<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549


                                   FORM 10-Q


                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                   THE SECURITIES AND EXCHANGE ACT OF 1934



For Quarter Ended July 31, 1996                    Commission File Number O-7607
                  -------------                                          -------


                            FAIR GROUNDS CORPORATION
                            ------------------------
             (Exact name of registrant as specified in its charter)



<TABLE>
<S>                                                                           <C>
              Louisiana                                                       72-0361770             
-----------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)


1751 Gentilly Blvd., New Orleans, LA                                             70119 
-----------------------------------------------------------------------------------------------------
(Address of principal executive offices)                                       (Zip Code)
</TABLE>


Registrant's telephone number including area code     (504) 944-5515   
                                                      --------------

                                Not Applicable
--------------------------------------------------------------------------------
  (Former name, former address, and former fiscal year, if changed since last
                                    report)



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

            x      Yes         No
          -----        ------

                 
       468,580 Common Shares were outstanding as of September 15, 1996.
<PAGE>   2




                            FAIR GROUNDS CORPORATION

                                     INDEX


<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----
<S>           <C>                                                                                          <C>
PART I.       FINANCIAL INFORMATION                                                                     
                                                                                                        
              Item 1.        Financial Statements                                                       
                                                                                                        
                             Balance Sheet, July 31, 1996 (Unaudited)                                   
                             and Balance Sheet, October 31, 1995  . . . . . . . . . . . . . . . . .          1
                                                                                                        
                             Statements of Operations and Retained                                      
                             Earnings for the Three Months Ended                                        
                             July 31, 1996 and 1995 (Unaudited)   . . . . . . . . . . . . . . . . .          3
                                                                                                        
                             Statements of Operations and Retained                                      
                             Earnings for the Nine Months Ended                                         
                             July 31, 1996 and 1995 (Unaudited)   . . . . . . . . . . . . . . . . .          5
                                                                                                        
                             Statements of Cash Flows for the Nine                                      
                             Months Ended July 31, 1996 and 1995                                        
                             (Unaudited)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          8
                                                                                                        
                             Notes to Financial Statements (Unaudited)  . . . . . . . . . . . . . .         10
                                                                                                        
              Item 2.        Management's Discussion and Analysis of Financial                          
                             Condition and Results of Operations    . . . . . . . . . . . . . . . .         19
                                                                                                        
                                                                                                        
PART II.      OTHER INFORMATION                                                                         
                                                                                                        
              Item 4.        Submission of Matters to a Vote of Security Holders  . . . . . . . . .         28
                                                                                                        
              Item 5.        Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         28 
                                                                                                               
              Item 6.        Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . .         28 
                                                                                                        
                                                                                                        
SIGNATURES                   . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . .         29
                                                                                                                  
</TABLE>
<PAGE>   3



                                    PART I
                            FINANCIAL INFORMATION
<PAGE>   4



                            FAIR GROUNDS CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          (Unaudited)
                                                                            July 31,             October 31,
                                                                              1996                    1995   
                                                                          -----------             -----------
<S>                                                                     <C>                     <C>
ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                          $   3,728,714           $   1,118,590
     Cash and cash equivalents -
          restricted                                                           -                      154,909
     Accounts receivable                                                    1,140,846               1,026,666
     Investment securities -
          available for sale                                                  227,125                 457,900
     Inventory                                                                 80,540                  80,565
     Deferred income taxes                                                     59,940                  59,940
     Prepaid expenses                                                         655,958                 557,033
                                                                        -------------           -------------
          Total Current Assets                                              5,893,123               3,455,603
                                                                        -------------           -------------

OTHER ASSETS                                                                   69,184                  71,264
                                                                        -------------           -------------

PROPERTY, PLANT AND EQUIPMENT
     Buildings and improvements                                            13,653,283              13,881,970
     Construction in progress                                              15,799,050              15,207,395
     Land improvements                                                      4,267,529               4,270,535
     Temporary facilities                                                   2,986,791               2,686,044
     Automotive equipment                                                     818,111                 818,111
     Machinery and equipment                                                  882,177                 789,347
     Furniture and fixtures                                                   171,631                 171,497
                                                                        -------------           -------------
          Total                                                            38,578,572              37,824,899

     Less: accumulated depreciation
           and amortization                                               (15,299,854)           (13,683,393)
                                                                        -------------           ------------ 

     Depreciation property net                                             23,278,718              24,141,506
     Land                                                                   3,286,281               3,286,281
                                                                        -------------           -------------

          Property - net                                                   26,564,999              27,427,787
                                                                        -------------           -------------

          TOTAL ASSETS                                                  $  32,527,306           $  30,954,654
                                                                        =============           =============
</TABLE>



(Continued)

                                     -1-
<PAGE>   5



                            FAIR GROUNDS CORPORATION
                           BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
                                                                          (Unaudited)
                                                                            July 31,              October 31
                                                                              1996                    1995   
                                                                         ------------            ------------
<S>                                                                      <C>                     <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Notes payable - current                                             $  9,763,336            $  3,706,143
     Accounts payable                                                       1,218,089                 897,016
     Construction contract payable                                                -                 4,864,199
     Accrued liabilities:
          Deferred purses                                                   4,111,802               5,666,212
          Uncashed mutuel tickets                                             352,413                 259,606
          Other                                                               192,299                 522,967
     Deferred revenues                                                         33,750                  50,149
                                                                         ------------            ------------
          Total Current Liabilities                                        15,671,689              15,966,292
                                                                         ------------            ------------

DEFERRED INCOME TAXES                                                       4,641,035               4,020,035  
                                                                         ------------            ------------  

          Total Liabilities                                                20,312,724              19,986,327
                                                                         ------------            ------------

COMMITMENTS AND CONTINGENCIES                                                     -                       -  
                                                                         ------------            ------------

STOCKHOLDERS' EQUITY
     Capital stock - no par value;
          authorized 600,000 shares,
          issued and outstanding
          469,940 shares                                                    1,525,092               1,525,092
     Additional paid-in-capital                                             1,936,702               1,942,350
     Retained earnings                                                      8,812,841               7,601,742
     Unrealized loss on investment
          securities - available for sale                                     (24,528)                (54,884)
                                                                         ------------            ------------ 
          Total                                                          12,250,107                11,014,300

     Less:  treasury stock at cost,
             1,360 shares                                                     (35,525)                (45,973)
                                                                         ------------            ------------ 

          Total Stockholders' Equity                                       12,214,582              10,968,327
                                                                         ------------            ------------

          TOTAL LIABILITIES AND
               STOCKHOLDERS' EQUITY                                      $ 32,527,306            $ 30,954,654
                                                                         ============            ============


</TABLE>



See accompanying notes to financial statements.





