UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

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

For the transition period from                           to                          

Commission File Number 0-1469

(Exact name of registrant as specified in its charter)

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

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

Common Stock, No Par Value

(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  YES  ý  NO  o

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.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES  ý NO  o

As of March 7 2005, 12,927,614 shares of the Registrant’s Common Stock were outstanding.  As of June 30, 2004 (based upon the closing sale price for such date on the Nasdaq National Market), the aggregate market value of the shares held by nonaffiliates of the Registrant was $330,029,651.

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on June 16, 2005 are incorporated by reference herein in response to Items 10, 11, 12, 13 and 14 of Part III of Form 10-K.  The exhibit index is located on pages 72-75.

CHURCHILL DOWNS INCORPORATED

INDEX TO ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2004

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PART I

ITEM 1.   BUSINESS

A.            Introduction

Churchill Downs Incorporated (the “Company”) is principally a racing company that conducts pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse racing and simulcasts signals of races.  Additionally, we offer racing services through our other business interests as well as alternative gaming through video poker operations in Louisiana.  We were organized as a Kentucky corporation in 1928.  Our principal executive offices are located at 700 Central Avenue, Louisville, Kentucky, 40208.

We operate our flagship operation, Churchill Downs racetrack (“Churchill Downs”), in Louisville, Kentucky.  Churchill Downs has conducted Thoroughbred racing continuously since 1875 and is internationally known as the home of the Kentucky Derby.  The Churchill Downs operation also encompasses an off-track betting facility (“OTB”).  In addition, the management of Churchill Downs oversees Ellis Park Race Course, Inc. (“Ellis Park”), which operates a Thoroughbred track in Henderson, Kentucky.

Churchill Downs Management Company (“CDMC”), a wholly owned subsidiary, manages all of our operations including: Churchill Downs; Ellis Park; Arlington Park, a Thoroughbred racing operation in Arlington Heights along with eight OTBs in Illinois; Calder Race Course (“Calder”), a Thoroughbred racing operation in Miami Gardens, Florida; Hollywood Park, a Thoroughbred racing operation in Inglewood, California; Fair Grounds Race Course (“Fair Grounds”), a Thoroughbred racing operation in New Orleans along with eleven OTBs in Louisiana; and Video Services, Inc. (“VSI”), the owner and operator of more than 700 video poker machines in Louisiana.  Arlington Park merged with the Company in September 2000. Fair Grounds and VSI were acquired in October 2004.

Additionally, CDMC manages Hoosier Park at Anderson in Anderson, Indiana (“Hoosier Park”).  Hoosier Park conducts Thoroughbred, Quarter Horse and Standardbred horse racing, and operates three OTBs in Indiana.  Hoosier Park is owned by Hoosier Park, L.P. (“HPLP”), an Indiana limited partnership.  Anderson Park, Inc. (“Anderson”), a wholly owned subsidiary of CDMC, is the sole general partner of HPLP.  Anderson owns a 62% interest in HPLP and continues to manage its day-to-day operations. Centaur Racing, LLC owns 38% of HPLP and, through a Partnership Interest Purchase Agreement, has options to purchase additional partnership interests from us.

We formed Churchill Downs Investment Company (“CDIC”), a wholly owned subsidiary, to oversee other industry related investments.  CDIC holds a 30% interest in NASRIN Services, LLC (“NASRIN”), a telecommunications service provider for the pari-mutuel and simulcasting industries. During 2004, the Company sold a 19% interest in Kentucky Downs, LLC (“Kentucky Downs”), a Franklin, Kentucky, racetrack that conducts a limited Thoroughbred race meet in September, as well as year-round simulcasting.  After consummation of the sale, the Company retained a 5% interest in Kentucky Downs. Our investments in NASRIN and Kentucky Downs are not material to the Company’s financial position or results of operations.

During 2003, the Company purchased the remaining 40% minority interest in Charlson Broadcast Technologies, LLC (“CBT”), now referred to as Churchill Downs Simulcast Productions (“CDSP”), which provides television production and integration of computer graphic software to the racing industry.  The simulcast signal produced by CDSP displays odds, statistical data and other racing information on television in real-time for patrons at racetracks and OTBs.  Our ownership in CDSP is not material to the Company’s financial position or results of operation.

B.            Live Racing and Alternative Gaming Operations

We conduct live horse racing at Churchill Downs, Hollywood Park, Calder, Fair Grounds, Arlington Park, Hoosier Park and Ellis Park.  The following is a summary of our significant live racing events and a description of our properties.

The Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs, continue to be our premier racing events.  The 2005 Kentucky Derby will offer a minimum $2.0 million in purse money, an increase from a minimum purse of $1.0 million in 2004, and the Kentucky Oaks offers a minimum $0.5 million in purse money.  The Kentucky Derby is the first race of the annual series of races for 3-year-old Thoroughbreds known as the Triple Crown, which offers a $5.0 million bonus to a horse that wins the Kentucky Derby, Preakness and Belmont Stakes.

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In addition, Churchill Downs offers a $0.8 million purse for the Stephen Foster Handicap.  Calder is home to The Festival of the Sun and the nationally prominent Summit of Speed, offering approximately $1.6 million in total purse money.  Hollywood Park is home to the Hollywood Gold Cup, which offers $0.8 million in purse money.  Hollywood Park’s Autumn Meet is highlighted by the annual $2.1 million Autumn Turf Festival, comprised of six turf races.  The Arlington Million, which is run during the International Festival of Racing at Arlington Park, with a purse of $1.0 million, is one of three North American stops for the World Series Racing Championship.  Fair Ground’s Winter Meet is highlighted by Louisiana Derby Day, the richest day in Louisiana racing that is headlined by the $0.6 million Louisiana Derby, a major prep race for the Kentucky Derby.  Other significant racing events are the Indiana Derby for Thoroughbreds and the Dan Patch Invitational for Standardbreds held at Hoosier Park, as well as the Gardenia Stakes for older fillies and mares held at Ellis Park.

Arlington Park hosted the Breeders’ Cup World Thoroughbred Championship (“Breeders’ Cup”) in 2002. Churchill Downs has hosted the Breeders’ Cup on five occasions and has also been selected as the site to host the event in 2006. Hollywood Park has hosted the Breeders’ Cup three times (all occurring prior to our acquisition of Hollywood Park).  Breeders’ Cup Limited, a tax-exempt organization chartered to promote Thoroughbred racing and breeding, sponsors Breeders’ Cup races, which currently feature $14.0 million in purses.  These races are held annually for the purpose of determining Thoroughbred champions in eight different events.  Racetracks across North America compete for the privilege of hosting the prestigious Breeders’ Cup races each year.

Churchill Downs

The Churchill Downs racetrack site and improvements (“Churchill facility”) are located in Louisville, Kentucky.  The Churchill facility consists of approximately 147 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, permanent grandstands, luxury suites and a stabling area.  During 2005, our facility will accommodate approximately 52,000 persons in our newly renovated clubhouse, grandstand and Jockey Club suites.  The facility also includes a state-of-the-art simulcast wagering facility designed to accommodate 1,500 persons, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants.  The site also has a saddling paddock, accommodations for groups and special events, parking areas for the public, and our racetrack and corporate office facilities.  The backside stable area has barns sufficient to accommodate approximately 1,400 horses, a 114-room dormitory and other facilities for backstretch personnel.

To supplement the facilities at Churchill Downs, we provide additional stabling facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile dirt track, which is used for training Thoroughbreds, at the OTB known as Trackside.  The facilities provide a year-round base of operation for many horsemen and enable us to attract new horsemen to race at Churchill Downs.

We continue to make numerous capital improvements to the Churchill facility in order to better serve our horsemen and patrons.  During the first quarter of 2002 we began a $121.7 million renovation plan to restore and modernize key areas at the Churchill Downs racetrack, referred to as our “Master Plan.”  The $26.6 million Phase I, which was substantially completed during 2003, included renovation of the historic Jockey Club and construction of 61 new luxury suites, a ballroom, new meeting rooms and kitchen facilities.  The $95.1 million Phase II of the Master Plan began during the second quarter of 2003 and includes the demolition and rebuilding of a large section of the clubhouse area and the addition of 15 new luxury suites.  Phase II construction is scheduled for completion in April 2005.

As part of the financing for the Master Plan, in 2002 we transferred title to the Churchill facility to the City of Louisville, Kentucky and leased back the facility.  Subject to the terms of the lease agreement, we can re-acquire the facility at any time for $1.00.  This transaction has no significant impact on our current financial position or results of operations.

Hollywood Park

Hollywood Park and the Hollywood Park Casino site and improvements are located in Inglewood, California.  The Hollywood Park facility consists of approximately 240 acres of land upon which the racetrack and casino are located with a one and one-eighth (1 1/8) mile dirt track, a one-mile turf track, permanent grandstands and a stabling area.  The facility includes clubhouse and grandstand seating for 16,675 persons, a general admission area, a saddling paddock area and food and beverage facilities ranging from fast food to full-service restaurants.  The stabling area consists of stalls to accommodate approximately 2,000 horses, tack rooms, feed rooms, a federally approved quarantine facility, a half-mile training track, and a not-for-profit Equine Teaching Hospital and Research Center

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operated under the direction of the Southern California Equine Foundation.  The Hollywood Park facility also features parking areas for the public and office facilities.

The Hollywood Park Casino is a state-of-the-art facility that is open 24 hours a day, 365 days a year.  The casino features more than 150 gaming tables offering a variety of California approved casino games.  Under California gaming law, the casino is a card club.  Thus, it is not authorized to operate slot machines or electronic gaming devices but instead rents tables to casino patrons for a seat fee charged on a per hand basis.  The casino also offers facilities for simulcast wagering.  We lease the facility to Pinnacle Entertainment, Inc. under a 10-year lease for an annual rent of $3.0 million.  The lease includes a 10-year renewal option and is subject to an adjustment to the rent at the time the option is exercised.

