MTR GAMING GROUP INC, 10-Q, 1997-11-14

MTR GAMING GROUP INC
10-Q, 1997-11-14
MISCELLANEOUS AMUSEMENT & RECREATION

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended SEPTEMBER 30, 1997

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

Commission File Number 0-20508
-------

MTR GAMING GROUP, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE 84-1103135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

STATE ROUTE 2 SOUTH, P.O. BOX 356, CHESTER, WEST VIRGINIA
---------------------------------------------------------
Address of principal executive offices

26034
--------
Zip Code

(304) 387-5712
--------------
Registrant's telephone number, including area code

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

Yes X No
--- ---

Indicate by check mark whether the Company has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.

Yes X No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

COMMON STOCK, $.00001 PAR VALUE
-------------------------------
Class

19,814,291
----------
Outstanding at November 4, 1997

<PAGE>

MTR GAMING GROUP, INC.
INDEX FOR FORM 10-Q

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1 - Financial Statements

Condensed and Consolidated Balance Sheets
at September 30, 1997 and December 31, 1996. . . . . . . . . . . . . 1
Condensed and Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996. . . 3
Condensed and Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1997 and 1996. . . . . . . 4
Notes to Condensed and Consolidated Financial Statements. . . . . . . . . 5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 13

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 22
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . 22
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 23

SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

</TABLE>

<PAGE>

PART I
FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,421,000 $ 4,226,000
Restricted cash 203,000 185,000
Accounts receivable, net of allowance
for doubtful accounts of $114,000 and $140,000 409,000 302,000
Deferred financing costs 462,000 1,066,000
Deferred income taxes 1,015,000 760,000
Other current assets 677,000 477,000
------------ ------------

Total Current Assets 11,187,000 7,016,000
------------ ------------

Property:
Land 371,000 371,000
Buildings 17,218,000 17,081,000
Equipment and automobiles 6,096,000 2,451,000
Furniture and fixtures 2,853,000 2,423,000
Construction in progress 1,656,000 326,000
------------ ------------
28,194,000 22,652,000

Less Accumulated Depreciation (5,598,000) (4,199,000)
------------ ------------
22,596,000 18,453,000
------------ ------------

Net Assets of Discontinued
Oil and Gas Activities 2,616,000 2,616,000
------------ ------------

Other Assets:
Deferred financing costs 1,271,000
Excess of cost of investments over net
assets acquired, net of accumulated
amortization of $1,211,000 and $1,022,000 2,563,000 2,752,000
Deposits and other 79,000 41,000
------------ ------------
3,913,000 2,793,000
------------ ------------

TOTAL ASSETS $ 40,312,000 $ 30,878,000
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to financial statements.

1
<PAGE>

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)

September 30 December 31
1997 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 664,000 $ 909,000
Accrued interest 1,346,000
Other accrued liabilities 1,811,000 1,891,000
Current portion of long term debt 29,000 186,000
Current portion of deferred incomes taxes 133,000 133,000
------------ ------------
Total Current Liabilities 3,983,000 3,119,000
------------ ------------

Deferred Income Taxes, Less Current Portion 1,164,000 1,263,000
------------ ------------

Long Term Debt, Less Current Portion 21,578,000 16,230,000
------------ ------------

Shareholders' Equity:
Common stock 2,000 2,000
Paid-in-capital 34,865,000 35,173,000
Accumulated deficit (21,280,000) (24,909,000)
------------ ------------

Total Shareholders' Equity 13,587,000 10,266,000
------------ ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 40,312,000 $ 30,878,000
------------ ------------

See accompanying notes to financial statements.

2
<PAGE>

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Video lottery operations $ 14,400,000 $ 10,067,000 $ 37,185,000 $ 21,967,000
Parimutuel commissions 1,214,000 1,232,000 3,460,000 3,397,000
Food, beverage and lodging 1,711,000 1,396,000 4,025,000 2,969,000
Other 338,000 381,000 832,000 834,000
------------ ------------ ------------ ------------
Total Revenue 17,663,000 13,076,000 45,502,000 29,167,000
------------ ------------ ------------ ------------

Costs and Expenses:
Cost of video lottery operations 8,894,000 6,343,000 23,199,000 14,371,000
Cost of parimutuel commissions 1,637,000 1,571,000 4,428,000 3,860,000
Cost of food, beverage and lodging 1,424,000 1,064,000 3,473,000 2,593,000
Cost of other revenues 226,000 302,000 789,000 794,000
Marketing and promotions 1,077,000 617,000 2,432,000 1,050,000
General and administrative expenses 1,131,000 748,000 3,716,000 2,809,000
Depreciation and amortization 591,000 435,000 1,588,000 1,301,000
------------ ------------ ------------ ------------
Total Costs and Expenses 14,980,000 11,080,000 39,625,000 26,778,000
------------ ------------ ------------ ------------

Operating Profit 2,683,000 1,996,000 5,877,000 2,389,000
------------ ------------ ------------ ------------

Other Income (Expense):
Interest income 54,000 21,000 98,000 31,000
Interest expense (780,000) (924,000) (2,636,000) (1,716,000)
Nonrecurring income 321,000 529,000
------------ ------------ ------------ ------------
Total Other Expense (726,000) (582,000) (2,538,000) (1,156,000)

Income Before Income Taxes
1,957,000 1,414,000 3,339,000 1,233,000
Benefit for Income Taxes 224,000 34,000 290,000 100,000
------------ ------------ ------------ ------------

Net Income $ 2,181,000 $ 1,448,000 $ 3,629,000 $ 1,333,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Net Income Per Share $ .10 $ .08 $ .17 $ .07
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted Average Number
of Shares Outstanding 21,378,434 18,702,179 20,881,375 18,378,890
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

</TABLE>

See accompanying notes to financial statements.

3
<PAGE>

MTR GAMING GROUP, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended Nine Months Ended
September 30, September 30,
1997 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 3,629,000 $ 1,333,000

Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Deferred financing costs amortization 1,242,000 569,000
Depreciation and amortization 1,588,000 1,301,000
Common stock issued and stock options granted
for services rendered 75,000 332,000
Provision for doubtful accounts 42,000
Provision for settlement (recoveries) 100,000 (579,000)
Deferred income taxes (354,000) (100,000)

Net Changes in Assets and Liabilities:
Restricted cash (18,000) (31,000)
Prepaid expenses and other (367,000) (143,000)
Accounts payable and accrued liabilities (425,000) (2,173,000)
----------- -----------

CASH PROVIDED BY
OPERATING ACTIVITIES $ 5,470,000 $ 551,000
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from shareholder 69,000
Deposits and other ( 38,000) 27,000
Settlement of prior acquisition costs (383,000)
Capital expenditures (5,125,000) (1,057,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES $(5,546,000) $ (961,000)
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Loan fees paid (920,000) (619,000)
Principal payments (186,000) (2,826,000)
Loan proceeds 5,377,000 6,100,000
----------- -----------

CASH PROVIDED BY FINANCING
ACTIVITIES $ 4,271,000 $ 2,655,000
----------- -----------

NET INCREASE IN CASH 4,195,000 2,245,000

Cash, Beginning of Period 4,226,000 807,000
----------- -----------

Cash, End of Period $ 8,421,000 $ 3,052,000
----------- -----------
----------- -----------

</TABLE>

See accompanying notes to financial statements

4
<PAGE>

MTR GAMING GROUP, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited condensed and consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of Management, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation have been included
herein. Operating results for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.

Note 2 - Commitments and Contingencies

CORRECTIVE ACTION PLAN. The Company has developed and is implementing a
corrective action plan to stop leakage from underground storage tanks at its
Mountaineer Race Track and Gaming Resort facility in Chester, West Virginia.
In 1995, Management estimated the cost of the plan to be $140,000, consisting
of $60,000 in monitoring and operational costs to be expended in 1995 and
1996, and $80,000 in capital expenditures to be incurred in 1996 and 1997.
The Company recorded a provision of $140,000 in 1995 for these projected
expenses and has entered into a service contract for the installation of
equipment and future operating costs. The Company's remaining liability at
September 30, 1997 is not material.

SETTLEMENT OF MOUNTAINEER PARK ACQUISITION PRICE GUARANTEE. In
connection with the December 1992 acquisition of Mountaineer Park, Inc., the
Company issued certain shares of the Company's common stock with a $6.00 per
share price guarantee. In January 1997, the Company reached a settlement
with the holders of 118,948 of such shares. In exchange for a cancellation
of the price guarantee, the Company paid a cash settlement of $105,000 and
issued 100,000 additional shares of the Company's common stock in January
1997. The Company recorded a $105,000 charge to paid-in-capital in
connection with this transaction.

In July 1997, the Company reached a settlement with Bill Blair,
Incorporated, which was the former majority shareholder of Mountaineer, and
holder of 181,739 additional guaranteed shares. The settlement was part of a
larger transaction by which Mountaineer and the Company resolved all matters
outstanding with the holder and its president. Pursuant to the agreement,
the price guarantee was extinguished, the Company paid a cash settlement of
$278,000 out of which Mr. Blair repaid in full the $78,000 balance due on a
promissory note, and the Company canceled a note receivable in the amount of
$240,000 and issued 50,000 shares of restricted common stock. The Company
had recorded a $240,000 provision for doubtful accounts in 1995 in reference
to the note receivable. The Company recorded a $278,000 reduction to
paid-in-capital and a $78,000 reduction in notes receivable in connection
with this transaction.