                                      -2-
<PAGE>   6



                            FAIR GROUNDS CORPORATION
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
               For the Three Months Ended July 31, 1996 and 1995
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                             1996                    1995       
                                                                         ------------            ------------
                                                                                                                
<S>                                                                      <C>                     <C>
REVENUES
     Pari-mutuel commissions                                             $  4,233,145            $  3,305,025
     Breakage                                                                 110,340                  90,690
     Uncashed mutuel tickets                                                  184,291                 102,892
                                                                         ------------            ------------

          Total                                                             4,527,776               3,498,607

     Less: pari-mutuel tax                                                    627,033                 509,144
                                                                          -----------            ------------
   
          Total Mutuel Income                                               3,900,743               2,989,463

     Concessions                                                              257,649                 239,459
     Video poker (net)                                                        275,664                 163,573
     Admissions (net of taxes)                                                 90,891                 102,899
     Programs and forms                                                       353,495                 237,773
     Miscellaneous                                                            132,222                  99,912
                                                                          -----------            ------------

          Total Operating Revenues                                          5,010,664               3,833,079
                                                                          -----------            ------------

RACING EXPENSES
     Purses                                                               $ 1,473,594            $  1,216,487
     Salaries and related taxes
          and benefits                                                      1,113,179                 905,737
     Contracts and services                                                   369,888                 261,362
     Host track fees
     Depreciation                                                             532,659                 517,484
     Cost of sales - concessions                                               98,416                  97,082
     Utilities                                                                153,106                 141,599
     Repairs and maintenance                                                  113,767                  82,403
     Program paper, forms and other
          supplies                                                            286,038                 318,022
     Advertising and promotion                                                 82,422                  72,562
     Rent                                                                      67,050                  66,798
     Miscellaneous                                                             79,786                  98,722
                                                                          -----------            ------------

          Total Racing Expenses                                             5,039,696               4,289,487
                                                                          -----------            ------------


</TABLE>

(Continued)





                                      -3-
<PAGE>   7



                            FAIR GROUNDS CORPORATION
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                                  (CONTINUED)
               For the Three Months Ended July 31, 1996 and 1995
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                             1996                    1995
                                                                         -----------             -----------

<S>                                                                      <C>                     <C>
GENERAL AND ADMINISTRATIVE EXPENSES
     Salaries and related taxes
          and benefits                                                   $    337,665            $    299,784
     Insurance                                                                182,718                 211,494
     Property taxes                                                           102,679                  86,702 
     Legal, audit and director fees                                           273,810                 203,615
     Loan closing fees                                                         52,788                     -
     Contract services                                                         47,656                  33,452
     Office expenses                                                           44,690                  77,210
     Miscellaneous                                                             55,441                  45,251  
                                                                         ------------            ------------  
                                                                                                               
          Total General and
          Administrative Expenses                                           1,097,447                 957,508
                                                                         ------------            ------------

LOSS FROM OPERATIONS                                                       (1,126,479)             (1,413,916)  
                                                                         ------------            ------------    
                                                                                                                 
OTHER INCOME (EXPENSE)
     Jazz and Heritage Festival income                                        869,676                 679,492
     Gain on sale of equity investments                                           -                     3,036
     Interest expense                                                        (222,280)                (50,259)
     Interest income                                                            6,438                   5,934
     Video poker tax relief                                                   679,108                     -
     Gain on sale of property                                                  91,963                     -
     Insurance settlements                                                        -                       829
                                                                         ------------            ------------

INCOME (LOSS) BEFORE INCOME TAXES                                             298,426                (774,884)

     Provision for income taxes                                               101,000                     -  
                                                                         ------------            ------------

NET INCOME (LOSS) per share -
     1996 $.42, 1995 ($1.66)                                             $    197,426            $   (774,884)

RETAINED EARNINGS,
     BEGINNING OF PERIOD                                                    8,615,415               8,721,917
                                                                         ------------            ------------

RETAINED EARNINGS,
     END OF PERIOD                                                       $  8,812,841            $  7,947,033 
                                                                         ============            ============ 
CASH DIVIDENDS PER SHARE                                                 $        -              $        -  
                                                                         ============            ============

WEIGHTED AVERAGE NUMBER OF
     SHARES OUTSTANDING                                                       469,940                 469,940   
                                                                         ============            ============   

</TABLE>
See accompanying notes to financial statements.





                                      -4-
<PAGE>   8



                            FAIR GROUNDS CORPORATION
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                             1996                    1995
                                                                          88 Days of              88 Days of
                                                                          Live Racing             Live Racing
                                                                         ------------            ------------
<S>                                                                      <C>                     <C>
REVENUES
     Pari-mutuel commissions                                             $ 15,237,381            $ 12,902,948
Breakage                                                                      348,231                 283,107
     Uncashed mutuel tickets                                                  281,411                 215,638
                                                                         ------------            ------------
          Total                                                            15,867,023              13,401,693

     Less: pari-mutuel tax                                                  2,057,959               1,808,138
                                                                         ------------            ------------

     Commission income                                                     13,809,064              11,593,555  
     Host track fees                                                        2,653,055               2,549,567 
                                                                         ------------            ------------  
          Total Mutuel Income                                              16,462,119              14,143,122

     Concessions                                                            1,246,345               1,387,169
     Video poker (net)                                                        855,536                 539,485
     Admissions (net of taxes)                                                278,128                 258,666
     Parking                                                                   14,967                  14,401
     Programs and forms                                                     1,158,827               1,012,862
     Miscellaneous                                                            606,616                 498,078 
                                                                         ------------            ------------ 

          Total Operating Revenues                                       $ 20,622,538            $ 17,853,783
                                                                         ------------            ------------

RACING EXPENSES
     Purses                                                              $  5,680,253            $  4,947,293
     Salaries and related taxes
          and benefits                                                      4,134,471               4,015,209
     Contracts and services                                                 1,710,737               1,637,396
     Host track fees                                                        1,576,857               1,011,072 
     Depreciation                                                           1,617,379               1,545,787
     Cost of sales - concessions                                              457,277                 602,413
     Utilities                                                                541,822                 469,506
     Repairs and maintenance                                                  286,277                 268,842
     Program paper, forms and other
          supplies                                                          1,126,165               1,016,823
     Advertising and promotion                                                645,193                 565,623
     Rent                                                                     225,696                 192,696
     Miscellaneous                                                            492,503                 392,153  
                                                                         ------------            ------------  
                                                                                                               
          Total Racing Expenses                                          $ 18,494,630            $ 16,664,813
                                                                         ------------            ------------


</TABLE>


(Continued)





                                      -5-
<PAGE>   9



                            FAIR GROUNDS CORPORATION
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                                  (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                             1996                    1995
                                                                          88 Days of              88 Days of
                                                                          Live Racing             Live Racing
                                                                         ------------             -----------
<S>                                                                      <C>                      <C>
GENERAL AND ADMINISTRATIVE EXPENSES
     Salaries and related taxes
          and benefits                                                   $    935,704             $   957,635
     Insurance                                                                768,900                 644,800
     Property taxes                                                           295,402                 153,761
     Legal, audit and director fees                                           641,288                 722,271
     Loan closing fees                                                        110,164                    -
     Contracts and services                                                   120,335                 135,983
     Office expenses                                                          230,840                 260,939 
     Litigation judgment                                                          -                  (188,109)
     Miscellaneous                                                            148,062                 235,016  
                                                                         ------------            ------------  

          Total General and
          Administrative Expenses                                           3,250,695               2,922,296
                                                                         ------------            ------------