Calder Race Course

The Calder racetrack and improvements are located in Miami Gardens, Florida, which was newly incorporated during 2003 and is the third largest city in Miami-Dade County.  The Calder facility is adjacent to Dolphin Stadium, home of the Florida Marlins and Miami Dolphins and consists of approximately 220 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, a training area with a five-eighths (5/8) mile training track, permanent grandstands and a stabling area.  The facility includes clubhouse and grandstand seating for approximately 15,000 persons, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants.  The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters and can accommodate approximately 1,800 horses.  The Calder Race Course facility also features a saddling paddock, parking areas for the public and office facilities.

Fair Grounds Race Course and VSI

On October 14, 2004, the Company completed its acquisition of the Fair Grounds racetrack and its affiliated operations, including eleven OTBs.  The Fair Grounds racetrack facility, located in New Orleans, Louisiana, consists of approximately 145 acres of land, a one mile dirt track, a seven–eighths (7/8) mile turf track, permanent grandstands and a stabling area.  The facility includes clubhouse and grandstand seating for approximately 5,000 persons, a general admissions area, and food and beverage facilities ranging from concessions to club-house dining.  The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters and can accommodate approximately 2,000 horses.  The Fair Grounds facility also features a saddling paddock, parking areas for the public and office facilities.  In connection with the acquisition of Fair Grounds racetrack and its affiliated operations, we expect to make numerous capital improvements to the Fair Grounds facility in order to better serve our horsemen and patrons.  VSI is the exclusive operator of more than 700 video poker machines at Fair Grounds and nine other tracks.

Arlington Park

The Arlington Park racetrack was constructed in 1927 and reopened its doors in 1989 after a devastating fire four years earlier.  The racetrack sits on 325 acres, has a one and one-eighths (1 1/8) mile dirt track, a one-mile turf track and a five-eighths (5/8) mile training track.  The facility includes permanent clubhouse, grandstand and suite seating for 6,045 persons, and food and beverage facilities ranging from fast food to full-service restaurants.  Arlington Park has 34 barns able to accommodate approximately 2,200 horses.  The Arlington Park facility also features a saddling paddock, parking areas for the public and office facilities.

Ellis Park

The Ellis Park racetrack and improvements, located in Henderson, Kentucky, consist of approximately 250 acres of land just north of the Ohio River with a one and one-eighths (1 1/8) mile dirt track, a one-mile turf track and a stabling area for 1,140 horses.  The facility includes clubhouse and grandstand seating for 8,000 people, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants.  The Ellis Park facility also features a saddling paddock, parking areas for the public and office facilities.

Hoosier Park

Hoosier Park is located in Anderson, Indiana, about 40 miles northeast of downtown Indianapolis.  Hoosier Park leases the land under a long-term lease from the city of Anderson and owns all of the improvements on the site.  The Hoosier Park facility consists of approximately 110 acres of leased land with a seven-eighths (7/8) mile dirt track,

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permanent grandstands and a stabling area.  The facility includes seating for approximately 2,400 persons, a general admission area, and food and beverage facilities ranging from fast food to a full-service restaurant.  The site also has a saddling paddock, parking areas for the public and office facilities.  The stable area has barns sufficient to accommodate 980 horses and other facilities for backstretch personnel.

C.            Simulcast Operations

We generate a significant portion of our revenues by transmitting signals of races from our racetracks to other facilities (“export”), and receiving signals from other tracks (“import”).  Revenues are earned through pari-mutuel wagering on signals that we both import and export.

The Churchill Downs Simulcast Network (“CDSN”) was developed in 2002 to focus on the distribution of the Company’s simulcast signal.  CDSN provides the principal oversight of our interstate and international simulcast and wagering opportunities, as well as the marketing, sales, operations and data support efforts related to the Company-owned racing content.  CDSN will present over 650 racing programs from our seven racetracks to wagering outlets during 2005.

Churchill Downs Arlington Park and Calder conduct on-site simulcast wagering only during live race meets, while Fair Grounds, Hollywood Park, Hoosier Park and Ellis Park offer year-round simulcast wagering at the racetracks.  Our OTB in Kentucky primarily conducts simulcast wagering only when Churchill Downs is not operating a live race meet.  The OTBs located in Indiana, Illinois and Louisiana conduct simulcast wagering year-round.

Off-Track Betting Facilities

Twelve of our OTBs are collectively branded “Trackside” to create a common identity for our OTB operations.  The Kentucky OTB is located in Louisville, Kentucky, about five miles from the Churchill facility.  This 100,000-square-foot property, on approximately 88 acres of land, is a Thoroughbred training and stabling annex that has state-of-the-art audiovisual capabilities for pari-mutuel wagering.  The OTB provides audio and visual technology, seating for approximately 3,000 persons, parking, offices and related facilities for simulcasting races.

Arlington Park operates eight OTBs that accept wagers on races at Arlington Park as well as on races simulcast from other locations.  One OTB is located on the Arlington Park property.  Another is located in Rockford, Illinois consisting of approximately 8.6 acres, and a third is located in East Moline, Illinois on approximately 232.6 acres.  Arlington Park also leases two OTBs located in Waukegan, Illinois consisting of approximately 25,000 square feet, and Chicago, Illinois consisting of approximately 19,700 square feet.  Arlington Park operates three OTBs within existing non-owned restaurants under license agreements.  These three OTBs are located in South Elgin, Illinois, McHenry, Illinois and South Beloit, Illinois, which opened in December 2002, June 2003 and February 2004, respectively.

Hoosier Park operates three OTBs providing a statewide distribution system for Hoosier Park’s racing signal, and additional simulcast markets for our products.  These OTBs are located in:  Merrillville, located about 30 miles southeast of Chicago, which consists of approximately 27,300 square feet of space; Fort Wayne which consists of approximately 15,750 square feet of space; and downtown Indianapolis where Hoosier Park leases approximately 24,800 square feet of space.

Fair Grounds operates eleven OTBs that accept wagers on races at Fair Grounds as well as on races simulcast from other locations.  One OTB is located on the Fair Grounds property.  Another is located in Kenner, Louisiana consisting of approximately 4.26 acres.  Fair Grounds also leases nine OTBs located in: Covington, Louisiana consisting of approximately 7,000 square feet of space; Elmwood, Louisiana which consists of approximately 14,000 square feet of space; Gretna, Louisiana which consists of approximately 20,000 square feet of space; Houma, Louisiana which consists of approximately 10,000 square feet of space; Laplace, Louisiana which consists of approximately 7,000 square feet of space; Metairie, Louisiana which consists of approximately 9,000 square feet of space; St. Bernard, Louisiana which consists of approximately 12,000 square feet of space; Slidell, Louisiana which consists of approximately 9,000 square feet of space; and Thibodaux, Louisiana which consists of approximately 5,000 square feet of space.

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Kentucky Off-Track Betting, LLC

We are a 50% owner in Kentucky Off-Track Betting, LLC (“KOTB”), with 25% of this ownership through our Ellis Park racetrack and the other 25% of this ownership through our Churchill Downs racetrack.  KOTB’s purpose is to own and operate facilities for the simulcasting of races and the acceptance of wagers on such races at locations other than a racetrack.  These OTBs may be located no closer than 75 miles from an existing racetrack without the racetrack’s consent and in no event closer than 50 miles to an existing racetrack.  Each OTB must first be approved by the Kentucky Horseracing Authority (“KHRA”) and the local government where the facility is to be located.  KOTB currently owns or leases and operates OTBs in Corbin, Maysville, Jamestown and Pineville, Kentucky that conduct simulcast wagering year-round.

OTBs developed by KOTB provide additional markets for the intrastate simulcasting of and wagering on Churchill Downs’ and Ellis Park’s live races and interstate simulcasting of and wagering on out-of-state signals.  KOTB did not contribute significantly to our operations in 2004 and is not anticipated to have a substantial impact on our operations in the future.  Our investment in KOTB is not material to the Company’s financial position or results of operations.

In-Home Wagering

In-home wagering, or account wagering, allows patrons to place wagers through an advance deposit account established with an operating company.  Most operating companies provide distribution of the live racing product through a broadcast medium such as television or the Internet.  We have entered into agreements with Television Games Network (“TVG”), affiliated with Gemstar-TV Guide International, Inc., to broadcast our simulcast products as part of TVG’s programming content.  Such agreements expire on various dates between March 2007 and April 2008.  We license our live racing products to TVG for which we receive a simulcast host fee and a source market fee.

We believe that in-home wagering will attract both new patrons and existing racing fans who will use account wagering in addition to the live track and OTB operations.  We view this distribution channel as a potential source of future growth in the off-track market in states where it is not expressly prohibited and we intend to continue to pursue the expansion of in-home wagering.

D.            Sources of Revenue

Our pari-mutuel revenues include commissions on pari-mutuel wagering at our racetracks and off-track betting facilities (net of state pari-mutuel taxes), plus simulcast host fees from other wagering sites and source market fees generated from contracts with our in-home wagering providers.  In addition to the commissions earned on pari-mutuel wagering, we earn pari-mutuel related streams of revenues from sources that are not related to wagering.  These other revenues are primarily derived from statutory racing regulations in some of the states where our facilities are located and can fluctuate materially year-to-year.  Non-wagering revenues are primarily generated from admissions, sponsorships, licensing rights and broadcast fees, Indiana riverboat admissions subsidy, concessions, video poker, lease income and other sources.