LABOR AGREEMENT. On September 26, 1996, the original term of
Mountaineer's labor agreement with approximately sixty (60) mutuel and
fourteen (14) video lottery employees expired. In a series of extensions,
Mountaineer and the union have agreed to extend the term of the agreement
through November 30, 1997 while negotiating an agreement of longer duration.

5
<PAGE>

HBPA AGREEMENT. On August 15, 1997, Mountaineer executed a new
agreement with the Horsemen's Benevolent and Protective Association, Inc.
(HBPA). The HBPA is the exclusive authorized bargaining representative for
all thoroughbred horse owners who participate in live races conducted by
Mountaineer. Mountaineer contributes all purse funds earned by such horse
owners, as well as compensation to the HBPA in an amount equal to 1.5% of the
amount paid for purses, from proceeds of its live and simulcast racing and
video lottery operations. Mountaineer is required to conduct a minimum of 210
live racing events annually during the term of the agreement, down from a
minimum threshold of 220 days under the prior contract. Also, the minimum
daily purse payment will increase from $22,500 under the prior agreement to
$30,000. The new agreement, which expires on January 1, 2001, contains no
other material changes from the prior agreement.

NONRECURRING INCOME. In the first nine months of 1996, the Company
negotiated significant reductions in three previously accrued obligations,
and as a result recorded $529,000 in nonrecurring income. The nonrecurring
income resulted from the following: (i) In 1995, the Company recorded a
provision for loss in the amount of $308,000 in connection with a legal
judgment which had been assessed against Mountaineer. In June 1996, the
related lawsuit was settled upon a cash payment of $100,000; (ii) In
September 1996, the Company reached agreement in a dispute over trade
accounts payable. A $411,000 claim for professional fees, which was accrued
as of December 31, 1995, was satisfied in full upon payment of a $150,000
cash settlement in September 1996; (iii) In July 1994, the Company entered
into an agreement in settlement of claims arising from a 1993 financial
advisory agreement. In connection therewith, the Company accrued a $150,000
liability and issued warrants to purchase 145,000 shares of common stock with
registration rights, exercisable at a price of $6.25 per share through
January 15, 1997. In September 1996, the settlement agreement was amended as
follows: (a) the obligation to remit the $150,000 payment was reduced to
$90,000 in return for an immediate payment, and (b) the exercise price of the
previously issued warrants was reduced to $3.00 per share and the exercise
period was extended to January 15, 1998.

Note 3 - Income Taxes

The benefit for income taxes recorded in the accompanying statement of
operations for the three and nine months ended September 30, 1997 and 1996
results from non-tax deductible depreciation expense attributable to the
purchase method of accounting for the Company's investment in Mountaineer
Park, Inc. and a $255,000 reduction in the valuation allowance for deferred
tax assets in the third quarter of 1997. At September 30, 1997, the Company
has recorded a valuation allowance of approximately $8.3 million against its
primary deferred tax assets (net operating loss carryforwards for federal and
state income tax purposes). At September 30, 1997, the Company has
approximately $21.8 million in federal net operating loss carryforwards and
approximately $4.7 million in state net operating loss carryforwards. The
use of such net operating loss carryforwards earned from 1992 through 1995
are subject to certain limitations as a result of change of ownership due to
common stock issuances. Due to limitations under the Alternative Minimum Tax
(AMT) rules of the Tax Reform Act of 1986, the Company expects to make
quarterly federal income tax expenditures in the future. In the third
quarter of 1997, the Company accrued a $65,000 provision for federal income
taxes in connection with these AMT limitations. Future payments are not
expected to have a material impact on operations.

Note 4 - Financial Accounting Standards Board

The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"),
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 will revise the standards for computing and
presenting earnings per share, as heretofore performed in accordance with
Accounting Principles Board Opinion No. 15. SFAS 128 will require
restatement of all prior

6
<PAGE>

period earnings per share information appearing in financial statements
issued for periods ending after December 15, 1997. The effect of adopting
SFAS 128 has not yet been determined.

Also in 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE, which is effective for financial statements issued for
periods ending after December 15, 1997.

Note 5 - Employment Agreements

OFFICERS. On March 1, 1997, the Company entered into a new three year
employment agreement with Edson R. Arneault to reflect Mr. Arneault's
responsibilities as president and chairman of the Company, which he assumed
on April 26, 1995. The new agreement replaced a May 10, 1994 employment
agreement pursuant to which Mr. Arneault was employed as president of the
Company's wholly owned subsidiary, ExCal Energy Corporation, and vice
president in charge of political relations for the Company. The new
employment agreement provides that Mr. Arneault will receive a base salary
with annual cost of living adjustments and bonuses at the recommendation of
the Compensation Committee and upon approval by the board of directors. As
of March 1, 1997, Mr. Arneault's base salary is $315,000, an increase of 31%,
and he was awarded performance bonuses of $67,500 each in December of 1996
and July of 1997. The Compensation Committee obtained the consent of the
Company's lender for the increase and bonuses.

The new agreement provides that if Mr. Arneault's period of employment is
terminated by reason of death or physical or mental incapacity, the Company
will continue to pay the employee or his estate the compensation otherwise
payable to the employee for a period of two years. If the employee's period
of employment is terminated for a reason other than death or physical or
mental incapacity or for cause, the Company will continue to pay the employee
the compensation that otherwise would have been due to him for the remaining
period of employment. If the employee's period of employment is terminated
for cause, the Company will have no further obligation to pay the employee,
other than compensation unpaid at the date of termination.

In the event that the termination of the employee's period of employment
occurs after there has been a change of control of the Company and (i) the
termination is not for cause or by reason of the death or physical or mental
disability of the employee or (ii) the employee terminates his employment for
good reason, as defined in the agreement, then the employee will have the
right to receive within thirty days of the termination, a sum that is three
times his annual base salary, but not to exceed the amount deductible by the
Company under the Internal Revenue Code of 1986.

OTHER EMPLOYMENT AGREEMENTS. In the second quarter of 1997, the Company
entered into new employment agreements with certain employees for periods
ranging from one to three years. The agreements provide for certain salaries
and stock option incentives in the ordinary course of business, and provide
for certain mandatory severance payments in the event of early termination.
Future annual minimum payments under the Company's employment agreements as
of September 30, 1997 are as follows:

Years Ending
December 31,
------------
1997 $ 280,000
1998 788,000
1999 675,000
2000 118,000
-----------
$ 1,861,000
-----------
-----------

7
<PAGE>

Note 6 - Long-Term Debt

$21.5 MILLION TERM LOAN. On July 2, 1996, Mountaineer entered into a
financing arrangement with a private lending firm for a $5.0 million working
capital loan and an $11.1 million loan commitment. On December 10, 1996,
Mountaineer amended and restated its July 2, 1996 term loan agreement,
increasing the amount of principal borrowed from $5.0 million to $16.1
million (the "First Amended Agreement"), and providing the Company a
$5,376,500 revolving line of credit. In connection with these transactions,
the Company agreed to pay various cash fees and to issue 550,000 shares of
its common stock and warrants to purchase an additional 1,632,140 shares of
the Company's common stock at an exercise price of $1.06 per share (which
were fully vested at the date of issuance and expire in 2001). The shares and
warrants were assigned an aggregate value of approximately $777,000, which
was recorded as deferred financing costs in the Company's 1996 consolidated
balance sheet included in its annual report on Form 10-K.

On July 2, 1997, Mountaineer and its lender again amended and restated
this $16.1 million loan, and the Company therefore amortized the deferred
financing costs for the First Amended Agreement in full through June 30,
1997. The July 2, 1997 Second Amended and Restated Term Loan Agreement (the
"Second Amended Agreement") bore the following revisions from the prior loan
agreements:

i) The maturity date of the loan was extended to July 2, 2001.

ii) The principal amount borrowed was increased to $21,476,500 (by
drawing down the line of credit).

iii) Annual cash fees in the amount of 8% of the outstanding principal
balance due on each anniversary of the term loan were eliminated.

iv) Annual warrants to purchase 250,000 shares of the Company's common
stock at an exercise price of $1.06, due to be issued on November
15, 1997, 1998 and 1999 were eliminated.

v) Annual warrants to purchase additional shares in a number to be
calculated under a formula defined in the First Amended Agreement,
due to be issued on November 15, 1997, 1998 and 1999, were
eliminated.

As consideration for the Second Amended Agreement, Mountaineer has agreed
to pay the lender (i) a one time fee of $1.8 million, which may be paid over
the first year of the term; (ii) interest at the rate of 13% (compared to
12% on the $16.1 million term loan and 15% on the $5.4 million line of credit
under the First Amended Agreement); and (iii) a call premium equal to 5% in
the event of prepayment during the first year of the term, declining to 3%
during the second year, 2% in the third year, and 1% in the final year. The
Company continues to guarantee the loan, and the lender's security position
has been improved from second to first trust holder.