INCOME LOSS FROM OPERATIONS                                                (1,122,787)             (1,733,326)
                                                                         ------------            ------------ 

OTHER INCOME (EXPENSE)
     Jazz and Heritage Festival income                                      1,529,774               1,153,083
     Video poker tax relief                                                 1,964,518                     -
     Interest expense                                                        (610,600)               (147,968)
     Interest income                                                           15,595                  87,756 
     Insurance related settlements                                                -                   366,594
     Gain (loss) on sale of investments                                       (36,364)                  3,036
     Gain on sale of property                                                  91,963                     -  
                                                                         ------------            ------------

INCOME (LOSS) BEFORE INCOME TAXES                                           1,832,099                (270,825)

     Provision for income taxes                                               621,000

CHARGE FOR CUMULATIVE EFFECT
     OF CHANGE IN ACCOUNTING
     FOR INVESTMENTS                                                     $        -              $    104,000  
                                                                         ------------            ------------  

NET INCOME (LOSS) per share - 1996
     $2.58, 1995 $ (.35)                                                    1,211,099                (166,825)

RETAINED EARNINGS,
     BEGINNING OF PERIOD                                                    7,601,742               8,113,858
                                                                         ------------            ------------

RETAINED EARNINGS,
     END OF PERIOD                                                       $  8,812,841            $  7,947,033  
                                                                         ============            ============  

</TABLE>

(Continued)





                                      -6-
<PAGE>   10



                            FAIR GROUNDS CORPORATION
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                                  (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                             1996                    1995
                                                                          88 Days of              88 Days of
                                                                          Live Racing             Live Racing
                                                                         ------------            ------------
<S>                                                                      <C>                     <C>     
CASH DIVIDENDS PER SHARE                                                 $        -              $        -  
                                                                         ============            ============

WEIGHTED AVERAGE NUMBER OF
     SHARES OUTSTANDING                                                       469,940                 469,940    
                                                                         ============            ============    

</TABLE>




See accompanying notes to financial statements.





                                      -7-
<PAGE>   11



                            FAIR GROUNDS CORPORATION
                            STATEMENTS OF CASH FLOWS
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                              1996                    1995   
                                                                          ------------            ------------
<S>                                                                       <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                                    $ 1,211,099              $ (166,825)  
                                                                          ------------             -----------   

     Adjustments to reconcile net income
          (loss) to net cash used for
          operating activities:
          Depreciation                                                      1,617,379               1,545,787
          Gain on sale of property                                            (91,963)                    -
          Loss on sale of securities                                           36,363                     -
          Deferred income taxes                                               621,000                  83,951
          Change in assets and liabilities:
          (Increase) decrease in:
               Accounts receivable                                           (104,848)                (29,645)
               Inventory                                                           25                  (2,969)
               Refundable income taxes                                            -                   566,289
               Accounts receivable - insurance
                    proceeds                                                      -                   487,341
               Prepaid expenses                                               (98,925)               (266,926)
               Restricted cash                                                154,909                (150,000)

          Increase (decrease) in
               Accounts payable and
                    accrued liabilities                                        78,680                  (6,173)
               Contracts payable                                           (4,864,199)                 (4,100)
               Deferred revenue                                               (16,399)                    -
               Deferred purses                                             (1,554,410)             (2,071,935)
                                                                         ------------            ------------ 

                    Total adjustments                                      (4,222,388)                151,620
                                                                         ------------            ------------

          Net cash used for
               operating activities                                        (3,011,289)                (15,205)
                                                                         ------------            ------------ 

CASH FLOWS FROM (USED FOR)
     INVESTING ACTIVITIES
          Capital expenditures                                               (755,243)             (7,986,887)
          Proceeds from sale of securities                                    225,420                 414,784
          Proceeds from sale of property                                       91,963                     -
          Deposits                                                              2,080                  (1,175) 
                                                                         ------------             -----------  

          Net cash used for
               investing activities                                          (435,780)             (7,573,278)
                                                                         ------------              ---------- 


</TABLE>

(Continued)





                                      -8-
<PAGE>   12



                            FAIR GROUNDS CORPORATION
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                            1996                    1995   
                                                                         ------------            -----------
<S>                                                                      <C>                     <C>
CASH FLOWS FROM FINANCING ACTIVITIES
     Loan proceeds                                                       $  8,822,695            $  2,150,000
     Principal repayments on
          short term borrowings                                            (2,765,502)                    -
     Advances from third party                                              1,000,000               1,000,000
     Repayments to third party                                             (1,000,000)             (1,000,000)
                                                                         ------------            -------------

     Net cash provided by
          financing activities                                              6,057,193               2,150,000
                                                                         ------------            ------------

     NET INCREASE (DECREASE) IN CASH
          AND CASH EQUIVALENTS                                              2,610,124              (5,438,483)

CASH AND CASH EQUIVALENTS AT
     BEGINNING OF PERIOD                                                    1,118,590               8,039,310
                                                                         ------------            ------------

CASH AND CASH EQUIVALENTS AT
     END OF PERIOD                                                       $  3,728,714            $  2,600,827     
                                                                         ============            ============     


SUPPLEMENTAL DISCLOSURES:

     Interest paid                                                       $    610,600            $    147,968  
                                                                         ============            ============  


</TABLE>



See accompanying notes to financial statements.





                                      -9-
<PAGE>   13



                            FAIR GROUNDS CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

NOTE 2 - COMMITMENTS AND CONTINGENCIES

FIRE RELATED LITIGATION

The Company is a party to a number of legal proceedings which have arisen as a
result of the December 1993 fire or in connection with the Company's efforts to
collect insurance proceeds after the fire.  The following is a brief
description of such fire related proceedings:

1.   On May 14, 1994, the Company filed an action in the 24th Judicial Court in
     the State of Louisiana against Travelers Indemnity Company of Illinois
     ("Travelers"), and others.  The Company contends that the insurance policy
     provided by Travelers provides the Company with blanket coverage in the
     amount of $24.1 million in excess of the $10 million of underlying
     coverage provided by Allianz Underwriters Insurance Company ("Allianz")
     and Royal Indemnity Company ("Royal"); accordingly, the Company maintains
     that Travelers is liable for the difference between $24.1 million and the
     amount already paid (approximately $9.3 million), plus statutory penalties
     of 10% of the amount not paid, interest, attorney's fees and costs.  The
     Company further contends the insurance agent and the insurance broker who
     arranged for the insurance are liable to the Company for any damages
     sustained including any damages sustained because the amount of coverage
     is less than that claimed by the Company. Travelers' position is that the
     excess policy did not provide blanket coverage, and that its liability
     under such policy is limited to the amount which it has already paid.  The
     case is set for trial in November 1996.





                                      -10-
<PAGE>   14


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

2.   The Company filed an action in December 1994, in the Civil District Court
     for Orleans Parish, against ADT Security Systems, the company which
     provided and maintained the fire alarm system at the Fair Grounds Race
     Course, and other defendants.  The complaint seeks unspecified damages,
     not otherwise compensated for by insurance, that were allegedly caused by
     the negligence of one or more of the defendants.  This case is set for
     trial in March 1997.