Financial information about our segments required by this Item is incorporated by reference from the information contained in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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E.              Licenses and Live Race Dates

The following table is a summary of our live racing dates and the number of live racing days for each of our seven racetracks.  Racing dates are generally approved by the respective state racing authorities:

Kentucky’s racetracks, including Churchill Downs and Ellis Park, are subject to the licensing and regulation of the Kentucky Horse Racing Authority (“KHRA”).  The KHRA is responsible for overseeing horse racing and regulating the state equine industry.  Licenses to conduct live Thoroughbred race meets and to participate in simulcasting are approved annually by the KHRA based upon applications submitted by the racetracks in Kentucky.  Although to some extent Churchill Downs and Ellis Park compete with other racetracks in Kentucky for the award of racing dates, the KHRA is required by state law to consider and seek to preserve each racetrack’s usual and customary live racing dates.  Generally, there is no substantial change from year to year in the racing dates awarded to each racetrack.

In California, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved annually by the California Horse Racing Board based upon applications submitted by California racetracks.  Generally, there is no substantial change from year to year in the racing dates awarded to each racetrack.  Although the southern California racetracks have maintained their traditional racing seasons, Hollywood may face direct competition from other southern California racetracks and may be subject to an increase or decrease in live racing dates in the future.

In Florida, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering (“DPW”).  The DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering facility, as well as issuing the permits necessary to operate a pari-mutuel wagering facility.  The DPW also approves annual licenses for Thoroughbred, Standardbred and Quarter Horse races.

Effective July 1, 2001, a new tax structure, as defined in the Florida Pari-Mutuel Wagering Act, eliminated the tax incentive for Miami-area racetracks in Florida to apply for licenses for race dates based on their traditional racing season.  Although the Miami-area racetracks have maintained their traditional racing seasons thus far, Calder may

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face direct competition from other Florida racetracks and may be subject to an increase or decrease in live racing dates in the future.

In Louisiana, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Louisiana State Racing Commission (“LSRC”).  The LSRC is responsible for overseeing the awarding of licenses for the conduct of live race meets, the conduct of Thoroughbred horse racing, the types of wagering which may be offered by pari-mutuel facilities and the disposition of revenue generated from wagering.  Off-track wagering is also regulated by the LSRC.

The manufacture, distribution, servicing and operation of video draw poker devices (“Devices”) in Louisiana are subject to the Louisiana Video Draw Poker Devices Control Law and the rules and regulations promulgated thereunder (the “Louisiana Act”).  Licensing and regulatory control is maintained by a single gaming control board for the regulation of gaming in Louisiana.  This Board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the “Louisiana Board”) and oversees all licensing for all forms of legalized gaming in Louisiana (including all regulatory enforcement and supervisory authority that exists in the state as to gaming on Native American lands).  The Video Gaming Division of the Gaming Enforcement Section of the Office of the State Police within the Department of Public Safety and Corrections (the “Division”) performs the investigative functions for the Louisiana Board.  The laws and regulations of Louisiana are based on policies of maintaining the health, welfare and safety of the general public and protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices.

In Illinois, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Illinois Racing Board (“IRB”).  Generally, there is no substantial change from year to year in the number of racing dates awarded to each racetrack.

In Indiana, licenses to conduct live Standardbred and Thoroughbred race meets, including Quarter Horse races, and to participate in simulcasting are approved annually by the Indiana Horse Racing Commission (“IHRC”) based upon applications submitted by Indiana racetracks.  Indiana law requires us to conduct live racing for at least 120 days each year in order to simulcast races.  A second racetrack in Indiana, Indiana Downs, was opened on December 6, 2002, resulting in changes to Hoosier Park’s traditional racing dates.  Hoosier Park experienced a reduction of 10 live Thoroughbred days in 2004 offset by an increase of 10 live Standardbred days compared to 2003.  Additionally, Hoosier Park experienced a reduction of 38 live Standardbred racing dates in 2003 compared to 2002.  The addition of a second racetrack in Indiana, located approximately 32 miles from Hoosier Park, also negatively impacts Hoosier Park’s share of the riverboat admissions revenue and creates an increase in competition in the market.  These factors will likely have an adverse impact on future profitability of the facility.

The total number of days on which each racetrack conducts live racing fluctuates annually according to each calendar year.  A substantial change in the allocation of live racing days at any of our seven racetracks could significantly impact our operations and earnings in future years.

F.              Competition

North American bloodstock sales surged in 2004, building upon gains made in 2003 after a two-year downward trend.  According to The Jockey Club Fact Book, gross sales increased 23% in 2004 compared to 2003, and 2003 sales were up 11% compared to 2002.  The number of foals registered in 2004 was flat compared to 2003, indicating a stabilization of the foal crop following the Mare Reproductive Loss Syndrome (MRLS) that affected the foal population in central Kentucky in 2001.  The number of Thoroughbreds registered has an impact on the number of horses available to participate in live racing.  The improvements in bloodstock sales for 2004 are primarily attributed to an improving economy, favorable tax law changes for horse purchasers and the strength of foreign currencies against the U.S. dollar which helped drive increased participation by overseas buyers.

We generally do not directly compete with other racetracks or OTBs for patrons due to the geographic separation of facilities or differences in seasonal timing of meets.  However, a new OTB opened in Evansville, Indiana by a competitor has had a negative impact on Ellis Park, and an OTB opened in Clarksville, Indiana in 2004 has had a negative impact on Churchill Downs racetrack and OTB operations.  The Hoosier Park market has also had an increase in competition with the opening of Indiana Downs.  We face competition from a variety of sources for discretionary consumer spending including spectator sports and other entertainment and gaming options, including riverboat, other Louisiana racetracks, cruise ship and land-based casinos and lotteries.  Additionally, the industry

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faces increasing competition for overall wagering dollars from internet wagering services, which are often established off-shore to avoid regulation under U.S. state and federal laws.

The development of riverboat gaming facilities began in Indiana pursuant to authorizing legislation passed by the state of Indiana in 1993.  Illinois had previously authorized riverboat gaming.  There are currently seven riverboat casinos operating on the Ohio River along Kentucky’s border.  In addition to those riverboats operating along the Ohio River, five riverboat casinos are located along the Indiana shore of Lake Michigan and four are situated in Illinois near Chicago. There are also Native American gaming operations in Wisconsin, Florida and California, which have drawn patrons from the Arlington Park, Calder Race Course and Hollywood Park markets, respectively.  Fair Grounds competes in the New Orleans area with three riverboat casinos, one land-based casino and video poker operations located at various truck stops and restaurants.

In response to the continued increased competition from other gaming options, the horse racing industry continues to search for new sources of revenue.  Several recent developments are anticipated to be key contributors to overall growth within the industry.  The repeal of a Federal withholding tax on foreign wagers removes an impediment for U.S. racetracks seeking to penetrate international markets.  Other developments focus on increasing the core customer base and developing new fans through new technology to increase the distribution of racing content, and through developing better identification of existing customers to increase revenues from existing sources.  Finally, the industry continues to seek additional ways to draw new and existing customers to live racing venues.  Each of these developments is highly dependent on the regulatory environment and legal developments within individual state jurisdictions.

Alternative Gaming

The NTRA, the representative body for the racing industry, supports the alternative gaming movement at racetracks and is working with regulators and legislators to pass alternative gaming legislation.  Alternative gaming refers to the operation of slot machines or electronic gaming devices within a racing facility or OTB.  In general, the NTRA and the racing industry believe that alternative gaming will result in the following benefits:

•      Higher racetrack revenues and purse levels with pass through benefits to breed developers and breeding farms

•      Increased tax revenues for states and local municipalities

•      Increased attendance at live track facilities driven primarily by “casual fans,” or those who are patrons of traditional gaming operations such as casinos but are not racing customers

G.            Legislative Changes

Federal

On October 11, 2004, the U. S. Congress passed The Foreign Sales Corporation Act. The Act includes a measure that repeals the 30 percent alien withholding requirements that should allow the U.S. horse racing industry to further export its product to foreign markets. President Bush signed the bill into law on October 22, 2004.  The 30 percent withholding effectively precluded common pooling by foreign countries into U.S. wagering pools.  The Company believes that the elimination of the 30 percent withholding requirement will help open the $85 billion international market for wagering on horse racing to U.S. tracks.  The future impact on our results of operations or financial position at this time is uncertain.

Indiana

During the first half of 2004, the Indiana Horse Racing Commission (“IHRC”) considered whether to prevent any Indiana betting facility from accepting wagers on Thoroughbred horse races run at Kentucky racetracks, including Churchill Downs racetrack and Ellis Park, unless all Indiana betting facilities were offered the opportunity to accept wagers on such races.  Pursuant to its statutory right under the Federal Interstate Horse Racing Act of 1978, the Kentucky Horsemen’s Benevolent and Protective Association withheld its consent and thereby prevented the Evansville OTB and Clarksville OTB, both owned by Indiana Downs, from accepting wagers on Thoroughbred horse races run at Kentucky racetracks.  To assist the IHRC in reaching a determination on the matter, the IHRC asked the Indiana Department of Gaming Research (“IDGR”) to estimate the impact of simulcast wagering on live horse racing in Kentucky and Indiana.  The IDGR issued a report in June 2004, which concluded the racing industry in both states would lose money if none of Indiana’s pari-mutuel facilities received Kentucky’s racing signals.  As a result, at its July 1, 2004 meeting, the IHRC decided not to ban Kentucky simulcast signals at Indiana racetracks.  Indiana Downs

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requested the IHRC to reconsider its decision, and at its August 2, 2004 meeting, by a vote of 3-2, the IHRC denied a motion which would have limited Kentucky simulcasts to Indiana’s two racetracks and would have prevented Kentucky simulcasts to OTB facilities unless the Kentucky simulcasts were made available to all OTB facilities.  An interim study committee of the Indiana General Assembly held hearings on this subject but there have been no recommendations for legislative changes to Indiana’s pari-mutuel statute.

