,  West  Virginia.
               Bryant had acquired its option from  Showboat  Operating  Company
               ("Showboat").  Showboat  has  retained an option  (the  "Showboat
               Option") to operate any casino at the Charles Town  Entertainment
               Complex in return for a management  fee (to be  negotiated at the
               time, based on rates payable for similar  properties) and a right
               of first  refusal to  purchase or lease the site of any casino at
               the Charles Town  Entertainment  Complex 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  under the  Showboat  Option  extend for a
               period of five years  from  November  6, 1996,  the date that the
               Charles Town Joint  Venture  exercised its option to purchase the
               Charles Town Races, and expires  thereafter unless legislation to
               permit  casino gaming at the Charles Town  Entertainment  Complex
               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  express  terms of the  Showboat  Option do not specify
               which activities at the Charles Town Entertainment  Complex would
               constitute  operation  of a casino,  Showboat has agreed that the
               installation  and  operation  of  gaming  devices  linked  to the
               lottery  (like the gaming  machines the Company has installed and
               will  continue  to install)  at the  Charles  Town  Entertainment
               Complex's   racetrack  would  not  trigger  Showboat's  right  to
               exercise the Showboat Option.

               Pursuant  to the terms of the  Pocono  Downs  purchase  agreement
               dated  November 27, 1996, 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  would be
               payable  in annual  installments  of $2 million  for five  years,
               beginning  on  the  date  that  the  Company  first  offers  such
               additional form of gaming.

               Profit Sharing Plans

               The Company has a profit  sharing  plan under the  provisions  of
               Section  401(k) of the  Internal  Revenue  Code,  called The Penn
               National  Gaming,  Inc.  Profit  Sharing Plan (the "Penn National
               401(k)  Plan")  that  cover all  eligible  employees  who are not
               members of a bargaining unit. The plan enables employees choosing
               to participate to defer a portion of their salary in a retirement
               fund  to  be   administered   by  the  Company.   The   Company's
               contributions  to the Penn National 401(k) Plan are set at 50% of
               employees  elective  salary  deferrals  which may be made up to a
               maximum of 6% of  employee  compensation  for  employees  of Penn
               National  Race Course and Pocono  Downs.  Charles Town  employees
               receive an annual  employer  contribution  based on an allocation
               formula  that  is  derived  from  a  total   retirement   expense
               calculated  as .25% of the daily mutual handle and .5% of the net
               44

<PAGE>

               video lottery  revenues.  The Company made  contributions  to the
               plan of approximately  $145,000,  $172,000 and $169,000,  for the
               years ended December 31, 1997, 1998 and 1999, respectively.

               The  Company  also has a defined  contribution  plan  called  the
               Charles  Town  Races  Future  Service  Retirement  Plan  covering
               substantially  all of its union  employees.  Charles  Town  makes
               monthly  contributions equal to the amount accrued for retirement
               expense,  which is  calculated as .25% of the daily mutual handle
               and .5% of the net video lottery  revenues.  Total  contributions
               for the  years  ended  December  31,  1997,  1998 and  1999  were
               $114,000, $185,000 and $239,000, respectively.

               OTW and Operating Facilities

               On  July On July  14,  1998,  the  Company  entered  into a lease
               agreement for an OTW facility in East  Stroudsburg.  The lease is
               for approximately 14,000 square feet at the Eagle's Glen Shopping
               Plaza located in East Stroudsburg, Pennsylvania. The initial term
               of the  lease  is for ten  years  with two  additional  five-year
               renewal  options  available.  On  November  6, 1998,  the Company
               submitted  its  application  for  approval  by  the  Pennsylvania
               Harness  Racing  Commission.   The  Pennsylvania  Harness  Racing
               Commission  approved the  application  on February 23, 1999.  The
               Company  was denied  building  and  zoning  permits by the zoning
               office of the  Borough  of East  Stroudsburg  and  filed  suit on
               November  13, 1998 to obtain the permits.  On May 17,  1999,  the
               Court of Common  Pleas of  Monroe  County  granted  a  peremptory
               judgment in favor of the  Company  that  directed  the Borough of
               East  Stroudsburg  and its zoning  officer to issue the  required
               building and zoning  permits to construct the OTW  facility.  The
               Company  started  construction  on the  $2  million  facility  in
               February 2000 with a projected opening date in the second quarter
               of 2000.

               On March 23,  1999,  the Company  entered  into a new  four-year,
               nine-month  purse  agreement with the  Horsemen's  Benevolent and
               Protection  Association,  which  represents  the  horsemen at the
               Company's  Penn  National  Race Course  facility  in  Grantville,
               Pennsylvania. The agreement ended an action by the horsemen which
               began on  February  16,  and  caused  the  Company  to close Penn
               National Race Course and its six affiliated  OTWs. As a result of
               the  action  the  Company  incurred  a  non-recurring  $1,250,000
               expense,  primarily  related to costs  incurred to  maintain  the
               closed  facilities  inclusive of employee salaries and rents, for
               Horsemen's Action Expense. The initial term of the agreement ends
               on January 1, 2004 and automatically  renews for another two year
               period, without change, unless notice is given by either party at
               least ninety days prior to the end of the initial term. 45
<PAGE>
               On June 30,  1999,  all the race  tracks  in West  Virginia  (the
               "Tracks"),   entered  into  a  hardware  and  software   purchase
               agreement (the  "Agreement") with  International  Game Technology
               ("IGT"),  for the purchase of a new video lottery central control
               computer  system.  The  aggregate  cost of the new system is $5.5
               million of which PNGI Charles Town Gaming LLC is obligated to pay
               $1.4 million.  On July 22, 1999, the Company submitted a check in
               the amount of $257,000 as the initial deposit and issued a letter
               of credit in the amount of  $1,156,000  to secure  the  remaining
               payments  due. In  addition,  the Tracks  agreed to  collectively
               acquire from IGT at least one thousand video lottery terminals by
               September  30,  1999.   (Charles  Town  is  to  acquire  400  new
               terminals).  The Agreement also requires each track to pay to IGT
               the sum of $7.50 per  terminal,  per day for each  video  lottery
               terminal  offering  progressive  games  operated  through the IGT
               central  system.  Installation  of the  new  central  system  was
               substantially complete on December 31, 1999.

               On December 17, 1999,  the Company  entered into a new three-year
               purse  agreement  with  the   Pennsylvania   Harness   Horsemen's
               Association,  Inc.  which  represents the owners,  trainers,  and
               drivers at the  Company's  The Downs  Racing,  Inc.  facility  in
               Wilkes-Barre,  Pennsylvania.  The contract term begins on January
               16, 2000 and ends on January 15, 2003.

               Mississippi Agreement

               On December 10,  1999,  the Company  entered into two  definitive
               agreements  to  purchase  all of the assets of the  Casino  Magic
               hotel,  casino, golf resort,  recreational  vehicle (RV) park and
               marina in Bay St.  Louis,  Mississippi  and the  Boomtown  Biloxi
               casino in Biloxi, Mississippi, from Pinnacle Entertainment,  Inc.
               formerly  Hollywood Park, Inc.  (NYSE:PNK) for $195 million which
               are contingent  upon each other.  In addition to acquiring all of
               the operating  assets and related  operations of the Casino Magic
               Bay St. Louis and Boomtown  Biloxi  properties,  the Company will
               enter into a licensing  agreement  to use the Boomtown and Casino
               Magic  names  and marks at the  properties  being  acquired.  The
               transaction is subject to certain  closing  conditions  including
               the approval of the Mississippi Gaming Commission,  financing and
               expiration of the applicable Hart-Scott-Rodino waiting period. As
               part of the  agreement,  the Company paid a deposit of $5 million
               to an escrow account,  which is refundable if certain  conditions
               are  not  met.  In  connection  with  financing  the  Mississippi
               acquisition,  the  Company  will  explore a number  of  financing
               alternatives,   which  may  include  repaying  or  redeeming  its
               existing debt.