3.   The Company is a defendant, along with its general liability insurance
     carrier, United National Insurance Company ("United National"), in a civil
     action filed in December 1994 in the United States District Court for the
     Eastern District of Louisiana by St. Paul Mercury Insurance Company ("St.
     Paul"), the insurer of the computerized betting equipment at the
     racetrack.  The complaint alleges that St. Paul is subrogated to its
     insured's rights to collect damages and that it has paid in excess of $1
     million for the loss of equipment in the fire.  Subsequently, United
     National filed suit against the Company seeking to deny coverage for such
     subrogation claim.  The two suits have been consolidated and are set for
     trial in May 1997.

Subsequent to July 31, 1996, a suit was filed in U.S. District Court in Baton
Rouge by Livingston Downs Racing Association ("Livingston") naming the Company
and other defendants in an antitrust suit.  Management of the Company believes
the suit is without merit.

Livingston had previously filed a series of other legal actions against the
Company which were resolved in the Company's favor.

As to the pending matters described above, there can be no assurance that the
Company will be successful in any of its claims or defenses.  Accordingly, no
assurance can be given that additional recoveries of insurance proceeds, if
any, will reimburse the Company adequately for the loss or destruction of its
property in the fire.

Except as described above, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business, to which the
Company is a party or of which any of its property is the subject.

STATUS OF CONSTRUCTION OF FACILITIES

A new tele-track facility and temporary clubhouse area were opened





                                      -11-
<PAGE>   15


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

on December 22, 1994.  The total cost for debris removal and the construction
of the tele-track was approximately $3.2 million.

During the summer of 1994, the Company approved the plans for a new main
facility.  The total cost of the facility, together with furniture, fixtures,
equipment and certain fees and permit costs, was anticipated to be
approximately $24.3 million at the time construction commenced.

As of July 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of approximately
$15.8 million.  Insurance proceeds recovered to date and interim bank financing
provided the source of funds used in such construction.  However, for the
reasons described below, further construction work on the project has been
halted.  As a result, the cost and timing to complete the project cannot now be
determined with any certainty.

CONSTRUCTION FINANCING

As previously reported, the Company received and accepted a commitment letter
dated February 6, 1995 from First National Bank of Commerce of New Orleans
("FNBC") for a non-revolving line of credit to be used as an interim
construction loan, convertible to a term loan.  The aggregate principal amount
of such loan under the terms of such commitment was to have been $17.5 million.
The commitment from FNBC provided that the interim construction loan was to
have closed on or before March 31, 1995.  However, the parties agreed to
various extensions of such closing date.  FNBC indicated that the principal
reason for the delay was FNBC's concern with restrictions on and the possible
elimination of video poker gaming in Louisiana.  Inasmuch as video poker
franchise tax monies generated by the Company and its tele-tracks were to be
used for the repayment of the FNBC loan, in accordance with the tax relief
legislation described below, any changes in the video poker gaming laws which
restricts or limits video poker as a source of revenue may have an adverse
impact on such source of repayment.

In 1994, legislation was adopted which provides that owners of video poker
devices that are located in licensed establishments owned or operated by
licensed racing associations eligible for emergency relief under the statute
are exempt from the franchise payment otherwise due under the Video Draw Poker
Devices Control Law for a period not to exceed 15 years.  The amount of the
franchise payment which otherwise would have been paid to the State of
Louisiana during the exemption period is to be remitted directly to the
licensed racing association, in an amount up to $2.5 million





                                      -12-
<PAGE>   16


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

annually, and such funds are to be used for providing emergency relief to the
licensed racing association.  The use of funds by the licensed racing
association is subject to review and oversight by a legislative committee,
which may reduce the amount of the authorized exemption if the racing
association cannot satisfy the committee that the exemption is necessary for
its ongoing economic viability.  The legislation also provides that at such
time, as the emergency relief granted under the act exceeds the required annual
debt service on any indebtedness incurred to address the emergency situation,
such indebtedness not to exceed $25 million, the excess of such funds is to be
remitted to the state treasury.  During 1995, the Joint Legislative Committee
on the Budget approved the dedication of funds received from the franchise tax
relief described above toward the exclusive use by the Company for making
principal and interest payments to FNBC.

INTERIM FINANCING

FNBC provided the Company with a short-term interim construction loan of $2.15
million on July 17, 1995.  In addition, as further described in Note 4, FNBC
provided the Company with an additional $4 million on November 7, 1995, and $1
million on November 30, 1995.  As also described in Note 4, all of such
financing was then reflected in a Loan Agreement dated December 18, 1995
between the Company and FNBC, pursuant to which the Company borrowed an
aggregate amount of $9,493,050 and utilized a portion of such funds to repay
the principal amount of the prior loans that was outstanding on December 18,
1995.  The remaining amount borrowed was utilized to pay construction costs.

POSSIBLE FUTURE FINANCING

The Company believes that it was unable during 1995 to obtain the full amount
of financing originally committed by FNBC due to the refusal of the Company's
fire insurer to pay the full amount of the Company's claim, the refusal of
various defendants to compensate the Company for the losses it sustained in the
fire, and the uncertainty regarding the future of video poker as a continuing
source of revenue.  In a special session held in March, 1996, the legislature
passed legislation requiring local elections to be held in November 1996 as a
condition to the continuation of video poker operations in Louisiana.  The
Company's ability to obtain future financing will depend the outcome of the
Company's lawsuit against its fire insurer and insurance brokers and its
lawsuit against the parties alleged to be responsible for the cause and/or
spread of the fire, as well as the outcome of these elections.





                                      -13-
<PAGE>   17


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

If the November election results in the elimination of video poker in various
parishes where the Company operates its facilities, the Company, under a sunset
clause provision, can continue to operate its video poker machines in these
parishes for a period of 30 months after the local referendum.

The Company has received a commitment from VSI to provide a non-interest
bearing loan in the principal amount of $1.5 million, in consideration for
which the Company is to agree to extend both the term of its agreement with VSI
and the term of the option period thereunder by two years.  The loan from VSI
is conditioned upon the receipt of the long-term bank financing.

In addition to the foregoing, Marie G. Krantz (Chairman of the Board of
Directors and Treasurer of the Company) has committed to make a $1 million loan
to the Company, which would be subordinate in right to payment to the permanent
FNBC financing.  Although specific terms of such loan have not been discussed,
it is likely that the loan would be interest-bearing, and that payments would
be made after the repayment of the FNBC financing.  The Company is also engaged
in discussions with AutoTote concerning a possible commitment by AutoTote to
lend or advance $2.5 million to the Company, such amount to be repaid through a
subordinate loan arrangement or through an extension of the lease terms
relating to the totalisator equipment.