On October 19, 2004, the Interim Study Committee on Agriculture and Small Business of the Indiana General Assembly endorsed a proposal to put pull-tab machines at Hoosier Park, Indiana Downs and two OTB sites located in Indianapolis and Fort Wayne.  We believe the endorsement provides momentum for the proposal in the 2005 session of the Indiana General Assembly.

Indiana HB 1569, which would have authorized slot machines at Indiana’s two pari-mutuel racetracks, was defeated in the Public Policy Committee of the Indiana General Assembly on February 14, 2005. No other legislation has originated in either chamber calling for slots at the racetracks.  However, it is still possible for legislation pertaining to alternative gaming at racetracks to be amended into existing bills.  The concept could also be incorporated into the state budget.  The Indiana General Assembly is scheduled to adjourn April 29, 2005.

Florida

In Florida, Yes for Local Control (formerly known as The Floridians for a Level Playing Field), a coalition of pari-mutuel facilities including Calder, successfully gathered the necessary petition signatures to place a question on the ballot for the November 2004 general election to allow Dade and Broward counties to hold a referendum on the installation of slot machines at existing pari-mutuel sites in those respective counties.  The Florida Supreme Court upheld the constitutionality of the ballot language in May 2004 and the ballot question was officially certified by the Florida Secretary of State on July 21, 2004 and appeared on the ballot as Amendment 4.  On July 23, 2004, a suit was filed against the Florida Division of Elections challenging the format of the initiative petition and was dismissed.  A suit was filed in September 2004 by Floridians Against Expanded Gambling, challenging the methodology used in the signature gathering process including allegations of fraud, in the initiative to put Amendment 4 on the ballot. However, the court had refused to hear the suit until after the November 2004 election to give proponents time to prepare their case. Calder has funded a pro-rata share of the initiative costs.  On November 2, 2004, Amendment 4 passed by a margin of 1.4 percent.

Voters in Miami-Dade and Broward counties voted March 8, 2005, in separate local referenda to decide whether slot machines can be installed at the seven existing pari-mutuel sites in those counties, including Calder.  Although the measure passed in Broward County, home of Gulfstream Park, it was unsuccessful in Miami-Dade County, where Calder is located.  Pari-mutuel operators in Broward County will now lobby Florida legislature to pass enabling legislation authorizing slot machine gaming at the pari-mutuel facilities.  Failure of the referendum to pass in Miami-Dade County was due primarily to Governor Jeb Bush’s active opposition to the measure during the final days of the campaign.  The Company is preparing a strategy to win passage in Miami-Dade County in 2007 when the issue can again be placed on the ballot.  The impact on the Company’s results of operations and financial position of the failed referendum in Miami-Dade County is uncertain at this time.

All litigation filed to challenge the signature gathering process and the vote counting on election day for the statewide referendum has been resolved in favor of Calder and the pari-mutuel coalition.

California

In California, Hollywood Park was part of a coalition of racetracks and card clubs supporting Proposal 68 on the November 2004 ballot.  The proposal failed to pass by a margin of 16 percent to 84 percent.  If passed, this initiative would have directed the governor to re-negotiate all existing compacts with Native American tribes in California.  If the tribes had declined to renegotiate the existing compacts, then five racetracks, including Hollywood Park, and 11 card clubs would have been allowed to operate electronic gaming devices.  We continue to work with other members of the California horse industry on a long-term strategy for developing a legislative agenda that addresses the competitive advantages afforded to Native American casinos.

In addition to Proposition 68 noted above, California Proposition 70, also known as The Indian Gaming Fair-Share Revenue Act of 2004, also failed to pass in the November 2004 election.  Proposition 70 called for an unlimited expansion of Native American gaming in return for an 8.8% tax on gaming revenue.  Proposition 70 was actively opposed by Governor Schwarzenegger.

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Also in California, legislation recently passed which is estimated will generate approximately $10.0 million in the aggregate annually industry-wide from a 0.5% increase in the commission, or take out rate, on exotic wagers placed on California races.  The increased revenue will be used to pay the cost of workers compensation insurance for backstretch workers and to provide a starter participation bonus.  Governor Schwarzenegger signed this bill on May 14, 2004.  During 2004 we funded $1.3 million for worker’s compensation insurance from the 0.5% increase in the commissions.

Illinois

In 1999, the state of Illinois enacted legislation that provides for pari-mutuel tax relief and related tax credits for Illinois racetracks, as well as legislation providing for subsidies to Illinois horse racing tracks from revenues generated by the relocation of a license to operate a riverboat casino gaming facility.  Arlington Park’s share of subsidies from the relocation of the license under the 1999 legislation would range from $4.6 million to $8.0 million annually, based on publicly available sources.  In the event Arlington Park receives such subsidies, additional shares of common stock would be issued to Duchossois Industries, Inc. (“DII”), to a maximum of 1.25 million shares only after the proposed casino opens and subsidies have been distributed for one year, under our merger agreement related to Arlington Park.  The additional shares may be issued to DII in the future, subject to the occurrence of certain events as specified in the merger agreement.  In January 2001, the Illinois Gaming Board (“IGB”) denied a license application of Emerald Casino, Inc. to relocate the license to operate the Rosemont casino.  During 2002, Emerald Casino, Inc. filed for bankruptcy and was attempting to sell its license rights subject to the approval of the IGB and the bankruptcy court.  In April 2004, the IGB conducted an auction of the license and awarded that license to Isle Capri Casinos, Inc., which announced plans to locate the license to operate in Rosemont, Illinois.  Both the Governor of Illinois and the Attorney General of Illinois have convened investigations of the award by the IGB.  The date for final approval by the bankruptcy court of the auction and issuance of the license by the IGB is not known at this time.

Pursuant to the Illinois Horse Racing Act, Arlington Park (and all other Illinois racetracks) is permitted to receive a payment commonly known as purse recapture.  Generally, in any year that wagering on Illinois horse races at Arlington Park is less than 75% of wagering at Arlington Park on Illinois horse races in 1994, Arlington Park is permitted to receive 2% of the difference in wagering in the subsequent year.  The payment is funded from the Arlington Park purse account.  Under the Illinois Horse Racing Act, the Arlington Park purse account is to be repaid via an appropriation by the Illinois General Assembly from the Illinois General Revenue Fund.  However, this appropriation has not been made since 2001.  Subsequently, Illinois horsemen unsuccessfully petitioned the Illinois Racing Board (“IRB”) to prevent Illinois racetracks from receiving this payment in any year that the Illinois General Assembly did not appropriate the repayment to the racetrack’s purse accounts from the General Revenue Fund.  Further, the Illinois horsemen filed a lawsuit seeking, among other things, to block the payment to Illinois racetracks as well as to recover the 2002 and 2003 amounts already paid to the Illinois racetracks.  Several bills were filed in the 2003, 2004 and 2005 session of the Illinois legislature that, in part, would eliminate the statutory right of Arlington Park and the other Illinois racetracks to continue to receive this payment.  None of these bills passed.  The lawsuit challenging the 2002 reimbursement has been resolved in favor of Arlington Park and the other Illinois racetracks.  The lawsuit challenging the 2003 reimbursement is still pending.  As the legal right still exists, we have elected to continue to receive the recapture payment from the purse account while the litigation is pending.  If the litigation challenging the reimbursement were to succeed or if Arlington Park loses the statutory right to receive this payment, there would be a material adverse impact on Arlington Park’s results of operations.

During January and February when there is no live racing in Illinois, the IRB designates a Thoroughbred racetrack as the host track in Illinois.  The IRB appointed Arlington Park as the host track in Illinois during January 2005, which is expected to result in pari-mutuel revenues comparable to the same period in 2004.  The IRB did not appoint Arlington Park as the host track in Illinois for February 2005, which is expected to result in an estimated decrease of $1.6 million in net earnings for the month of February in 2005 compared to the same period in 2004.  Arlington Park’s future designation as the host track is subject to the annual appointment by the IRB.

Kentucky

In Kentucky, racetracks with on-track average daily handle of $1.2 million or more pay an excise tax equal to 3.5% of on-track handle while tracks with on-track average daily handle that does not meet the $1.2 million threshold pay an excise tax of 1.5% of on-track handle.  To mitigate the disparity of treatment between larger tracks such as Churchill Downs and other Kentucky racetracks, we successfully pursued legislation creating an excise tax credit for racetracks as part of the 2002-2004 state budget.  The measure resulted in a $12,000 credit against our excise tax liability for each day of live racing starting July 1, 2003 and ending June 30, 2004.  However, average daily wagering

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at Churchill Downs racetrack fell below the $1.2 million threshold for the state’s fiscal year ended June 30, 2004, which resulted in a drop in our excise tax rate from 3.5% to 1.5% for the year.  As a result, the excise tax credit did not apply to Churchill Downs racetrack and a $260,000 refund of tax payments was received from the Kentucky Revenue Cabinet during the third quarter of 2004.  The excise tax credit was not included in the Kentucky state budget currently under consideration.

The Kentucky Horse industry continues to seek legislation to allow alternative forms of gaming at the state’s eight existing racetracks. Alternative forms of gaming would enable our Kentucky racetracks to better compete with neighboring gaming venues by providing substantial new revenues for purses and capital improvements. Several alternative gaming bills were introduced in the 2005 session of the Kentucky General Assembly.  The 2005 session concluded with no action having been taken with respect to such bills.

Louisiana

In 2003, the Louisiana Legislature passed a bill authorizing the operation of slot machines at Fair Grounds subject to amendment of Louisiana’s contract with Harrah’s Casino in New Orleans (which prohibited other land based gaming in Orleans Parish), subject to Orleans Parish voter approval, and subject to the owner and operator of the track securing the necessary gaming licenses from the Louisiana Gaming Control Board.  In addition, video poker operations must be discontinued at the main racetrack location when slot machines become operational.