In connection with the First Amended Agreement, pursuant to a December
10, 1996 Fee Agreement, Mountaineer agreed to pay Bridge Capital, LLC, which
had arranged the transaction, $277,500 in the event Mountaineer refinanced
the loan by July 2, 1997 and thus obtained a waiver of the $888,000 fee that
would have been due pursuant to the First Amended Agreement. In July 1997,
Mountaineer paid Bridge Capital, LLC $100,000 in satisfaction of
Mountaineer's obligations under the Fee Agreement.

OTHER DEBT. At December 31, 1996, the Company owed principal balances
totaling $316,000 on two other term notes, as described more fully in Note 6
to the consolidated financial

8
<PAGE>

statements included in the Company's annual report on Form 10-K dated
December 31, 1996. The Company made principal payments totaling $186,000
relating to these two notes in the first nine months of 1997.

ANNUAL COMMITMENTS. Future annual principal payments required under all
long-term indebtedness as of September 30, 1997 are as follows:

Years Ending
December 31,
------------
1997 $ 0
1998 29,000
1999 31,000
2000 33,000
2001 21,514,000
------------
$ 21,607,000
------------
------------

INTEREST EXPENSE. The Company made interest payments on long-term debt
totaling $702,000 and $1,680,000, respectively, for the three and nine month
periods ended September 30, 1997.

Note 7 - Line of Credit

As part of the Amended and Restated Term Loan Agreement, the Company's
lender provided Mountaineer a revolving line of credit which was originally
scheduled to expire on December 26, 1999. Under the terms of the agreement,
Mountaineer could borrow up to a maximum of $5,376,500. The agreement required
Mountaineer to pay interest monthly at 15% per annum on amounts borrowed with
all unpaid principal and interest due at maturity. Mountaineer drew $1,000,000
on the line of credit in June, 1997, which balance was outstanding at July 2,
1997, when the loan was amended and restated. (See Note 6, Long-Term Debt.) A
facility fee of $376,000 became due at the December 26, 1996 closing of the
Amended and Restated Term Loan Agreement. Pursuant to the loan agreement,
$57,900 of these fees were withheld from the proceeds at closing; the remaining
$318,450 was to have been paid in eleven equal monthly installments of $28,950
commencing February 1, 1997. However, such costs were amortized through June
30, 1997, since the Company refinanced the line loan on July 2, 1997.

Note 8 - Capital Transactions

EARNINGS PER SHARE. The weighted average number of shares used in the
Company's earnings per share calculations assume the exercise of 1,597,476
and 1,126,211 stock options and warrants for the respective three and nine
month periods ended September 30, 1997 due to an increase in the average
market price of the Company's common stock over the exercise price of certain
stock options and warrants during those periods. This dilution was
calculated in accordance with the treasury stock method as mandated by
Accounting Principles Board No. 15, and is reflected in the net income per
share amounts appearing on the Company's condensed and consolidated
statements of operations.

INCENTIVE PLAN STOCK OPTIONS. On October 2, 1996, the Company's board of
directors adopted, subject to shareholder approval, an incentive stock option
plan meeting the requirements of Section 422 of the Internal Revenue Code of
1986. At the board's discretion, the options may or may not qualify for
favorable treatment under Section 422. In accordance with the plan, 500,000
shares were reserved for issuance. On August 14, 1997, the board adopted an
amendment to the plan increasing the number of shares reserved to 750,000. On
September 19,

9
<PAGE>

1997, the board elected to grant in the aggregate all 750,000 options as
non-qualified options to 14 key employees and directors (for their services
as directors) at an exercise price of $1.34 per share, the fair market value
of the stock on the date of the grant. The options are exercisable for a
term of five years. On October 8, 1997, the Company's shareholders ratified
the amended plan.

On May 27, 1997 and again on August 26, 1997, the Company's board of
directors voted to amend the terms of options granted to certain officers and
key employees of the Company on May 28, 1992 such that, with respect to
grantees of such options who are currently employees of the Company or its
subsidiaries (in the aggregate, options to purchase 410,867 shares of the
Company's common stock at a price of $1.06 per share), the period during
which such options may be exercised was extended, most recently for a period
of 2 years. The options originally would have expired on May 28, 1997. This
action was taken in continuation of the goal the Company has previously set
forth in its employee stock option plans: to provide the participants with
the maximum benefits and to provide an incentive to the Management of the
Company. The Company recorded $71,902 of compensation expense as a result of
the August amendment which will be amortized over the two-year term of the
options, as amended.

OUTSTANDING OPTIONS AND WARRANTS. The Company's stock option and warrant
activity during the nine months ended September 30, 1997 is as follows:

Shares Price Range
Available Per Share
--------- --------------

Balance, December 31, 1996 8,069,630 $ 0.01 - $4.00
Granted 750,000 $ 1.34
Canceled (189,133) $ 1.06
Exercised 10,000 $ 0.01
--------- --------------
Balance, September 30, 1997 8,620,497 $ 0.01 - $4.00

The weighted average exercise price of stock options and warrants
outstanding at September 30, 1997 is a follows:

Weighted Weighted
Average Average Price Range
Exercise Price Remaining Life per Share
-------------- -------------- -------------
<S> <C> <C> <C>
Outstanding stock options and warrants $ 1.20 42 months $0.01 - $2.00
$ 3.67 21 months $2.01 - $4.00

In the money stock options and warrants $ 1.03 46 months $0.01 - $1.44

</TABLE>

Note 9 - Enhanced Gaming Legislation and Other Regulatory Changes.

LEGISLATIVE ACTIONS. The West Virginia Legislature passed two bills in
1997 which enhance various aspects of Mountaineer's existing racing and video
lottery operations. Salient features of the bills are summarized below:

- The "sunset" provision of the Racetrack Video Lottery Act which would
have caused the Act's termination in 1997 was repealed.

- Beginning in 1998, the two thoroughbred tracks in West Virginia will
be required to schedule 210 days of live racing annually, down from
the current 220 day minimum. Additionally, the bill specifies
procedures which will allow further reductions in the required number
of live race days if certain conditions exist, subject to approval by
the

10
<PAGE>

State Racing Commission. On August 15, 1997, the HBPA executed an
agreement with Mountaineer accepting the 210 day minimum.

- Effective July 1997, a portion of the taxes and assessments on video
lottery revenues which were previously allotted solely to the West
Virginia Breeders Classics Association, will be reallocated in the
following manner:

(i) The first $800,000 assessed on statewide video lottery
operations will be allocated to the West Virginia Breeders
Classics Association.

(ii) The next $200,000 assessed on statewide video lottery
operations will be allocated to Mountaineer to be used for the
payment of purses and promotional expenses of a stakes race to
be known as the West Virginia Derby.

(iii) After this annual statewide $1.0 million funding threshold is
reached, any further assessments paid will be returned to the
respective racetracks from which they were assessed. Any
amounts refunded to Mountaineer under this provision are
required to be disbursed evenly between capital improvement
expenditures and purse payments for the West Virginia Derby.

LOTTERY COMMISSION ACTION. In the first quarter of 1997, the West Virginia
Lottery Commission removed its prohibition on the installation of "player
tracking" software in video lottery terminals, to be used for the purpose of
target marketing. In June 1997, the West Virginia Lottery Commission renewed
Mountaineer's license to conduct video lottery operations. The renewed license
will remain in effect through June 30, 1998.

Note 10 - Advertising Expense

Marketing and promotions expenses recorded in the first nine months of 1997
are net of approximately $497,000 to be refunded to the Company under the
auspices of two state grants to a convention and visitors bureau of which
Mountaineer is a member. Through September 30, 1997 the Company had received
refunds totaling $315,000 under the grant programs.

Note 11 - Discontinued Oil and Gas Activities

The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. In February 1993, the Company decided not to continue
to pursue funds in the public market to undertake the drilling of oil and gas
properties primarily due to the expiration of "Section 29" credits, a credit
against federal income taxes for gas produced from Devonian shale or tight sands
formations from wells commenced before January 1993. On March 31, 1993, the
Company's board of directors approved a formal plan of orderly liquidation to
divest its oil and gas operations. This decision was precipitated by several
factors, including the more profitable long-term potential of the Company's
gaming operations and the anticipated time to be devoted to it by Management.

In December 1994, the Company entered into an arrangement to sell certain
of the proved and unproven gas reserves located in Southeast Ohio for notes
valued at approximately $426,000 to a party related to an officer and
shareholder of the Company. In connection therewith, the

11
<PAGE>

Company obtained two notes, a $300,000 note, bearing interest at 8% per
annum, payable $10,000 per month beginning May 1995, and a $150,000
non-interest bearing note, payable based on 50% of excess revenues over
$10,000 per month from production, secured by the assets sold. The Company
recorded a $567,000 loss on the sale of these assets. As of December 31,
1996, the principal balance on the notes receivable approximated $228,000.
As of September 30, 1997, the purchaser is delinquent on four of the note
payments which were due in the first nine months of 1997. The Company and
the purchaser are negotiating arrangements to bring the account current, and
the Company believes the matter will be resolved amicably. The Company is
continuing to attempt to sell its remaining oil and gas interests pursuant to
the plan of orderly liquidation.