NOTE 3 - CONTINGENCIES - GOING CONCERN

The accompanying financial statements for the nine months ended July 31, 1996
have been prepared assuming that the Company will continue as a going concern.
In view of the cessation of construction and the additional expense which is
likely to be incurred as a result of construction delays, it is not certain
that if all of the financing, as described in Note 2, is consummated, including
the long-term financing by FNBC in accordance with the terms of the original
commitment, the Company will be able to complete the construction of its new
facility as presently planned.  In order to complete such construction, it may
be necessary to (i) obtain funds from other sources, (ii) attempt to increase
the amount of long-term financing from FNBC, or (iii) seek to effect savings in
the construction costs related to the completion of the facility.  The Company
has had no discussions with any other possible source of such financing, nor
has it reached any understanding with FNBC regarding any increase in the
financing which the Company hopes to obtain from FNBC as originally committed
by FNBC.  Accordingly, the Company is presently unable to determine whether any
of the foregoing alternatives will be available to it.





                                      -14-
<PAGE>   18


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)




NOTE 3 - CONTINGENCIES - GOING CONCERN (CONTINUED)

FNBC and the Company have had discussions concerning an extension of the
October 31, 1996 due date for payment in full under the Loan Agreement, and
FNBC has informally agreed to extend such date to April 30, 1997.  However, in
the event that (i) long-term financing is not completed by the due date under
the Loan Agreement or (ii) funds provided through all sources of financing are
insufficient to meet the Company's needs, the foregoing uncertainties raise
substantial doubt about the Company's ability  to continue as a going concern.

NOTE 4 - NOTES PAYABLE

On December 18, 1995, First National Bank of Commerce of New Orleans ("FNBC")
provided the Company with a short-term interim construction loan in the amount
of $9,493,050, which included approximately $921,300 of the remaining principal
balance of the $2,150,000 previously loaned to the Company in July 1995 and
approximately $5,000,000 loaned to the Company in November 1995, for
construction costs relating to the rebuilding of the grandstand and clubhouse
facilities.

Pursuant to the loan agreement, FNBC agreed to extend credit to the Company up
to an aggregate principal amount of $9,493,050 until October 31, 1996.  The
loan agreement states that such commitment is not a revolving credit facility,
and the commitment is only to make loans up to such aggregate principal amount.
Accordingly, FNBC has no obligation under the loan agreement to lend additional
funds to the Company.

Payment of the principal and interest under the loan agreement is to be made on
demand, or if no demand is made, then in 10 monthly installments of $52,740
principal plus interest, beginning January 17, 1996, and one final payment of
all principal plus accrued interest on October 31, 1996.  The loan bears
interest at 9% per annum.  On each monthly payment date, payment of principal
and interest is to be made from the proceeds of the funds received as a result
of the video poker tax relief legislation, which funds are to be on deposit in
a separate lockbox, in accordance with a Disbursement Agreement entered into
among the Company, FNBC and Video Services, Inc. ("VSI") dated July 17, 1995.
The Disbursement Agreement provides that VSI acknowledges that the first $2.5





                                      -15-
<PAGE>   19


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 4 - NOTES PAYABLE (CONTINUED)

million in video poker franchise fee payments otherwise due annually to the
State of Louisiana are to be remitted to the Company under the terms of the tax
relief legislation.  For each annual period from July 1 through June 30, such
funds are to be debited from VSI's bank account and deposited into a lockbox at
FNBC.  Such proceeds are to be used solely for the purpose of making payments
of principal and interest from time to time due under the terms of the loan
agreement.  Any amount in excess of the amount of debt service, up to $2.5
million annually, is to be applied as a prepayment of the principal amount of
the loan, and any excess of the debt service is to be returned to the Treasury
of the State of Louisiana.  The loan agreement also provides that any fire
insurance proceeds, as defined in the loan agreement, received by the Company
are to be used to prepay the loan.

The indebtedness under the loan agreement is secured by (i) a second mortgage
by the Company of all of its real property; (ii) a mortgage by Marie G. Krantz
of all the real property formerly constituting the Jefferson Downs Race Course;
(iii) a security interest in all the Company's accounts, inventory, equipment,
fire insurance proceeds, tax relief monies, construction property, material
contracts and all deposit accounts; (iv) a security interest in certain
investment securities owned by Marie G. Krantz; (v) a security interest in all
furniture, fixtures and equipment owned by the Company, Finish Line and
Jefferson Downs; (vi) a pledge by Richard Katcher, as Trustee u/t/a between
John G.  Masoni and John G. Masoni, Trustee, pursuant to a restatement of his
Trust Agreement dated April 19, 1991 as modified on October 24, 1992 (the
"Trust"), Marie G. Krantz, individually and as Voting Trustee, Bryan G. Krantz,
Vickie Krantz and Jefferson Downs of an aggregate of 342,584 shares of common
stock of the Company beneficially owned by them; (vii) a limited guaranty of
such indebtedness by Marie G. Krantz and Finish Line; and (viii) a guaranty of
such indebtedness by Finish Line.  As further discussed in Note 5, effective
April 24, 1996, the Trust mentioned in "vi" above transferred 339,604 shares of
common stock to Bryan G. Krantz.

The loan agreement provides that, commencing January 20, 1996, the Company will
deposit monthly into an account at FNBC all "Excess Cash Flow" generated during
the immediately preceding month.  Excess Cash Flow is defined as all net income
for the month; plus or minus non-cash-items such as depreciation and
amortization; plus or minus the changes in accounts receivable, inventory,
prepaid expenses, accounts payable and accrued expenses, and any other
operating balance sheet related activity affecting the cash position; and plus
or minus capital expenditures.  This obligation ceases if the 1996 regular
session of the Louisiana Legislature





                                      -16-
<PAGE>   20


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 4 - NOTES PAYABLE (CONTINUED)

adjourns without having passed any statute that adversely affects the status of
the video poker tax relief or the existing video poker operations of the
Company or Finish Line, or that would allow for or require local elections as a
condition to the continuation of video poker operations; or if there is any
such  legislation requiring local elections, the voters fail to approve any
such adverse change.  Prior to the cessation of such obligation, the Company
may not withdraw any funds in such account, and FNBC has a security interest in
such funds.

The loan agreement contains certain negative covenants pursuant to which the
Company has agreed that it will not (i) resume construction activities without
first providing FNBC with satisfactory evidence of the source of funding for
the balance of  such construction; (ii) enter into any agreement with any
affiliate except to the extent that such agreements are commercially reasonable
and provide for terms which would normally be obtainable in an arm's length
transaction with an unrelated third party; and (iii) incur capital expenditures
during any fiscal year in excess of $200,000 without the consent of FNBC.

On December 26, 1995, the Company paid $1,000,000 of principal on the
$2,000,000 remaining balances related to its promissory notes held by Louis J.
Roussel, III and agreed to pay the remaining $1,000,000 of principal on October
31, 1996.  Marie G. Krantz has agreed to lend to the Company the funds
necessary to repay the outstanding balance owed to Mr. Roussel, III on such
date.  It is anticipated that Ms. Krantz will be repaid in January 1997 from a
$1 million advance to be received by the Company from VSI.

In January 1996, the Company received an advance of $1,000,000 from VSI, which
the Company repaid in six equal monthly installments beginning in February
1996.