In October 2003, Orleans Parish voters approved a referendum authorizing slot machine gaming at Fair Grounds conditioned upon the adoption of certain zoning and permitting requirements.  In 2003, the Louisiana Legislature passed an act that limited the number of slot machines that may be operated at Fair Grounds to 400 slot machines through June 30, 2005 and 500 slot machines thereafter.  However, the act provides that if gross gaming revenues at Harrah’s Casino in New Orleans exceed $350 million for any previous 12-month period, up to 700 slot machines may be operated at Fair Grounds.

After approval of the amendment to Louisiana’s contract with Harrah’s Casino by the Louisiana Gaming Control Board in December 2004 and by the Joint Legislative Committee on the Budget in January 2005, on February 2, 2005, Harrah’s Casino and the State Of Louisiana executed an amendment to their contract providing for slot machines at Fair Grounds.

Churchill Downs Louisiana Horseracing Company, LLC has initiated the process to obtain the necessary gaming licenses to own and operate slot machines at Fair Grounds and to seek the necessary local zoning change and permits.

The City of New Orleans is challenging the live pari-mutuel tax calculation used by the Fair Grounds Corporation, the seller of Fair Grounds to Churchill Downs Louisiana Horseracing Company, LLC.  The City’s interpretation is different from the interpretation and methods used by of all of the racetracks in Louisiana.  If the City of New Orleans were to prevail in its interpretation of the tax calculation, the Fair Grounds could be assessed for an underpayment of taxes from the date of our ownership of the track.  As of December 31, 2004, any underpayment would not be significant to the overall operations of Fair Grounds, since there were a limited number of live race days in 2004.

Additional information regarding how our facilities could be impacted by legislative changes is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

H.            Environmental Matters

The septic system at our Ellis Park facility must be replaced with a hook-up to city sewers.  The cost of the hook-up, which Ellis Park has expanded in order to include the stabling area, is estimated by the City of Henderson, Kentucky to be $1.5 million, which has been provided for in Ellis Park’s 2005 capital budget.  The project is expected to be completed during 2005.

In 1992, we acquired certain assets of Louisville Downs Incorporated for $5.0 million including the site of the Louisville OTB.  In conjunction with this purchase, we withheld $1.0 million from the amount due to the sellers to offset certain costs related to the remediation of environmental contamination associated with underground storage tanks at the site.  All of the $1.0 million hold back had been utilized as of December 31, 2004 and additional costs of remediation have not yet been conclusively determined.  The sellers had previously received a reimbursement of $1.0

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million from the Commonwealth of Kentucky for remediation costs, and that amount is now being held in an escrow account to pay further costs of remediation.  Approximately $1.5 million, including interest on the escrow principal, remains in the account.  The seller has submitted a Corrective Action Plan to the state and has reported to the state that all wells, with the exception of one, are “below action.”  That is, contamination levels of the wells are below levels that require remediation under the applicable governmental standards.  Well-testing continues and the Kentucky Environmental and Public Protection Cabinet has not taken final action on this matter.  In addition to the hold back, we have obtained an indemnity to cover the full cost of remediation from the prior owner of the property.  We do not believe the cost of further investigation and remediation will exceed the amount of funds in the escrow.

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

I.                 Service Marks

We hold numerous state and federal service mark registrations on specific names and designs in various categories including the entertainment business, apparel, paper goods, printed matter and house wares and glass.  We license the use of these service marks and derive revenue from such license agreements.

J.              Employees

As of December 31, 2004, we employed approximately 1,500 full-time employees Company-wide.  Due to the seasonal nature of our live racing business, the number of seasonal and part-time persons employed will vary throughout the year.  During 2004, average full-time and seasonal employment per pay period was approximately 2,500 individuals Company-wide.

K.            Internet Access

Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available free of charge on or through our website (www.churchilldownsincorporated.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.

ITEM 2.   PROPERTIES

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

Our real and personal property (but not including the property of Hoosier Park, CDSP, KOTB, NASRIN or Kentucky Downs) is encumbered by liens securing our $200 million line of credit facility and our $100 million senior notes facility.  The shares of stock of and ownership interests in certain of our subsidiaries are also pledged to secure these debt facilities.

The Kentucky Derby Museum is located on property that is adjacent to, but not owned by, Churchill Downs.  The Museum is owned and operated by the Kentucky Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986.

ITEM 3.   LEGAL PROCEEDINGS

On March 2, 2005, the Company commenced litigation in the United States District Court for the Western District of Kentucky against the Jockey’s Guild, a trade organization associated with many of the jockeys who race at the Company’s tracks.  The case was filed due to certain actions by the Jockey’s Guild at certain of the Company’s tracks that interfered with the Company’s operations.  In the case, the Company asserts claims under the antitrust laws and seeks injunctive relief along with damages.

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

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

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

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq National Market under the symbol CHDN.  As of March 2, 2005, there were approximately 3,768 shareholders of record.

The following table sets forth the high and low sale prices, as reported by Nasdaq, and dividend payment information for our common stock during the last two years:

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

The following table provides information with respect to shares of common stock repurchased by the Company during the quarter ended December 31, 2004:

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ITEM 6.   CONSOLIDATED SELECTED FINANCIAL DATA

(In thousands, except per share data)

The selected financial data presented above is subject to the following information:

(1)   The Company restated its Consolidated Financial Statements for the years ended December 31, 2003, 2002, 2001 and 2000 to correct errors relating to the calculation of accrued deferred compensation liabilities and deferred taxes associated with the liability.  See Note 1 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to the impact of the restatement on the 2003 and 2002 Consolidated Financial Statements.  The restatement serves to decrease operating income by approximately $0.5 million and $0.1 million for the years ended December 31, 2001 and 2000, respectively.  The restatement serves to decrease net earnings by approximately $0.4 million and $0.1 million for the years ended December 31, 2001 and 2000, respectively.

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The following table represents the effect of the restatement from periods prior to the year ended December 31, 2000 reflected as an adjustment to the retained earnings balance as of January 1, 2000:

(2)   During 2004, the Company recorded a $4.3 million loss representing an unrealized loss on derivative instruments embedded in a convertible promissory note, a $1.6 million gain on the sale of our 19% interest in Kentucky Downs and a $6.2 million asset impairment loss recorded to write down the assets of Ellis Park (part of our Kentucky Operations segment) to its estimated fair market value.

(3)   During 2003, the Company recorded a $4.1 million gain related to an Illinois real estate tax settlement.  The amount recorded, net of attorney’s fees and other reductions, approximates $3.1 million reflected as a reduction in operating expenses and $1.0 million in earned interest income.

(4)   During 2002, an asset impairment loss of $4.5 million was recorded to write down the assets of Ellis Park (part of our Kentucky Operations segment) to its estimated fair market value.

(5)   On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which required us to discontinue the amortization of goodwill.  In 2001 and 2000, goodwill amortization amounted to $1.4 million for each year.

(6)   On September 8, 2000, the Company completed the merger with Arlington Park, and its results of operations are included from the date of merger forward.

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

Information set forth in this discussion and analysis contains various “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.  The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements.  All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act.  The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.  Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information.  Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from our expectations include: the effect of global economic conditions; the effect (including possible increases in the cost of doing business) resulting from future war and terrorist activities or political uncertainties; the economic environment; the impact of increasing insurance costs; the impact of interest rate fluctuations; the effect of any change in the Company’s accounting policies or practices; the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in those markets in which we operate; the impact of live racing day competition with other Florida, Louisiana and California racetracks within those respective markets; costs associated with our efforts in support of alternative gaming initiatives; costs associated with our Customer Relationship Management initiatives; a substantial change in law or regulations affecting our pari-mutuel and gaming activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operations in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional Indiana racetrack and its wagering facilities near our operations; our continued ability to effectively compete for the country’s top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; any business disruption associated with our facility renovations; the loss of our totalisator companies or their inability to provide adequate reliance on their internal control processes through SAS 70 reports or to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price.

The Company restated its 2003 and 2002 Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K to correct errors relating to the calculation of accrued deferred compensation liabilities and deferred taxes associated with the liability.  See Note 1 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.  Corresponding amounts throughout this Item 7 have also been restated as appropriate.

You should read this discussion with the financial statements and other financial information included in this report.  Our significant accounting polices are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

General Information About Our Business

We conduct pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse racing and simulcast signals of races.  Additionally, we offer racing services through our other interests as well as alternative gaming through video poker machines in Louisiana.

We operate the Churchill Downs racetrack in Louisville, Kentucky, which has conducted Thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby, and Ellis Park Race Course, Inc., a Thoroughbred racing operation in Henderson, Kentucky (collectively referred to as “Kentucky Operations”).  We also own and operate Hollywood Park, a Thoroughbred racing operation in Inglewood, California; Arlington Park, a Thoroughbred racing operation in Arlington Heights, Illinois; and Calder Race Course, a Thoroughbred racing operation in Miami Gardens, Florida.  During October 2004, we purchased the assets of Fair Grounds Race Course

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(“Fair Grounds”), a Thoroughbred racing operation in New Orleans, Louisiana and the stock of Video Services Inc. (“VSI”), the owner and operator of more than 700 video poker machines in Louisiana.  Additionally, we are the majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts Thoroughbred, Quarter Horse and Standardbred horse racing.  We conduct simulcast wagering on horse racing at 23 simulcast wagering facilities in Kentucky, Indiana, Illinois and Louisiana, as well as at our seven racetracks.

The Churchill Downs Simulcast Network (“CDSN”) was developed in 2002 to focus on the distribution of the Company’s simulcast signal.  CDSN provides the principal oversight of our interstate and international simulcast and wagering opportunities, as well as the marketing, sales, operations and data support efforts related to the Company-owned racing content.