Note 12 - Subsequent Events

LAND PURCHASE OPTION. On October 7, 1997, Mountaineer entered into an
agreement in which it obtained an exclusive option to purchase 349 acres of
real property located adjacent to its Hancock County, West Virginia
operation. Mountaineer paid $100,000 in exchange for an irrevocable option to
purchase the property for $600,000 before October 1, 1998, with payment to be
made in the form of a $200,000 cash payment at closing and a $400,000 term
note bearing interest at 9% payable over five years.

CAPITAL TRANSACTIONS AND CONSULTING AGREEMENTS. On October 1, 1997, the
Company entered into a financial advisory agreement with an investment
banking firm to perform various consulting services. Under the terms of the
agreement, the Company issued warrants to purchase 150,000 shares of its
common stock at an exercise price of $1.50 per share. The warrants will be
exercisable for a period of four years. In addition, the consultant may
qualify to earn additional fees upon the successful completion of various
financing projects.

Also on October 1, 1997, Mountaineer entered into a three year contract
with an employee benefits and governmental relations consultant. Under the
terms of the agreement the consultant will receive annual options to
purchase 10,000 shares of the Company's common stock on October 1, 1997, 1998
and 1999. The options will be exercisable for a period of five years from the
dates vested at an exercise price for each tranche equal to the market price
of the Company's common stock on the dates of vesting. The exercise price of
the first tranche of 10,000 options is $1.44 per share, the market price of
the Company's common stock on the date of grant. The fair value of these
options will be estimated in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and will be amortized to expense over the service period.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations - Nine Months Ended September 30, 1997 Compared to Nine
Months Ended September 30, 1996.

The Company earned revenues for the respective nine month periods in 1997
and 1996 as shown below:

<PAGE>

Nine Months Ended
September 30
1997 1996
------------ ------------
Operating Revenues:
Video lottery operations $ 37,185,000 $ 21,967,000
Parimutuel commissions 3,460,000 3,397,000
Lodging, food and beverage 4,025,000 2,969,000
Other revenues 832,000 834,000
------------ ------------
Total Revenues $ 45,502,000 $ 29,167,000
------------ ------------

The Company's Mountaineer Park, Inc. subsidiary has exhibited steady,
pronounced revenue growth under the expansion plan which began in 1994,
centered around video lottery operations. The emergence of video lottery
operations as Mountaineer's dominant profit center has significantly
moderated the seasonality experienced in prior year revenue trends.

The geographic area surrounding the Company's operating facilities in
West Virginia experienced extensive flooding and unusually heavy snowfall in
the first quarter of 1996. Flood and snow damage in portions of Ohio, West
Virginia and Western Pennsylvania reached levels resulting in their
designation as Federal disaster areas. Mountaineer's facilities are situated
well above the flood plain and did not sustain any damage; Mountaineer's
nearest competitor was extensively damaged and ceased operations for
approximately four weeks in the first quarter of 1996.

VIDEO LOTTERY OPERATIONS. Mountaineer has operated video lottery
terminals ("VLTs") in West Virginia since December 1992; operations were
conducted under a provisional license until September 1994. The West
Virginia Racetrack Video Lottery Act, signed in March 1994, allowed the
uninterrupted continuation of video lottery games at Mountaineer and
permitted the Company to increase its number of VLTs from 165 to 400 on
September 4, 1994. In July 1995, the Company placed into operation an
additional 400 VLTs, bringing the total number of VLTs in operation to 800.
The 800 VLTs then in operation offered only card games and keno ("Card
Terminals"). Upon enactment of an amendment to the video lottery law
permitting game themes simulating spinning reels or classic casino slot
machines ("Slot Terminals"), in July of 1996 Mountaineer converted 350 Card
Terminals into Slot Terminals. In October of 1996, Mountaineer converted an
additional 50 Card Terminals to Slot Terminals. In March of 1997,
Mountaineer purchased and installed 400 new Slot Terminals and removed 200
previously leased Card Terminals, bringing the total number of VLTs to 1,000
as of March 13, 1997, consisting of 800 Slot Terminals and 200 Card
Terminals.

A summary of the video lottery gross winnings less patron payouts ("net
win") for the nine months ended September 30, 1997 and 1996 is as follows:

Nine Months Ended
September 30
1997 1996
------------- -------------
Total gross wagers $ 128,435,000 $ 75,010,000
Less patron payouts (91,250,000) (53,043,000)
------------- -------------
Revenues - video lottery operations $ 37,185,000 $ 21,967,000
------------- -------------
------------- -------------
Average daily net win per terminal $ 144 $ 100
------------- -------------
------------- -------------

13
<PAGE>

Revenues from video lottery operations increased by 69% from $22 million
in the first nine months of 1996 to $37.2 million in 1997. Management
attributes the increase to the following factors: (i) conversion of 350 Card
Terminals into Slot Terminals in July, 1996, followed by the conversion of 50
more Card Terminals into Slot Terminals in October 1996, (ii) commencement of
extensive advertising in January 1997, featuring a 30 minute infomercial
broadcast on television affiliates within a two hour driving radius, and
(iii) the purchase of 400 new Slot Terminals in March 1997 to replace 200
Card Terminals retired at that time.

The results of video lottery operations reflect a three year trend of
significantly increasing aggregate net win, coupled with an increase in
average daily net win per terminal since the inception of video slot games.
The aggressive infomercial marketing campaign begun in January 1997 has been
coupled with an extensive direct mail marketing program designed to attract
repeat business. Management has undertaken, and substantially completed
during the summer of 1997, a large scale redecoration of its racetrack
grandstand video lottery facilities, including expansion of ancillary dining
and bar areas. Management believes it can draw and accommodate significantly
heavier patronage to the grandstand gaming facilities, which currently
operate on the Company's 220 annual live race days and additional days as the
market demands. Programs to increase patronage at the grandstand facilities
include promotions, food discounts, and other cash and noncash incentives.
For the nine months ended September 30, 1997, average daily net win on the
500 grandstand VLTs was $60 (including $0 for days when the grandstand
facilities were closed), compared to $227 earned on the 500 lodge-based VLTs,
which operate 365 days per year.

PARIMUTUEL COMMISSIONS. The Company's revenues from racing operations
are derived mainly from Commissions earned on parimutuel wagering handle on
live races held at Mountaineer and on races conducted at other thoroughbred
and greyhound racetracks and simulcast at Mountaineer. Mountaineer's
parimutuel commissions for the nine months ended September 30, 1997 and 1996
are summarized below:

Nine Months Ended
September 30
1997 1996
------------ ------------
Simulcast racing parimutuel handle $ 16,091,000 $ 15,696,000
Live racing parimutuel handle 15,967,000 16,065,000
Less patrons' winning tickets (25,402,000) (25,162,000)
------------ ------------
6,656,000 6,599,000
Less:
State and county parimutuel tax (384,000) (379,000)
Purses and Horsemen's Association (2,812,000) (2,823,000)
------------ ------------
Revenues-parimutuel commissions $ 3,460,000 $ 3,397,000
------------ ------------
------------ ------------

Simulcast handle remained relatively constant for the comparative nine
month periods, increasing by 3% from $15.7 million in 1996 to $16.1 million in
1997. And even with the cancellation of eight racing days in 1996 due to severe
weather, live racing handle also remained constant, decreasing by 1% from $16.1
million to $16.0 million for the same nine month periods. Mountaineer completed
176 of its annually required 220 days of live racing in the first nine months of
1997, compared to 170 days completed in the first nine months of 1996. Average
live race handle was $91,000 for each race day during the first nine months of
1997, compared to $95,000 for the same period in 1996. Pursuant to legislation
and agreement with the HBPA, the minimum annual requirement has been reduced to
210 race days commencing January 1, 1998.

Mountaineer paid average daily live purses of $44,000 during the first nine
months of 1997 and $32,000 in the corresponding period of 1996. Management
believes that live racing handle will increase as racing purses are raised, as
higher purses attract higher quality race participants,

14
<PAGE>

which in turn captures the interest of wagerers from a larger geographic
region. In accordance with this philosophy, Mountaineer has begun promoting
moderately funded stakes races of up to $25,000 per race during the third
quarter of 1997, and a featured night of racing in October in which over
$100,000 of purses was offered. More sizable stakes races may be offered in
the future if a favorable revenue trend develops from this practice.

Legislation was approved by the Ohio General Assembly that permitted
full-card simulcasting and off-track betting beginning in September 1996.
To date, simulcasting in Ohio has remained at existing racing facilities.
Management is unaware of any imminent plans for competing Ohio racetracks to
open any off-track betting sites near Mountaineer, and it is unknown whether
the opening of such facilities would have a material adverse effect on the
business of Mountaineer.