NOTE 5 - MAJORITY STOCK TRANSFER

Effective April 24, 1996, the Masoni Trust transferred 339,604 shares of common
stock to Bryan G. Krantz for consideration of $9,984,358.  A promissory note
was executed by Byran G. Krantz in favor of the Trust for $9,984,358 with
interest at 5.76% per year.  The note is due in April 2005 and cannot be
prepaid in whole or in part.  The note is secured by a Stock Pledge Agreement
executed by Byran G. Krantz and Marie G. Krantz, in her capacity as Voting
Trustee under the Voting Trust Agreement, in favor of the Trust.  The Stock
Pledge Agreement is subject to the Pledge Agreements executed in favor of FNBC.





                                      -17-
<PAGE>   21


                            FAIR GROUNDS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                For the Nine Months Ended July 31, 1996 and 1995
                                  (Unaudited)


NOTE 6 - TREASURY STOCK REISSUANCE

In June 1996, a Director of the Company purchased 400 shares of treasury stock
from the Company at a cost of $4,800, the market of the stock at that time.
Because the Company accounts for treasury stock using the cost method, the
Company incurred a loss on sale of treasury stock of $5,648 which has been
charged to additional paid in capital in accordance with generally accepted
accounting principles.





                                      -18-
<PAGE>   22



         Management's Discussion and Analysis of  Financial Condition
                          and Results of Operations

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 1996 AND 1995

GENERAL NOTE

As previously reported, on the night of Friday, December 17, 1993, the 17th
racing day in the Company's 87 racing day schedule for 1993-1994, after the
conclusion of live racing for the day at the Fair Grounds Race Course, a fire
swept through and destroyed the main grandstand building and all of its
contents.  Included in that area was the grandstand and clubhouse with a
seating capacity of approximately 10,000, the racing paddock, and substantially
all of the administrative, racing operations, and other offices of the Company.
As a result of the fire, racing operations at the Fair Grounds Race Course, and
all operations at the Company's tele-track facilities, were temporarily
suspended.

Immediately after the fire, management determined that it would be in the
Company's best interest to attempt to reopen the Fair Grounds Race Course, in
order to continue the live racing schedule, as soon as possible.  Accordingly,
during the remainder of December 1993, the Company made arrangements for the
installation of temporary racing and patron facilities.  During the two and
one-half week period from the date of the fire to January 5, 1994, the
temporary facilities were installed and the property was readied for the
reopening of racing.  Tele-track operations were reopened on December 29, 1993,
and the Fair Grounds Race Course was reopened for live racing on January 5,
1994.

REVENUES

During the quarters ended July 31, 1996 and 1995, the Company derived its
pari-mutuel income and other operating revenues by operating tele-tracks for
off-track wagering.  For the quarters ended July 31, 1996 and 1995, the Company
operated tele-tracks in New Orleans at the Fair Grounds Race Course and on
Bourbon Street, and at locations in Lafourche, St. Bernard and St. John
Parishes, Louisiana.  In October 1995, the Company opened a tele-track facility
in Jefferson Parish, Louisiana.  Through Finish Line Management Corporation
("Finish Line"), an affiliate, the Company operated tele-track facilities in
Terrebonne, St. Tammany and Jefferson Parishes, Louisiana, which were formerly
operated by Jefferson Downs Corporation.

The Company's income before income taxes for the quarter ended July 31, 1996
was $197,426 compared to a loss before income tax benefit of $(774,884) for the
quarter ended July 31, 1995.  The significant increase in income before income
taxes is primarily the result of the Company's recognition of video poker tax
relief income in the current quarter (as described below) and an increase in
net Jazz and Heritage Festival income over the previous comparable quarter
ended July 31, 1995.





                                      -19-
<PAGE>   23

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



For the quarter ended July 31, 1996, the Company experienced an increase in
off-track pari-mutuel wagering of $4,546,256 or 27.2% from the previous
comparable quarter.  The increase in off-track wagering is primarily the result
of the operations of the Company's new tele-track facility in Jefferson,
Parish, Louisiana.

Comparative off-track pari-mutuel wagering activity for the quarters ended July
31, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                  Quarter Ended
                           1996                    1996 
                           ----                    ---- 
<S>                     <C>                     <C>
Off-track wagering      $21,248,722             $16,702,466  
                        -----------             -----------  
                                             
</TABLE>

As a result of the increase in total off-track pari-mutuel wagering in the
current quarter, the Company's total operating revenue increased $1,177,585 or
30.7% from the quarter ended July 31, 1995.  The operations of the Company's
new tele-track facility contributed significantly to the increase in operating
revenues.

Race related expenses for the quarter ended July 31, 1996 increased $750,209 or
17.5% from the previous comparable quarter primarily due to the increase in
operations of the new Jefferson Parish tele-track.

General and administrative expenses increased $139,939 or $14.6% from the
previous comparable quarter primarily due to an increase in salaries and
related taxes and benefits, an increase in legal audit and director fees, and
an increase in loan closing fees.  These increases were partially offset by a
decline in insurance expense and a decline in office expense.  Legal, audit and
director fees increased $70,195 or 34.5% due to an increase in litigation
related expenses in the current quarter.  Salaries and related taxes and
benefits increased $37,881 or 12.6% primarily as a result of an increase in
health insurance and claims in the current quarter.

Loan closing fees in the current quarter in the amount of $52,788 are the
result of the fees associated with the Company's loan closing with First
National Bank of Commerce in December 1995.  Insurance expense declined in the
current quarter $28,776 or 13.6% as a result of declines in the Company's
property and general liability premiums which were renewed in May 1996.

OTHER INCOME (EXPENSES)

Other income for the quarter ended July 31, 1996 increased $785,873 or 123%
from the quarter ended July 31, 1995 primarily due to the Company's recognition
of video poker tax relief of $679,108 and an increase in net Jazz and Heritage
Festival income of $190,184 from the fiscal 1995 quarter.  The video poker tax
relief provides that owners of video poker devices that are located in licensed





                                      -20-
<PAGE>   24

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



establishments owned or operated by licensed racing associations are eligible
for emergency relief under the Statute and are exempt from the franchise
payment otherwise due under the Video Draw Poker Devices Control Law.


COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1996 AND 1995

REVENUES

During the nine months ended July 31, 1996 and 1995, the Company derived its
pari-mutuel income by conducting live racing meets of 88 days and in the
operation of the tele-tracks for off-track wagering.

For the nine months ended July 31, 1996, the Company reported income before
income taxes of $1,832,099 compared to a loss before income tax benefit of
$(270,825) in the prior period.  The significant increase in income before
income taxes is the result of several factors, the most significant of which
are the increase in operating income, a significant increase in net Jazz and
Heritage Festival income and the recognition of video poker tax relief in the
current 1996 fiscal period.

For the nine months ended July 31, 1996, the Company reported a loss from
operations of ($1,122,787) as compared to a loss from operations of
($1,733,326) for the period ended July 31, 1995.  The favorable variance of
$610,539 or 35% is the result of an increase in total pari-mutuel wagering and
a significant increase in net video poker revenue in the current period.