               New Jersey Joint Venture

               On January 28,  1999,  pursuant to a First  Amendment to an Asset
               Purchase  Agreement  by and  among  Greenwood  New  Jersey,  Inc.
               ("Greenwood"),  International  Thoroughbred Breeders Inc., Garden
               State Race Track,  Inc.,  Freehold Racing  Association,  Atlantic
               City Harness,  Inc. and Circa 1850, Inc., the original parties to
               an Asset Purchase  Agreement entered into as of July 2, 1998, and
               the Company (the "Agreement"),  and pursuant to which the Company
               entered  into a joint  venture  ("Joint  Venture"),  the Company,
               along  with its  Joint  Venture  partner,  Greenwood,  agreed  to
               purchase  certain  assets  of the  Garden  State  Race  Track and
               Freehold Raceway, both located in New Jersey (the "Acquisition").
                                       46
<PAGE>

               The purchase  price for the  Acquisition  was  approximately  $46
               million  (subject to reduction  of certain  disputed  items,  for
               which  amounts have been placed in escrow).  The  purchase  price
               consisted of $23 million in cash and $23 million  pursuant to two
               deferred  purchase  price  promissory  notes in the amount of $22
               million and $1 million  each. On July 29, 1999,  after  receiving
               the necessary approvals from the New Jersey Racing Commission and
               the  necessary  consents  from the holders of its 10.625%  Senior
               Notes due 2004, Series B, the Company completed its investment in
               the Joint Venture,  pursuant to which  Pennwood,  Inc. was formed
               with  Greenwood New Jersey,  Inc. (a  wholly-owned  subsidiary of
               Greenwood  Racing,  Inc.  the  owner of  Philadelphia  Park  Race
               Track).  Pursuant  to the Joint  Venture  Agreement,  the Company
               agreed to guarantee severally: (i) up to 50% of the obligation of
               the Joint Venture under its Put Option  Agreement ($17.5 million)
               with Credit  Suisse First Boston  Mortgage  Capital LLC ("CSFB");
               (ii) up to 50% of the Joint Venture obligation for the seven year
               lease at Garden State Park;  (iii) up to 50% of the Joint Venture
               obligation to International  Thoroughbred Breeders,  Inc. for the
               contingent  purchase price notes ($10.0 million)  relating to the
               operation,  subject to passage by the New Jersey legislature,  by
               the Joint Venture of OTWs and telephone  wagering accounts in New
               Jersey. In conjunction with the closing, the Company entered into
               a Debt Service Maintenance Agreement with Commerce Bank, N.A. for
               the  funding  of a $23.0  million  credit  facility  to the Joint
               Venture.  The  Joint  Venture  Agreement  provides  for a limited
               obligation of the Company of $11.5 million subject to limitations
               provided for in the Company's 10.625% Senior Notes Indenture. The
               Company's  investment in the Joint Venture is accounted for under
               the equity method,  original investments are recorded at cost and
               adjusted by the Company's  share of income or losses of the Joint
               Venture.  The income from July 30, 1999 through December 31, 1999
               of the Joint  Venture is included  in earnings of  unconsolidated
               affiliates in the accompanying  Consolidated Statements of Income
               for the year ended December 31, 1999.

                                     Summarized  balance sheet  information  for
                                     the Joint  Venture as of December  31, 1999
                                     is as follows (in thousands):
<TABLE>
<S>                              <C>                                                 <C>
                                 Current assets                                       $    7,324
                                 Property, plant and equipment, net                       30,786
                                 Other                                                    18,158
                                                                                    -------------
                                 Total assets                                         $   56,268
                                                                                    =============
                                 Current liabilities                                  $    7,453
                                 Long-term liabilities                                    46,221
                                 Members' equity                                           2,594
                                                                                    -------------
                                 Total liabilities and members' equity                $   56,268
                                                                                    =============

</TABLE>
                                       47
<PAGE>



                                    Summarized  results  of  operations  of  the
                                    unconsolidated  Joint Venture (commencing on
                                    July 30,  1999) for the year ended  December
                                    31, 1999 is as follows (in thousands):

                                 Revenues                      $   27,982
                                                             -------------
                                 Operating expenses                23,005
                                                             -------------
                                 EBITDA*                            4,977
                                                             -------------
                                 Net Income                         2,196
                                                             -------------

     * Earnings before interest, depreciation, taxes, and amortization.
<TABLE>
<CAPTION>

4.      Income Taxes              The provision for income taxes charged to operations was as follows:

                                  Year ended December 31,                        1997         1998         1999
                                  ------------------------------------------------------------------------------
                                                                                                 (in thousands)
<S>                               <C>                                       <C>          <C>          <C>
                                  Current tax expense

                                      Federal                               $   2,006    $   3,374    $   2,759
                                      State                                       399          755          108
                                                                              ----------------------------------
                                  Total current                                 2,405        4,129        2,867
                                                                              ----------------------------------
                                  Deferred tax expense (benefit)
                                      Federal                                     (56)         378         (317)
                                      State                                       (41)          12        1,227
                                                                              ----------------------------------
                                  Total deferred                                  (97)         390          910
                                                                              ----------------------------------
                                  Total provision                           $   2,308    $   4,519    $   3,777
                                                                              ----------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                  Deferred tax assets and liabilities are comprised of the following:

                                  December 31,                                                1998         1999
                                                                                      --------------------------
<S>                               <C>                                                    <C>          <C>
                                  Deferred tax assets
                                      Reserve for debit balances of
                                      horsemens' accounts, bad debts
                                      restructuring charges and
                                      litigation                                         $     458    $     888
                                                                                      --------------------------
                                  Deferred tax liabilities
                                      Property, plant and equipment                      $  11,471    $  12,924
                                                                                      --------------------------

</TABLE>

                                       48
<PAGE>



The following is a  reconciliation  of the statutory  federal income tax rate to
the actual effective income tax rate for the following periods:
<TABLE>
<CAPTION>

                                  Year ended December 31,                            1997       1998       1999
                                                                             --------------------------------------
<S>                               <C>                                                <C>        <C>        <C>
                                  Percent of pretax income
                                      Federal tax rate                               34.0 %     34.0 %     34.0 %
                                      Increase in taxes resulting from
                                           state and local income taxes,
                                           net of federal tax benefit                 3.9        4.2        2.0
                                      Permanent difference relating to
                                           amortization of goodwill                    .9         .4         .2
                                      Other miscellaneous items                       (.8)      (1.0)       (.3)
                                                                             --------------------------------------
                                                                                     38.0 %     37.6 %     35.9 %
                                                                             --------------------------------------
</TABLE>

5.      Supplemental
        Disclosures of
        Cash Flow
        Information

                    Cash  paid  during  the year for  interest  was  $4,346,000,
                    $8,192,000   and   $8,742,000   in  1997,   1998  and  1999,
                    respectively.

                    Cash paid during the year for income  taxes was  $3,649,000,
                    $4,207,000,   and   $2,970,000  in  1997,   1998  and  1999,
                    respectively.


     6. Common  Stock

                    On February  18,  1997,  the  Company  completed a secondary
                    public offering of 1,725,000 shares of its common stock. The
                    net  proceeds of $23 million were used to reduce $19 million
                    of the  Term  Loan  amounts  outstanding  under  the  Credit
                    Facility  with the balance of the proceeds used to finance a
                    portion of the cost of the refurbishment of the Charles Town
                    Entertainment Complex (see Note 2 for Acquisitions).

                    In 1998, the Company  purchased 424,700 shares of its common
                    stock in public  market  trading.  The  total  cost of these
                    transactions  was  $2,378,465  or $5.60  per  share  average
                    price.

                    In  April  1994,  the  Company's   Board  of  Directors  and
                    shareholders adopted and approved the Stock Option Plan (the
                    "Plan").  On April 30, 1997, the  shareholders and the Board
                    of   Directors   approved  an  increase  in  the  number  of
                    authorized  shares  underlying  stock  options to be granted
                    from  1,290,000 to  2,000,000  shares.  Therefore,  the Plan
                    permits  the grant of options to  purchase  up to  2,000,000
                    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 an 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
                    nonqualified  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.