Management Overview and Recent Developments

We completed our acquisition of the assets of Fair Grounds through our wholly owned subsidiary Churchill Downs Louisiana Horseracing Company, L.L.C. (“CDI Louisiana”), on October 14, 2004 for approximately $47 million in cash.  The transaction also included the acquisition of two related New Orleans operations, including certain assets of Finish Line Management Corporation and the stock of VSI, for approximately $10.7 million.  These acquisitions (collectively the “Louisiana Operations”) will supplement our full-year racing calendar and allows us to offer a full-year simulcast product as well as an opportunity to utilize alternative gaming.  The results of operations of the Louisiana Operations are included in our Consolidated Financial Statements from the date of acquisition during the fourth quarter of 2004.

On October 19, 2004, we sold a 19% interest in Kentucky Downs, LLC (“Kentucky Downs”), including debt owed to us, to Kelley Farms Racing, LLC in exchange for 86,886 shares of our common stock valued at approximately $3.2 million.  The consideration paid by Kelley Farms Racing, LLC was shares of our common stock, no par value, held by Brad M. Kelley.  The sale resulted in a $1.6 million gain and is included in our Consolidated Financial Statements.  Mr. Kelley is the sole owner of Bison Capital, LLC and Bison Capital, LLC is the sole owner of Kelley Farms Racing, LLC.  The agreement also includes a contingency payout should Kentucky Downs be approved for alternative gaming legislation.  We retained a 5% interest in Kentucky Downs.

On October 19, 2004, we also acquired 452,603 shares of our common stock from Mr. Kelley in exchange for a convertible promissory note (the “Note”) in the principal amount of $16.7 million.  The Note was amended and restated on March 7, 2005 (as so amended and restated the “Note”) to eliminate our ability to pay the Note at maturity with shares of our common stock.  The Company will pay interest on the principal amount of the Note on an annual basis in an amount equal to what Mr. Kelly would have received as a dividend on the shares that were redeemed. The Note is immediately convertible, at the option of Mr. Kelley, into shares of the Company’s common stock at a conversion price of $36.83. Upon maturity, we must pay the principal balance and unpaid accrued interest in cash.  The Note matures on October 18, 2014 and may not be prepaid without Mr. Kelley’s consent.  As a result of this transaction, we recorded a $4.3 million unrealized loss on derivative instruments during the fourth quarter of 2004 related to changes in the fair market value of embedded derivatives within the Note.

During the third quarter of 2004, we recognized a fixed asset impairment charge of $4.4 million and an intangible asset impairment charge of $1.8 million at our Ellis Park facility.  The asset impairment charges were triggered as a result of Ellis Park’s poor live race meet performance during the third quarter of 2004.  The impairment charges are included in our Consolidated Statements of Net Earnings and are described more fully under Critical Accounting Policies and Estimates.

Initiatives related to the passage of legislation permitting alternative gaming at racetracks, such as slot machines and video lottery terminals, were placed on certain state ballots for voters during the fourth quarter of 2004, including the states in which we operate.  During 2004, we spent $5.9 million at our Hollywood Park and Calder Race Course facilities on the alternative gaming initiatives in California and Florida, respectively.

As a result of the non-deductible legislative initiative costs, intangible asset impairment charges and the unrealized loss on derivative instruments related to the Note discussed above, we revised our year-to-date effective tax rate at December 31, 2004.  The effective tax rates were 61%, 40% and 41% for the years ended December 31, 2004, 2003 and 2002, respectively.

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Legislative and Regulatory Changes

Federal

On October 11, 2004, the U. S. Congress passed The Foreign Sales Corporation Act. The Act includes a measure that repeals the 30 percent alien withholding requirements that should allow the U.S. horse racing industry to further export its product to foreign markets. President Bush signed the bill into law on October 22, 2004.  The 30 percent withholding effectively precluded common pooling by foreign countries into U.S. wagering pools.  The Company believes that the elimination of the 30 percent withholding requirement will help open the $85 billion international market for wagering on horse racing to U.S. tracks.  The future impact on our results of operations or financial position at this time is uncertain.

Indiana

During the first half of 2004, the Indiana Horse Racing Commission (“IHRC”) considered whether to prevent any Indiana betting facility from accepting wagers on Thoroughbred horse races run at Kentucky racetracks, including Churchill Downs racetrack and Ellis Park, unless all Indiana betting facilities were offered the opportunity to accept wagers on such races.  Pursuant to its statutory right under the Federal Interstate Horseracing Act of 1978, the Kentucky Horsemen’s Benevolent and Protective Association withheld its consent and thereby prevented the Evansville OTB and Clarksville OTB, both owned by Indiana Downs, from accepting wagers on Thoroughbred horse races run at Kentucky racetracks.  To assist the IHRC in reaching a determination on the matter, the IHRC asked the Indiana Department of Gaming Research (“IDGR”) to estimate the impact of simulcast wagering on live horse racing in Kentucky and Indiana.  The IDGR issued a report in June 2004, which concluded the racing industry in both states would lose money if none of Indiana’s pari-mutuel facilities received Kentucky’s racing signals.  As a result, at its July 1, 2004 meeting the IHRC decided not to ban Kentucky simulcast signals at Indiana racetracks.  Indiana Downs requested the IHRC to reconsider its decision, and at its August 2, 2004 meeting, by a vote of 3-2, the IHRC denied a motion which would have limited Kentucky simulcasts to Indiana’s two racetracks and would have prevented Kentucky simulcasts to OTB facilities unless the Kentucky simulcasts were made available to all OTB facilities.  An interim study committee of the Indiana General Assembly held hearings on this subject but there have been no recommendations for legislative changes to Indiana’s pari-mutuel statute.

On October 19, 2004, the Interim Study Committee on Agriculture and Small Business of the Indiana General Assembly endorsed a proposal to put pull-tab machines at Hoosier Park, Indiana Downs and two OTB sites located in Indianapolis and Fort Wayne.  We believe the endorsement provides momentum for the proposal in the 2005 session of the Indiana General Assembly.

Indiana HB 1569, which would have authorized slot machines at Indiana’s two pari-mutuel racetracks, was defeated in the Public Policy Committee of the Indiana General Assembly on February 14, 2005. No other legislation has originated in either chamber calling for slots at the racetracks.  However, it is still possible for legislation pertaining to alternative gaming at racetracks to be amended into existing bills.  The concept could also be incorporated into the state budget.  The Indiana General Assembly is scheduled to adjourn April 29, 2005.

Florida

In Florida, Yes for Local Control (formerly known as The Floridians for a Level Playing Field), a coalition of pari-mutuel facilities including Calder, successfully gathered the necessary petition signatures to place a question on the ballot for the November 2004 general election to allow Dade and Broward counties to hold a referendum on the installation of slot machines at existing pari-mutuel sites in those respective counties.  The Florida Supreme Court upheld the constitutionality of the ballot language in May 2004 and the ballot question was officially certified by the Florida Secretary of State on July 21, 2004 and appeared on the ballot as Amendment 4.  On July 23, 2004, a suit was filed against the Florida Division of Elections challenging the format of the initiative petition and was dismissed.  A suit was filed in September 2004 by Floridians Against Expanded Gambling, challenging the methodology used in the signature gathering process including allegations of fraud, in the initiative to put Amendment 4 on the ballot. However, the court had refused to hear the suit until after the November 2004 election to give proponents time to prepare their case. Calder has funded a pro-rata share of the initiative costs.  On November 2, 2004, Amendment 4 passed by a margin of 1.4 percent.

Voters in Miami-Dade and Broward counties voted March 8, 2005, in separate local referenda to decide whether slot machines can be installed at the seven existing pari-mutuel sites in those counties, including Calder.  Although the

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measure passed in Broward County, home of Gulfstrem Park, it was unsuccessful in Miami-Dade County, where Calder is located.  Pari-mutuel operators in Broward County will now lobby Florida legislature to pass enabling legislation authorizing slot machine gaming at the pari-mutuel facilities.  Failure of the referendum to pass in Miami-Dade County was due primarily to Governor Jeb Bush’s active opposition to the measure during the final days of the campaign.  The Company is preparing a strategy to win passage in Miami-Dade County in 2007 when the issue can again be placed on the ballot.  The impact of the Company’s results of operations and financial position of the failed referendum in Miami-Dade County is uncertain at this time.

All litigation filed to challenge the signature gathering process and the vote counting on election day for the statewide referendum has been resolved in favor of Calder and the pari-mutuel coalition.

California

In California, Hollywood Park was part of a coalition of racetracks and card clubs supporting Proposal 68 on the November 2004 ballot.  The proposal failed to pass by a margin of 16 percent to 84 percent.  If passed, this initiative would have directed the governor to re-negotiate all existing compacts with Native American tribes in California.  If the tribes had declined to renegotiate the existing compacts, then five racetracks, including Hollywood Park, and 11 card clubs would have been allowed to operate electronic gaming devices.  We continue to work with other members of the California horse industry on a long-term strategy for developing a legislative agenda that addresses the competitive advantages afforded to Native American casinos.

In addition to Proposition 68 noted above, California Proposition 70, also known as The Indian Gaming Fair-Share Revenue Act of 2004, also failed to pass in the November 2004 election.  Proposition 70 called for an unlimited expansion of Native American gaming in return for an 8.8% tax on gaming revenue.  Proposition 70 was actively opposed by Governor Schwarzenegger.

Also in California, legislation recently passed which is estimated will generate approximately $10.0 million in the aggregate annually industry-wide from a 0.5% increase in the commission, or take out rate, on exotic wagers placed on California races.  The increased revenue will be used to pay the cost of workers compensation insurance for backstretch workers and to provide a starter participation bonus.  Governor Schwarzenegger signed this bill on May 14, 2004.  During 2004 we funded $1.3 million for worker’s compensation insurance from the 0.5% increase in the commissions.