In 1997, the West Virginia legislature passed a bill which Management
believes will help the Company's live racing operations. The bill includes
the following important features:

- Effective July 1997, a portion of the taxes and assessments on video
lottery revenues, which are administered by the West Virginia Lottery
Commission, and which were previously allotted solely to the West
Virginia Breeders Classics Association, will be reallocated in the
following manner:

(i) The first $800,000 assessed on statewide video lottery
operations will be allocated to the West Virginia Breeders
Classics Association.

From July 1, 1997 through October 25, 1997, $354,000 of such
assessments had been funded.

- Effective July 1997, Mountaineer and the other three racetracks in
West Virginia are permitted to export simulcast broadcasts of their
live races. To encourage intrastate simulcasting, the legislation
exempts from parimutuel taxation one-half of the racing handle wagered
at other West Virginia racetracks on live races conducted at
Mountaineer, and vice versa. Management believes that if demand for
simulcast broadcasts continues, Mountaineer may commence such
activities during 1998; however, there can be no assurance such demand
will continue or that it will be adequate to make such operations
profitable.

15
<PAGE>

FOOD, BEVERAGE AND LODGING OPERATIONS. Food, beverage and lodging
revenues accounted for a combined increase of 36% from $3.0 million to $4.0
million for the nine months ended September 30, 1997. Management attributes
the increase to direct elements of the infomercial marketing campaign which
commenced in January 1997, discounting, coupons and other sales promotions
designed to attract heavier patronage, especially at the track facilities, as
well as the synergistic effects of heavier video lottery patronage.
Approximately $3.0 million of the revenues for the first nine months of 1997
were derived from food and beverage operations, compared to $2.1 million in
the first nine months of 1996. Mountaineer's lodge-based restaurant and bar
venues accounted for $436,000 of the revenue increase from 1996 to 1997,
while track-based venues contributed a revenue increase of $147,000.
Mountaineer's lodging operations also achieved significant growth in
revenues, increasing 22% from $825,000 in the first nine months of 1996 to
$1.0 million in the corresponding 1997 period.

OTHER OPERATING REVENUES. Other sources of revenues remained stable,
decreasing by only $2,000 to $832,000 for the nine month period ended
September 30, 1997, compared to the same period in 1996. Other operating
revenues are primarily derived from the sale of live and simulcast racing
programs, parking and admission fees relating to Mountaineer's racing
activities and periodic boxing and concert events.

NONRECURRING INCOME. In the first nine months of 1996, the Company
negotiated significant reductions in three previously accrued obligations,
and as a result recorded $529,000 in nonrecurring income consisting of (i)
$100,000 paid in settlement of a $308,000 judgment against Mountaineer, (ii)
$150,000 in settlement of a claim for professional fees of $411,000, and
(iii) $90,000 plus a reduction in the exercise price of warrants to purchase
145,000 shares of the Company's common stock from $6.25 to $3.00 per share in
settlement of claims in connection with a financial advisory agreement (See
Note 2 in Notes to Condensed and Consolidated Financial Statements).

Costs and Expenses

Operating costs and gross profit earned from operations for the nine month
periods ended September 30, 1997 and 1996 are as follows:

Nine Months Ended
September 30
1997 1996
------------ ------------
Operating Costs:
Video lottery operations $ 23,199,000 $ 14,371,000
Parimutuel commissions 4,428,000 3,860,000
Lodging, food and beverage 3,473,000 2,593,000
Other revenues 789,000 794,000
------------ ------------
Total Operating Costs $ 31,889,000 $ 21,618,000
------------ ------------
------------ ------------

Gross Profit (Loss):
Video lottery operations $ 13,986,000 $ 7,596,000
Parimutuel commissions (968,000) (463,000)
Lodging, food and beverage 552,000 376,000
Other revenues 43,000 40,000
------------ ------------
Total Gross Profit $ 13,613,000 $ 7,549,000
------------ ------------
------------ ------------

The Company's 56% increase in revenues resulting from the expanded scope
of entertainment offerings at Mountaineer resulted in higher total costs, as
operating costs increased by 48% to $31.9 million in the first nine months of
1997. As a result, gross profit from the Company's four profit centers
increased substantially from $7.5 million for the first nine months of 1996
to $13.6 million for the same period in 1997, an increase of 80%.

16
<PAGE>

VIDEO LOTTERY OPERATIONS. Costs of VLTs increased by $8.8 million, or
61%, to $23.2 million for the nine months ended September 30, 1997,
reflecting the increase in statutory expenses directly related to the 69%
increase in video lottery revenues. Such expenses accounted for $8.2 million
of the total cost increase.

After payment of a State Administrative Fee of up to 4% of revenues,
Mountaineer is obligated to make payments from the remaining video lottery
revenues to certain funds administered by the West Virginia Lottery
Commission as follows: State Tax 30%, Horsemen's Purse Fund 15.5%, Tourism
Promotion 3%, Hancock County Tax 2%, Stakes Races 1%, Veterans Memorial 1%,
and Employee Pension Fund 0.5%. Assessments paid to the Employee Pension
Fund are returned by the Lottery Commission to a defined contribution pension
plan administered by Mountaineer for the sole benefit of Mountaineer
employees. Assessments paid to the Horsemen's Purse Fund are returned by the
Lottery Commission to bank accounts administered by Mountaineer for the sole
benefit of horse owners who race at Mountaineer. These funds are used
exclusively to pay purses for thoroughbred races run at Mountaineer in
amounts determined by the Company in accordance with its agreement with the
Horsemen's Benevolent and Protective Association. Taxes and assessments paid
to all of these funds are included in "Cost of Video Lottery Operations" in
the Condensed and Consolidated Statements of Operations. Statutory costs and
assessments, including the State Administrative Fee, for the respective nine
month periods are as follows:

Nine Months Ended
September 30
1997 1996
------------ -----------
Employee Pension Fund $ 182,000 $ 107,000
Horsemen's Purse Fund 5,641,000 3,322,000
------------ -----------
Subtotal 5,823,000 3,429,000

State of West Virginia 11,712,000 6,940,000
Tourism Promotion Fund 1,092,000 643,000
Hancock County 728,000 429,000
Stakes Races 364,000 214,000
Veteran's Memorial 364,000 214,000
------------ -----------
$ 20,083,000 $ 11,869,000
------------ -----------
------------ -----------

The remaining significant expenses incurred by video lottery operations
for the comparative nine moth periods consist of VLT lease expense ($852,000
in 1997 compared to $1,068,000 in 1996), direct and indirect wages and
employee benefits ($1,375,000 in 1997 compared to $616,000 in 1996), and
utilities, property tax and insurance ($440,000 in 1997 compared to $163,000
in 1996).

In March 1997, the Company purchased 400 new Slot Terminals and retired
200 leased Card Terminals. As a result, VLT lease expense has declined from
approximately $108,000 per month in the first quarter of 1997 to
approximately $89,000 per month for the remainder of the lease term. Wages
and benefits expense increased from 1996 to 1997 in response to higher levels
of patron play. Management believes these costs will continue to exceed prior
year levels due to this increase in number of VLTs from 800 to 1000 in March
1997, and anticipated high levels of patronage.

17
<PAGE>

PARIMUTUEL COMMISSIONS. Costs of parimutuel commissions increased by
$568,000, or 15%, from $3.9 million in the first nine months of 1996 to $4.4
million in the first nine months of 1997. Host track simulcast fees,
totalisator and other lease expenses remained stable at approximately
$900,000 in the first nine months of 1997 and 1996. Wages and benefits
relating to the Company's racing operations increased by $254,000, or 13%,
from $1.9 million to $2.2 million in the nine months ended September 1997
compared to the prior period, largely as a result of conducting 176 live race
performances in 1997 compared to only 170 in the first nine months of 1996.
Cost of supplies increased by $212,000, or 163%, from $130,000 to $342,000
for the same period to period comparison.

Mountaineer's labor agreement with approximately 50 mutuel and 14 video
lottery employees has been extended to November 30, 1997. There can be no
assurances that a new labor agreement will be finalized prior to the
expiration of this extended term.

On August 15, 1997, Mountaineer executed a new agreement with the HBPA,
the exclusive authorized bargaining representative for all thoroughbred horse
owners who participate in live races at Mountaineer. Mountaineer contributes
all purse funds earned by such horse owners, as well as compensation to the
HBPA in an amount equal to 1.5% of the amount paid for purses, from proceeds
of its live and simulcast racing and video lottery operations. Mountaineer
is required to conduct a minimum of 210 live racing events annually during
the term of the agreement, down from a minimum threshold of 220 days under
the prior contract. Also, the minimum daily purse payment will increase from
$22,500 under the prior agreement to $30,000. The new contract, which
expires on January 1, 2001, contains no other material changes from the prior
agreement.

FOOD, BEVERAGE AND LODGING OPERATIONS. Operating costs of the Company's
food, beverage and lodging operations increased by 34% from $2.6 million in
the first nine months of 1996 to $3.5 million in the first nine months of
1997, consistent with the 34% increase in revenues from such operations for
the same comparative periods. Direct expenses of the Company's food and
beverage operations increased from $1.8 million in the first nine months of
1996 to $2.6 million during the corresponding period in 1997. The food and
beverage operation earned a gross profit of $412,000 in the first nine months
of 1997, compared to $364,000 in 1996 as higher revenues more fully absorbed
the operation's fixed costs. Lodging direct costs totaled $864,000 for the
nine months ended September 30, 1997, compared to $813,000 in 1996. Lodging
operations achieved a gross profit of $140,000 in the 1997 period, compared
to a $12,000 profit in the first nine months of 1996.