For the nine months ended July 31, 1996, the Company reported total pari-mutuel
wagering of $77,782,571 compared to $64,297,217 for the nine months ended July
31, 1995, an increase of 20.9%.  The increase in total pari-mutuel wagering in
the current period is the result of the impact of operations of the Company's
new tele-track facility as well as the implementation of full card simulcasting
in January.  A comparison of pari-mutuel wagering for both on-track and off-
track activity is as follows:

<TABLE>
<CAPTION>
                                 Nine Months Ended
                            1996                  1995
                            ----                  ----
<S>                     <C>                    <C>
On-track wagering       $20,180,889            $25,134,326 
Off-track wagering       57,601,682             39,162,891   
                        -----------            ----------- 
Total Wagering          $77,782,571            $64,297,217 
                        ===========            =========== 
                                            
</TABLE>

As a result of the increase in total pari-mutuel wagering, the Company's total
operating revenues for the nine months ended July 31, 1996, increased
$2,768,755 or 15.5% from the previous fiscal 1995 period.  All of the
components of the Company's operating revenues increased with the exception of
concessions revenues.  For





                                      -21-
<PAGE>   25

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



the nine months ended July 31, 1996, concessions revenue declined $140,824 or
10.2% due to the Company's elimination of its track kitchen operations.  Net
video poker revenue increased significantly in the current fiscal period as a
result of the video poker operations at the Company's new tele-track facility.

RACE RELATED EXPENSES

For the nine months ended July 31, 1996, the Company's race related expenses
increased $1,829,187 or 10% from the previous fiscal period ended July 31, 1996
primarily due to an increase in pari-mutuel activity at the new tele-track
facility.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the nine months ended July 31, 1996
increased $328,399 or 11.2% from the nine months ended July 31, 1995, primarily
due to the Company's recognition in the fiscal 1995 period of a favorable
litigation settlement in the amount of $188,109, an increase in insurance
expense of $124,100 or 19.2% in the current period, an increase in property tax
expense of $141,641 or 92.1%, and the recognition of loan closing fees in the
current period of $110,164.  These increases were partially offset by a
decrease in legal, audit and director fees of $80,983 or 11.2% and a decrease
in miscellaneous expense of $86,954 or 36.9%

During the nine months ended July 31, 1995, the Company received settlement
monies totalling $188,109 from one of its former insurance carriers.  The
monies represent the Company's pro-rata distribution for claims paid by the
Company as a result of the insolvency of this insurance carrier.

For the nine months ended July 31, 1996, property taxes of $295,402 are based
upon the pro-rata portion of the current tax assessment.  In the prior fiscal
period, property tax expense included the result of a partial reversal of an
estimated amount of property tax expense for the fiscal year ended October 31,
1994.  As of the date of issuance of the Company's fiscal 1994 financial
statements, the City of New Orleans had not finalized the Company's 1994
property tax bill due to complications with assessed values as a result of the
December 1993 fire.  The Company accrued and reported for the fiscal year ended
October 31, 1994 an estimated $300,000 in property tax liability.  In February
1995, the city of New Orleans determined that the Company's property tax
liability for 1994 would be $217,000, resulting in income of $83,000 in the
period ended July 31, 1995.

Loan closing fees in the current fiscal period in the amount of $110,164 are
the result of the fees associated with the Company's loan closing with First
National Bank of Commerce in December 1995.





                                      -22-
<PAGE>   26

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



OTHER INCOME (EXPENSE)

For the nine months ended July 31, 1996, other income was $2,954,886 compared
to $1,462,501 for the nine months ended July 31, 1995.  The $1,492,385 or 102%
increase is the result of an increase in net Jazz and Heritage Festival income
of $376,691 or 32.7%, the recognition in the current period of video poker tax
relief of $1,964,518 offset by an increase in interest expense in the current
period of $610,600, primarily related to interim financing, and the Company's
recognition of insurance related settlement of $366,594 in the previous
comparable period.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Cash and cash equivalents increased $2,610,124 during the nine months ended
July 31, 1996 compared to a decrease of $5,438,483 during the nine months ended
July 31, 1995.  The increase in cash and cash equivalents in the first nine
months of fiscal 1996 was the result of cash provided from financing activities
of $6,057,193 offset by cash used for operating activities of $3,011,289 and
cash used for investing activities of $435,780.  The cash provided from
financing activities was primarily the result of $8,571,725 short term interim
construction loan borrowings from FNBC.  The cash used for operating activities
was primarily the result of cash used to pay purses during the Company's live
racing season, as well as cash used to pay construction costs on the new
facility.

As of July 31, 1996, the Company had received $19,478,791 in insurance proceeds
resulting from fire loss claims submitted to the Company's insurance carriers.
The Company has filed suit against one of its insurance carriers, as described
elsewhere herein, seeking to recover an additional $14.7 million under its
insurance policy with such carrier.

The Company's new tele-track facility at the Fair Grounds Race Course, which
also serves as a temporary clubhouse area, was opened on December 22, 1994.
The total cost for debris removal and the construction of the tele-track
facility was approximately $3.2 million.

During the Summer of 1994, the Company approved the plans for a new racing
facility and commenced construction thereof in August 1994.  The total cost of
the facility, together with furniture, fixtures, equipment and certain fees and
permit costs, was anticipated to be approximately $24.3 million at the time
construction commenced, which is in addition to the $3.2 million relating to
debris removal and construction of the tele-track facility, as described.

As of July 31, 1996, construction of the facility was approximately 60%
completed, and the Company had incurred construction costs of





                                      -23-
<PAGE>   27

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



approximately $15.8 million.  Insurance proceeds recovered to date and interim
financing provided by FNBC, as described below, provided the source of funds
used in such construction.  However, for the reasons described below, further
construction work on the project has been halted.  As a result, (i) the cost to
complete the project cannot now be determined with any certainty and (ii) the
Company will utilize the temporary tent facilities and the tele-track facility
during the next racing season.

As previously reported, the Company received and accepted a commitment letter
dated February 6, 1995 from FNBC for a non-revolving line of credit to be used
as an interim construction loan, convertible to a term loan.  The aggregate
principal amount of such loan under the terms of such commitment was to have
been $17.5 million.  The commitment from FNBC provided that the interim
construction loan was to have closed on or before March 31, 1995.  However, the
parties agreed to various extensions of such closing date.  FNBC indicated that
the principal reason for the delay was FNBC's concern with restrictions on and
the possible elimination of video poker gaming in Louisiana.  Inasmuch as video
poker franchise tax monies generated by the Company and its tele-tracks were to
be used as a source for the repayment of the FNBC loan, in accordance with the
tax relief legislation described herein, any change in the video poker gaming
laws which restricts or limits video poker as a source of revenue may have an
adverse impact on such source of repayment.

During 1995 FNBC provided the Company with short-term interim construction
loans of $2.15 million on July 17, 1995, $4 million on November 7, 1995 and $1
million on November 30, 1995.  All of such financing was then consolidated
under the Loan Agreement dated December 18, 1995, pursuant to which the Company
borrowed an aggregate amount of $9,493,050, including funds previously
borrowed, and utilized a portion of such funds to repay the principal amount of
the prior loans that was outstanding on December 18, 1995.  The remaining
amount borrowed was utilized to pay construction costs.

Pursuant to the Loan Agreement, FNBC agreed to extend credit to the Company up
to aggregate principal amount of $9,493,050 until October 31, 1996.  The Loan
Agreement states that such commitment is not a revolving credit facility, and
the commitment is only to make loans up to such principal amount.  Accordingly,
FNBC has no obligation under the Loan Agreement to lend additional funds to the
Company.

The Loan Agreement provides for the payment of the principal and interest on
demand, or if no demand is made, then in 10 monthly installments of $52,740
principal plus interest, beginning January 17, 1996, and one final payment of
all principal plus accrued interest on October 31, 1996.  The loan bears
interest at 9% per annum.  The Loan Agreement provides that on each monthly
payment





                                      -24-
<PAGE>   28

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



date, payment of principal and interest is to be made from the proceeds of the
funds received as a result of the video poker tax relief legislation, which
funds are to be on deposit in a separate lockbox, in accordance with a
Disbursement Agreement and from the fire insurance proceeds as defined in the
Loan Agreement.  Through September 30, 1996, the Company had made principal and
interest payments in the aggregate amount of $2,553,199 and the outstanding
principal balance under the Loan Agreement was approximately $8,041,000 on
September 30, 1996.

In December 1995, the Company made a payment to Louie J. Roussel, III of $1
million of the remaining $2 million principal balance owed to him and agreed
that the outstanding principal balance of $1 million will be due and payable on
October 31, 1996.  Marie G. Krantz has agreed to lend to the Company the funds
necessary to repay the outstanding balance owed to Mr. Roussel, III on such
date.  It is anticipated that Ms. Krantz will be repaid in January 1997 from a
$1 million advance to be received by the Company from VSI.

There is considerable uncertainty in Louisiana at the present time regarding
the future of the gaming industry.  The cessation of operations of the
temporary land-based casino in New Orleans in November 1995 has adversely
affected tax revenue for both the State of Louisiana and the City of New
Orleans.  Notwithstanding that loss of revenue, the legislature, in a special
session held in March 1996, passed legislation calling for local elections to
be held in November 1996 to determine the future of casinos, riverboats and
video poker in Louisiana.  The Company's ability to obtain future financing
will depend in part on the outcome of these elections.

If the November election results in the elimination of video poker in any of
the parishes where the Company operates its facilities, the Company, under a
sunset clause provision, can continue to operate video poker machines in such
parishes for a period of 30 months after the local referendum.

The Company has received a commitment from VSI to provide a non-interest
bearing loan in the principal amount of $1.5 million, in consideration for
which the Company is to agree to extend both the term of its agreement with VSI
and the term of the option period. The loan is conditioned upon the closing of
the anticipated long-term bank financing.

In addition to the foregoing, Marie G. Krantz has committed to make a $1
million loan to the Company, which would be conditioned upon the closing of,
and subordinate in right of payment to, the long-term FNBC financing.  Although
specific terms of such loan have not been discussed, it is likely that the loan
would be interest-bearing, and that payments would be made after the repayment
of the FNBC financing.  The Company has also engaged in discussions with





                                      -25-
<PAGE>   29

          Management's Discussion and Analysis of Financial Condition
                     and Results of Operations (Continued)



AutoTote to lend or advance $2.5 million to the Company, such amount to be
repaid through a subordinate loan arrangement or through an extension of the
lease terms relating to the totalisator equipment.

In view of the cessation of construction and the additional expense which is
likely to be incurred as a result of construction delays, it is not certain
that, even if all of such financing is consummated, including the long-term
financing by FNBC in accordance with the terms of the original commitment, the
Company will be able to complete the construction of its new facility as
presently planned.  In order to complete such construction, it may be necessary
to (i) obtain funds from other sources, (ii) attempt to increase the amount of
long-term financing from FNBC or (iii) seek to effect savings in the
construction costs related to the completion of the facility.  The Company has
had no discussions with any other potential lender, nor has it reached any
understanding with FNBC regarding any increase in the financing which the
Company hopes to obtain from FNBC as originally committed by FNBC.
Accordingly, the Company is presently unable to determine whether any of the
foregoing alternatives will be available to it.

FNBC and the Company have had discussions concerning an extension of the
October 31, 1996 due date for payment in full under the Loan Agreement, and
FNBC has informally agreed to extend such date to April 30, 1997.  However, in
the event that (i) long-term financing is not completed by the due date under
the Loan Agreement or (ii) funds provided through all sources of financing are
insufficient to meet the Company's needs, the Company may, among other
alternatives, seek protection from creditors under the United States Bankruptcy
Code.

IMPACT OF INFLATION

To date, inflation has  not had a material effect on the Company's operations.





                                      -26-
<PAGE>   30



                                    PART II
                               OTHER INFORMATION





                                      -27-
<PAGE>   31



Item 4.  Submission of Matters to a Vote of Security Holders

At the annual meeting of shareholders held on June 4, 1996, the Company's
shareholders elected directors and also ratified the Board of Directors'
appointment of Rebowe & Company, Certified Public Accountants (A Professional
Corporation), as independent accountants, with 347,646 shares voted for
ratification, 480 shares voted against and no abstentions.  The voting with
respect to the nominees for election as directors was as follows:

<TABLE>
<CAPTION>
                                     Votes              Abstentions
                          -------------------------     -----------
Nominee                     For            Withheld
                            ---            --------
<S>                     <C>                   <C>            <C>               
Katherine F. Duncan     348,606               0              0            
                                                                          
Bryan G. Krantz         348,606               0              0            
                                                                          
Marie G. Krantz         348,606               0              0            
                                                                          
Ronald S. Maestri       348,606               0              0            
                                                                          
Charmaine R. Morel      348,606               0              0            
                                                                          
Donald L. Peltier       348,606               0              0            
                                                                          
</TABLE>

Item 5.  Other Events

On August 13, 1996, the Board of Directors of the Company elected Wayne Thomas
to the Board of Directors.


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

27             Financial Data Schedule (Filed electronically only)


(b)  Reports on Form 8-K

On May 9, 1996, the Company filed a Form 8-K, reporting certain information
concerning Item 1, Change in Control of Registrant.  The Form 8-K describes the
transaction, effective April 24, 1996, pursuant to which Richard Katcher,
Trustee u/t/a/ between John G. Masoni and John G. Masoni, Trustee, pursuant to
a restatement of his Trust Agreement dated April 19, 1991, as modified (the
"Trust"), transferred the 339,604 common shares of the Company previously owned
by the Trust to Bryan G. Krantz for an aggregate consideration of $9,984,358.





                                      -28-
<PAGE>   32



                                   SIGNATURES



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



                                         FAIR GROUNDS CORPORATION             
                                         ------------------------------
                                         (Registrant)

Date: 10/28/96                      By:  /s/ Bryan G. Krantz            
     ---------------------               ------------------------------
                                         Bryan G. Krantz
                                         President



Date: 10/28/96                      By:  /s/ Gordon M. Robertson         
     ---------------------               ------------------------------
                                         Gordon M. Robertson
                                         Chief Financial Officer





                                      -29-