Illinois

In 1999, the state of Illinois enacted legislation that provides for pari-mutuel tax relief and related tax credits for Illinois racetracks, as well as legislation providing for subsidies to Illinois horse racing tracks from revenues generated by the relocation of a license to operate a riverboat casino gaming facility.  Arlington Park’s share of subsidies from the relocation of the license under the 1999 legislation would range from $4.6 million to $8.0 million annually, based on publicly available sources.  In the event Arlington Park receives such subsidies, additional shares of common stock would be issued to Duchossois Industries, Inc. (“DII”), to a maximum of 1.25 million shares only after the proposed casino opens and subsidies have been distributed for one year, under our merger agreement related to Arlington Park.  The additional shares may be issued to DII in the future, subject to the occurrence of certain events as specified in the merger agreement.  In January 2001, the Illinois Gaming Board (“IGB”) denied a license application of Emerald Casino, Inc. to relocate the license to operate the Rosemont casino.  During 2002, Emerald Casino, Inc. filed for bankruptcy and was attempting to sell its license rights subject to the approval of the IGB and the bankruptcy court.  In April 2004, the IGB conducted an auction of the license and awarded that license to Isle Capri Casinos, Inc., which announced plans to locate the license to operate in Rosemont, Illinois.  Both the Governor of Illinois and the Attorney General of Illinois have convened investigations of the award by the IGB.  The date for final approval by the bankruptcy court of the auction and issuance of the license by the IGB is not known at this time.

Pursuant to the Illinois Horse Racing Act, Arlington Park (and all other Illinois racetracks) is permitted to receive a payment commonly known as purse recapture.  Generally, in any year that wagering on Illinois horse races at Arlington Park is less than 75% of wagering at Arlington Park on Illinois horse races in 1994, Arlington Park is permitted to receive 2% of the difference in wagering in the subsequent year.  The payment is funded from the Arlington Park purse account.  Under the Illinois Horse Racing Act, the Arlington Park purse account is to be repaid via an appropriation by the Illinois General Assembly from the Illinois General Revenue Fund.  However, this appropriation has not been made since 2001.  Subsequently, Illinois horsemen unsuccessfully petitioned the Illinois Racing Board (“IRB”) to prevent Illinois racetracks from receiving this payment in any year that the Illinois General

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Assembly did not appropriate the repayment to the racetrack’s purse accounts from the General Revenue Fund.  Further, the Illinois horsemen filed a lawsuit seeking, among other things, to block the payment to Illinois racetracks as well as to recover the 2002 and 2003 amounts already paid to the Illinois racetracks.  Several bills were filed in the 2003, 2004 and 2005 session of the Illinois legislature that, in part, would eliminate the statutory right of Arlington Park and the other Illinois racetracks to continue to receive this payment.  None of these bills passed.  The lawsuit challenging the 2002 reimbursement has been resolved in favor of Arlington Park and the other Illinois racetracks.  The lawsuit challenging the 2003 reimbursement is still pending.  As the legal right still exists, we have elected to continue to receive the recapture payment from the purse account while the litigation is pending.  If the litigation challenging the reimbursement were to succeed or if Arlington Park loses the statutory right to receive this payment, there would be a material adverse impact on Arlington Park’s results of operations.

During January and February when there is no live racing in Illinois, the IRB designates a Thoroughbred racetrack as the host track in Illinois.  The IRB appointed Arlington Park as the host track in Illinois during January 2005, which is expected to result in pari-mutuel revenues comparable to the same period in 2004.  The IRB did not appoint Arlington Park as the host track in Illinois for February 2005, which is expected to result in an estimated decrease of $1.6 million in net earnings for the month of February in 2005 compared to the same period in 2004.  Arlington Park’s future designation as the host track is subject to the annual appointment by the IRB.

Kentucky

In Kentucky, racetracks with on-track average daily handle of $1.2 million or more pay an excise tax equal to 3.5% of on-track handle while tracks with on-track average daily handle that does not meet the $1.2 million threshold pay an excise tax of 1.5% of on-track handle.  To mitigate the disparity of treatment between larger tracks such as Churchill Downs and other Kentucky racetracks, we successfully pursued legislation creating an excise tax credit for racetracks as part of the 2002-2004 state budget.  The measure resulted in a $12,000 credit against our excise tax liability for each day of live racing starting July 1, 2003 and ending June 30, 2004.  However, average daily wagering at Churchill Downs racetrack fell below the $1.2 million threshold for the state’s fiscal year ended June 30, 2004, which resulted in a drop in our excise tax rate from 3.5% to 1.5% for the year.  As a result, the excise tax credit did not apply to Churchill Downs racetrack and a $260,000 refund of tax payments was received from the Kentucky Revenue Cabinet during the third quarter of 2004.  The excise tax credit was not included in the Kentucky state budget currently under consideration.

The Kentucky Horse industry continues to seek legislation to allow alternative forms of gaming at the state’s eight existing racetracks. Alternative forms of gaming would enable our Kentucky racetracks to better compete with neighboring gaming venues by providing substantial new revenues for purses and capital improvements. Several alternative gaming bills were introduced in the 2005 session of the Kentucky General Assembly.  The 2005 session concluded with no action having been taken with respect to such bills.

Louisiana

In 2003, the Louisiana Legislature passed a bill authorizing the operation of slot machines at Fair Grounds subject to amendment of Louisiana’s contract with Harrah’s Casino in New Orleans (which prohibited other land based gaming in Orleans Parish), subject to Orleans Parish voter approval, and subject to the owner and operator of the track securing the necessary gaming licenses from the Louisiana Gaming Control Board.  In addition, video poker operations must be discontinued at the main racetrack location when slot machines become operational.

In October 2003, Orleans Parish voters approved a referendum authorizing slot machine gaming at Fair Grounds conditioned upon the adoption of certain zoning and permitting requirements.  In 2003, the Louisiana Legislature passed an act that limited the number of slot machines that may be operated at Fair Grounds to 400 slot machines through June 30, 2005 and 500 slot machines thereafter.  However, the act provides that if gross gaming revenues at Harrah’s Casino in New Orleans exceed $350.0 million for any previous 12-month period, up to 700 slot machines may be operated at Fair Grounds.

After approval of the amendment to Louisiana’s contract with Harrah’s Casino by the Louisiana Gaming Control Board in December 2004 and by the Joint Legislative Committee on the Budget in January 2005, on February 2, 2005, Harrah’s Casino and the State Of Louisiana executed an amendment to their contract providing for slot machines at Fair Grounds.

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Churchill Downs Louisiana Horseracing Company, L.L.C. has initiated the process to obtain the necessary gaming licenses to own and operate slot machines at Fair Grounds and to seek the necessary local zoning change and permits.

The City of New Orleans is challenging the live pari-mutuel tax calculation used by the Fair Grounds Corporation, the seller of Fair Grounds to Churchill Downs Louisiana Horseracing Company, L.L.C.  The City’s interpretation is different from the interpretation and methods used by of all of the racetracks in Louisiana.  If the City of New Orleans were to prevail in its interpretation of the tax calculation, the Fair Grounds could be assessed for an underpayment of taxes from the date of our ownership of the track.  As of December 31, 2004, any underpayment would not be significant to the overall operations of Fair Grounds, since there were a limited number of live race days in 2004.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States.  Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources.  Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those initial estimates.  In general, however, our estimates have historically approximated actual results.

Our most significant estimates relate to the valuation of plant and equipment, receivables, goodwill and other intangible assets, which may be significantly affected by changes in the regulatory environment in which we operate, and to the aggregate costs for self-insured liability and worker’s compensation claims.  Additionally, estimates are used for determining income tax liabilities, the valuation of interest rate risk derivative contracts (interest rate swaps) and other derivative instruments.

We evaluate our goodwill, intangible and other long-lived assets in accordance with the application of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”) and SFAS No. 144, “Accounting for the impairment or disposal of Long-Lived Assets”.  For goodwill and intangible assets, we review the carrying values at least annually during the first quarter of each year or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.  We assign estimated useful lives to our intangible assets based on the period of time the asset is expected to contribute directly or indirectly to future cash flows.  We consider certain factors when assigning useful lives such as legal, regulatory, competition and other economic factors.  Intangible assets with finite lives are amortized using the straight-line method.

While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessment of useful lives and fair market values.  Changes in assumptions may cause modifications to our estimates for amortization or impairment, thereby impacting our results of operations.  If the estimated lives of our intangible assets were to decrease based on the factors mentioned above, amortization expense could increase significantly.

Our business can be impacted positively and negatively by legislative and regulatory changes and by alternative gaming competition.  A significant negative impact from these activities could result in a significant impairment of our plant and equipment and/or our goodwill and intangible assets in accordance with generally accepted accounting principles.

Additional information regarding how our business can be impacted by competition and legislative changes is included in Items 1F and 1G, respectively, in this Annual Report on Form 10-K.

During the third quarter of 2004, we recognized a fixed asset impairment charge of $4.4 million and an intangible asset impairment charge of $1.8 million at our Ellis Park facility.  The asset impairment charges were triggered as a result of Ellis Park’s poor live race meet performance during the third quarter of 2004.  Our review, based on consideration of current fiscal year operating results and the forecasted operating results of the facility, indicated that the estimated future cash flows were insufficient to recover the carrying value of long-lived assets.  Accordingly, we adjusted the carrying value of these long-lived assets, including grandstands and buildings ($3,549), furniture and fixtures ($85), equipment ($217), improvements ($512) and goodwill ($1,839), to management’s estimated fair value.