COST OF OTHER REVENUES. Costs of other revenues remained stable,
decreasing by only $5,000 from $794,000 for the nine months ended September
30, 1996 to $789,000 for the nine months ended September 30, 1997. Cost of
other revenues consist primarily of direct and indirect wages and employee
benefits, and supplies and other items purchased for resale.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $907,000 to $3.7 million in the first nine months of 1997 from
$2.8 million for the nine month period ended September 30, 1996.
Management's efforts to reduce the cost of corporate overhead continued to
yield beneficial results, as corporate general and administrative expenses
declined from $1.4 million in the first nine months of 1996 to $1.1 million
in the corresponding period of 1997. General and administrative expenses at
Mountaineer increased to $2.6 million in the first nine months of 1997,
compared to $1.5 million in the corresponding period of 1996. Wages and
benefits expense at Mountaineer increased from $619,000 in the first nine
months of 1996 to $1.1 million for the same period in 1997, due to the
transfer of management employees from the Company's corporate office to
Mountaineer, the hiring of support staff to administer the expanded scope of
Mountaineer's operations, and its assumption of various corporate
responsibilities. Professional fees at Mountaineer also rose significantly,
from $308,000 to $725,000 for the nine

18
<PAGE>

month periods ended September 30, 1996 and 1997, respectively. Over $300,000
of the increased professional fees were incurred in pursuit of financing
alternatives. (See Liquidity and Sources of Capital below).

MARKETING AND PROMOTIONS EXPENSE. Marketing expenses at Mountaineer
increased from $1.0 million in the first nine months of 1996 to $2.4 million
in the first nine months of 1997, as Management embarked on an aggressive
regional marketing campaign centered around its 30-minute infomercial
broadcasts. Marketing and promotions expense in the first nine months of 1997
are net of approximately $497,000 to be refunded to Mountaineer under the
auspices of two state grants to a convention and visitors bureau of which
Mountaineer is a member. The Company has also qualified to be reimbursed for
up to $110,000 of future expenses incurred in advertising programs supported
by these grants. Patron inquiries from the infomercial are being compiled
into a relational database for use in direct mail marketing campaigns.

The Company has added to its marketing department staff, producing a 42%,
or $86,000 increase in wage and benefits expense from $203,000 to $289,000
for the same period to period comparison. Significantly expanded marketing
activities are reflected in the comparative expense levels for the nine
months ending September 30, 1997 and 1996, respectively; television
advertising $611,000 versus $58,000, newspaper advertising $408,000 versus
$256,000, radio advertising $123,000 versus $9,000, and direct mail marketing
$93,000 versus $8,000. In addition, promotional events and discounts
amounted to $758,000 versus $387,000, consisting of promotional events and
discounts for video lottery $336,000 versus $149,000, sales discounts and
food and beverage coupons at the track $173,000 versus $27,000, sales
discounts and food and beverage coupons at the lodge $205,000 versus
$119,000, and other promotional events and discounts $44,000 versus $92,000.

Management is currently analyzing the potential benefits to be earned
from the installation of player tracking software in its video lottery
terminals to enhance its direct mail targeting capabilities. The cost of the
software, if purchased, is expected to exceed $1,000,000.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased by $287,000, or 22%, from $1.3 million for the nine month
period ended September 30, 1996 to $1.6 million for the corresponding period
in 1997. Management expects depreciation expenses to continue to increase in
subsequent quarters as new capital improvements are placed into service, most
notably a $3.1 million purchase of 400 video slot terminals which became
operational in March 1997, and large scale redecoration of Mountaineer's
grandstand video lottery and ancillary dining and bar facilities, which were
substantially completed in the Summer of 1997.

CASH FLOWS

The Company's operations produced $5.5 million of cash flow in the nine
months ended September 30, 1997, compared to $551,000 produced in the first
nine months of 1996. Current year noncash expenses include $1.6 million for
depreciation and amortization and $1.2 million for the amortization of
deferred financing costs as interest expense.

The Company invested $5.1 million for continued expansion and development
of its properties at Mountaineer in the first nine months of 1997 including a
$3.1 million investment in video slot terminals, compared to a $1.1 million
investment in the first nine months of 1996. In the first nine months of
1997, the Company settled certain common stock price guarantees relating to
the 1992 acquisition of Mountaineer via cash payments of $385,000 and the
issuance of 150,000 shares of common stock.

In 1997, the Company and its lender amended and restated the existing
loan agreements, converting the line loan to a term loan, as further
described below, and the lender advanced the full

19
<PAGE>

amount of the $5.4 million line of credit to Mountaineer. The Company paid
cash loan fees of $920,000 during the nine months ended September 30, 1997.

LIQUIDITY AND SOURCES OF CAPITAL

The Company's working capital balance stood at $7.2 million at September
30, 1997, and its unrestricted cash balance amounted to $8.4 million. Racing
purses are paid from funds contributed by the Company to bank accounts owned
by the horse owners who race at Mountaineer. At September 30, 1997, the
balances in these accounts exceeded the purse payment obligations by
$762,000; this amount is available for payment of future purse obligations at
the discretion of the Company and in accordance with the terms of its
agreement with the HBPA. The Company would expect this amount to grow during
the winter as racing days are curtailed and video lottery and simulcast
revenues continue at a comparatively less reduced rate.

LONG-TERM DEBT AND LINE OF CREDIT REFINANCING. Effective July 2, 1997,
Mountaineer and the Company amended and restated their July 2, 1996 Term Loan
Agreement, which had been previously amended and restated as of December 10,
1996. The December 10, 1996 amendment (the "First Amended Agreement")
reflected an increase in the amount borrowed from $5 million to $16.1
million, established a $5,376,500 revolving line of credit, and converted the
lender's position from second to first trust holder.

The July 2, 1997 Second Amended and Restated Term Loan Agreement (the
"Second Amended Agreement") (i) extends the term of the loan to July 2, 2001
(compared to July 2, 1999); (ii) increases the total amount borrowed to
$21,476,500 (by virtue of Mountaineer drawing down the line of credit); (iii)
eliminates from the First Amended Agreement annual fees of cash in the amount
of 8% of the outstanding principal balance of the loan that would have been
due each November 15 while the loan is outstanding; (iv) calls for payments
of interest only with the principal due at the end of the four year term; (v)
eliminates annual warrants to purchase 250,000 shares of the Company's common
stock at $1.06 per share which would have been issued on November 15, 1997,
1998 and 1999; and (vi) eliminates annual warrants to purchase additional
shares in a number to be calculated under a formula defined in the First
Amended Agreement, which would have been issued on November 15, 1997, 1998
and 1999. The lender's rights pursuant to the First Amended Agreement with
respect to the 550,000 shares of the Company's stock and warrants to purchase
1,632,140 additional shares issued thereunder are unaffected by the Second
Amended Agreement. The Company continues to guarantee the loan. As a result
of this transaction, the Company has excess funds available for investment,
further expansion at Mountaineer and, subject to legislative approval,
additional VLTs.

As consideration for the lender's entering into the Second Amended
Agreement, Mountaineer has agreed (i) to pay a one time fee of $1.8 million
or 8.5% of the total amount borrowed, which may be paid over the first year
of the term (as of September 30, 1997, the Company has paid $500,000 and is
obligated to pay the remaining $1.3 million in equal payments over the next
nine months); (ii) to pay interest at the rate of 13% (compared to 12% on the
$16.1 million term loan and 15% on the $5.4 million line of credit under the
First Amended Agreement); and (iii) to pay a call premium equal to 5% in the
event of prepayment during the first year of the term, declining to 3% during
the second year, 2% in the third year and 1% in the final year.

CAPITAL IMPROVEMENTS. The Company is contemplating significant further
expansion of its Mountaineer facility including approximately doubling its
hotel room capacity and constructing a regional convention center, most
likely to occur in 1998 and 1999. The Company began to invest in significant
infrastructure improvements beginning with extensive paving in the fourth
quarter of 1997 and construction of a sewage treatment facility is planned
for 1998. The Company may separately finance any construction activities
that it executes of this magnitude. Capital improvements of a near-term
nature include numerous smaller renovations, including a new

20
<PAGE>

entrance to the racetrack clubhouse. Management is also contemplating the
respective benefits and costs of installing a point of sale computerized
player tracking system in its video Slot Terminal network. The cost of the
system, if purchased, is expected to exceed $1,000,000.

On October 7, 1997, Mountaineer entered into an agreement in which it
obtained an exclusive option to purchase 349 acres of real property located
adjacent to its Hancock County, West Virginia operation. Mountaineer paid
$100,000 in exchange for an irrevocable option to purchase the property for
$600,000 before October 1, 1998, with payment to be made in the form of a
$200,000 cash payment at closing and a $400,000 term note bearing interest at
9% payable over five years.

ROAD IMPROVEMENTS. During the third quarter of 1997, construction
projects commenced affecting West Virginia State Route 2 (the road
Mountaineer fronts) both in Weirton (approximately 18 miles to the south) and
in Chester (approximately 8 miles to the north), and Ohio State Routes 7 and
11. Although such road improvements could ultimately benefit Mountaineer by
improving traffic flow, while such construction is in progress, access to
Mountaineer could be impeded. If construction were to make travel to
Mountaineer unduly burdensome, patronage at Mountaineer could decline,
adversely affecting the Company's financial condition. The materiality of
such effect would be in proportion to any decline in patronage. Although
there can be no assurance as to the long-term effects of such construction on
the business of Mountaineer, the Company has experienced no discernible
impact on patronage since it commenced.

INCREASE IN AUTHORIZED NUMBER OF SHARES. On October 15, 1996, the
Company's shareholders voted to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock from 25,000,000 to 50,000,000. The purpose of this amendment
was to provide a sufficient number of shares for the Company to honor its
obligation to issue shares of common stock under various agreements and for
future corporate purposes. While the Company has no plans to issue shares of
common stock other than in the ordinary course of business, the authorization
of additional shares gives the Company flexibility in future capital raising
or acquisition activities.

OUTSTANDING OPTIONS AND WARRANTS. As of September 30, 1997, there were
outstanding options and warrants to purchase 6,397,247 shares of the
Company's common stock at below market price. Of this amount, options to
purchase 2,818,914 shares are held by employees, former employees or
directors of the Company, and warrants to purchase 2,220,776 shares are held
by the Company's lender whose exercise rights are subject to a statutory
ownership limitation not to exceed 5% of the Company's outstanding voting
shares without prior approval of the West Virginia Lottery Commission. All
but 70,000 of such shares are subject to registration rights and will be
included in a registration statement which the Company intends to file with
the Securities and Exchange Commission.

DEFERRED INCOME TAX BENEFIT. Management believes that the substantial
and steady revenue increases earned in the past three years will continue,
and ultimately occur in amounts which will allow the Company to utilize its
$21.8 million federal net operating loss tax carryforwards, although there
are no assurances that sufficient income will be earned in future years to do
so. The utilization of federal net operating losses may be subject to
certain limitations. As of September 30, 1997, the deferred income taxes
receivable balance is approximately $1 million on the Condensed and
Consolidated Balance Sheet (See Note 3 in Notes to Condensed and Consolidated
Financial Statements).

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of

21
<PAGE>

historical fact included in this document, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Liquidity and Sources of Capital" regarding
the Company's strategies, plans, objectives, expectations, and future
operating results are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable at this time, it can give no assurance that such expectations
will prove to have been correct. Actual results could differ materially
based upon a number of factors, including but not limited to weather
conditions, road construction affecting major travel routes to Mountaineer,
adverse changes in West Virginia video lottery laws or the rates of taxation
of video lottery operations, legalization and implementation of new forms of
gaming by neighboring states, which would lead to increased competition, loss
of the services of the Company's president, and general economic conditions
affecting the resort business.

PART II
OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There is incorporated by reference the information appearing under the
caption "Legal Proceedings" in the Company's Form 10-K for the fiscal year
ended December 31, 1996, Form 10-Q for the fiscal quarter ended March 31,
1997, and Form 10-Q for the fiscal quarter ended June 30, 1997.

ITEM 2 - CHANGES IN SECURITIES

On July 2, 1997, the Company issued 50,000 shares of common stock
pursuant to a settlement agreement with a former principal of Mountaineer.
The issuance of the shares was part of a larger transaction in which the
Company also made certain payments and forgave certain indebtedness in
exchange for cancellation of a guarantee made by the Company in connection
with the acquisition of Mountaineer in the amount of approximately $1,090,000.

In the fourth quarter of 1997, the Company recently offered warrants
to purchase up to 180,000 shares and 25,000 shares of common stock to
consultants for services to be rendered, and the Company may engage the
services of others in the future on similar terms.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

At the Company's annual meeting of stockholders, held on October 8,
1997, the following proposals were approved by a majority of the shareholders
of the Company: (1) election of Edson R. Arneault, Robert A. Blatt and Robert
L. Ruben to serve as directors of the Company until the next annual meeting
of stockholders, (2) ratification of the adoption of the Company's 1996
Amended Stock Option Plan, and (3) confirmation of Corbin & Wertz as the
Company's accountants and independent auditors.

ITEM 5 - OTHER INFORMATION

Not applicable.

22
<PAGE>

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Articles of Incorporation, as amended (1)

3.2 Certificate of Amendment of Restated Certificate of
Incorporation, filed as of October 18, 1996 (2)

3.3 By-Laws of the Company (1)

10.1 Real Estate Option Agreement, dated October 7, 1997, between
Mountaineer Park, Inc., Realm Corporation and Robert Logan.

27 Financial Data Schedule

FOOTNOTES

(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(2) Incorporated by reference from the Company's Current Report on
Form 8-K, dated October 18, 1996, filed November 1, 1996.

(b) Reports on Form 8-K - The Company filed the following Current
Report on Form 8-K during the third quarter of 1997:

On July 8, 1997, the Company filed a Current Report on Form 8-K, dated
July 2, 1997, reporting under Item 5 (i) the Second Amended and Restated Term
Loan Agreement, dated July 2, 1997, between the Company and Madeleine LLC,
and (ii) a Compromise Fee Agreement, dated July 2, 1997, between the Company
and Bridge Capital LLC.

23
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

MTR Gaming Group, Inc.
----------------------
(Company)

/s/ Edson R. Arneault November ___, 1997
- -------------------------------------
Edson R. Arneault
President and Chief Executive Officer

/s/ Thomas K. Russell November ___, 1997
- -------------------------------------
Thomas K. Russell
Secretary, Treasurer and Chief Financial Officer

/s/ Robert L. Ruben November ___, 1997
- -------------------------------------
Robert L. Ruben
Director

/s/ Robert A. Blatt November ___, 1997
- -------------------------------------
Robert A. Blatt
Assistant Secretary and Director

<PAGE>
Exhibit 10.1

OPTION AGREEMENT

This Option Agreement (the "Agreement"), is entered into as of this __ day
of September, 1997, by and between Realm Corporation, an Ohio corporation
("Realm") and Robert Logan, individually ("Logan"), collectively as one party,
(Logan and Realm are collectively referred to from time to time as "Seller") and
Mountaineer Park, Inc., a West Virginia corporation ("Buyer"), as the other
party.

RECITALS

A. Seller currently is: (i) through Realm the owner of that certain
approximate 270 acres of real property ("Parcel A") located in the
Hancock County, West Virginia more fully described in Exhibit A, attached
hereto and incorporated herein; and (ii) through Logan a party to that
certain Real Estate Sales Contract dated September 25, 1997 by an between
Brohha Land, Co, as seller and Logan, as purchaser, a copy of which is
attached hereto and incorporated herein as Exhibit C (the "Contract")
pursuant to which Logan is to purchase approximately 79 acres ("Parcel
B") of real property contiguous to Parcel A, as more full described in
Exhibit B attached hereto and incorporated herein [Parcel A and Parcel B
shall be collectively referred to as the "Real Property"].

B. Seller desires to sell, and Buyer desires to purchase the Real Property
currently owned by and subject to Logan's rights under the Contract.

Therefore, in consideration of the granting of the options for the payments
set out below, and for other good and valuable consideration, the receipt,
sufficiency and incontestability of which are acknowledged, the parties agree as
follows:

1. RECITALS INCORPORATED. The foregoing Recitals are incorporated into
this Agreement as if fully set out herein.

2. OPTION TO PURCHASE. In consideration of the sum of One Hundred
Thousand Dollars ($100,000.00) [the "Option Payment"] and other good and
valuable consideration, the Seller hereby grants to the Buyer an irrevocable
option to purchase all of the Real Property. This option to purchase shall
expire on its own terms at 12:00 midnight (Chester, West Virginia time) on
September 30, 1998.

3. TERMS OF PURCHASE. The Purchase Price of the Real Property is
$600,000.00. The Purchase Price shall be payable as follows: (i) payment by
Buyer of $200,000.00 all cash or immediately available funds at settlement on
the sale of the Real Property; and (ii) execution of a "take back" promissory
note by Buyer in a form to be agreed to by the parties

<PAGE>

in the amount of $400,000.00 payable over five (5) years in equal monthly
installments of principal and interest at the rate of 9% per annum.

4. SURVEY AND TESTING. Buyer shall have the right, subject to
reasonable advance notice to Seller, to enter upon the Real Property to
conduct a survey or such other testing as Buyer, in its sole and absolute
discretion, deems reasonable. In the event the survey indicates available
acreage in an amount less than 350 acres or in the event Logan fails to
acquire Parcel B, the Purchase Price shall be reduced proportionately.

5. EXERCISE. The Buyer shall exercise this option by giving at least
30 days notice in writing setting the date, time and place for settlement.
Settlement shall in no event take place later than September 30, 1998.

6. TITLE. A. At settlement, the Seller's title to the Real Property
shall be conveyed by general warranty deed and shall be good, insurable at
standard rates and merchantable, free and clear of all liens and encumbrances
except: (i) covenants, restrictions and easements and rights of way of record
which do not materially impact the value or use of the Real Property; and
(ii) the existing leasehold interest in Parcel A previously disclosed to
Buyer.

B. In the event that any lien or encumbrance is discovered prior
to settlement which has not been mentioned above, or in the event a title
defect is discovered prior to settlement, the Buyer may either: (i) purchase
the Real Property or part thereof as above provided subject to such liens or
encumbrances or title defects; or (ii) elect not to purchase the Real
Property by giving ten (10) days written notice to the Seller, and neither
party shall have any further liability to the other.

7. PRESERVATION OF REAL PROPERTY. The Seller covenants and agrees to
refrain for the duration of this Agreement from doing any act which would
tend to damage this option, the value of the Real Property or would impair
the Buyer from acquiring the Real Property. No further consideration shall
be necessary to keep this option in full force and effect during its
duration. Seller shall not sell, gift, transfer or otherwise convey in any
manner all or any part of the Real Property to anyone other than Buyer so
long as this option is in effect.

8. ASSIGNMENT. This option may be assigned by the Buyer without the
consent of the Seller; provided, however, that concurrently with such
assignment, the Buyer notifies the Seller of such assignment, the names and
addresses of the assignees, and furnishes the Seller with a copy of such
assignment.

9. REPRESENTATIONS AND WARRANTIES. To induce Buyer to enter into this
Agreement and make the payments specified herein, Seller represents and warrants
to Buyer, their successors and assigns, as follows:

2
<PAGE>

A. Realm is a corporation duly organized and in good standing
under the laws of the State of Ohio and is qualified to do business in West
Virginia.

B. Realm is the sole owner of Parcel A, and Logan is the sole
party entitled to purchase Parcel B. No other person or entity holds any
interest, legal or beneficial, in the Real Property.

C. Seller is authorized and able to sell the Real Property without
the further consent of any person or entity. And, the granting of this
option and sale of the Real Property does not violate any contract,
agreement, loan agreement or Court order to which Seller is a party.

D. To the best of Seller's knowledge, information and belief: (i)
no "hazardous substances" or "toxic substances" as defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9061 ET SEQ.; Hazardous Materials
Transportation Act, 49 U.S.C. Section 1802; and Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 ET SEQ. and any other substances
considered hazardous, toxic or the equivalent pursuant to any other
applicable laws and in the regulations adopted and publications promulgated
pursuant to said laws or any other present or future federal, state, county
or local laws or regulations concerning environmental protection, including,
without limitation, any material or substance which is (a) defined or listed
as a "hazardous waste," "extremely hazardous waste," "restricted hazardous
waste," "hazardous material," "pollutant" or "contaminant" under any law, (b)
petroleum or a petroleum derivative, (c) a flammable explosive, (d) a
radioactive material, (e) a polychlorinated biphenyl, or (f) asbestos or an
asbestos derivative ("Hazardous Materials") are located on or in the Real
Property (including the surface, soil or subsurface of the Real Property);
and (ii) Seller has not used the Real Property for the storage, manufacture,
repair or disposal of Hazardous Materials, or machinery containing such
Hazardous Materials.

E. Seller shall use the Option Payment solely for the purpose of
purchasing Parcel B and shall immediately thereafter provide Buyer a copy of
the deed evidencing Seller's fee simple ownership of Parcel B.

F. Seller shall convey the Real Property free and clear of all
liens, encumbrances, interests and claims of any kind.

G. The representations and warranties set out in this Section 9
shall be true and correct both as of the date of this Agreement and as of the
date of sale and transfer of Real Property from Seller to Buyer.

H. The provisions of this Section 9 shall survive any termination of
this option or the closing on the sale of the Real Property.

3
<PAGE>

NOTICES AND DELIVERIES.

NOTICES. All notices or other communications required or
permitted under this Agreement shall be in writing and be delivered by: i)
certified United States mail, return receipt requested; ii) recognized overnight
courier (e.g. Federal Express; Express Mail, etc.); or iii) hand delivery,
addressed as follows:

To Seller:
Realm Corporation

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

--------------------------------------------------
Attn: Bob Logan

To Buyer:
Mountaineer Park, Inc.
Route 2, P.O. Box 358
Chester, West Virginia 26304
Attn.: Edson R. Arneault

Notices properly addressed shall be deemed given: x) three (3) business days
after being deposited in the U.S. mail, postage prepaid; y) one (1) business day
after being delivered to an overnight courier; and z) upon delivery by hand.

B. CHANGES. Any party may change the person(s) to whom, or the
place to which, notices, payments or certificates shall be sent by giving
written notice of the change to the other party consistent with Section 10(A).

11. THE CONTRACT. In the event Seller fails to purchase Parcel B with the
proceeds of the Option Payment, Buyer in its sole and absolute discretion, shall
have the right either to: (a) rescind this Agreement and demand an immediate
return of the Option Payment to Buyer; or (b) elect to proceed with this
Agreement and purchase Parcel A at the Purchase Price, as adjusted pursuant to
Section 4, above, whereupon the term "Real Property" shall be deemed to include
only Parcel A.

12. MISCELLANEOUS.

A. GOVERNING LAW. This agreement shall be construed in accordance
with the laws of the State of West Virginia.

B. BINDING EFFECT. This Agreement shall be binding upon, and
inure to the benefit of, Seller, Buyer and their respective heirs, personal
representatives, successors and permitted assigns. Any amendment or
modification of this Agreement must be in writing and signed both by Buyer
and by Seller.

4
<PAGE>

C. REMEDIES CUMULATIVE. Any remedy specified in this Agreement is
in addition to, not in lieu of, any other rights or remedies available to either
party at law or in equity. All rights or remedies are cumulative and may from
time to time be exercised separately or together.

13. ENTIRE AGREEMENT. This agreement and the attached exhibits constitute
the entire agreement between the parties. No representations, warranties or
promises pertaining to the option or the land affected by this option have been
made or shall be binding on any of the parties except as expressly stated in
this agreement. This agreement may not be changed orally but only by an
instrument in writing signed by all the parties hereto.

IN WITNESS WHEREOF, the parties have signed this Agreement, under seal, as
of the date first set forth above.

WITNESS: SELLER:

REALM CORPORATION

- --------------------------- -----------------------------------[SEAL]
By:
--------------------------------------
Its:
-------------------------------------

- --------------------------- -----------------------------------[SEAL]
Robert Logan

WITNESS: BUYER:

MOUNTAINEER PARK, INC.

- --------------------------- By -------------------------------[SEAL]
Edson R. Arneault, President

This Instrument was prepared by Louis M. Aronson, Esquire, Freer, McGarry,
Bodansky & Rubin, P.C., 1000 Thomas Jefferson Street, N.W., Suite 600,
Washington, D.C. 20007.

5
<PAGE>

STATE OF )
COUNTY OF ) SS:

ON THIS, the _____ day of _____________ 1997, before me, the undersigned
officer, personally appeared Edson R. Arneault who acknowledged himself to be
the President of Mountaineer Park, Inc., a West Virginia corporation, and that
he, as such officer, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such officer.

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

----------------------------
Notary Public

My Commission Expires:
-------------------------------

STATE OF )
COUNTY OF ) SS:

ON THIS, the ____ day of _____________ 1997, before me, the undersigned
officer, personally appeared ________________________________ who acknowledged
himself to be the _______________________ of Realm Corporation and that he, as
such officer, being authorized to do so, executed the foregoing instrument for
the purposes therein contained by signing the name of the corporation by himself
as such officer.

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

----------------------------
Notary Public

My Commission Expires:
-------------------------------

6
<PAGE>

STATE OF )
COUNTY OF ) SS:

ON THIS, the _____ day of _____________ 1997, before me, the undersigned
personally appeared Robert Logan and, being first duly sworn according to law,
deposed and acknowledged that he executed the foregoing as his free and
voluntary act for the purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

----------------------------
Notary Public

My Commission Expires:
-------------------------------

7
<PAGE>

EXHIBIT A

8
<PAGE>

EXHIBIT B

9
<PAGE>

EXHIBIT C

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,624,000
<SECURITIES> 0
<RECEIVABLES> 523,000
<ALLOWANCES> 114,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,187,000
<PP&E> 28,194,000
<DEPRECIATION> 5,598,000
<TOTAL-ASSETS> 40,312,000
<CURRENT-LIABILITIES> 3,983,000
<BONDS> 21,578,000
0
0
<COMMON> 2,000
<OTHER-SE> 13,585,00
<TOTAL-LIABILITY-AND-EQUITY> 40,312,000
<SALES> 45,502,000
<TOTAL-REVENUES> 45,600,000
<CGS> 31,889,000
<TOTAL-COSTS> 39,625,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,636,000
<INCOME-PRETAX> 3,339,000
<INCOME-TAX> (290,000)
<INCOME-CONTINUING> 3,629,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,629,000
<EPS-PRIMARY> .17
<EPS-DILUTED> .17

</TABLE>