                                       49
<PAGE>

                    Stock  options  that  expire  between  August  20,  2000 and
                    January 4, 2009 have been granted to officers and  directors
                    to purchase  Common  Stock at prices  ranging  from $3.33 to
                    $17.63 per share.  All options and warrants  were granted at
                    market prices at date of grant. The following table contains
                    information  on stock options  issued under the Plan for the
                    three-year period ended December 31, 1999:
<TABLE>
<CAPTION>

                                                                          Exercise
                                                     Option            Price Range      Average
                                                     Shares              Per Share        Price

                                                 ------------------------------------------------
<S>               <C>                              <C>             <C>                    <C>

                  Outstanding at
                      January 1, 1997                979,750       $  3.33 to 17.63       $ 9.10
                  Granted                            100,000         11.50 to 16.63        15.59
                  Exercised                          (39,250)          3.33 to 5.63         4.01
                                                 ------------------------------------------------
                  Outstanding at
                      December 31, 1997            1,040,500          3.33 to 17.63         7.31
                  Granted                            195,000          6.44 to 15.50         9.06
                  Exercised                          (11,500)          3.33 to 5.63         4.88
                  Canceled                           (39,500)         5.63 to 15.50        13.36
                                                 ------------------------------------------------
                  Outstanding at
                      December 31, 1998            1,184,500          3.33 to 17.63         9.50
                  Granted                            144,500           6.88 to 9.13         6.98
                  Exercised                          (27,000)                  5.63         5.63
                  Canceled                           (31,750)         5.63 to 15.50        13.40
                                                 ------------------------------------------------
                  Outstanding at
                        December 31, 1999          1,270,250       $  3.33 to 17.63       $ 7.27
                                                 ------------------------------------------------
</TABLE>

                    In addition, 300,000 Common Stock options were issued to the
                    Chairman outside the Plan on October 23, 1996. These options
                    were issued at $17.63 per share and are exercisable  through
                    October 23, 2006.
<TABLE>
<CAPTION>

                                   Exercisable at year-end:
                                                                                       Exercise        Weighted

                                                                Option              Price Range         Average
                                                                Shares                Per Share           Price

                                                          ------------------------------------------------------
<S>                               <C>                        <C>          <C>                     <C>
                                  1997                         653,833    $       3.33 to 17.63   $        7.08
                                  1998                       1,034,666            3.33 to 17.63            8.36
                                  1999                       1,242,625            3.33 to 17.63            9.49
                                                          ------------------------------------------------------

                                  Options available for future grant:                                1994 Plan
                                                                                                  -------------
                                  1999                                                                 541,750
                                                                                                  -------------

</TABLE>

                                       50
<PAGE>



                    The  following  table  summarizes  information  about  stock
                    options outstanding at December 31, 1999
<TABLE>
<CAPTION>

                                                                                 Ranges                 Total
                                                                    --------------------------------------------
<S>                               <C>                                 <C>           <C>             <C>

                                                                             $3.33          $5.58         $3.33
                                  Range of exercise prices                to $5.50      to $17.63     to $17.63
                                                                    --------------------------------------------

                                  Outstanding options
                                      Number outstanding at
                                           December 31, 1999               637,250        933,000     1,570,250
                                      Weighted average remaining
                                           contractual life (years)           3.84           5.94          5.09
                                      Weighted average exercise
                                           price                      $       3.84  $       12.94   $      9.25

                                  Exercisable options
                                      Number outstanding at
                                           December 31, 1999               637,250        605,375     1,242,625
                                      Weighted average exercise
                                           price                      $       3.84  $       15.44   $      9.49
</TABLE>

                    Warrants were granted to the  underwriters  of the Company's
                    initial  public  offering  at a price of $4.00 per share and
                    were all  exercised  prior to  their  expiration  on June 2,
                    1999.

                                  A summary of the warrant transactions follows:
<TABLE>
<CAPTION>

                                                                                      Exercise
                                                                                         Price         Weighted
                                                                       Warrant           Range          Average
                                                                        Shares       Per Share            Price
                                                                   ---------------------------------------------
<S>                               <C>                                  <C>            <C>              <C>
                                  Warrants outstanding at
                                      January 1, 1997                  195,000        $   4.00         $   4.00
                                  Warrants exercised                   (43,000)           4.00             4.00
                                                                   ---------------------------------------------

                                  Warrants outstanding at
                                      December 31, 1997                152,000            4.00             4.00
                                  Warrants exercised                    (3,000)           4.00             4.00
                                                                   ---------------------------------------------

                                  Warrants outstanding
                                      at December 31, 1998             149,000            4.00             4.00
                                  Warrants exercised                  (149,000)           4.00             4.00
                                                                   ---------------------------------------------
                                  Warrants outstanding at
                                           December 31, 1999                 -
                                                                   ---------------------------------------------
</TABLE>


                    During  1995,  the  Financial   Accounting  Standards  Board
                    adopted Statement of Financial Accounting Standards No. 123,
                    "Accounting  for  Stock-Based  Compensation"  ("SFAS  123"),
                    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
                                       51
<PAGE>

                    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, 1994, 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.   Accounting
                    Principles  Board  Opinion  No.  25,  "Accounting  for Stock
                    Issued to Employers" ("APB 25"), uses what is referred to as
                    an intrinsic  value based method of accounting.  The Company
                    has decided to continue to apply APB 25 for its  stock-based
                    employee   compensation   arrangements.    Accordingly,   no
                    compensation cost has been recognized. Had compensation cost
                    for the Company's employee stock option plan been determined
                    based on the fair value at the grant  date for awards  under
                    the  plan  consistent  with  the  method  of SFAS  123,  the
                    Company's  net income  and net  income per share  would have
                    been reduced to the pro forma amounts indicated below:

    Year ended December 31,                 1997            1998           1999
                                ------------------------------------------------
    Net income
             As reported           $   2,287,000   $   7,503,000   $  6,733,000
             Pro forma                 1,660,000       6,827,000      6,143,000
    Basic net income
        per share
             As reported           $         .15   $         .50   $        .45
             Pro forma                       .11             .45            .41
    Diluted net income
        per share
             As reported           $         .15   $         .49   $        .44
             Pro forma                       .11             .44            .40

                    The fair value of each option and warrant grant is estimated
                    on the date of grant using the Black-Scholes  option-pricing
                    model with the following  weighted average  assumptions used
                    for  grants in 1997,  1998 and 1999:  dividend  yield of 0%;
                    expected  volatility of 20%;  risk-free interest rate of 6%;
                    and  expected  lives of five years.  The effects of applying
                    SFAS 123 in this pro forma  disclosure are not indicative of
                    future  amounts.  SFAS 123 does not apply to awards prior to
                    1995. Additional awards in future years are anticipated.

7.        Shareholder
          Rights Plan

                    On May 20,  1998,  the  Board of  Directors  of the  Company
                    authorized  and  declared  a  dividend  distribution  of one
                    Preferred  Stock  purchase  right  (the  "Rights")  for each
                    outstanding  share of the Company's  common stock, par value
                    $.01  per  share   (the   "Common   Shares"),   payable   to
                    shareholders of record at the close of business on March 19,
                    1999. Each Right entitles the registered  holder to purchase
                    from the Company one  one-hundredth of a share (a "Preferred
                    Stock Fraction"),  or a combination of securities and assets
                    of  equivalent  value,  at a  purchase  price of $40.00  per
                    Preferred Stock Fraction (the "Purchase Price"),  subject to
                    adjustment.  The description and terms of the Rights are set
                    forth in a Rights Agreement (the "Rights  Agreement")  dated
                    March 2, 1999  between  the Company  and  Continental  Stock
                    Transfer and Trust  Company as Rights  Agent.  All terms not
                    otherwise  defined  herein are used as defined in the Rights
                    Agreement.

                    The  Rights  will be  exercisable  only if a person or group
                    acquires  15% or more of the  Company's  common  stock  (the
                    "Stock  Acquisition  Date"),  announces a tender or exchange
                    offer that will result in such person or group acquiring 20%
                                       52
<PAGE>

                    or more of the  outstanding  common stock or is a beneficial
                    owner of a  substantial  amount of Common  Shares  (at least
                    10%)  whose  ownership  may have a material  adverse  impact
                    ("Adverse  Person")  on the  business  or  prospects  of the
                    Company.  The Company  will be entitled to redeem the Rights
                    at a price of $.01 per Right  (payable  in cash or stock) at
                    anytime until 10 days following the Stock  Acquisition  Date
                    or the date on which a person has been  determined  to be an
                    Adverse  Person.  If the  Company  is  involved  in  certain
                    transactions after the Rights become  exercisable,  a Holder
                    of Rights (other than Rights owned by a shareholder  who has
                    acquired  15% or more of the  Company's  outstanding  common
                    stock or is determined to be an Adverse Person, which Rights
                    become  void) is entitled  to buy a number of the  acquiring
                    company's  Common Shares or the Company's  common stock,  as
                    the case may be, having a market value of twice the exercise
                    price of each Right. A potential  dilutive  effect may exist
                    upon the exercise of the Rights. Until a Right is exercised,
                    the  holder  will  have no rights  as a  stockholder  of the
                    Company, including,  without limitations,  the right to vote
                    as a stockholder or to receive dividends. The Rights are not
                    exercisable  until the Distribution  Date and will expire at
                    the close of  business  on March 18,  2009,  unless  earlier
                    redeemed or exchanged by the Company.

8.        Loss From
          Retirement
          of Debt

                    In 1997,  the  Company  recorded  an  extraordinary  loss of
                    $1,482,000 after taxes for the early retirement of debt. The
                    extraordinary  loss  consists  primarily  of  write-offs  of
                    deferred finance costs associated with the retired notes and
                    legal and bank fees relating to the early  extinguishment of
                    the debt.

9.        Site Development
          and Restructuring
          Charges

                    During  1997,   the  Company   incurred   site   development
                    ($1,735,000)  and   restructuring   ($702,000)   charges  of
                    $2,437,000. The site development charges consist of $800,000
                    related to the  Charles  Town Races  facility  and  $935,000
                    related to the  abandonment  of certain  proposed  operating
                    sites  during  1997.  The  restructuring  charges  primarily
                    consist of: $350,000 in severance  termination  benefits and
                    other charges at the Charles Town Races  facility;  $300,000
                    for the restructuring of the Erie, Pennsylvania OTW facility
                    and  $52,000  of  property  and  equipment  written  off  in
                    connection  with  the   discontinuation   of  Penn  National
                    Speedway, Inc. operations during 1997. These charges, net of
                    income taxes,  decreased the 1997 net income and diluted net
                    income  per  share  by   $1,462,000   and  $.09  per  share,
                    respectively.

                    On February 11, 2000, the Tennessee Supreme Court denied the
                    Company's  application for permission to appeal the decision
                    of the Court of  Appeals.  In the  appeal,  the  Company was
                    asking the Supreme Court to take the jurisdictional question
                    from the Appellate Court and to review the substantive issue
                    of whether pari-mutuel wagering on horse racing is lawful in
                    Tennessee  under the existing  statute without the Tennessee
                    Commission.  As a result of this  decision,  the Company has
                    taken a charge against earnings in the year 1999 of $535,000
                    for costs incurred for its Tennessee racing license.

10.      Litigation Settlement

                    In December 1997,  Amtote  international,  Inc.  ("Amtote"),
                    filed an action  against the  Company  and the Charles  Town
                    Joint  Venture in the United States  District  Court for the
                    Northern District of West Virginia. In its complaint, Amtote
                    stated that the Company and the Charles  Town Joint  Venture
                    allegedly  breached  certain  contracts  with Amtote and its
                    affiliates when it entered into a wagering services contract
                    with a third party.  On September 30, 1999 the United States
                    District  Court for the Northern  District of West  Virginia
                    rendered  a decision  which  awarded  liquidated  damages to
                    Amtote. On February 11, 2000, the Company and Amtote entered
                    into a settlement  agreement in which the Company which paid
                    Amtote in full satisfaction of the judgement the sum of $1.5
                    million, which is included in accrued expenses.
                                       53

<PAGE>

11.      Subsequent Events

                    In July 1999,  the Company  entered into an  agreement  with
                    Trackpower,  Inc. (OTC BB: TPWR)  ("Trackpower") to serve as
                    the   exclusive   pari-mutuel   wagering  hub  operator  for
                    Trackpower.   Trackpower  provides   direct-to-home  digital
                    satellite  transmissions  of horse racing to its  subscriber
                    base.  The  initial  term of the  contract is for five years
                    with an additional  five-year option available.  The Company
                    pays Trackpower a commission on all new revenues earned from
                    their subscriber base. As additional incentive to enter into
                    the  contract,  the  Company  received  warrants to purchase
                    5,000,000  shares of common  stock of  Trackpower  at prices
                    ranging  from  $1.58  per  share to  $2.58  per  share.  The
                    warrants  vest at 20% per year and expire on April 30, 2004.
                    The fair value of the warrants issued will be amortized over
                    the vesting period or one year from the anniversary  date of
                    the  agreement.  As a result of the transition of operations
                    in 1999,  the  amount  to be  amortized  as a  reduction  of
                    commissions earned in 1999 by Trackpower was not material.

                    In March 2000,  the Company  entered into a letter of intent
                    with  Trackpower and eBet Limited  ("eBet") which that, if a
                    definitive  agreement is executed,  will replace and restate
                    the  above  agreement.  Under  the  terms of the  letter  of
                    intent, the Company and eBet will contribute various assets,
                    equipment,  management  agreements relating to our telephone
                    account   wagering   systems  and  business   operations  to
                    Trackpower.  Under the proposed agreement,  the Company will
                    continue to receive the same level of income as in 1999. The
                    Company  and eBet will  each  receive  18,000,000  shares of
                    Trackpower  common  stock as well as  warrants  to  purchase
                    additional  shares  exercisable  at $1.00  per  share.  Upon
                    completion of the proposed  transaction the Company and eBet
                    will each own 26.5% of Trackpower  prior to considering  the
                    exercises of options or warrants.  The  agreement is subject
                    to due diligence, regulatory and other approvals.

                                       54
<PAGE>

12.      Subsidiary
         Guarantors

     Summarized  financial  information for years ended December 31, 1997, 1998,
     and  1999  for  Penn  National  Gaming,  Inc.  ("Parent"),  the  Subsidiary
     Guarantors and Subsidiary Nonguarantors is as follows:
<TABLE>
<CAPTION>
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
                                                                  Subsidiary
                                    Parent       Subsidiary             Non-          Elimin-           Consoli-
                                   Company       Guarantors       Guarantors           ations              dated
Year ended December 31, 1997
Consolidated Statement of Income (In Thousands)
<S>                        <C>              <C>              <C>              <C>              <C>
Total revenues             $        6,887   $        90,320  $        16,484  $       (2,155)  $        111,536
Total operating expenses            3,434            81,822           18,700          (2,155)           101,801
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income from operations              3,453             8,498          (2,216)               --             9,735
Other income(expenses)             (3,565)            1,612          (1,705)               --            (3,658)
----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income before income taxes           (112)           10,110          (3,921)               --             6,077
Taxes on income                       (38)            3,909          (1,563)               --             2,308
Extraordinary item                   (142)             (768)           (572)                             (1,482)
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net income (loss)          $        (216)   $         5,433  $       (2,930)   $           --   $         2,287
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Consolidated Statement of Cash Flows (In Thousands)
Net cash provided by
(used in) operating
activities                 $       2,559    $      (169,422) $          882    $      176,659   $        10,678
Net cash provided by
(used in) investing
activities                        (8,995)            68,529              40          (107,194)          (47,620)
Net cash provided by
(used in) financing
activities                        22,361            100,266              --           (69,465)           53,162
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net increase (decrease)
in cash and cash
equivalents                       15,925               (627)            922                --            16,220
Cash and cash
equivalents at
beginning of period                3,015              2,597              22                --             5,634
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Cash and cash
equivalents at end of
period                    $       18,940    $         1,970  $          944    $           --   $        21,854
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
</TABLE>


                                       55
<PAGE>


<TABLE>
<CAPTION>

------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
                                                                  Subsidiary
                                    Parent       Subsidiary             Non-          Elimin-           Consoli-
                                   Company       Guarantors       Guarantors           ations              dated
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
As of December 31, 1998
Consolidated Balance Sheet (In Thousands)
<S>                        <C>              <C>              <C>              <C>              <C>
Current assets            $          3,558  $         6,944  $         4,204  $         (592)  $          14,114
Net property, plant and
equipment                           13,576           62,598           44,578               --            120,752
Other assets                       102,400          153,818            1,779        (232,065)             25,932
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total                     $        119,534  $       223,360  $        50,561  $     (232,657)  $         160,798
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Current liabilities       $          1,000  $        13,961  $         7,520  $      (10,278)  $          12,203
Long-term liabilities               81,037           78,527           47,334        (117,339)             89,559
Shareholders' equity
(deficiency)                        37,497          130,872          (4,293)        (105,040)             59,036
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total                     $        119,534  $       223,360  $        50,561   $    (232,657)   $        160,798
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Year ended December 31, 1998
Consolidated Statement of Income (In Thousands)
Total revenues            $         10,789  $        89,142  $        56,883  $       (2,749)  $         154,065
Total operating expenses             4,612           81,187           51,557          (2,749)            134,607
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income from operations               6,177            7,955            5,326               --             19,458
Other income(expenses)              (5,535)           2,842           (4,743)              --             (7,436)
----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income before income taxes             642           10,797              583               --             12,022
Taxes on income                        100            4,186              233               --              4,519
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net income                 $           542  $         6,611  $           350   $           --  $           7,503
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Year ended December 31, 1998
Consolidated Statement of Cash Flows (In Thousands)
Net cash provided by
(used in) operating
activities                 $        (2,072) $        (4,121) $         1,267   $       16,792  $          11,866
Net cash provided by
(used in) investing
activities                         (13,387)             290              909          (10,145)           (22,333)
Net cash provided by
(used in) financing
activities                          (1,480)           3,566               --           (6,647)            (4,561)
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net increase (decrease)
in cash and cash
equivalents                        (16,939)            (265)           2,176               --            (15,028)
Cash and cash
equivalents at
beginning of period                 18,940            1,970              944               --             21,854
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Cash and cash
equivalents at end of
period                     $         2,001  $         1,705  $         3,120   $           -- $            6,826
------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
</TABLE>

                                       56
<PAGE>


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                                  Subsidiary
                                    Parent       Subsidiary             Non-          Elimin-           Consoli-
                                   Company       Guarantors       Guarantors           ations              dated
-----------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Consolidated Balance Sheet (In Thousands)
<S>                        <C>              <C>              <C>               <C>              <C>
Current assets             $         3,651  $         7,669  $         6,523   $          139   $         17,982
Net property, plant and
equipment                              813           79,932           46,126               --            126,871
Other assets                       116,170          155,509            1,620         (227,552)            45,747
-----------------------------------------------------------------------------------------------------------------
Total                      $       120,634  $       243,110  $        54,269   $     (227,413)  $        190,600
-----------------------------------------------------------------------------------------------------------------
Current liabilities        $           (29) $        25,731  $         7,664   $       (8,015)  $         25,351
Long-term liabilities               82,091           86,556           47,459         (117,129)            98,977
Shareholders' equity
(deficiency)                        38,572          130,823             (854)        (102,269)            66,272
-----------------------------------------------------------------------------------------------------------------
Total                      $       120,634  $       243,110  $        54,269   $     (227,413)  $        190,600
-----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Consolidated Statement of Income (In Thousands)
Total revenues             $         4,147  $        93,651  $        79,772   $       (6,112)  $        171,458
Total operating expenses            (3,393)          91,448           71,698           (6,112)           153,641
-----------------------------------------------------------------------------------------------------------------
Income from operations               7,540            2,203            8,074               --             17,817
Other income(expenses)              (5,693)           3,020           (4,634)              --             (7,307)
-----------------------------------------------------------------------------------------------------------------
Income before income taxes           1,847            5,223            3,440               --             10,510
Taxes on income                        642            3,135               --               --              3,777
-----------------------------------------------------------------------------------------------------------------
Net income                 $         1,205  $         2,088  $         3,440   $           --   $          6,733
-----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Consolidated Statement of Cash Flows (In Thousands)
Net cash provided by
(used in) operating
activities                 $         6,287  $        14,842  $         4,313   $       (2,981)  $         22,461
Net cash provided by
(used in) investing
activities                          (6,516)         (20,245)          (3,205)             210            (29,756)
Net cash provided by
financing activities                   772            6,236              124            2,771              9,903
-----------------------------------------------------------------------------------------------------------------
Net increase in cash
and cash equivalents                   543              833            1,232               --              2,608
Cash and cash
equivalents at
beginning of period                  2,001            1,705            3,120               --              6,826
-----------------------------------------------------------------------------------------------------------------
Cash and cash
equivalents at end of
period                     $         2,544  $         2,538  $         4,352   $           --   $          9,434
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                       57
<PAGE>



ITEM 9   CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

                  Not Applicable

                                    PART III

ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                  The  information  required  by  Item  10  is  incorporated  by
                  reference from the Company's  definitive  proxy statement with
                  respect to the Company's  Annual Meeting of Shareholders to be
                  held on May 17,  2000.  Such  proxy  statement  shall be filed
                  pursuant to Regulation  14A  promulgated  under the Securities
                  Exchange  Act of 1934,  as amended,  within 120 days after the
                  end of the fiscal year  covered by this Annual  Report on Form
                  10-K.

ITEM 11  EXECUTIVE COMPENSATION

                  The  information  required  by  Item  11  is  incorporated  by
                  reference from the Company's  definitive  proxy statement with
                  respect to the Company's  Annual Meeting of Shareholders to be
                  held on May 17,  2000.  Such  proxy  statement  shall be filed
                  pursuant to Regulation  14A  promulgated  under the Securities
                  Exchange  Act of 1934,  as amended,  within 120 days after the
                  end of the fiscal year  covered by this Annual  Report on Form
                  10-K.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

                  The  information  required  by  Item  12  is  incorporated  by
                  reference from the Company's  definitive  proxy statement with
                  respect to the Company's  Annual Meeting of Shareholders to be
                  held on May 17,  2000.  Such  proxy  statement  shall be filed
                  pursuant to Regulation  14A  promulgated  under the Securities
                  Exchange  Act of 1934,  as amended,  within 120 days after the
                  end of the fiscal year  covered by this Annual  Report on Form
                  10-K.

ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  The  information  required  by  Item  13  is  incorporated  by
                  reference from the Company's  definitive  proxy statement with
                  respect to the Company's  Annual Meeting of Shareholders to be
                  held on May 17,  2000.  Such  proxy  statement  shall be filed
                  pursuant to Regulation  14A  promulgated  under the Securities
                  Exchange  Act of 1934,  as amended,  within 120 days after the
                  end of the fiscal year  covered by this Annual  Report on Form
                  10-K.

                                       58
<PAGE>

                                     PART IV

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

(A) (1)   The Financial Statements included in the Index to Part II,
          Item 8, are filed as part of this Report

    (2)   List of Exhibits

EXHIBIT

 NOS.                  DESCRIPTION OF EXHIBIT

1.   Purchase  Agreement  dated December 12, 1997 between Penn National  Gaming,
     Inc. and BT Alex Brown Incorporated and Jefferies & Company, Inc.

2.1  Agreement  and Plan of  Reorganization  dated  April 11,  1994  among  Penn
     National  Gaming,  Inc.,  Carlino  Family  Partnership,  Carlino  Financial
     Corporation and the  shareholders  and general partners of the entities now
     comprising Penn National  Gaming,  Inc.  (Incorporated  by reference to the
     Company's registration statement on Form S-1, File #33-77758, dated May 26,
     1994.)

2.1  First Amendment to Asset Purchase Agreement dated as of January 28, 1999 by
     and between among Greenwood New Jersey,  Inc.,  International  Thoroughbred
     Breeders, Inc., Garden State Race Track, Inc., Freehold Racing Association,
     Atlantic City Harness Inc.,  Circa 1850,  Inc.,  and Penn National  Gaming,
     Inc.  (Incorporated  by reference to the Company's  current  report on Form
     8-K, dated February 12, 1999.)

2.1.1Amendment  to  Agreement  and Plan of  Reorganization  dated April 26, 1994
     among Penn National  Gaming,  Inc.,  Carlino  Family  Partnership,  Carlino
     Financial  Corporation  and the  shareholders  and general  partners of the
     entities  now  comprising  Penn  National  Gaming,  Inc.  (Incorporated  by
     reference  to the  Company's  registration  statement  on  Form  S-1,  File
     #33-77758, dated May 26, 1994.)

2.2  Agreement  and Plan of  Reorganization  dated April 11, 1994  between  Penn
     National Gaming,  Inc. and Thomas J. Gorman.  (Incorporated by reference to
     the Company's registration statement on Form S-1, File #33-77758, dated May
     26, 1994.)

2.2  First Amendment to Joint Venture Agreement dated as of January 28, 1999, by
     and between  Greenwood New Jersey,  Inc.,  and Penn National  Gaming,  Inc.
     (Incorporated  by reference to the  Company's  current  report on Form 8-K,
     dated February 12, 1999.)

2.2.1Amendment  to  Agreement  and Plan of  Reorganization  dated April 26, 1994
     between Penn National Gaming,  Inc. and Thomas J. Gorman.  (Incorporated by
     reference  to the  Company's  registration  statement  on  Form  S-1,  File
     #33-77758, dated May 26, 1994.)

2.3  Closing  Agreement  dated January 15, 1997 among Charles Town Races,  Inc.,
     Charles  Town Racing  Limited  Partnership,  and PNGI  Charles  Town Gaming
     Limited  Liability  Company.  (Incorporated  by reference to the  Company's
     current report on Form 8-K, dated January 30, 1997.)

2.4  Amended and  Restated  Operating  Agreement  dated as of December  31, 1996
     among Penn  National  Gaming of West  Virginia,  Inc.,  Bryant  Development
     Company  and  PNGI  Charles   Town  Gaming   limited   Liability   Company.
     (Incorporated  by reference to the  Company's  current  report on Form 8-K,
     dated January 30, 1997.)

2.5  Letter  dated  January  14,  1997 from Peter M.  Carlino to James A. Reeder
     (Incorporated  by reference to the  Company's  current  report on Form 8-K,
     dated January 30, 1997.)

2.6  First Amendment and Consent dated as of January 7, 1997 among Penn National
     Gaming,  Inc.,  Bankers Trust Company as Agent,  CoreStates  Bank,  N.A. as
     Co-Agent,  and  certain  banks  party to the Credit  Agreement  dated as of
     November 27, 1996  (Incorporated by reference to the current report on Form
     8-K, dated January 30, 1997.)
                                       59

<PAGE>

2.7  Amended and Restated  Option  Agreement dated as of February 17, 1995 among
     Charles Town Races, Inc., Charles Town Racing Limited Partnership, and PNGI
     Charles Town Gaming limited Liability Company (Incorporated by reference to
     Exhibit 2.1 of the Company's  current report on Form 8-K, dated January 30,
     1997.)

2.8  Transfer,  Assignment  and  Assumption  Agreement  and  Bill of Sale  dated
     January  15,  1997 among  Charles  Town Races,  Inc.,  Charles  Town Racing
     Limited  Partnership,  and PNGI  Charles  Town  Limited  Liability  Company
     (Incorporated by reference to Exhibit 2.2 of the Company's Form 10-Q, dated
     November 14, 1997.)

2.9  Second  Amended and Restated  Operating  Agreement  dated as of October 17,
     1997, among Penn National Gaming of West Virginia, Inc., BDC Group and PNGI
     Charles Town Gaming Limited Liability Company (Incorporated by reference to
     the Company's Form 10-Q, dated November 14, 1997.)

2.10 Purchase  Agreement dated September 13, 1996 between Penn National  Gaming,
     Inc.  and the Estate of Joseph B. Banks for the  purchase  of Pocono  Downs
     Race Track and two related OTW  facilities.  (Incorporated  by reference to
     the Company's Form 10-Q, dated November 13, 1996.)

3.1  Amended and Restated  Articles of  Incorporation  of Penn National  Gaming,
     Inc.,  filed with the  Pennsylvania  Department of State on April 12, 1994.
     (Incorporated by reference to the Company's  registration statement on Form
     S-1, File #33-77758, dated May 26, 1994.)

3.2  By-laws of Penn National  Gaming,  Inc.  (Incorporated  by reference to the
     Company's registration statement on Form S-1, File #33-77758, dated May 26,
     1994.)

4.   Rights  Agreement dated as of March 2, 1999,  between Penn National Gaming,
     Inc. and  Continental  Stock Transfer and Trust Company.  (Incorporated  by
     reference  to the  Company's  current  report on Form 8-K,  dated March 17,
     1999.)

4.1  Indenture  dated December 17, 1997 between Penn National  Gaming,  Inc. and
     State  Street Bank and Trust  Company.  (Incorporated  by  reference to the
     Company's  registration  statement  on Form  S-4,  File  #333-45337,  dated
     January 30, 1998.)

9.1  Form of Trust Agreement of Peter D. Carlino,  Peter M. Carlino,  Richard J.
     Carlino,  David E. Carlino,  Susan F.  Harrington,  Anne de Lourdes  Irwin,
     Robert M.  Carlino,  Stephen  P.  Carlino  and Rosina E.  Carlino  Gilbert.
     (Incorporated by reference to the Company's  registration statement on Form
     S-1, File #33-77758, dated May 26, 1994.)

10.1 1994  Stock  Option  Plan.  (Incorporated  by  reference  to the  Company's
     registration statement on Form S-1, File #33-77758, dated May 26, 1994.)

10.2 Employment  Agreement  dated April 12, 1994 between Penn  National  Gaming,
     Inc. and Peter M.  Carlino.  (Incorporated  by  reference to the  Company's
     registration statement on Form S-1, File #33-77758, dated May 26, 1994.)

10.3 Credit  Agreement,  dated as of  November  27,  1996,  among Penn  National
     Gaming, Inc., various banks, CoreStates bank, N.A., as Co-Agent and Bankers
     Trust Company, as Agent.  (Incorporated by reference to Exhibit 10.1 of the
     Company's current report on Form 8-K, dated December 12, 1996.)

10.4 Employment Agreement dated April 12, 1994 between the Registrant and Robert
     S.  Ippolito.  (Incorporated  by  reference to the  Company's  registration
     statement on Form S-1, File #33-77758, dated May 26, 1994.)

10.8 Consolidation  of PRA Agreement  dated May 18, 1992 and PRA Amendment dated
     February 9, 1993 among all members of the Pennsylvania  Racing Association.
     (Incorporated by reference to the Company's  registration statement on Form
     S-1, File #33-77758, dated May 26, 1994.)
                                       60
<PAGE>

10.11Lease dated March 7, 1991 between  Shelbourne  Associated  and PNRC Limited
     Partnership.  (Incorporated  by  reference  to the  Company's  registration
     statement on Form S-1, File #33-77758, dated May 26, 1994.)

10.13.1 Lease  dated June 30,  1993  between  John E.  Kyner,  Jr. and Sandra R.
     Kyner,  and PNRC  Chambersburg,  Inc.  (Incorporated  by  reference  to the
     Company's registration statement on Form S-1, File #33-77758, dated May 26,
     1994.)

10.38Consulting  Agreement dated August 29, 1994,  between Penn National Gaming,
     Inc. and Peter D. Carlino. (Incorporated by reference to the Company's Form
     10-K, dated March 23, 1995.)

10.39Lease dated July 7, 1994,  between North Mall  Associates and Penn National
     Gaming, Inc. for the York OTW.  (Incorporated by reference to the Company's
     Form 10-K, dated March 23, 1995.)

10.41.1 Lease dated March 31, 1995 between Wyomissing  Professional  Center III,
     LP and Penn National  Gaming,  Inc. for the  Wyomissing  Corporate  Office.
     (Incorporated  by reference  to the  Company's  Form 10-K,  dated March 20,
     1996.)

10.42Employment  agreement dated June 1, 1995 between Penn National Gaming, Inc.
     and William J. Bork. (Incorporated by reference to the Company's Form 10-K,
     dated March 20, 1996.)

10.43Lease dated July 17, 1995 between E. Lampeter  Associates and  Pennsylvania
     National Turf Club,  Inc. for the Lancaster OTW, as amended.  (Incorporated
     by reference to the Company's Form 10-K, dated March 20, 1996.)

10.44Agreement dated September 1, 1995 between Mountainview  Thoroughbred racing
     Association  and  Pennsylvania  National  Turf Club,  Inc. and Sports Arena
     Employees'  Union  Local  137  (non-primary  location.)   (Incorporated  by
     reference to the Company's Form 10-K, dated March 20, 1996.)

10.45Agreement dated December 27, 1995 between Pennsylvania  National Turf Club,
     Inc. and Teleview Racing Patrols,  Inc.  (Incorporated  by reference to the
     Company's Form 10-K, dated March 20, 1996.)

10.50Formation  Agreement dated February 26, 1996 between Penn National  Gaming,
     Inc.  and Bryant  Development  Company.  (Incorporated  by reference to the
     Company's Form 10-K, dated March 20, 1996.)

10.51Assignment  of Agreement of Sale dated March 6, 1996 between Penn  National
     Gaming,  Inc. and  Montgomery  Realty Growth Fund,  Inc.  (Incorporated  by
     reference to the Company's Form 10-Q, dated May 14, 1996.)

10.56Amended  and  Restated  Option  Agreement  dated as of  February  17,  1995
     between the PNGI Charles Town Gaming Limited  Liability  Company (The Joint
     Venture)  and Charles  Town Racing  Limited  Partnership  and Charles  Town
     Races,  Inc.  (Incorporated  by reference to the Company's Form 10-Q, dated
     November 13,1996.)

10.58Agreement  dated March 19, 1997,  between PNGI Charles Town Gaming  Limited
     Liability  Company  and  the  Charles  Town  HBPA,  Inc.  (Incorporated  by
     reference to the Company's Form 10-K, dated March 27, 1997.)

10.59Agreement  dated March 21, 1997,  between PNGI Charles Town Gaming  Limited
     Liability Company and The West Virginia  Thoroughbred Breeders Association.
     (Incorporated  by reference  to the  Company's  Form 10-K,  dated March 27,
     1997.)

10.60Agreement  between PNGI Charles Town Gaming Limited  Liability  Company and
     The West Virginia  Union of Mutuel  Clerks,  Local 533,  Service  Employees
     International Union,  AFL-CIO.  (Incorporated by reference to the Company's
     Form 10-K, File #0-24206, dated March 27, 1997.)

10.66Fourth  Amendment  Waiver and Consent  dated as of October 20, 1997,  among
     Penn National Gaming, Inc., Bankers Trust, as Agent,  CoreStates Bank, N.A.
     as Co-Agent  and certain  banks party to the Credit  Agreement  dated as of
     November 17, 1996.  (Incorporated  by reference to the Company's Form 10-Q,
     dated November 14, 1997.)
                                       61

<PAGE>

10.67Agreement  dated October 2, 1996 between  Pennsylvania  National Turf Club,
     Inc.,  Mountainview  Racing  Association and Sports Arena  Employees' Union
     Local  No.  137  (Primary  Location.)  (Incorporated  by  reference  to the
     Company's Form 10-K, dated March 27, 1998.)

10.68Lease  dated July 1, 1997  between  Laurel  Mall  Associated  and the Downs
     Off-Track Wagering,  Inc.  (Incorporated by reference to the Company's Form
     10-K, dated March 27, 1998.)

10.72Totalisator  Agreement  dated  November  19, 1997,  between  Penn  National
     Gaming, Inc. and AutoTote Systems,  Inc.  (Incorporated by reference to the
     Company's Form 10-K, dated March 27, 1998.)

10.73Amended and Restated Credit  Facility dated as of December 17, 1997,  among
     Penn National  Gaming,  Inc.,  certain lenders,  Bankers Trust Company,  as
     Agent, and CoreStates  Bank, N.A., as Co-Agent.  (Incorporated by reference
     to the Company's Form 10-K, dated March 27, 1998.)

10.74Waiver dated March 25, 1998,  between Penn National Gaming,  Inc.,  certain
     lenders,  Bankers Trust Company as Agent,  and  CoreStates  Bank,  N.A., as
     Co-Agent.  (Incorporated  by reference to the  Company's  Form 10-K,  dated
     March 27, 1998.)

10.76First Amendment and Waiver dated May 15, 1998,  among Penn National Gaming,
     Inc.,  CoreStates  Bank, N.A. and Bankers Trust Company.  (Incorporated  by
     reference to the Company's Form 10-Q, dated March 31, 1998.)

10.77Purchase  Agreement dated July 7, 1998,  between Ladbroke Racing Management
     -  Pennsylvania   and   Mountainview   Thoroughbred   Racing   Association.
     (Incorporated  by  reference  to the  Company's  Form 10-Q,  dated June 30,
     1998.)

10.78Lease Agreement between Penn National Gaming,  Inc. and Eagle Valley Realty
     dated July 14, 1998. (Incorporated by reference to the Company's Form 10-Q,
     dated September 30, 1998.)

10.79Joint  Venture  Agreement  dated  October 30, 1998  between  Penn  National
     Gaming, Inc. and Greenwood New Jersey,  Inc.  (Incorporated by reference to
     the Company's Form 10-Q, dated September 30, 1998.)

10.80Amendment  dated November 2, 1998 to Joint Venture  Agreement  between Penn
     National  Gaming,  Inc. and Greenwood  New Jersey,  Inc.  (Incorporated  by
     reference to the Company's Form 10-Q, dated September 30, 1998.)

10.82First Amendment to Asset Purchase Agreement dated as of January 28, 1999 by
     and among Greenwood New Jersey, Inc., International  Thoroughbred Breeders,
     Inc., Garden State Race Track, Inc., Freehold Racing Association,  Atlantic
     City  Harness  Inc.,  Circa 1850,  Inc.,  and Penn  National  Gaming,  Inc.
     (Incorporated  by reference to the  Company's  current  report on Form 8-K,
     dated January 28, 1999.)

10.83First Amendment to Joint Venture Agreement dated as of January 28, 1999, by
     and between  Greenwood  New Jersey,  Inc. and Penn  National  Gaming,  Inc.
     (Incorporated  by reference to the  Company's  current  report on Form 8-K,
     dated January 28, 1999.)

10.85Assignment  and  Assumption  of Lease  Agreement  dated  December  31, 1998
     between  Mountainview  Thoroughbred  Racing Association and Ladbroke Racing
     Management-Pennsylvania.  (Incorporated  by reference to the Company's Form
     10K, dated March 30, 1999.)

10.86Subordination,  Non-Disturbance and Attornment Agreement dated December 31,
     1998 between  Mountainview  Thoroughbred  Racing Association and CRIIMI MAE
     Services Limited  Partnership.  (Incorporated by reference to the Company's
     Form 10-K, dated March 30, 1999.)

10.87Second Amended and Restated  Credit  Agreement dated as of January 28, 1999
     between Penn National Gaming,  Inc. and various banks, First Union National
     Bank,  as Agent.  (Incorporated  by reference to the  Company's  Form 10-K,
     dated March 30, 1999.)

10.88Live Racing  Agreement dated March 23, 1999 between  Pennsylvania  National
     Turf Club,  Inc.  and  Mountainview  Thoroughbred  Racing  Association  and
     Pennsylvania  Horsemen's  Benevolent  and  Protection   Association,   Inc.
     (Incorporated  by reference  to the  Company's  Form 10-K,  dated March 30,
     1999.)
                                       62

<PAGE>

10.89Amendment to Employment Agreement dated June 1, 1999, between Penn National
     Gaming,  Inc.  and  Peter  M.Carlino.  (Incorporated  by  reference  to the
     Company's Form 10-Q, dated August 12, 1999.)

10.90Amendment to Employment Agreement dated June 1, 1999, between Penn National
     Gaming,  Inc.  and Robert S.  Ippolito.  (Incorporated  by reference to the
     Company's Form 10-Q, dated August 12, 1999.)

10.91Second  Amendment  to Joint  Venture  Agreement  dated as of July 29, 1999,
     between Penn National Gaming, Inc. and Greenwood Racing, Inc. (Incorporated
     by reference to the Company's Form 10-Q, dated August 12, 1999.)

10.92Shareholder's  Agreement dated July 29, 1999, between Penn National Holding
     Company and  Greenwood  Racing,  Inc.  (Incorporated  by  reference  to the
     Company's Form 10-Q, dated August 12, 1999.)

10.93Amended and Restated  Limited  Partnership  Agreement  dated July 29, 1999,
     between FR Park Racing, L.P., Pennwood Racing, Inc. and Penn National GSFR,
     Inc.  (Incorporated  by reference to the Company's Form 10-Q,  dated August
     12, 1999.)

10.94Amended and Restated  Limited  Partnership  Agreement  dated July 29, 1999,
     between FR Park Services,  L.P.,  Pennwood  Racing,  Inc. and Penn National
     GSFR,  Inc.  (Incorporated  by reference to the Company's Form 10-Q,  dated
     August 12, 1999.)

10.95Amended and Restated  Limited  Partnership  Agreement  dated July 29, 1999,
     between GS Park Racing, L.P., Pennwood Racing, Inc. and Penn National GSFR,
     Inc.  (Incorporated  by reference to the Company's Form 10-Q,  dated August
     12, 1999.)

10.96Amended and Restated  Limited  Partnership  Agreement  dated July 29, 1999,
     between GS Park Services,  L.P.,  Pennwood  Racing,  inc. and Penn National
     GSFR,  Inc.  (Incorporated  by reference to the Company's Form 10-Q,  dated
     August 12, 1999.)

10.97Amendment No. 1 to Second Amended and Restated Credit  Agreement dated July
     29, 1999, between Penn National Gaming, Inc. and First Union National Bank.
     (Incorporated  by reference to the  Company's  Form 10-Q,  dated August 12,
     1999.)

10.98Amendment No. 2 to Second Amended and Restated Credit  Agreement dated July
     29,  1999,  Penn  National  Gaming,  Inc.  and First Union  National  Bank.
     (Incorporated  by reference to the  Company's  Form 10-Q,  dated August 12,
     1999.)

10.99Agreement  dated July 9, 1999,  between  Penn  National  Gaming,  Inc.  and
     American Digital  Communications,  Inc. (Portions of this Exhibit have been
     omitted pursuant to a request for confidential treatment.) (Incorporated by
     reference to the Company's Form 10-Q, dated August 12, 1999.)

10.01a Subordination  and Intercreditor  Agreement dated July 29, 1999,  between
     Penn National Gaming,  Inc., FR Park Racing,  L.P., and Commerce Bank, N.A.
     (Incorporated  by reference to the  Company's  Form 10-Q,  dated August 12,
     1999.)

10.02a Debt Service  Maintenance  Agreement  dated July 29,  1999,  between Penn
     National Gaming, Inc. and Commerce Bank, N.A. (Incorporated by reference to
     the Company's Form 10-Q, dated August 12, 1999.)

10.03a First  Supplemental  Indenture dated May 19, 1999,  between Penn National
     Gaming,   Inc.   and  State  Street  Bank  and  Trust   Company,   Trustee.
     (Incorporated  by reference to the  Company's  Form 10-Q,  dated August 12,
     1999.)

10.04a Asset Purchase  Agreement between BSL., Inc. and Casino Magic Corp. dated
     December 9, 1999. (Filed as exhibit 99.2 to the Company's current report on
     Form 8-K, dated December 17, 1999.)

10.05a Guaranty  of Penn  National  Gaming,  Inc. to Casino  Magic  Corp.  dated
     December 9, 1999 (Filed as exhibit 99.3 to the Company's  current report on
     Form 8-K, dated December 17, 1999.)
                                       63

<PAGE>

10.06a Guaranty of Hollywood  Park,  Inc. to BSL, Inc.  dated  December 9, 1999.
     (Filed as exhibit 99.4 to the Company's  current  report on Form 8-K, dated
     December 17, 1999.)

10.07a First Amendment to Asset Purchase  Agreement between BSL, Inc. and Casino
     Magic  Corp.  dated  December  17,  1999.  (Filed  as  exhibit  99.5 to the
     Company's current report on Form 8-K, dated December 17, 1999.)

10.08a Asset  Purchase  Agreement  between BTN,  Inc. and Boomtown,  Inc.  dated
     December 9, 1999 (Filed as exhibit 99.6 to the Company's  current report on
     Form 8-K, dated December 17, 1999.)

10.09a Guaranty of Penn National Gaming,  Inc. to Boomtown,  Inc. dated December
     9, 1999 (Filed as exhibit 99.7 to the Company's current report on Form 8-K,
     dated December 17, 1999.)

10.10a Guaranty of Hollywood  Park,  Inc. to BTN, Inc.  dated  December 9, 1999.
     (Filed as exhibit 99.8 to the Company's  current  report on Form 8-K, dated
     December 17, 1999.)

10.11a First  Amendment  to Asset  Purchase  Agreement  between  BTN,  Inc.  and
     Boomtown,  inc.  dated  December  17,  1999.  (Filed as exhibit 99.9 to the
     Company's current report on Form 8-K, dated December 17, 1999.)

10.12a Senior  secured  multiple draw term loan dated  December 13, 1999 between
     Penn National Gaming of West Virginia, Inc. and Bank of America.

10.13a Amendment No. 3 and Consent and Waiver under Second  Amended and Restated
     Credit Agreement dated December 13, 1999 between Penn National Gaming, Inc.
     and First Union National Bank, as Agent.

10.14a Harness  horsemen  agreement  dated  December  17, 1999 between The Downs
     Racing, Inc. and the Pennsylvania Harness Horsemen.

10.15a Settlement  agreement  dated  February  11, 2000  between  Penn  National
     Gaming, Inc. and Amtote International, Inc.

10.16a Thoroughbred horsemen letter dated February 24, 2000 between PNGI Charles
     Town Gaming, LLC and the Charles Town thoroughbred horsemen.

10.17a Agreement  dated March 7, 2000 between  Penn  National  Gaming,  Inc. and
     Trackpower, Inc. and eBet Limited, Inc.

21   Subsidiaries of the Registrant.

27.1 Financial Data Schedule.

         (B)  Reports on Form 8-K

     The  Company  filed the  following  reports  on Form 8K during  the  fourth
quarter 1999:

     On December 10, 1999,  the Company filed a current  report on Form 8K which
reflected the definitive agreement to purchase all of the assets of Casino Magic
hotel, etc.

                                       64
<PAGE>



                                   SIGNATURES

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

                                 PENN NATIONAL GAMING, INC.


                                 By  /s/Peter M. Carlino

                                 Peter M. Carlino, Chairman of the Board
Dated:  March 20, 2000

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

SIGNATURE                               TITLE                        DATE

                             Chief Executive Officer and
                             Director (Principal Executive
/s/Peter M. Carlino                   Officer)                  March  20, 2000
--------------------------------------
Peter M. Carlino

                             Chief Operating Officer and
                             Director (Principal Operating
/s/William J. Bork                    Officer)                  March  20, 2000
--------------------------------------
William J. Bork

                             Chief Financial Officer
/s/Robert S. Ippolito        (Principal Financial Officer)      March  20, 2000
--------------------------------------
Robert S. Ippolito

/s/Harold Cramer             Director                           March  20, 2000
--------------------------------------
Harold Cramer

/s/David A. Handler          Director                           March  20, 2000
--------------------------------------
David A. Handler

/s/Robert P. Levy            Director                           March  20, 2000
--------------------------------------
Robert P. Levy

/s/ John M. Jacquemin        Director                           March  20, 2000
--------------------------------------
John M. Jacquemin

                                       65
<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit Nos.               Description of Exhibits                                               Page No.
------- ------------------------------ -- --------                                               --------
<S>                        <C>                                                                   <C>
10.04a                     Senior secured multiple draw term loan dated December
                           13, 1999 between Penn National  Gaming of West
                           Virginia, Inc. and Bank of America.                                    67-186

10.13a                     Amendment No. 3 and Consent and Waiver under Second Amended           187-196
                           and Restated Credit Agreement dated December 13, 1999 between
                           Penn National Gaming, Inc. and First Union National Bank, as Agent.

10.05a                     Harness horsemen agreement dated December 17, 1999 between            197-205
                           The Downs Racing, Inc. and the Pennsylvania Harness Horsemen.

10.06a                     Settlement agreement dated February 11, 2000 between Penn National    206-208
                           Gaming, Inc. and Amtote International, Inc.

10.07a                     Thoroughbred  horsemen letter dated February 24, 2000
                           between  PNGI 209 Charles  Town  Gaming,  LLC and the
                           Charles Town thoroughbred horsemen.

10.08a                     Agreement dated March 7, 2000 between Penn National Gaming, Inc.      210-218
                           and Trackpower, Inc. and eBet Limited, Inc.

                                       66
</TABLE>