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We anticipate that the current carrying value of Ellis Park will be supported by ongoing operations, however, should plans for expected operating results at Ellis Park not be realized, an additional write down of these assets could occur.

We also use estimates and judgments for financial reporting to determine our current tax liability, as well as those taxes deferred until future periods.  Net deferred and accrued income taxes represent significant assets and liabilities of the Company.  In accordance with the liability method of accounting for income taxes as specified in SFAS 109, “Accounting for Income Taxes,” we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns.

Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our assets and liabilities, measured by future tax rates we estimate will be applicable when these differences are expected to reverse.  Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expenses could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.

We utilize interest rate swap contracts to hedge exposure to interest rate fluctuations on our variable rate debt and have designated these swaps as cash flow hedges of anticipated interest payments.  Our interest rate swap contracts match the critical terms of the underlying debt, thus qualifying for hedge accounting.  Such critical terms include the notional amounts, benchmark interest rate basis, interest reset dates and payment dates.  The fair market value of the swaps is recorded on the balance sheet as an asset or liability with the offset recorded in accumulated other comprehensive income net of income taxes.  Any changes in the fair market value of the swaps are adjusted to the asset or liability account and recorded net of the income taxes in other comprehensive income.

We maintain an allowance for doubtful accounts receivable that we have deemed to have a high risk of collectibility.  We analyze historical collection trends and customer creditworthiness when evaluating the adequacy of our allowance for doubtful accounts receivable.  Any changes in our assumptions or estimates could impact our bad debt expense and results of operations.

For our business insurance renewals over the past several years, we assumed more risk than in the prior years, primarily through higher retentions and higher maximum losses for stop-loss insurance for certain coverages.  In 2004, our business insurance renewals included substantially the same coverages and retentions as in previous years.  We estimate insurance liabilities for workers compensation and general liability losses based on our historical loss experience, certain actuarial assumptions of loss development factors and current industry trends.  Any changes in our assumptions, actuarial assumptions or loss experience could impact our total insurance cost and overall results of operations.  Our ability to obtain insurance coverage at acceptable costs in future years under terms and conditions comparable to the current years is uncertain.

Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Consolidated Net Revenues

Our net revenues and earnings are significantly influenced by our racing calendar.  Therefore, revenues and operating results for any interim quarter are not generally indicative of the revenues and operating results for the year, and may not be comparable with results for the corresponding period of the previous year.  We historically have very few live racing days during the first quarter of each year, with a majority of our live racing occurring in the second, third and fourth quarters, including the running of the Kentucky Derby and Kentucky Oaks in the second quarter. However in 2004, we acquired Fair Grounds, which will provide us with significant live racing days in the first quarter.  Information regarding racing dates at our facilities for 2005 and 2004 is included in Item 1E, “Licenses and Live Racing Dates” of this Annual Report on Form 10-K.

Our pari-mutuel revenues include commissions on pari-mutuel wagering at our racetracks and off-track betting facilities (net of state pari-mutuel taxes), plus simulcast host fees from other wagering sites and source market fees generated from contracts with our in-home wagering providers.  In addition to the commissions earned on pari-mutuel wagering, we earn pari-mutuel related streams of revenues from sources that are not related to wagering.  These other revenues are primarily derived from statutory racing regulations in some of the states where our facilities are located and can fluctuate materially year-to-year.  Non-wagering revenues are primarily generated from

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admissions, sponsorships, licensing rights and broadcast fees, Indiana riverboat admissions subsidy, concessions, video poker, lease income and other sources.

Pari-mutuel revenues are recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective states’ racing regulatory body.  Additional non-wagering revenues such as admissions, programs and concession revenues are recognized as delivery of the product or services has occurred.

Greater than 75% of our annual revenues are generated by pari-mutuel wagering on live and simulcast racing content and in-home wagering. Live racing handle includes patron wagers made on live races at our live tracks and also wagers made on imported simulcast signals by patrons at our racetracks during our live meets.  Import simulcasting handle includes wagers on imported signals at our racetracks when the respective tracks are not conducting live race meets and at our OTBs throughout the year.  Export handle includes all patron wagers made on our live racing signals sent to other tracks, OTBs and in-home wagering.  In-home wagering, or account wagering, consists of patron wagers through an advance deposit account.

The Company retains as revenue a pre-determined percentage or commission on the total amount wagered, and the balance is distributed to the winning patrons.  The gross percentages retained on live racing and import simulcasting at our various locations range from approximately 15% to 27%.  In general, the fees earned from export simulcasting are contractually determined and average approximately 3.5%.  All commissions and fees earned from pari-mutuel wagering are shared with horsemen through payment of purses based on local contracts and average approximately 50%.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operating data for our properties:

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

Our total net revenues increased $19.1 million primarily as a result of our acquisition of the Louisiana Operations. We acquired the Louisiana Operations in October 2004 providing 2 ½ months of revenues during the year ended December 31, 2004.  Hollywood Park experienced revenue growth from an additional six live race days.  Additionally, the Kentucky Operations segment benefited from incremental Jockey Club luxury suite sales for the Kentucky Derby and Kentucky Oaks days during the second quarter.  Further discussion of net revenue variances by our reported segments is detailed below.

Significant items affecting comparability of operating income, net earnings and diluted earnings per share included:

•      We recorded a $4.4 million fixed asset impairment loss and a $1.8 million intangible impairment loss at Ellis Park during the third quarter of 2004 based on management’s consideration of current fiscal year operating results and the forecasted operating results of the facility.

•      We incurred $5.9 million of additional expenses related to alternative gaming legislative initiatives in California and Florida during 2004.

•      Interest income decreased $0.9 million during 2004 compared to 2003 as a result of interest income related to a property tax refund in Illinois recognized during the third quarter of 2003.

•      We recorded an unrealized loss on derivative instruments of $4.3 million related to changes in the fair market value of embedded derivatives within a convertible promissory note issued during the fourth quarter of 2004.

•      Our year-to-date effective tax rate rose from 40% to 61% resulting from the non-deductibility of the legislative initiative costs, a portion of the asset impairment loss and the unrealized loss on derivative instruments.

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Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

Total net revenues decreased during the period primarily resulting from a $9.5 million reduction in the Indiana riverboat admissions subsidy at Hoosier Park.  The reduction in subsidy stemmed from regulatory changes requiring Hoosier Park to split the subsidy revenues with Indiana Downs, a newly built racetrack in Shelbyville, Indiana.  Additionally, total net revenues declined as a result of five fewer live race days at Hollywood Park amounting to a $6.0 million decrease at that facility.

Gross profit declined during the period primarily as a result of the decrease in Indiana riverboat admissions subsidy at Hoosier Park and the reduction in live race days at Hollywood Park mentioned above.

Net earnings increased in 2003 due to a $4.1 million gain recognized during 2003 related to an Illinois real estate tax settlement and an asset impairment charge recorded for Ellis Park Race Course (under Kentucky Operations) during 2002 of $4.5 million offset by the decrease in gross profit discussed above.  Additionally, decreases in gross profit mentioned above were offset by an overall decrease in interest expense resulting from a lower interest rate environment.

Consolidated Expenses

The following table is a summary of our consolidated expenses:

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

Total expenses increased 8% during 2004 primarily as a result of the $6.2 million asset impairment loss at Ellis Park and the $5.9 million of additional expenses related to legislative costs for alternative gaming (included in SG&A expenses) as mentioned above.  Additionally, expenses increased $14.3 million as a result of our acquisition of the Louisiana Operations during the fourth quarter of 2004.  Further discussion of expense variances by our reported segments is detailed below.

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

Total expenses decreased by $14.2 million during 2003 compared to 2002.  Consistent with the decrease in riverboat admission subsidy revenues mentioned above, riverboat purse expense declined by $4.5 million. Also, overall expenses were reduced due to the $4.5 million asset impairment loss at Ellis Park during 2002. As a result of 48 fewer live race days in 2003, total expenses were reduced at our racetracks, principally at Hoosier Park and Hollywood Park.  Further discussion of expense variances by our reported segments is detailed below.

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Other Income (Expense) and Provision for Income Taxes

The following table is a summary of our other income (expense) and provision for income taxes:

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

Significant items affecting the comparability of other income and expense and provision for income taxes include:

•                  Interest income decreased $0.9 million during 2004 compared to 2003 as a result of interest income related to a property tax refund in Illinois recognized during the third quarter of 2003.

•                  Interest expense increased slightly during 2004 primarily due to additional borrowings for the acquisition of the Louisiana Operations combined with a rising interest rate environment.

•                  We recognized an unrealized loss on derivative instruments of $4.3 million related to changes in the fair market value of embedded derivatives within a convertible promissory note issued during the fourth quarter of 2004.

•                  Miscellaneous income increased during 2004 as a result of a $1.6 million gain realized on the sale of 19% of our interest in Kentucky Downs during the fourth quarter of 2004.

•                  Our year-to-date effective tax rate increased from 40% to 61% resulting from the non-deductibility of the legislative initiative costs, a portion of the asset impairment loss and the unrealized loss on derivative instruments.

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

Significant items affecting comparability of other income and expense and provision for income taxes include:

•                  Interest income increased $1.0 million during 2003 compared to 2002 as a result of interest income related to a property tax refund in Illinois recognized during the third quarter of 2003.

•                  Interest expense decreased during 2003 due to a lower interest rate environment.  The Company replaced expired interest rate swap contracts in March 2003 with new interest rate swap contracts under which lower fixed interest rates were paid.

•                  Miscellaneous income increased due to the lower earnings of Hoosier Park during 2003, which resulted in less minority interest expense as compared to 2002.

•                  Our income tax provision increased as a result of an increase in pre-tax earnings.

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Net Revenues By Segment

The following table presents net revenues, including intercompany revenues, by our reported segments: