UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




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




For the
fiscal year ended December 31, 2007




OR




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ________________ to
      ________________Commission
      file number 1-12522




EMPIRE
      RESORTS, INC.(Exact
      name of registrant as specified in its
charter)




Delaware
            
            13-4141279(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)




701
      N. Green Valley Parkway, Suite 200, Henderson, NV
    89074(Address
      of principal executive
      offices)                                                                           (Zip
      Code)Registrant’s
      telephone number, including area code (702)
  990-3355




Securities
      registered under Section 12(b) of the Act:Title
      of each class
            Name
      of each exchange on which
registered




Common
      Stock, $.01 par value per share
            
            Nasdaq
      Global Market5-1/2%
      Secured Convertible Notes Due 2014
            
            The
      PORTAL Market


Securities
      registered under Section 12(g) of the Act:
                Common
      Stock, $.01 par value per share(Title
      of class)




Indicate by check
      mark if the registrant is a well-known seasoned issuer, as defined in Rule
      405 of the Securities Act.
            Yes o
            No xIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act.
            Yes o
            No xIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.
            Yes x
            No o






INDEX




Indicate by check mark if disclosure of delinquent filers pursuant to Item
      405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
      and will not be contained, to the best of registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this Form
      10-K.
            
            oIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. See definitions of “large accelerated filer,” “accelerated
      filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
      (Check one):


Large accelerated
      filer
            o
            Accelerated
      filer
            xNon-accelerated
      filer
            o
            Smaller reporting
      company
            o




Indicate
      by check mark whether the registrant is a shell company (as defined
      in Rule 12b-2 of the Act).
              Yes o
              No x


The
aggregate market value of the issuer’s common equity held by non-affiliates, as
of June 29, 2007 was $196,077,737, based on the closing price of the common
stock on the Nasdaq Global Market.




As of March 11, 2008,
there were 29,699,601 shares of the issuer’s common equity
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




The information required
by Item 11 of Part III will be incorporated by reference to certain portions of
a definitive proxy statement, which is expected to be filed by the Registrant
within 120 days after the close of its fiscal year.













INDEX





PART I
            1Item 1.
            Business.
            1Item 1A.
            Risk Factors.
            8Item 1B.
            Unresolved Staff Comments.
            18Item 2.
            Properties.
            18Item 3.
            Legal Proceedings.
            19Item 4.
            Submission of Matters to a Vote of Security
      Holders.
            21PART II
            21Item 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities.
            21Item 6.
            Selected Financial Data.
            23Item 7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operation.
            23Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            32Item 8.
            Financial Statements and Supplementary
    Data.
            33Item 9.
            Changes In and Disagreements With Accountants on Accounting
      and Financial Disclosure.
            62Item 9A.
            Controls and Procedures.
            62Item 9B.
            Other Information.
            63PART III
            64Item 10.
            Directors and Executive Officers of the
      Registrant.
            64Item 11.
            Executive Compensation.
            67Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.
            67Item 13.
            Certain Relationships and Related
      Transactions.
            70Item 14.
            Principal Accounting Fees and Services.
            71PART IV
            72Item 15.
            Exhibits, Financial Statement
Schedules.
            72





i
 INDEX





PART I




FORWARD-LOOKING
STATEMENTS




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, reflecting management’s
current expectations.  Examples of such forward-looking statements
include our expectations of results with respect to our
strategy.  Although we believe that our expectations are based upon
reasonable assumptions, there can be no assurances that our financial goals will
be realized.  Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements.  Numerous factors may
affect our actual results and may cause results to differ materially from those
expressed in forward-looking statements made by us or on our
behalf.  Any statements herein that are not statements of historical
fact may be forward-looking statements.  Among others, the words,
“believes,” “anticipates,” “plans,” “estimates,” and “expects” are intended to
identify forward-looking statements.  Factors that could cause actual
results, performance or achievements to differ materially from those expressed
or implied by these forward looking statements include, but are not limited to,
the risk factors set forth in Item 1A of this Annual Report.  Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date of this filing.  We assume no
obligation to update the forward-looking information to reflect actual results
or changes in the factors affecting such forward-looking
information.




Item 1.
            Business.




Overview




Empire
Resorts, Inc. (“Empire,” the “Company,” “us” or “we”) was organized as a
Delaware corporation on March 19, 1993, and since that time has served as a
holding company for various subsidiaries engaged in the hospitality and gaming
industries.




Through
our wholly-owned subsidiary, Monticello Raceway Management, Inc., we currently
own and operate Monticello Gaming and Raceway, a harness horseracing facility
located in Monticello, New York, 90 miles Northwest of New York
City.  At Monticello Gaming and Raceway, we conduct pari-mutuel
wagering through the running of live harness horse races, the import
simulcasting of harness and thoroughbred horse races from racetracks across the
country and the export simulcasting of our races to offsite pari-mutuel wagering
facilities.  In addition, we operate more than 1,500 video gaming
machines (“VGMs”) in conjunction with the New York State Lottery at the
grandstand of Monticello Gaming and Raceway.




We have
been working to develop a Class III casino with various Indian tribes beginning
in 1996. Our most recent efforts have been in partnership with the St. Regis
Mohawk Tribe focused on a site owned by us adjacent to our Monticello, New York
facility.  We were advised, however, that on January 4, 2008, the St.
Regis Mohawk Tribe received a letter from James E. Cason of the Bureau of Indian
Affairs (the “BIA”) denying the St. Regis Mohawk Tribe's request to take 29.31
acres into trust for the purpose of building a Class III gaming facility to be
located at Monticello Gaming and Raceway.  In addition, our agreements
with the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming Authority
expired by their terms on December 31, 2007.




We plan
to grow and diversify our business by marketing our services to gaming and
hospitality clients, seeking consulting relationships with additional gaming
clients and pursuing joint ventures or other growth opportunities.  We
have an agreement, subject to certain conditions, with Concord Associates, L.P.
(“Concord”) to develop a hotel, convention center, gaming facility and harness
horseracing track on 160 acres of land located in Kiamesha Lake, New York (the
“Entertainment City Project”).  Implementation of this project will
involve the relocation of our current VGM facility and harness horseracing track
to this new site.  We have also identified 29.31 acres of land
adjacent to Monticello Gaming and Raceway for the development of a Class III
casino.  In addition, we are pursuing additional commercial and
entertainment projects on the remaining 200 acres of land owned by the Company
at this site.  The development of a Class III casino would require
either an amendment to the New York State Constitution to permit Class III
casino gaming or an agreement with either the St. Regis Mohawk Tribe or any
other
Indian tribe for the development of a Class III casino, together with certain
necessary federal and state regulatory approvals.




1
 INDEX




As used
herein, Class III gaming means a full casino including slot machines, on which
the outcome of play is based upon randomness, and various table games including
,but not limited to, poker, blackjack and craps.  As used herein,
Class II gaming means a gaming facility with video lottery terminals (“VLTs”)
and no table games.  VLTs look like slot machines, but are actually
fixed odds machines, on which the outcome of play is not based on
randomness.




Monticello
Gaming and Raceway




Monticello
Gaming and Raceway began operations in 1958 and currently features:




·
            1,587
      VGMs;




·
            year-round
      live harness horse racing;




·
            year-round
      simulcast pari-mutuel wagering on thoroughbred and harness horse racing
      from across the country;




·
            a
      5,000-seat grandstand and a 100-seat clubhouse with retractable
      windows;




·
            parking
      spaces for 2,000 cars and 10 buses;




·
            a
      350-seat buffet and food court with three
  outlets;




·
            a
      large central bar and an additional clubhouse bar;
  and




·
            an
      entertainment lounge with seating for 75
people.




VGM Operations.  We
currently operate a 45,000 square foot VGM facility at Monticello Gaming and
Raceway.  VGMs are electronic gaming devices that allow patrons to
play electronic versions of various lottery games of chance and are similar in
appearance and feel to traditional slot machines.  VGM operations at
Monticello Gaming and Raceway began on June 30, 2004.  At December 31,
2007, the number of VGMs in operation was 1,587.




Revenues
derived from our VGM operations consist of VGM revenues and related food and
beverage concession revenues.  Each of the VGMs is owned by the State
of New York.  By statute, for a period of five years beginning April
1, 2008, 42% of gross VGM revenue will be distributed to us, which represents an
increase over the current vendor fee of 32% for the first $50 million annually,
29% for the next $100 million annually, and 26% thereafter.  Following
the five-year period, 40% of the first $50 million, 29% of the next $100 million
and 26% thereafter of gross VGM revenue will be distributed to us. Gross VGM
revenues consist of the total amount wagered at our VGMs, less prizes
awarded.   The statute also provides a vendor’s marketing
allowance for racetracks operating video lottery programs of 10% on the first
$100 million of net revenues generated and 8% thereafter, which represents an
increase over the current marketing allowance of 8% for the first $100 million
annually, and 5% thereafter.  The legislation authorizing the
implementation of VGMs at Monticello Gaming and Raceway expires in
2013.




During
the past decade, the operation of video gaming devices at racetracks in several
states outside New York has enhanced state lottery revenues and improved the
racetrack’s economic performance.  Our VGM operations have helped to
increase our racing revenues through increased attendance at our racetrack from
customers for our VGM facility resulting in increased handles at the
racetrack.  In addition, the VGM operations have supported increased
purses, which allow for higher profile racing activities.




2
 INDEX


VGM
activities in the State of New York are presently overseen by the Division of
the Lottery of the State of New York.




Raceway
Operations.  Monticello Gaming and Raceway derives its racing
revenue principally from:




·
            wagering
      at Monticello Gaming and Raceway on live races run at Monticello Gaming
      and Raceway;




·
            fees
      from wagering at out-of-state locations on races run at Monticello Gaming
      and Raceway using export
simulcasting;




·
            revenue
      allocations, as prescribed by law, from betting activity at off-track
      betting facilities in New York City, Nassau County and the Catskills
      region of the State of New York;




·
            wagering
      at Monticello Gaming and Raceway on races broadcast from out-of-state
      racetracks using import simulcasting;
and




·
            admission
      fees, program and racing form sales, food and beverages sales and certain
      other ancillary activities.




Simulcasting.  Import
and, particularly, export simulcasting is an important part of Monticello Gaming
and Raceway’s business.  Simulcasting is the process by which a live
horse race held at one facility (the “host track”) is transmitted to another
location that allows its patrons to wager on that race.  Amounts
wagered are then collected from each off-track betting location and combined
into appropriate pools at the host track where the final odds and payouts are
determined.  With the exception of a few holidays, Monticello Gaming
and Raceway offers year-round simulcast wagering from racetracks across the
country, including Churchill Downs, Hollywood Park, Santa Anita Racetrack,
Gulfstream Park, Aqueduct Racetrack, Belmont Park and Saratoga
Racecourse.  In addition, races of national interest, such as the
Kentucky Derby, Preakness Stakes and Breeders’ Cup supplement regular simulcast
programming.  Monticello Gaming and Raceway also exports live
broadcasts of its races to casinos and off-track betting facilities in other
states.




Pari-mutuel
Wagering.  Monticello Gaming and Raceway’s racing revenue is
derived from pari-mutuel wagering at the track and government mandated revenue
allocations from certain New York State off-track betting
locations.  In pari-mutuel wagering, patrons bet against each other
rather than against the operator of the facility or with pre-set
odds.  The dollars wagered form a pool of funds from which winnings
are paid based on odds determined by the wagering activity.  The
racetrack acts as a stakeholder for the wagering patrons and deducts from the
amounts wagered a “take-out” or gross commission from which the racetrack pays
state and county taxes and racing purses.  Monticello Gaming and
Raceway’s pari-mutuel commission rates are fixed as a percentage of the total
handle or amounts wagered.




If we are
successful in completing our agreement with Concord for the Entertainment City
Project, our operations at Monticello Gaming and Raceway will be moved to the
Concord property on 160 acres of land located in Kiamesha Lake, New
York.




CompetitiveAdvantages




We
believe that if we are able to develop gaming operations in the Catskills region
in the State of New York, they will be successful because the Catskills area has
historically been a resort area, where popularity declined as a result of the
growth of destinations such as Atlantic City and Las Vegas.  Located
approximately 90 miles northwest of New York City, a Class III casino resort at
the current Monticello Gaming and Raceway site would be a shorter trip from the
nation’s most populous metropolitan area than either Atlantic City or any
regional Indian casino, including Foxwoods and Mohegan Sun in
Connecticut.  There are approximately 1.3 million adults living within
50 miles of the Catskills area.  In addition, roughly 18.4 million
adults live within 100 miles of the Catskills area, an area where household
income averages approximately $76,000.  Specifically, Monticello
Gaming and Raceway is directly adjacent to Highway 17, has highly visible
signage and convenient access, and is less than 1,000 feet from the highway’s
exit.  There is currently no direct competition for our VGM operations
within 55 miles of Monticello Gaming and Raceway.




3
 INDEX


Development




Entertainment
City Project




On
February 8, 2008, we entered into an Agreement to Form Limited Liability Company
and Contribution Agreement with Concord (the “Contribution Agreement”), pursuant
to which we and Concord will form a limited liability company (the “LLC”) and
enter into an Operating Agreement.




The
closing of the transaction is conditioned on, among other things, (i)
distribution to us of at least $50 million (less amounts outstanding under our
existing credit facility with Bank of Scotland that are to be assumed by the
LLC); (ii) receipt of all necessary approvals for the transfer of our gaming and
racing licenses, including from the Bank of Scotland, holders of our convertible
senior notes, the New York State Racing and Wagering Board and the New York
State Lottery; (iii) transfer of our obligations related to our credit facility
to the LLC; (iv) entry into construction, development, casino development,
casino and hotel management contracts; and (v) approval by our stockholders, if
required by law.  No assurance can be given that the conditions to the
closing of the transaction will be satisfied in order to complete the
transaction, as planned.




The
Contribution Agreement may be terminated by either us or Concord if financing
commitments have not been received by June 30, 2008.  If not
previously completed, the Contribution Agreement terminates on August 31, 2008,
subject to extensions under certain conditions.  The Contribution
Agreement may also be terminated by either us or Concord if Concord’s management
committee has neither approved the transaction nor waived the condition
requiring such approval by May 1, 2008, in which case we are entitled to a $1
million fee.




Pursuant
to the Contribution Agreement, we, together with our subsidiary, will contribute
our gaming and racing licenses and operations at Monticello Gaming and Raceway
and Concord will contribute 160 acres of land located in Kiamesha Lake, New York
(the “Concord Property”).  We and Concord will develop the
Entertainment City Project on the Concord Property, which is expected to include
a 100,000 square foot gaming area, a harness horseracing track, convention
center, hotel, golf privileges, retail stores, restaurants and various family
entertainment activities. There are zoning and final site plan approvals for a
1.5 million-square foot facility. The gaming floor will be built within the
hotel, adjacent to a new 5/8th mile, state-of-the-art harness
track.  Upon approval and completion of construction, we expect the
new facility to significantly increase the current revenues generated for New
York State, which goes to fund education.  Financing for the
Entertainment City Project is to either be State of New York supported and/or
financed through private sources.




Concord
will be responsible for the development of the Entertainment City
Project.  Concord’s affiliate, George A. Fuller Company, will be the
general contractor.  We will be responsible for development of the
gaming facility and for managing and operating the hotel, gaming facility and
harness horseracing track. We and Concord will share equally the fees that we
each earn in connection with our respective development and management efforts,
as well as share equally any distributions available following the repayment of
any debt service and the payment of any preferred returns due to any of the
members of the LLC.  We will receive a preference on the first $8
million of distributions.  Construction fees earned by George A.
Fuller Company will not be shared with us.




Class
III Casino Development




We have
identified 29.31 acres of land adjacent to Monticello Gaming and Raceway for the
development of a Class III casino.  A Class III casino resort at
Monticello Gaming and Raceway, as planned, is expected to feature 160,000 square
feet of gaming space with 3,500 slot machines and 125 table games, restaurants,
bars and other amenities consistent with such a facility.




The
29.31-acre site has already received zoning and site plan approval for the
proposed Class III casino.  However, the construction plans are only
in a preliminary stage and are subject to additional approvals by relevant
government authorities.  Currently, we are not permitted to operate a
Class III casino at Monticello Gaming and Raceway because Class III casino
gaming, other than Indian gaming, is not allowed in New York.  In
order to operate a Class III casino at Monticello Gaming and Raceway, therefore,
an amendment to the New York State Constitution to permit Class III casino
gaming would need to be passed or we would need to enter into an agreement with
the St. Regis Mohawk Tribe or any other Indianribe for the development of such a Class III casino.  In
orderto be
amended to permit Class III casino gaming, the New York State Constitution
requires the passage of legislation in two consecutive legislative sessions and
then passage of the majority of the state's voters in a statewide
referendum.  If we enter into an agreement with an Indian tribe for
the development of a Class III casino, we would be required to obtain certain
federal and state regulatory approvals.




4
 INDEX




We have
been working to develop a Class III casino with various Indian tribes beginning
in 1996.   This process requires certain determinations to be
made by the Department of Interior, a concurrence by the governor of New York
State, and completion of federal environmental reviews.  During this
process, in April 2000, the St. Regis Mohawk Tribe received the required
two-part determination necessary to conduct gaming activities on newly acquired
land.  On February 19, 2007, the Governor of New York issued his
concurrence with regard to this April 2000 Secretarial Determination that found
that the request of the St. Regis Mohawk Tribe to take 29.31 acres into trust
for the purpose of building a Class III gaming facility to be located at
Monticello Gaming and Raceway, in accordance with the Indian Gaming Regulatory
Act of 1988, as amended (the “Land-to-Trust Transfer”) would be in the St. Regis
Mohawk Tribe’s and its members’ best interest and would not be detrimental to
the surrounding communities.  In addition to the concurrence, the
Governor also signed an amendment to the gaming compact between the St. Regis
Mohawk Tribe and New York State pursuant to which New York State would receive
20% of slot-machine revenues for the first two years after the St. Regis Mohawk
Tribe’s Class III casino to be located at Monticello Gaming and Raceway opens,
23% for the next two years and 25% thereafter.  On December 21, 2006,
the St. Regis Mohawk Tribe received a letter from James E. Cason of the BIA
stating that the St. Regis Mohawk Tribe’s Final Environmental Assessment for the
project had been deemed sufficient, that an Environmental Impact Study would not
be required and that a formal Finding of No Significant Impact (“FONSI”) related
to the proposed federal action approving the Land-to-Trust Transfer had been
issued.




We were
advised, however, that on January 4, 2008, the St. Regis Mohawk Tribe received a
letter from James E. Cason of the BIA denying the St. Regis Mohawk Tribe's
request to take 29.31 acres into trust for the purpose of building a Class III
gaming facility to be located at Monticello Gaming and Raceway, in accordance
with the Indian Gaming Regulatory Act of 1988, as amended.  The
request was apparently denied based upon newly-issued guidance concerning
regulations promulgated under the Indian Gaming Regulatory Act of 1988, as
amended, relating to the need of the St. Regis Mohawk Tribe for additional land,
the purposes for which the land would be used, and the distance of the land from
the St. Regis Mohawk Tribe’s reservation.  On January 11, 2008, the
St. Regis Mohawk Tribe filed a lawsuit against the United States Department of
the Interior, Dirk Kempthorne, in his official capacity as Secretary of the
Interior, James E. Cason, in his official capacity as Associate Deputy Secretary
of the Interior, and Carl J. Artman, in his official capacity as Associate
Secretary of the Interior for Indian Affairs, in federal district court in New
York for unlawfully rejecting the Land-to-Trust Transfer.




The St.
Regis Mohawk Gaming Authority failed to establish a closing date by December 31,
2007 for the consummation of the transactions contemplated by the Second Amended
and Restated Land Purchase Agreement by and between St. Regis Mohawk Gaming
Authority and Monticello Raceway Management, Inc., dated as of December 1, 2005,
as amended.  As a result, the Second Amended and Restated Land
Purchase Agreement, and related agreements, expired by their
terms.  On February 5, 2008, we notified the St. Regis Mohawk Tribe
that as a result of the BIA decision we were postponing further development
efforts, but would continue to work with the St. Regis Mohawk Tribe with respect
to their litigation to overturn the Secretary of the Interior's decision. On
February 6, 2008, the St. Regis Mohawk Tribe issued a press release accusing us
of abandoning the St. Regis Mohawk Tribe and breaching our gaming agreements
with it.  We issued a press release on February 6, 2008 in which we
confirmed that we had not abandoned the St. Regis Mohawk casino project in
Monticello and had no intention of doing so. On February 13, 2008, the St. Regis
Mohawk Tribe issued a press release stating that they were formally parting ways
with us and had notified local officials and leaders in New York State and
Congress, including the National Indian Gaming Commission (the “NIGC”), of their
formal departure from our proposed project. Additionally, the St. Regis Mohawk
Tribe announced on February 13, 2008 that it had formally withdrawn its federal
lawsuit against the Secretary of the Interior.  On February 14, 2008,
three of our subsidiaries filed for arbitration with the American Arbitration
Association against the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming
Authority seeking declarations as to the effectiveness of each of the
agreements.  On February 20, 2008, however, the St. Regis Mohawk Tribe
announced in a news article that it did not view arbitration as necessary since
it acknowledges that the agreements have expired.




5
 INDEX


Competition




Monticello
Gaming and Raceway




Generally,
Monticello Gaming and Raceway does not compete directly with other harness
racing tracks in New York State for live racing patrons.  However,
Monticello Gaming and Raceway does face intense competition for off-track
wagering at numerous gaming sites within the State of New York and the
surrounding region.  The inability to provide larger purses for the
races at Monticello Gaming and Raceway has been a significant limitation on its
ability to compete for off-track wagering revenues.




In New
York, the primary competition for Monticello Gaming and Raceway is expected to
be from two racetracks located within the New York City metropolitan area,
Yonkers Raceway and Aqueduct Racetrack.  Yonkers Raceway re-opened
during the fourth quarter of 2006. It appears that the VGM facility at Aqueduct
Racetrack will not be opened until late 2008, at the earliest. In addition,
proposals have been made for the implementation of a similar program in New
Jersey, which would include a facility at the Meadowlands
Racetrack.




In July
2004, Pennsylvania enacted a law legalizing the operation of up to 61,000 slot
machines at 14 locations throughout the state. The holders of horse racing
licenses in Pennsylvania may apply for 7 of the 14 licenses to operate slot
machines, while the other 7 locations have yet to be identified. On January 25,
2005, the Mohegan Tribal Gaming Authority acquired Pocono Downs Racetrack and
five off-track wagering operations. Pocono Downs Racetrack opened in January
2007 with approximately 3,000 machines. Pocono Downs Racetrack is located in
Wilkes-Barre, Pennsylvania, approximately 75 miles southwest of Monticello. In
October 2007, the Mt. Airy Casino Resort opened with approximately 2,500 slot
machines and includes a hotel and a golf course.  The Mt. Airy Casino
Resort is located in Mount Pocono, Pennsylvania, approximately 60 miles
southwest of Monticello.




Competing
Casinos and Proposed Casino Projects




In
Atlantic City there are currently more than 10 casino hotels, several of which
are either new or have recently undergone substantial improvements.




In
February 1992, the Mashantucket Pequot Nation opened Foxwoods Resorts Casino, a
casino hotel facility in Ledyard, Connecticut (located in the far eastern
portion of such state), an approximately two and one-half hour drive from New
York City and an approximately two and one-half hour drive from Boston,
Massachusetts, which currently offers 24-hour gaming and contains approximately
7,400 slot machines, 380 table games and over 1,400 rooms and suites, 26
restaurants, 19 retail stores, entertainment and a year-round golf
course.  Also, a high-speed ferry operates seasonally between New York
City and Foxwoods Resort and Casino.  The Mashantucket Pequot Nation
has also announced plans for a high-speed train linking Foxwoods Resort and
Casino to the interstate highway and an airport outside Providence, Rhode
Island.




In
December 2006, the Mashantucket Pequot Nation announced that they had signed
agreements with a major casino company, MGM Mirage, to collaborate on a major
destination hotel/casino resort adjacent to the existing Foxwoods facility and
other development activities.  The new facility will be known as the
“MGM Grand at Foxwoods” and is expected to open in Spring 2008 and will operate
subject to a long term licensing agreement.




In
October 1996, the Mohegan Nation opened the Mohegan Sun casino in Uncasville,
Connecticut, located 10 miles from Foxwoods Resort and Casino. The Mohegan Sun
casino has approximately 6,400 slot machines and 300 table games, off-track
betting, bingo, 30 food and beverage outlets, and retail stores and completed
the first phase of an expansion project that included a 115,000 square foot
casino, a 10,000 seat arena, 40 retail shops, dining venues and two additional
parking garages, accommodating up to 5,000 cars, in September
2001.  The second phase included a 1,200 guest room, 34 story tower
hotel with convention facilities and a spa which opened in the summer of
2002.




In 2001,
the New York State Legislature and the New York State Governor authorized the
building of three Indian casinos in the Catskills region of the State of New
York.  In November of 2004, a number of Indian tribes entered into
agreements with the State of New York with respect to land claims against the
State.  These agreements require
state and federal legislation to be enacted in order to implement their
provisions.  Recent court decisions have adversely affected the
likelihood of such legislation being adopted.




6
 INDEX


The
Stockbridge Munsee Band of Mohicans, currently located in Wisconsin, asserting
aboriginal roots in New York State, has applied for approval to develop an
Indian casino in the Catskills region of the State of New York.  Their
partner, Trading Cove Associates, Inc., developers of the successful Mohegan Sun
casino in Connecticut, has purchased an option on 300 acres as a potential site
on which to build a $600 million hotel and casino on a site approximately 5
miles east of Monticello Gaming and Raceway. In November 2004, the Stockbridge
Munsee Band of Mohicans entered into an Agreement of Settlement and Compromise
to resolve certain land claims against the State of New York.  In
return, the State of New York agreed to negotiate and enter into a mutually
satisfactory gaming compact (subject to the review and approval of the Secretary
of Interior of the United States) that would authorize the Stockbridge Munsee
Band of Mohicans to operate a Class III gaming facility in the Catskills region
of the State of New York and to fully support all regulatory approvals required
for such facility.  In January 2008, however, the Stockbridge Munsee
Band of Mohicans’ land-into-trust application to the BIA with respect to the
land in New York was rejected.




In
November 2004, the Wisconsin Oneidas entered into an Agreement of Settlement and
Compromise to resolve certain land claims against the State of New York. In
return, the State of New York agreed to negotiate and enter into a mutually
satisfactory gaming compact (subject to the review and approval of the Secretary
of Interior of the United States) that will authorize the Wisconsin Oneidas to
operate a Class III gaming facility in the Catskills region of the State of New
York and to fully support all regulatory approvals required for such
facility.




It is
unlikely, however, that the development of these other casinos in the Catskills
region of the State of New York will be able to occur in the near
future.  The legislation introduced in 2005 to implement these
proposed settlements was not enacted by the New York State Legislature. Other
New York based federally recognized Indian tribes or tribes with historical ties
to New York have expressed interest in operating casinos in the Catskills region
of the State of New York, but none has submitted applications to the BIA for
such purpose.  Two of these, the Oneida Nation of New York and the
Seneca Nation, have already been active in the development of casinos in Western
New York.  In July 1993, the Oneida Nation of New York opened “Turning
Stone,” a casino featuring 24-hour table gaming and electronic gaming machines
with approximately 90,000 square feet of gaming space, near Syracuse, New
York.  In October 1997, the facility expanded to include a hotel,
expanded gaming facilities, a golf course and a convention center. Turning Stone
is completing an additional expansion consisting of 50,000 square feet of gaming
space, additional hotel rooms, additional golf courses and a water park. The
Seneca Nation completed its negotiations with New York State and, on January 1,
2003, opened a casino in Niagara Falls, New York.  The casino offers
full Las Vegas style gambling with slot machines and table games. Although the
Oneida Nation and the Seneca Nation have expressed interest in operating a
casino in the Catskills region of the State of New York and have been engaged in
preliminary development work, neither has publicly identified a site, submitted
federal applications or entered into a settlement agreement or compact with the
State of New York providing for the operation of a casino in the Catskills
area.




A number
of groups are seeking to become federally-recognized Indian tribes in order
operate casinos near the New York metropolitan area.  There have been
periodic proposals for locating an Indian casino in the City of Bridgeport,
Connecticut.  Should a federally-recognized tribe be successful in
doing so, it would have an economic impact on any casinos in the Catskills
region of the State of New York since Bridgeport is close to a large portion of
the New York metropolitan area.  In addition, the Shinnecock Indian
Nation, a state-recognized Indian tribe, is attempting to construct a casino in
Southampton, New York. The Shinnecocks take the position that because they are
state-recognized, but not federally recognized, they have the right to engage in
gaming free of state regulation and without the restrictions imposed by the
Indian Gaming Regulatory Act (including the need for a gaming compact). The
Shinnecocks broke ground on their casino on June 30, 2003, but the State of New
York brought suit against the Shinnecocks, and a federal district court enjoined
the Shinnecocks from moving ahead with their casino because they are not a
federally recognized tribe. The court initially stayed the case for 18 months so
that a decision on the Shinnecocks’ request for federal recognition could be
made, but later determined that the request could take the federal government
several years to process, and agreed to move toward trial on the issue of
whether the Shinnecocks, as a state-recognized tribe, are immune from the
state’s lawsuit. In October 2007, the court ruled against the Shinnecocks,
citing that the Shinnecocks were not immune from zoning laws prohibiting the
building of a casino at the site because it did not have "aboriginal" title to
the land.  The court noted that this decision does not affect
the status of the Shinnecocks’ request for federal recognition.  In
October 2007, the Shinnecocks also submitted a plan to the State of New York to
build a casino at the Aqueduct Racetrack.




7
 INDEX




Legislation
permitting other forms of casino gaming is proposed, from time to time, in
various states, including those bordering the State of New York.  Six
states have legalized riverboat gambling while others are considering its
approval. Several states are also considering, or have approved, large-scale
land-based VGM operations based at their state’s racetracks.  The
business and operations of Monticello Gaming and Raceway could be adversely
affected by such competition, particularly if casino and/or video gaming is
permitted in jurisdictions close to New York City.  Currently, casino
gaming, other than Indian gaming, is not allowed in New York, Connecticut or in
areas of New Jersey outside of Atlantic City.  However, proposals were
introduced to expand legalized gaming in each of those locations.




Employees




As of
March 12, 2008, we and our subsidiaries employed approximately 340
people.




Website
Access




The
Company's website address is www.empireresorts.com. The Company's filings with
the Securities and Exchange Commission ("SEC") are available at no cost on its
website as soon as practicable after the filing of such reports with the
SEC.




Item 1A.
            Risk
      Factors.




Risks
Related To Our Business




If
revenues and operating income from our VGMs at Monticello Gaming and Raceway do
not increase, if we are unable to complete our proposed joint venture with
Concord or if we are unable to develop a Class III casino, it could adversely
affect our ability to service our outstanding debt.




Our
ability to service our senior secured convertible notes or loans under our
credit facility with Bank of Scotland will depend upon the success of our VGM
facility, our ability to complete our proposed joint venture with Concord, our
ability to successfully develop and manage a Class III casino and our ability to
attract sufficient attendance.




There can
be no assurance that VGMs will draw sufficiently large crowds to Monticello
Gaming and Raceway to increase local wagering to the point that we will realize
a profit.  The operations and placement of our VGMs, including the
layout and distribution, are under the jurisdiction of the New York State
Lottery and the program contemplates that a significant share of the
responsibility for marketing the program will be borne by the New York State
Lottery.  The New York State Lottery may make decisions that we feel
are not in our best interest and, as a consequence, the profitability of our VGM
operations may not reach the levels that we believe to be feasible or may be
slower than expected in reaching those levels.  Our VGM operations
have historically been insufficient to service our debt, as we were only
permitted to retain 32% of the first $50 million of our VGM revenue, 29% of the
next $100 million of our VGM revenue and 26% of our VGM gross revenue in excess
of $150 million. Although new legislation has been approved that will increase
our share of VGM revenue, no assurance can be given that such increased revenue
will be sufficient to support our ability to service our outstanding
debt.  Moreover, the legislation authorizing the implementation of
VGMs at Monticello Gaming and Raceway expires in 2013, prior to the stated
maturity of our senior secured notes, and no assurance can be given that the
authorizing legislation will be extended beyond this
period.  Similarly, the development of a Class III casino is subject
to many regulatory, competitive, economic and business risks beyond our control,
and there can be no assurance that it will be developed in a timely manner, or
at all.  Any failure in this regard could have a material adverse
impact on our operations and our ability to service our debt
obligations.




8
 INDEX




We
may not have the ability to repurchase our senior secured convertible notes,
which we may be required to do as early as July 31, 2009.


Upon the
occurrence of a change in control (as defined in the indenture governing our
senior secured convertible notes), we would be required to repurchase all of our
outstanding senior secured convertible notes tendered to us by the holders of
such notes.  In addition, the holders of our senior secured
convertible notes are entitled to demand repayment of the notes on July 31,
2009. We cannot assure you that we will have sufficient financial resources, or
will be able to arrange financing, to pay the purchase price for all of such
notes tendered by the holders in connection with any such
repurchase.  Any failure to repurchase the notes when required will
result in an event of default under the indenture.




In
addition, the events that constitute a change in control under the indenture may
also be events of default under any credit agreement or other agreement
governing future debt.  These events may permit the lenders under such
credit agreement or other agreement to accelerate the debt outstanding
thereunder and, if such debt is not paid, to enforce security interests in the
collateral securing such debt, thereby limiting our ability to raise cash to
purchase the notes, and reducing the practical benefit of the offer to purchase
provisions to the holders of the notes.




As
a holding company, we are dependent on the operations of our subsidiaries to pay
dividends or make distributions in order to generate internal cash
flow.




We are a
holding company with no revenue generating operations.  Consequently,
our ability to meet our working capital requirements, to service our debt
obligations (including under our senior secured notes or the Bank of Scotland
credit facility), depends on the earnings and the distribution of funds from our
subsidiaries.  There can be no assurance that these subsidiaries will
generate enough revenue to make cash distributions in an amount necessary for us
to satisfy our working capital requirements or our obligations under our senior
secured notes or the Bank of Scotland credit facility.  In addition,
these subsidiaries may enter into contracts that limit or prohibit their ability
to pay dividends or make distributions.  Should our subsidiaries be
unable to pay dividends or make distributions, our ability to meet our ongoing
obligations would be jeopardized.  Specifically, without the payment
of dividends or the making of distributions, we would be unable to pay our
employees, accounting professionals or legal professionals, all of whom we rely
on to manage our operations, ensure regulatory compliance and sustain our public
company status.




Changes
in the laws, regulations, and ordinances (including tribal and/or local laws) to
which the gaming industry is subject, and the application or interpretation of
existing laws and regulations, or our inability or the inability of our key
personnel, significant stockholders, or joint venture partners to obtain or
retain required gaming regulatory licenses, could prevent us from pursuing
future development projects, including future Class III casino development
projects, force us to divest the holdings of a stockholder found unsuitable by
any federal, state, regional or tribal governmental body or otherwise adversely
impact our results of operation.




The
ownership, management and operation of our current and any future gaming
facilities are and will be subject to extensive federal, state, provincial,
tribal and/or local laws, regulations and ordinances that are administered by
the relevant regulatory agency or agencies in each
jurisdiction.  These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibilities,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations, and often require such parties to obtain certain licenses, permits
and approvals.  These laws, regulations and ordinances may also affect
the operations of our gaming facilities or our plans in pursuing future
projects.




Licenses
that we and our officers, directors and principal stockholders are subject to
generally expire after a relatively short period of time and thus require
frequent renewals and reevaluations.  Obtaining these licenses in the
first place, and for purposes of renewals, normally involves receiving a
subjective determination of “suitability.”  A finding of unsuitability
could lead to a material loss of investment by either us or our stockholders, as
it would require divestiture of one’s direct or indirect interest in a gaming
operator that conducts business in the licensing jurisdiction making the
determination of unsuitability.  Consequently, should we or any
stockholder ever be found to be unsuitable by the federal government, the State
of New York or any Indian tribe with which we may seek to develop a Class III
casino, to own a direct or indirect interest in a company with gaming
operations, we or such stockholder, as the case may be, could be forced to
liquidate all interests in that entity.  Should either we or such
stockholder be forced to liquidate these interests within a relatively short
period of time, we or such stockholder would likely be forced to sell at a
discount, causing a material loss of investment value.




9
 INDEX


During
2002, certain affiliates of Bryanston Group, Inc. (“Bryanston Group”), our
former largest stockholder, and certain of our other stockholders were indicted
for various counts of tax and bank fraud.  On September 5, 2003, one
of these stockholders pleaded guilty to felony tax fraud, and on February 4,
2004, four additional stockholders were convicted of tax and bank
fraud.  None of the acts these individuals were charged with or
convicted of relate to their ownership interests in us and their remaining
interests do not provide them with any significant control in the management of
the Company.  However, there can be no assurance that none of the
various governmental agencies that now, or in the future may, regulate and
license our gaming related activities will factor in these indictments or
criminal acts in evaluating our suitability.  Should a regulatory
agency fail to acknowledge that these indictments and convictions do not bear on
our suitability, we could lose our gaming licenses or be forced to liquidate
certain or all of our gaming interests.




We
received a letter from the New York State Racing and Wagering Board on January
16, 2006, requesting information about our plans to divest Bryanston Group and
its affiliates of their remaining interests in us.  We have advised
the New York State Racing and Wagering Board that approximately one-half of the
ownership of Bryanston has been forfeited to the United States as a result of
the convictions referred to above.  According to the terms of our
Series E Preferred Stock, we have the option to redeem these shares at a price
of $10 per share plus all accrued and unpaid dividends.  The cost of
redeeming these shares, as of December 31, 2007, was approximately $24.3
million.  We may not be able to obtain sufficient financing in amounts
or on terms that are acceptable to us in order to redeem all of these shares,
should this be required.




The
gaming industry in the northeastern United States is highly competitive, with
many of our competitors better known and better financed than us.




The
gaming industry in the northeastern United States is highly competitive and
increasingly run by multinational corporations or Indian tribes that enjoy
widespread name recognition, established brand loyalty, decades of casino
operation experience and a diverse portfolio of gaming
assets.  Atlantic City, the second most popular gaming destination in
the United States, with more than 10 full service hotel casinos, is
approximately a two hour drive from New York City, the highly popular Foxwoods
Resort and Casino and the Mohegan Sun casino are each only two and a half hour
drives from New York City.  Harrah’s Entertainment, Inc., a large
gaming company, Trading Cove Associates, Inc., the developers of the Mohegan Sun
casino, and the Wisconsin Oneidas are each planning to develop Indian casinos on
properties that are near Monticello Gaming and Raceway.  Additionally,
on July 4, 2004, the State of Pennsylvania enacted a law allowing for the
operation of up to 61,000 slot machines at 14 locations.  Pursuant to
this new law, slot machine facilities could be developed within 30 miles of
Monticello Gaming and Raceway that would compete directly with our VGMs. One
such development, the Mohegan Sun at Pocono Downs, opened in January 2007 in
Wilkes-Barre, Pennsylvania, approximately 75 miles southwest of
Monticello.  In addition, in October 2007, the Mt. Airy Casino Resort
opened with approximately 2,500 slot machines, a hotel and a golf
course.  The Mt. Airy Casino Resort is located in Mount Pocono,
Pennsylvania, approximately 60 miles southwest of Monticello. Moreover, a number
of well financed Indian tribes and gaming entrepreneurs are presently seeking to
develop casinos in New York and Connecticut in areas that are 90 miles from New
York City such as Bridgeport, Connecticut and Southampton, New York. In
addition, we face competition for our VGMs from Yonkers Raceway and Aqueduct
Racetrack, both of which are located closer to New York City than our
facility.  Yonkers Raceway re-opened during the fourth quarter of 2006
and Aqueduct Racetrack may open as soon as 2008 with a new VGM
facility.  In addition, proposals have been made for the
implementation of a similar program in New Jersey, which would include a
facility at the Meadowlands Racetrack.  In contrast, we have limited
financial resources and currently operate only a harness horse racing facility
and VGMs in Monticello, New York, which is approximately a one and a half hour
drive from New York City.  No assurance can be given that we will be
able to compete successfully with the established Atlantic City casinos,
existing and proposed regional Indian casinos, slot machine facilities in
Pennsylvania or New Jersey, competing VGM facilities at Yonkers Raceway and
Aqueduct Racetrack or the casinos proposed to be developed by Harrah’s
Entertainment, Inc., Trading Cove Associates, Inc. and the Wisconsin Oneidas in
the Catskills region of the State of New York for gaming customers.




10
 INDEX




The
transactions contemplated by the Contribution Agreement between Concord and us,
will require amendments or waivers under both our senior convertible note
indenture and Bank of Scotland credit facility and will require approval from
the New York State Racing and Wagering Board and the New York
Lottery.


The
contribution of our gaming and racing licenses and operations at Monticello
Gaming and Raceway to the LLC, as contemplated by the Contribution Agreement
between Concord and us will require an amendment or waiver under the senior
convertible note indenture and Bank of Scotland credit facility, as well as
regulatory approval from the New York State Racing and Wagering Board and the
New York State Lottery.  Specifically, each of the senior secured note
indenture and Bank of Scotland credit facility contains numerous restrictive
covenants that limit, for example, the amount of new indebtedness we may occur,
the amount of capitalized expenditures we may make, the type of investments we
may make and the type of acquisitions we may consummate. The contribution of our
gaming and racing licenses and operations at Monticello Gaming and Raceway to
the LLC, as contemplated in the Contribution Agreement, will require consents
under these restrictive covenants, as well as regulatory approval from the New
York State Racing and Wagering Board and the New York State
Lottery.  No assurance can be given that either the noteholders or
Bank of Scotland will agree to these proposals, or that if they do, they will
not force us to pay severe penalties, causing a material adverse effect on our
financial condition, thus making it harder to remain in compliance with the
indenture and credit facility going forward, or to secure Class III casino
development financing.  In addition, no assurance can be given that
either the New York State Racing and Wagering Board or the New York State
Lottery will provide the necessary regulatory approvals to complete the transfer
of our gaming and racing licenses and operations at Monticello Gaming and
Raceway to the LLC.  If we are unable to secure these necessary
waivers, consents and/or approvals on reasonable terms, or at all, we will be
unable to proceed with the Entertainment City Project, which may have a material
adverse effect on our business, financial condition and operating
results.




We,
through the LLC, will require financing in order to complete the transactions
contemplated by the Contribution Agreement between Concord and us.




We,
through the LLC, will require external financing to complete the transactions
contemplated by the Contribution Agreement between Concord and us.  We
can make no assurance that financing will be available in amounts or on terms
acceptable to us or within the limitations contained in our credit facility with
Bank of Scotland or the indenture governing our senior secured convertible
notes, if at all.  Further, if we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
common stock, and debt financing, if available, may involve restrictive
covenants which could restrict our operations or finances.  If we
cannot raise funds, if needed, on acceptable terms, we may be required to
abandon the proposed transactions with Concord.




We
may be required to pay $15 million or more to certain off-track betting
corporations as recoupment of prior years’ payments of dark day monies and
out-of-state off-track betting commissions.




On June
15, 2005, various Article 78 proceedings were commenced by four regional New
York State regional off-track betting corporations (the “OTBs”) against the New
York State Racing and Wagering Board, Monticello Gaming and Raceway and Yonkers
Raceway seeking the return to the OTBs of various racing revenues previously
paid by the OTBs to Monticello Gaming and Raceway and Yonkers Raceway, more
commonly known in the industry as “dark day monies” and out-of-state OTB
commissions.  Dark day monies are revenue received from OTBs when
racing is held at Monticello Gaming and Raceway and thoroughbred racing
facilities are closed. In September 2006, a favorable outcome was achieved when
the combined petition was dismissed.  In November 2007, however, the
Appellate Division – Third Department of the New York State Supreme Court
essentially reversed the September 2006 decision as to dark day monies and
out-of-state OTB commissions (the “OTB Appellate Decision”).  The
practical result of this reversal is that OTBs are no longer responsible to pay
dark day monies to Monticello Gaming and Raceway or Yonkers Raceway and will
have to pay a lesser amount of out-of-state OTB commissions to the
tracks.  The approximate amount of the revenue shortfall to us going
forward for the fiscal year ending 2008 is estimated to be $1.5 million.It
is anticipated that the OTBs will be seeking recoupment of at least six years’
prior payments, which amounts are estimated to be approximately $15 million plus
interest.




11
 INDEX




There is
presently pending a motion for leave to appeal the OTB Appellate Decision to the
New York State Court of Appeals, which motion was brought jointly by the New
York State Racing and Wagering Board, Monticello Raceway, Yonkers Raceway and
Saratoga Raceway.  Until that motion for leave to appeal is decided,
there is no further activity in any OTB litigation.  If the Court of
Appeals grants leave to hear the appeal, the matter is not expected to be
decided for approximately 12 to 18 months, during which time there is
notexpected to be any further action on behalf of the OTBs to
recoup prior dark day monies.  In the event the OTB Appellate Decision
is not
overturned on appeal, the OTBs will have to bring a separate lawsuit claiming
entitlement to recoupment of past dark day monies.  In addition, there
are lobbying efforts on behalf of the tracks and the horsemen to amend the
particular statute which the Appellate Division interpreted in favor of the OTBs
and against the position of the Racing and Wagering Board and the
tracks.




If the
OTB Appellate Decision is not overturned on appeal or if legislation is not
enacted to amend the statute, which the Appellate Division interpreted in favor
of the OTBs, and if the OTBs bring a successful litigation to recoup prior
payments, our potential liability is estimated to be approximately $15 million
or more to the OTBs for past payments of dark day monies and out-of-state OTB
commissions.  If we are required to pay $15 million to the OTBs, such
a payment would have a material adverse effect on our business, financial
condition and operating results.




The
continuing decline in the popularity of horse racing and increasing competition
in simulcasting could adversely impact the business of Monticello Gaming and
Raceway.




Since the
mid-1980s, there has been a general decline in the number of people attending
and wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering.  The declining
attendance at live horse racing events has prompted racetracks to rely
increasingly on revenues from inter-track, off-track and account wagering
markets.  The industry-wide focus on inter-track, off-track and
account wagering markets has increased competition among racetracks for outlets
to simulcast their live races.  A continued decrease in attendance at
live events and in on-track wagering, as well as increased competition in the
inter-track, off-track and account wagering markets, could lead to a decrease in
the amount wagered at Monticello Gaming and Raceway.  Our business
plan anticipates the possibility of Monticello Gaming and Raceway attracting new
customers to its racetrack wagering operations through VGM operations and
potential Class III casino development in order to offset the general decline in
raceway attendance.  However, even if the numerous arrangements,
approvals and legislative changes necessary for Class III casino development
occur, Monticello Gaming and Raceway may not be able to maintain profitable
operations.  Public tastes are unpredictable and subject to
change.  Any decline in interest in horse racing or any change in
public tastes may adversely affect Monticello Gaming and Raceway’s revenues and,
therefore, limit its ability to make a positive contribution to our
results.




We
depend on our key personnel and the loss of their services would adversely
affect our operations.




If we are
unable to maintain our key personnel and attract new employees with high levels
of expertise in those gaming areas in which we propose to engage, without
unreasonably increasing our labor costs, the execution of our business strategy
may be hindered and our growth limited.  We believe that our success
is largely dependent on the continued employment of our senior management and
the hiring of strategic key personnel at reasonable costs.  If any of
our current senior managers were unable or unwilling to continue in his or her
present position, or we were unable to attract a sufficient number of qualified
employees at reasonable rates, our business, results of operations and financial
condition will be materially adversely affected.




Substantial
leverage and debt service obligations may adversely affect our cash flow,
financial condition and results of operations.




As a
result of the issuance of our senior secured notes in the principal amount of
$65 million, our debt service obligations increased
substantially.  There is the possibility that we may be unable to
generate cash sufficient to pay the principal or interest on and other amounts
due in respect of our indebtedness when due.  We may also incur
substantial additional indebtedness in the future. Our level of indebtedness
will have several important effects on our future operations, including, without
limitation:




·
            a
      portion of our cash flow from operations will be dedicated to the payment
      of any interest or principal required with respect to outstanding
      indebtedness;




·
            increases
      in our outstanding indebtedness and leverage will increase our
      vulnerability to adverse changes in general economic and industry
      conditions, as well as to competitive pressure;
  and




12
 INDEX


·
            depending
      on the levels of our outstanding indebtedness, our ability to obtain
      additional financing for working capital, general corporate and other
      purposes may be limited.




Our
ability to make payments of principal and interest on our indebtedness depends
upon our future performance, which is subject to general economic conditions,
industry cycles and financial, business and other factors affecting our
operations, many of which are beyond our control. Our business might not
continue to generate cash flow at or above current levels. If we are unable to
generate sufficient cash flow from operations in the future to service our debt,
we may be required, among other things:




·
            to
      seek additional financing in the debt or equity
  markets;




·
            to
      refinance or restructure all or a portion of our indebtedness, including
      our senior secured convertible notes;
or




·
            to
      sell selected assets.




Such
measures might not be sufficient to enable us to service our indebtedness. In
addition, any such financing, refinancing or sale of assets may not be available
on commercially reasonable terms, or at all.




Future
sales of shares of our common stock in the public market or the conversion of
our senior secured convertible notes could adversely affect the trading price of
shares of our common stock, the value of our senior secured convertible notes
and our ability to raise funds in new stock offerings.




Future
sales of substantial amounts of shares of our common stock in the public market,
the conversion of our senior secured convertible notes into shares of our common
stock, or the perception that such sales or conversion are likely to occur,
could affect prevailing trading prices of our common stock and, as a result, the
value of our senior secured convertible notes.  As of March 11, 2008,
we had 29,699,601 shares of common stock outstanding.  Because our
senior secured convertible notes generally are initially convertible into shares
of our common stock only at a conversion price in excess of the recent trading
price, a decline in our common stock price may cause the value of our senior
secured convertible notes to decline.  In addition, due to this
dilution, the existence of our senior secured convertible notes may encourage
trading strategies involving our senior secured convertible notes and our common
stock, including short selling by market participants, a practice in which an
investor sells shares that he or she does not own at prevailing market prices,
hoping to purchase shares later at a lower price to cover the sale.




At
December 31, 2007, we had outstanding options to purchase an aggregate of
2,403,326 shares of our common stock at an average exercise price of $5.54 per
share and 250,000 warrants at $7.50 per share.  If the holders of
these options or warrants were to exercise their options and/or warrants and
attempt to sell a substantial amount of the shares issued to them upon such
exercise at once, the market price of our common stock would likely
decline.  Moreover, the perceived risk of this potential dilution
could cause stockholders to attempt to sell their shares and investors to
“short” the stock.  As each of these events would cause the number of
shares of our common stock being offered for sale to increase, the common
stock’s market price would likely further decline.  All of these
events could combine to make it very difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.




We
will require additional financing in order to develop a Class III casino or
other projects and we may be unable to meet our future capital requirements and
execute our business strategy.




Because we are unable to generate
sufficient cash from our operations, we will be forced to rely on external
financing to develop a Class III casino or other projects and to meet future
capital and operating requirements.  Any projections of future cash
needs and cash flows are subject to substantial uncertainty.  Our
capital requirements depend upon several factors, including the rate of market
acceptance, our ability to expand our customer base and increase revenues, our
level of expenditures for marketing and sales, purchases of equipment and other
factors.  If our capital requirements vary materially from those
currently planned, we may require additional financing sooner than
anticipated.  We can make no assurance that financing will be
available in amounts or on terms acceptable to us or within the limitations
contained in our credit facility with Bank of Scotland or the indenture
governing our senior secured convertible notes, if at all.  Further,
if we issue equity securities, stockholders may experience additionaldilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock, and debt financing, if available, may involve
restrictive covenants which could restrict our operations or
finances.  If we cannot raise funds, if needed, on acceptable terms,
we may be required to delay, scale back or eliminate some of our expansion and
development goals related to the Class III casino projects and we may not be
able to continue our operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements
which could negatively impact our business, operating results and financial
condition.


13
 INDEX






In
addition, the construction of an Indian Class III casino may depend upon the
ability of an Indian tribe with which we may seek to develop a Class III casino
resort to obtain financing for the project.  In order to assist such
tribe to obtain any such financing, we, or one of our subsidiaries, may be
required to guarantee the tribe’s debt obligations.  Any guarantees by
us or one of our subsidiaries or similar off-balance sheet liabilities, if any,
will increase our potential exposure in the event of a default by the tribe. Our
credit facility and indenture would not currently permit us to guarantee such
financing.




Currently,
Class III casino gaming, other than Indian gaming, is not allowed in New
York.  There can be no assurance that the required amendment to the
New York State Constitution will be passed in order to allow Class III casino
gaming, other than Indian gaming, in a timely manner, or at all.




Currently,
we are not permitted to operate a Class III casino at Monticello Gaming and
Raceway because Class III casino gaming, other than Indian gaming, is not
allowed in New York.  In order to operate a Class III casino at
Monticello Gaming and Raceway, an amendment to the New York State Constitution
to permit Class III casino gaming would need to be passed or we would need to
enter into an agreement with an Indian tribe for the development of such a Class
III casino.  In order to be amended to permit Class III casino gaming,
the New York State Constitution requires the passage of legislation in two
consecutive legislative sessions and then passage of the majority of the state's
voters in a statewide referendum.  There can be no assurance given
that an amendment to the New York State Constitution to permit Class III casino
gaming will be passed in a timely manner, or at all.




We
currently do not have a development and management agreement with the St. Regis
Mohawk Tribe or any other Indian tribe for the development of a Class III casino
resort and we may not be able to enter into such an agreement on terms favorable
to us, or at all.  In addition, such a transaction with an Indian
tribe for the development of a Class III casino resort will be subject to
various federal and state regulatory approvals.




On
December 31, 2007, the Second Amended and Restated Land Purchase Agreement by
and between St. Regis Mohawk Gaming Authority and Monticello Raceway Management,
Inc., dated as of December 1, 2005, as amended, and the related agreements,
expired by their terms.  On January 4, 2008, the St. Regis Mohawk
Tribe received a letter from the BIA denying its request to take 29.31 acres
into trust for the purpose of building a Class III gaming facility to be located
at Monticello Gaming and Raceway, in accordance with the Indian Gaming
Regulatory Act of 1988, as amended.  As a result, we no longer have a
development and management agreement with an Indian tribe for the development of
a Class III casino resort.  There can be no assurance that we will be
able to enter into agreements with the St. Regis Mohawk Tribe or any other
Indian tribe for the development of a Class III casino resort on the land that
we own at Monticello Gaming and Raceway on terms favorable to us, or at
all.




Indian
casinos in New York are regulated extensively by federal, state and tribal
regulatory bodies, including the NIGC and agencies of the State of New
York.  Consequently, a transaction with an Indian tribe for the
development of a Class III casino resort will be subject to various federal and
state regulatory approvals.  For example, any agreement that we may
enter into with the St. Regis Mohawk Tribe or any other Indian tribe will not be
effective to allow us to commence the development or management of a gaming
facility until a management agreement is first approved by the
NIGC.  In addition, an Indian tribe cannot lawfully engage in Class
III gaming in the Catskills region of the State of New York unless such tribe
and the Governor for the State of New York enter into a Class III gaming compact
for such gaming that is approved or deemed approved by the Secretary of the
Interior.  Such gaming compacts generally will not be entered into
until the appropriate land has been taken into trust by the United States for
the benefit of such tribe.  No assurance can be given that such land
will be taken into trust or that any required approvals will be obtained on
terms acceptable to us or at all.




14
 INDEX


The
FONSI that was issued to the St. Regis Mohawk Tribe has been challenged in
federal court, and there is a risk that the validity of the FONSI could be
called into question.




The
National Environmental Policy Act requires federal agencies to consider the
environmental impacts of activities they perform, fund, or permit, as well as
alternatives to those activities and ways to mitigate or lessen those
impacts.  Under the National Environmental Policy Act, federal
agencies must prepare an environmental assessment to determine whether the
proposed action will have a significant effect on the quality of the
environment.  If the agency determines that the action will not have a
significant effect on the environment, it issues a FONSI, and the project can
move forward; if the agency finds to the contrary, it must then prepare an
environmental impact statement, detailing the environmental impacts,
alternatives, and mitigation measures.




We
believe that the fact that a FONSI was issued to the St. Regis Mohawk Tribe with
respect to the 29.31 acres of land at Monticello Gaming and Raceway, stating
that the St. Regis Mohawk Tribe’s Final Environmental Assessment for the project
had been deemed sufficient, that an Environmental Impact Study would not be
required and that the fact that a formal FONSI related to the proposed federal
action approving the Land-to-Trust Transfer was issued to the Tribe could
significantly improve our chances of and expedite the process with respect to
the potential future development of an Indian Class III casino resort on such
land with the St. Regis Mohawk Tribe or with any other Indian tribe with which
we may seek to develop a Class III casino resort.  On February 16,
2007, however, the St. Regis Mohawk Tribe received a copy of a complaint filed
in the United States District Court for the Southern District of New York in the
case of Sullivan County Farm Bureau, Catskill Center for Conservation and
Development, Inc., Orange Environment, Inc. and Natural Resources Defense
Council v. United States Department of the Interior, Dirk Kempthorne, in his
official capacity as Secretary of the Interior, James E. Cason, in his official
capacity as Associate Deputy Secretary of the Interior and Acting Assistant
Secretary of the Interior for Indian Affairs and BIA.  The claim
alleges that the BIA violated the National Environmental Policy Act and the
Administrative Procedure Act by issuing the FONSI without requiring an
environmental impact statement under the National Environmental Policy
Act.  The plaintiffs are seeking an order requiring the preparation of
an environmental impact statement prior to Department of the Interior’s granting
final approvals for the proposed St. Regis Mohawk Casino at Monticello Gaming
and Raceway and prior to the Department of the Interior’s causing the transfer
of the subject land into federal trust.   If a full environmental
impact statement is required, this could result in significant delays to
developing an Indian Class III casino.  Moreover, the costs involved
in obtaining a full environmental impact statement may be
significant.




Because
of the unique status of Indian tribes, our ability to successfully develop and
manage an Indian Class III casino would be subject to unique risks.




We have
limited experience in managing or developing Indian Class III casinos, which
presents unique challenges.  Indian tribes are sovereign nations and
possess the inherent power to adopt laws and regulate matters within their
jurisdiction.  For example, tribes are generally immune from suit and
other legal processes unless they waive such immunity.  Gaming at a
Class III casino developed by an Indian tribe will be operated on behalf of such
tribe’s government, and that government is subject to changes in leadership or
governmental policies, varying political interests, and pressures from the
tribe’s individual members, any of which may conflict with our
interests.  Thus, disputes between us and any such Indian tribe may
arise.  It is possible that we may be required to seek enforcement of
our rights in a court or other dispute resolution forum of the tribe, instead of
state or federal courts or arbitration.  Until a gaming facility
management agreement has been approved by the NIGC and by the relevant Indian
tribe, the operative provisions of that agreement will not be valid or binding
on the applicable tribe, and under relevant federal court precedent, it is
likely that any other agreements with such tribe will also be inoperative until
such gaming facility management agreement has been approved by the
NIGC.




Indian
gaming is also governed by unique laws, regulations and requirements arising
from the Indian Gaming Regulatory Act of 1988, as amended, any applicable Class
III gaming compact, and gaming laws of the applicable Indian tribe, and certain
federal Indian law statutes or judicial principles.  A number of
examples exist where Indian tribes have been successful in obtaining
determinations that management-related contracts (including development or
consulting contracts) were void as a result of the application of the unique
provisions of these laws.  For all of the foregoing and other reasons,
we may encounter difficulties in successfully developing and managing an Indian
Class III casino with an Indian tribe.  Several companies with gaming
experience that have tried to become involved in the management and/or
development of Indian Class III casinos have been unsuccessful.  Due
to our
management’s limited Indian gaming experience, no assurance can be given that we
will be able to avoid the pitfalls that have befallen other companies in their
efforts to develop successful Indian gaming operations.




15
 INDEX




The
value of the conversion right associated with the senior secured convertible
notes may be substantially lessened or eliminated if we are party to a merger,
consolidation or other similar transaction.




If we are
party to a consolidation, merger or binding share exchange or transfer or lease
of all or substantially all of our assets pursuant to which shares of our common
stock are converted into cash, securities or other property, at the effective
time of the transaction, the right to convert senior secured convertible notes
into shares of our common stock will be changed into a right to convert the note
into the kind and amount of cash, securities or other property which the holder
would have received if the holder had converted its senior secured convertible
notes immediately prior to the transaction. This change could substantially
lessen or eliminate the value of the conversion privilege associated with the
notes in the future. For example, if we were acquired in a cash merger, each
note would become convertible solely into cash and would no longer be
convertible into securities whose value would vary depending on our future
prospects and other factors.




Certain
provisions of our certificate of incorporation and bylaws discourage unsolicited
takeover proposals and could prevent stockholders from realizing a premium
return on their investment in our common stock.




Our board
of directors is divided into three classes, with each class constituting
one-third of the total number of directors and the members of each class serving
staggered three-year terms.  This classification of the board of
directors makes it more difficult for our stockholders to change the composition
of the board of directors because only a minority of the directors can be
elected at once.  The classification provisions could also discourage
a third party from accumulating our stock or attempting to obtain control of us,
even though this attempt might be beneficial to us and some, or a majority, of
our stockholders.  Accordingly, under certain circumstances our
stockholders could be deprived of opportunities to sell their shares of common
stock at a higher price than might otherwise be available.  In
addition, pursuant to our certificate of incorporation, our board of directors
has the authority, without further action by the stockholders, to issue up to
3,225,045 shares of preferred stock on such terms and with such rights,
preferences and designations, including, without limitation, restricting
dividends on our common stock, dilution of our common stock’s voting power and
impairing the liquidation rights of the holders of our common stock, as the
board of directors may determine.  Issuance of such preferred stock,
depending upon its rights, preferences and designations, may also have the
effect of delaying, deterring or preventing a change in control.




Stockholders’
ability to influence corporate decisions may be limited because our major
stockholders own a large percentage of our common stock.




Our
significant stockholders own a substantial portion of our outstanding
stock.  As a result of their stock ownership, if these stockholders
were to choose to act together, they may be able to effectively control all
matters submitted to our stockholders for approval, including the election of
directors and approval of any merger, consolidation or sale of all or
substantially all of our assets.  This concentration of voting power
could delay or prevent an acquisition of our company on terms that other
stockholders may desire.  In addition, as the interests of our
majority and minority stockholders may not always be the same, this large
concentration of voting power may lead to stockholder votes that are
inconsistent with other stockholders’ best interests or the best interest of us
as a whole.




The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when our stockholders want to sell their
holdings.




The
market price of our common stock has in the past been, and may in the future
continue to be, volatile.  For instance, between January 1, 2005 and
March 14, 2008, the closing bid price of our common stock has ranged between
$0.92 and $12.63.  A variety of events may cause the market price of
our common stock to fluctuate significantly, including but not necessarily
limited to:




·
            quartertoquartervariationsinoperatingresults;




16
 INDEX


·
            adverse
      news announcements; and




·
            market
      conditions for the gaming industry.




In
addition, the stock market in recent years has experienced significant price and
volume fluctuations for reasons unrelated to operating
performance.  These market fluctuations may adversely affect the price
of our common stock and other interests in the Company at a time when our
stockholders want to sell their interest in us.




General
Business Risks




Terrorism
and the Uncertainty of War May Harm Our Operating Results.




The
terrorist attacks of September 11, 2001 and the after-effects (including the
prospects for more terror attacks in the United States and abroad), combined
with recent economic trends and the U.S.-led military action in Iraq had a
negative impact on various regions of the United States and on a wide range of
industries, including, in particular, the hospitality industry.  In
particular, the terrorist attacks, as well as the United States war on
terrorism, may have an unpredictable effect on general economic conditions and
may harm our future results of operations as they may engender apprehension in
people who would otherwise be inclined to travel to destination resort areas
like the Catskills region of the State of New York.  Moreover, in the
future, fears of recession, war and additional acts of terrorism may continue to
impact the U.S. economy and could negatively impact our business.




We
are subject to greater risks than a geographically diverse company.




Our
proposed operations are primarily limited to the Catskills region of the State
of New York.  As a result, in addition to our susceptibility to
adverse global and domestic economic, political and business conditions, any
economic downturn in the region could have a material adverse effect on our
operations.  An economic downturn would likely cause a decline in the
disposable income of consumers in the region, which could result in a decrease
in the number of patrons at our proposed facilities, the frequency of their
visits and the average amount that they would be willing to spend at the
proposed Class III casino.  We are subject to greater risks than more
geographically diversified gaming or resort operations and may continue to be
subject to these risks upon completion of our expansion projects,
including:




·
            a
      downturn in national, regional or local economic
    conditions;




·
            an
      increase in competition in New York State or the northeastern United
      States and Canada, particularly for day-trip patrons residing in New York
      State, including as a result of recent legislation permitting new Indian
      Class III casinos and VGMs at certain racetracks and other locations in
      New York, Connecticut and
Pennsylvania;




·
            impeded
      access due to road construction or closures of primary access routes;
      and




·
            adverse
      weather and natural and other disasters in the northeastern United States
      and Canada.




The
occurrence of any one of the events described above could cause a material
disruption in our business and make us unable to generate sufficient cash flow
to make payments on our obligations.




Our
business could be affected by weather-related factors and
seasonality.




Our
results of operations may be adversely affected by weather-related and seasonal
factors.  Severe winter weather conditions may deter or prevent
patrons from reaching our gaming facilities or undertaking day
trips.  In addition, some recreational activities are curtailed during
the winter months.  Although our budget assumes these seasonal
fluctuations in gaming revenues for our proposed Indian Class III casino to
ensure adequate cash flow during expected periods of lower revenues, we cannot
ensure that weather-related and seasonal factors will not have a material
adverse effect on our operations.  Our limited operating history makes
it difficult to predict the future effects of seasonality on our business, if
any.




17
 INDEX


We
are vulnerable to natural disasters and other disruptive events that could
severely disrupt the normal operations of our business and adversely affect our
earnings.




Currently,
the majority of our operations are located at a facility in Monticello, New York
and our proposed Indian Class III casino will be located in the same general
geographic area.  Although this area is not prone to earthquakes,
floods, tornados, fires or other natural disasters, the occurrence of any of
these events or any other cause of material disruption in our operation could
have a material adverse effect on our business, financial condition and
operating results.  Moreover, although we do maintain insurance
customary for our industry, including a policy with a ten million dollar ($10
million) limit of coverage for the perils of flood and earthquake, we cannot
ensure that this coverage will be sufficient in the event of one of the
disasters mentioned above.




We
may be subject to material environmental liability as a result of unknown
environmental hazards.




We
currently own 232 acres of land.  As a significant landholder, we are
subject to numerous environmental laws.  Specifically, under the
Comprehensive Environmental Response, Compensation and Liability Act, a current
or previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances or chemical releases on or relating to
its property and may be held liable to a governmental entity or to third parties
for property damage, personal injury and for investigation and cleanup costs
incurred by such parties in connection with the contamination.  Such
laws typically impose cleanup responsibility and liability without regard to
whether the owner knew of or caused the presence of contaminants.  The
costs of investigation, remediation or removal of such substances may be
substantial.




Potential
changes in the regulatory environment could harm our business.




From time
to time, legislators and special interest groups have proposed legislation that
would expand, restrict or prevent gaming operations in the jurisdictions in
which we operate or intend to operate.  In addition, from time to
time, certain anti-gaming groups propose referenda that, if adopted, could force
us to curtail operations and incur significant losses.




The BIA,
through its denial on January 4, 2008 of the St. Regis Mohawk Tribe's request to
take 29.31 acres into trust for the purpose of building a Class III gaming
facility to be located at Monticello Gaming and Raceway, in accordance with the
Indian Gaming Regulatory Act of 1988, as amended, as well as its denial of other
proposed off-reservation casinos, was based, in part, of its opinion that the
casinos were not within a reasonable commuting distance from the
reservations.  The current position of the BIA will likely have an
adverse effect on the ability of companies to develop off-reservation Indian
gaming operations.




We
are dependent on the State of New York, Sullivan County, the Town of Thompson
and the Village of Monticello to provide our proposed facilities with certain
necessary services.




It is
uncertain whether the local governments have the ability to support the level of
economic development associated with the construction of one or more gaming
facilities.  The demands placed upon the local governments by these
expansion efforts may be beyond the infrastructure capabilities that these
entities are able to provide.  The failure of the State of New York,
Sullivan County, the Town of Thompson or the Village of Monticello to provide
certain necessary services such as water, sanitation, law enforcement and fire
protection, or to be able to support increased traffic demands for our proposed
facilities, would have a material adverse effect on our business.




Item 1B.
            Unresolved
      Staff Comments.




None.




Item 2.
            Properties.




Monticello
Land




Our primary asset, which
is held in fee by Monticello Raceway Management, Inc., our wholly owned
subsidiary, is a 232 acre parcel of land in Monticello, New
York.  Facilities at the site include Monticello Gaming and Raceway,
which includes an enclosed grandstand with a capacity for 4,500 people, a
clubhouse restaurant facility with a capacity for 200 customers, pari-mutuel
wagering facilities (including simulcasting), a paddock, exterior barns and
related facilities for the horses, drivers, and trainers.  In
addition, our VGM operation is conducted in thegrandstand portion of
Monticello Gaming and Raceway, which includes a gaming floor with a central bar
and lounge and a separate high stakes gaming area, a 350 seat buffet, a food
court with a coffee bar, a pizza station and deli, kitchens, employee locker
rooms, storage and maintenance facilities, surveillance and security facilities
and systems, cashier’s cage and accounting and marketing areas, as well as
enhanced parking areas for cars and buses.




18
 INDEX




Of these
232 acres of land, we have identified a 29.31-acre parcel of land for the
development of a Class III casino if either Class III casino gaming is legalized
in the State of New York or if we enter into an agreement with the St. Regis
Mohawk Tribe or any other Indian tribe for and obtain the necessary approvals in
connection with the development of such a Class III casino.  If we
pursue the development of a Class III casino with an Indian tribe, the parcel of
land is to be conveyed to the United States of America to be held in trust for
the benefit of an Indian tribe following the BIA’s approval of such transfer and
its authorization to use such land for Class II and Class III gaming. We will
also enter in an agreement with such Indian tribe pursuant to which, among other
things, we will agree not to use such property for any purpose other than Class
II or Class III gaming, and activities incidental to gaming such as the
operation of entertainment, parking, restaurant or retail
facilities.




On
January 11, 2005, we entered into a credit facility with Bank of Scotland,
pursuant to which Bank of Scotland agreed to provide us with a two year $10
million senior secured revolving loan (subject to certain
reserves).  On June 20, 2007, the agreement was amended to provide for
a maturity date of January 7, 2009, among other things.  On March 14,
2008, we entered into an additional amendment to our credit facility with Bank
of Scotland that extends the maturity date to May 29, 2009.  To secure
the timely repayment of any borrowings under this credit facility, among other
things, Monticello Raceway Management, Inc. executed a Mortgage, Security
Agreement, Assignment of Leases and Rents, and Fixture Filing in favor of Bank
of Scotland pursuant to which we granted Bank of Scotland a security interest
and lien with respect to the above described 232 acres of land, along with all
improvements, fixtures, leases, rents and contracts related to the land and the
proceeds therefrom.  This security interest shall terminate upon
satisfaction of all of our obligations under the credit facility, and all
related documents, concurrently with the termination of Bank of Scotland’s
obligations to provide us advances under the credit facility.




Other
Properties




We lease
approximately 165 square feet of office space at 701 N. Green Valley Parkway,
Suite 200, Henderson, Nevada, 89074 on a month-to-month basis.  The
rent for this office space is approximately $2,000 per month.




Item 3.
            Legal
      Proceedings.




The
Monticello Harness Horsemen’s Association, Inc. (“Horsemen”, “Horsemen’s
Association”) has brought multiple actions against our subsidiary, Monticello
Raceway Management, Inc.




Monticello
Harness Horsemen’s Association v. Monticello Raceway Management, State of New
York, Supreme Court, Sullivan County Index No.: 1750/03: This is an action
brought by the Horsemen’s Association of Monticello Raceway against Monticello
Raceway Management, Inc.  The claim is that the barn area at
Monticello Gaming and Raceway has been reduced in size and there are less
available stalls for Horsemen at the track than in prior years.  An
additional claim is that some of the Horsemen who are no longer eligible for
stall use due to consolidation of the barn area were discriminated against by
reason of their membership in the Horsemen’s Association.  The action
was commenced July 31, 2003, and the plaintiff obtained a temporary restraining
order upon commencement of the action.  The temporary restraining
order was dismissed and an injunction denied to the Horsemen after a hearing
which was held the following week and the case had not been pursued further by
the plaintiff, although it is still pending.  The consolidation of the
barn area at Monticello Gaming and Raceway was completed.






19
 INDEX




Monticello
Harness Horsemen’s Association v. Monticello Raceway Management, Supreme Court,
State of New York, Sullivan County Index Numbers: 1765/03 and
2624/03:  These are consolidated actions brought by the Horsemen’s
Association seeking damages for alleged underpayment of purses due to the
Horsemen from various raceway revenue sources.  These actions were
commenced respectively on September 30, 2003 and December 12,
2003.  The actions were consolidated by order of the Sullivan County
Supreme Court in November 2004.  One case alleges that certain monies
designated by contract for the Horsemen’s overnight purses were used to fund a
special racing series at Monticello Gaming and Raceway.  That portion
of the claim seeks a recoupment of approximately $60,000 in purse
monies.  That action also seeks control by the Horsemen of the setting
of purses as opposed to Monticello Gaming and Raceway.  The second
action which was consolidated with the first action involves a claim that the
Horsemen’s purse account has not been properly credited with various
simulcasting revenues and that there were deductions from the Horsemen’s purse
account for simulcast expenses which the plaintiff claims were not authorized by
the parties’ contract.  That complaint seeks approximately $2.0
million in compensatory damages and a similar amount in punitive
damages.  During 2007, we were successful in having a third cause of
action dismissed from the complaint, which cause of action sought control of the
purse account by the Horseman’s Association.  The plaintiff amended
its complaint in 2007 to add a new cause of action seeking approximately $1.4
million in additional damages.  The basis of that claim is that we,
for a period of time in 2005 after the parties’ last written contract had
expired, paid purses to the Horsemen in an amount less than the parties’ written
contract required.  The plaintiff claims that the last written
contract between the parties, which expired by its terms on May 31, 2004, was
agreed between the parties to remain in full force and effect until a new
contract agreement was reached.  Our position is that the contract was
no longer in effect, that there was no agreement to extend the contract terms
until a new contract was in place, and that the setting of the purses at lower
levels during the subject period of time was solely in the our management’s
discretion and not violative of any contract provisions.  This
consolidated action is pending.  There has been extensive exchange of
documentary evidence and there will be further discovery proceedings in light of
the amended claim interposed in 2007. It is anticipated that there will be
depositions conducted in 2008.




On June
15, 2005, various Article 78 proceedings were commenced by the OTBs against the
New York State Racing and Wagering Board, Monticello Gaming and Raceway and
Yonkers Raceway seeking the return to the OTBs of various racing revenues
previously paid by the OTBs to Monticello Gaming and Raceway and Yonkers
Raceway, more commonly known in the industry as “dark day monies” and
out-of-state OTB commissions.  Dark day monies are revenue received
from OTBs when racing is held at Monticello Gaming and Raceway and thoroughbred
racing facilities are closed. All of the petitions have been consolidated into
one proceeding now pending in the New York State Supreme Court Albany
County.  The approximate amount of reimbursement which the OTBs are
seeking from Monticello Gaming and Raceway, as prosecuted, is in excess of $4.0
million together with ongoing payments which the OTBs are making to Monticello
Gaming and Raceway as per the direction and rulings of the New York State Racing
and Wagering Board.  In September 2006, a favorable outcome was
achieved when the combined petition was dismissed.  In November 2007,
however, the Appellate Division – Third Department of the New York State Supreme
Court essentially reversed the September 2006 decision as to dark day monies and
out-of-state OTB commissions.  The practical result of the OTB
Appellate Decision is that OTBs are no longer responsible to pay dark day monies
to Monticello Gaming and Raceway or Yonkers Raceway and will have to pay a
lesser amount of out-of-state OTB commissions to the tracks.  The
approximate amount of the revenue shortfall to us going forward for the fiscal
year ending 2008 is estimated to be approximately $1.5 million.  There
is presently pending a motion for leave to appeal the OTB Appellate Decision to
the New York State Court of Appeals, which motion was brought jointly by the New
York State Racing and Wagering Board, Monticello Raceway, Yonkers Raceway and
Saratoga Raceway.  Until that motion for leave to appeal is decided,
there is no further activity in any OTB litigation.  If the Court of
Appeals grants leave to hear the appeal, the matter will be before the Court of
Appeals and not decided for approximately 12 to 18 months, during which time
there is not expected to be any further action on behalf of the OTBs to recoup
prior dark day monies.  In the event the OTB Appellate Decision is not
overturned on appeal, the OTBs will have to bring a separate lawsuit claiming
entitlement to recoupment of past dark day monies.  It is possible
that such a lawsuit may seek up to $15 million plus interest.  Any
such litigation will be vigorously contested upon the grounds that there has
been no unjust enrichment of Monticello Raceway since the OTBs voluntarily paid
those amounts and there was a general understanding in the industry that
according to statute they were required to pay the dark day monies to all of
their regional tracks.  It is estimated that there would be no final
judgment on any separate action to recoup past payments brought by the OTBs for
at least 24 to 36 months after commencement of such action.  No
provision has been made for this contingent liability.




20
 INDEX


In August
2006, the New York State Racing and Wagering Board issued an arbitrator’s award
defining the contract terms between Monticello Gaming and Raceway and the
Horsemen’s Association.  In December 2006, the




We
believe that the resolution of the claims listed above will not have a material
and adverse effect on our consolidated financial position, results of operations
or cash flows.




We are a
party from time to time to various other legal actions that arise in the normal
course of business.  In the opinion of management, the resolution of
these other matters will not have a material and adverse effect on our
consolidated financial position, results of operations or cash
flows.




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




None.









PART II




Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.




Performance
Graph













Company/Index
            
            12/31/2002
            
            
            12/31/2003
            
            
            12/31/2004
            
            
            12/31/2005
            
            
            12/30/2006
            
            
            12/31/2007Empire
      Resorts, Inc.
            
            
            100.00
            
            
            
            397.14
            
            
            
            491.19
            
            
            
            325.99
            
            
            
            381.94
            
            
            
            150.22Resorts
      and Casinos
            
            
            100.00
            
            
            
            131.27
            
            
            
            222.67
            
            
            
            217.53
            
            
            
            340.30
            
            
            
            384.36NASDAQ
      Market Index
            
            
            100.00
            
            
            
            150.36
            
            
            
            163.00
            
            
            
            166.58
            
            
            
            183.68
            
            
            
            201.91





Assumes
$100 invested on December 31, 2002 in the Company’s common stock, the NASDAQ
Market Index and the Peer Group.




The
calculations in the table were made on a dividends reinvested
basis.




There can
be no assurance that the Company’s common stock performance will continue with
the same or similar trends depicted in the above graph.




21
 INDEX


Market
Information




Our
common stock is listed on the Nasdaq Global Market under the symbol “NYNY”. The
following table sets forth the high and low intraday sale prices for the common
stock for the periods indicated, as reported by the Nasdaq Global
Market.




High
            
            
            LowYear
      ended December 31, 2006First
      Quarter
            
            $
            8.29
            
            
            $
            4.12Second
      Quarter
            
            
            6.95
            
            
            
            4.80Third
      Quarter
            
            
            7.76
            
            
            
            5.04Fourth
      Quarter
            
            
            10.20
            
            
            
            6.25Year
      ended December 31, 2007First
      Quarter
            
            $
            12.70
            
            
            $
            8.53Second
      Quarter
            
            
            10.67
            
            
            
            7.10Third
      Quarter
            
            
            7.44
            
            
            
            3.80Fourth
      Quarter
            
            
            6.69
            
            
            
            3.03





Holders




According
to Continental Stock Transfer & Trust Company, there were 237 holders of
record of our common stock at March 11, 2008.




Dividends




During
the past two fiscal years, we did not declare or pay any cash dividends with
respect to our common stock and we do not anticipate declaring any cash
dividends on our common stock in the foreseeable future.  We intend to
retain all future earnings for use in the development of our
business.  In addition, the payment of cash dividends is restricted by
undeclared dividends on our Series E preferred stock and financial covenants in
our credit agreement with Bank of Scotland.  We have accumulated
unpaid Series E preferred dividends of approximately $7.0 million as of December
31, 2007.




Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table provides information as of December 31, 2007 with respect to the
shares of our common stock that may be issued under our existing equity
compensation plans.




Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                (a)
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
                (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                (c)Equity
      compensation plans approved bysecurity
      holders
            
            
            2,343,326
            
            
            $
            5.38
            
            
            
            387,051Equity
      compensation plans not approved bysecurity
      holders
            
            
            310,000
            
            
            
            7.70
            
            
            
            --Total
            
            
            2,653,326
            
            
            $
            5.65
            
            
            
            387,051





22
 INDEX




Item 6.
              Selected
      Financial Data.


The
following selected financial information is qualified by reference to, and
should be read in conjunction with, the Company’s consolidated financial
statements and the notes thereto, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” contained elsewhere herein. The
selected consolidated income statement data for the years ended December 31,
2007, 2006, and 2005 and the selected consolidated balance sheet data as of
December 31, 2007 and 2006 are derived from the Company’s audited consolidated
financial statements which are included elsewhere herein. The selected
consolidated income statement data for the years ended December 31, 2004 and
2003 and the selected consolidated balance sheet data as of December 31, 2005,
2004 and 2003 are derived from the Company’s audited consolidated financial
statements not included herein.




STATEMENTS
      OF OPERATIONS DATA
            
            (All
      dollar amounts in thousands, except per share data)Years
      ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003NET
      REVENUES
            
            $
            75,693
            
            
            $
            97,871
            
            
            $
            86,708
            
            
            $
            45,006
            
            
            $
            9,740Operating
      costs and expenses, including depreciation
            
            
            81,930
            
            
            
            98,487
            
            
            
            85,647
            
            
            
            55,514
            
            
            
            11,263Impairment
      loss – deferred development costs *
            
            
            12,822
            
            
            
            ---
            
            
            
            14,291
            
            
            
            ---
            
            
            
            4,243LOSS
      FROM OPERATIONS
            
            
            (19,059
            )
            
            
            (616
            )
            
            
            (13,230
            )
            
            
            (10,508
            )
            
            
            (5,766
            )NET
      LOSS
            
            
            (24,649
            )
            
            
            (7,076
            )
            
            
            (18,527
            )
            
            
            (12,745
            )
            
            
            (6,524
            )Dividends
      paid on preferred stock
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (30
            )
            
            
            ---Undeclared
      dividends on preferred stock
            
            
            (1,551
            )
            
            
            (1,551
            )
            
            
            (1,551
            )
            
            
            (1,510
            )
            
            
            ---NET
      LOSS APPLICABLE TO COMMON SHARES
            
            $
            (26,200
            )
            
            $
            (8,627
            )
            
            $
            (20,078
            )
            
            $
            (14,285
            )
            
            $
            (6,524
            )Loss
      per common share, basic and diluted
            
            $
            (0.89
            )
            
            $
            (0.32
            )
            
            $
            (0.77
            )
            
            $
            (0.57
            )
            
            $
            (0.36
            )OTHER
      FINANCIAL DATA:Capital
      Expenditures
            
            $
            339
            
            
            $
            320
            
            
            $
            1,967
            
            
            $
            31,079
            
            
            $
            1,382BALANCE
      SHEET DATA:Cash
      and cash equivalents
            
            $
            15,008
            
            
            $
            9,471
            
            
            $
            6,992
            
            
            $
            7,164
            
            
            $
            1,354Total
      assets
            
            
            54,199
            
            
            
            60,564
            
            
            
            57,245
            
            
            
            60,753
            
            
            
            13,825Long-term
      debt
            
            
            72,617
            
            
            
            72,617
            
            
            
            72,476
            
            
            
            65,000
            
            
            
            7,503Proceeds
      from exercise of stock options
            
            
            18,932
            
            
            
            1,166
            
            
            
            283
            
            
            
            151
            
            
            
            ---Total
      stockholders' deficit**
            
            
            (28,077
            )
            
            
            (25,723
            )
            
            
            (27,215
            )
            
            
            (14,992
            )
            
            
            (1,662
            )








*
            Impairment
      loss represents the write-off of costs associated with efforts to develop
      Indian casinos in New York State.**
            For
      the year ended December 31, 2003 total stockholders'  deficit was
      members’  deficit.




Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.




The
following discussion of our financial condition and results of operations should
be read in conjunction with the consolidated Financial Statements and Notes
thereto appearing elsewhere in this document.




Overview




We were
organized in 1993 as a holding company for entities engaged primarily in the
hospitality and gaming industries.  For much of our history, we
concentrated on riverboat casinos in the southern United States, with nominal
holdings in the mid-Atlantic states.  In 2002 this focus shifted, as
we commenced the liquidation of all of our holdings outside the Catskills region
of the State of New York, and by the end of 2003 we had no direct operations or
meaningful assets other than a minority interest in Catskill Development,
L.L.C., the owner of approximately 232 acres of land in Monticello, New York,
the sole stockholder of Monticello Raceway Management,
Inc. and the controlling member of Monticello Casino Management,
LLC.  Consequently, Empire Resorts, Inc. had no operating revenue
during the fiscal year ended December 31, 2003.




23
 INDEX


On
October 31, 2001, the State of New York enacted a bill designating seven
racetracks, including Monticello Gaming and Raceway, to install and operate
VGMs.  Under the program, the New York State Lottery made an initial
allocation of 1,800 VGMs to Monticello Gaming and
Raceway.  Construction contracts for these facilities were signed and
work on the necessary improvements began in February 2004.  On June
30, 2004, we began operating 1,744 VGMs on 45,000 square feet of floor space at
Monticello Gaming and Raceway after completing approximately $27 million of
renovations to the facility.




In
January 2004, we acquired from the members of both Catskill Development, L.L.C.
and Monticello Raceway Development Company, LLC all of the outstanding
membership interests and capital stock of Monticello Raceway Management, Inc.,
Monticello Casino Management, LLC, Monticello Raceway Development Company, LLC
and Mohawk Management, LLC in exchange for 80.25% of our common stock,
calculated on a post-consolidation, fully diluted basis. Monticello Raceway
Management, Inc., Monticello Casino Management, LLC, Monticello Raceway
Development Company, LLC and Mohawk Management, LLC own all of the development
and management rights with respect to an Indian Class III casino to be developed
in Monticello, New York. As we had no significant operations during the time of
this acquisition and the members of Catskill Development, L.L.C. and Monticello
Raceway Development Company, LLC, collectively, received a controlling interest
in us as part of this acquisition, the acquisition was accounted for as a
reverse merger.




During
2004, we undertook improvements to Monticello Gaming and Raceway and commenced
the VGM operations under the auspices of the New York State
Lottery.  We also pursued continuing efforts to develop an Indian
Class III casino resort on a parcel of land adjacent to Monticello Gaming and
Raceway.




On August
1, 2005, we entered into a letter agreement with the St. Regis Mohawk Tribe, a
federally recognized Indian tribe, to develop a Class III Indian casino on the
29.31 acres of land adjacent to Monticello Gaming and Raceway.  Under
this agreement, we were obligated to supply technical and financial assistance
to the St. Regis Mohawk Tribe in exchange for the right to serve as the tribe’s
exclusive partner in the development, construction, financing, operation and
management of such Class III casino.  This agreement expired pursuant
to its terms on December 31, 2007.   Also, see Item 1. Business–Development – Class III Casino
Development.




Thus,
much of our ability to develop a successful business is now dependent on the
success or failure of our ability to develop our interests in the Catskills
region of the State of New York, and our financial results in the future will be
based on different activities than those from our prior fiscal
years.




Off-Balance
Sheet Arrangements




On
January 12, 2004, in order to better focus on the implementation of the New York
State Lottery’s VGM program and the development of other gaming operations at
Monticello Gaming and Raceway, all claims relating to certain litigation against
parties alleged to have interfered with Catskill Development, L.L.C.’s relations
with the St. Regis Mohawk Tribe, along with the rights to any proceeds from any
judgment or settlement that may arise from such litigation, were transferred to
a grantor trust (the “Litigation Trust”) in which our common stockholders of
record immediately before the consolidation’s closing were provided a 19.75%
interest, with the members of Catskill Development, L.L.C. and Monticello
Raceway Development Company, LLC immediately before the consolidation’s closing
owning the remaining 80.25%.  We separately entered into an agreement
with the grantor trust pursuant to which we agreed to provide the trust with a
$2.5 million line of credit to finance the litigation.




In the
year ended December 31, 2007, we advanced $985,000 in draws on the line of
credit that we provided to the Litigation Trust and in each of the years ended
December 31, 2006 and 2005 we advanced $505,000 in draws on the line of
credit.  Due to the unpredictable nature of the litigation and the
pending motions currently under review, we provided for a valuation allowance
equal to the receivable from the Litigation Trust in each of those years. The
aggregate amount due at December 31, 2007 was $2,500,000 and there is a
valuation allowance recorded for the full amount of those advances.




24
 INDEX


Pursuant
to the terms of the Declaration of Trust establishing the trust, in the event of
a recovery in the litigation, we are to receive payments to reimburse us for
prior litigation expenses of $7.5 million and to repay the $2.5 million on the
line of credit.




In August
2004, we agreed to provide development assistance of $35,000 per month to the
Seneca Cayuga Tribe of Oklahoma in connection with the establishment and initial
operations of a tribal gaming authority for New York gaming operations. We
discontinued providing this assistance in the second quarter of
2005.




In
connection with ourdevelopment project with
the St. Regis Mohawk Tribe, we agreed to make payments to the tribe to support
operations of the Tribal Gaming Authority and provide technical assistance,
payment of professional and legal consultants and other support as we sought the
necessary licenses and approvals to commence construction.




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and judgments related to
the application of certain accounting policies.




While we
base our estimates on historical experience, current information and other
factors deemed relevant, actual results could differ from those estimates. We
consider accounting estimates to be critical to our reported financial results
if (i) the accounting estimate requires us to make assumptions about
matters that are uncertain and (ii) different estimates that we reasonably
could have used for the accounting estimate in the current period, or changes in
the accounting estimate that are reasonably likely to occur from period to
period, would have a material impact on our financial statements.




We
consider our policies for revenue recognition to be critical due to the
continuously evolving standards and industry practice related to revenue
recognition, changes which could materially impact the way we report revenues.
Accounting polices related to: point loyalty program, accounts receivable,
deferred development costs, impairment of long-lived assets, stock-based
compensation and loss contingencies are also considered to be critical as these
policies involve considerable subjective judgment and estimation by management.
Critical accounting policies, and our procedures related to these policies, are
described in detail below.




Revenue and expense
recognition. Revenues represent (i) revenues from pari-mutuel wagering
earned from live harness racing and simulcast signals from other tracks, (ii)
the net win from VGMs and (iii) food and beverage sales, net of promotional
allowances, and other miscellaneous income. We recognize revenues from
pari-mutuel wagering earned from live harness racing and simulcast signals from
other tracks, before deductions of such related expenses as purses, stakes and
awards. Revenue from the VGM operations is the difference between the amount
wagered by bettors and the amount paid out to bettors and is referred to as the
net win. The net win is included in the amount recorded in our consolidated
financial statements as gaming revenue. We report incentives related to VGM play
and points earned in loyalty programs as a reduction of gaming revenue.
Operating costs include (i) the amounts paid to the New York State Lottery for
the State's share of the net win, (ii) amounts due to the Horsemen and Breeders'
for their share of the net win and (iii) amounts paid for harness racing purses,
stakes and awards. Also included in operating costs are the costs associated
with the sale of food, beverages and other miscellaneous items and the marketing
allowance from the New York State Lottery.




We
currently have a point loyalty program ("Player's Club") for our VGM customers
which allows them to earn points based on the volume of their VGM activity. The
estimated redemption value of points earned by customers is recorded as an
expense in the period the points are earned. We estimate the amount of points
which will be redeemed and record the estimated redemption value of those points
as a reduction from revenue in promotional allowances. The factors included in
this estimation process include an overall redemption rate, the cost of awards
to be offered and the mix of cash, goods and services for which the points will
be redeemed. We use historical data to estimate these amounts.




25
 INDEX


Accounts
Receivable.  Accounts receivable are stated at the amount we
expect to collect. If needed, an allowance for doubtful accounts is recorded
based on information on specific accounts.  In the normal course of business,
we settle wagers for other racetracks and are potentially exposed to credit
risk.  We have not experienced significant losses regarding the
settlement of wagers.  These wagers are included in accounts
receivable.  Account balances are written off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote.




Deferred Development
Costs.  Deferred development costs are recorded at cost. In
connection with our development activities, we may make advances to tribes for
development assistance and to facilitate the establishment and initial
operations of tribal gaming authorities. We also incur costs associated with
development activities, including salaries of employees engaged in those
activities which we capitalize as deferred development costs. We provide
technical assistance, engage and pay attorneys and consultants and provide other
support for our Indian partners in matters relating to land claims against the
State of New York and agreements for development and operation of the proposed
Class III casino developments. We periodically review deferred development costs
for impairment as further described below.




Impairment of Long-Lived
Assets.  We periodically review the carrying value of our
long-lived assets in relation to historical results, as well as management's
best estimate of future trends, events and overall business climate. If such
reviews indicate an issue as to whether the carrying value of such assets may
not be recoverable, we will then estimate the future cash flows generated by
such assets (undiscounted and without interest charges). If such future cash
flows are insufficient to recover the carrying amount of the assets, then
impairment is triggered and the carrying value of any impaired assets would then
be reduced to fair value.




On
January 4, 2008, the BIA announced the denial of the land to trust application
from the St. Regis Mohawk Tribe for the site on which our efforts had been
focused. In light of that decision, we determined that the carrying value of our
deferred development costs was likely not recoverable and recorded an impairment
loss for the amounts incurred as of December 31, 2007. The impairment loss
recorded in 2007 is approximately $ 12.8 million.




Stock-Based
Compensation.  Effective January 1, 2006, we adopted the fair
value recognition provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), "Share Based Payment"("SFAS No. 123(R)") using
the modified-prospective method. We had adopted the fair value approach
contained in SFAS No. 123 effective January 1, 2003 and we have consistently
used the Black-Scholes-Merton formula to estimate the fair value of stock
options granted in the periods since that time. As of December 31, 2007, there
was approximately $655,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under our plans. That
cost is expected to be recognized over a period of 3 years. This expected cost
does not include the impact of any future stock-based compensation
awards.




Loss
Contingencies.  There are times when non-recurring events occur
that require management to consider whether an accrual for a loss contingency is
appropriate. Accruals for loss contingencies typically relate to certain legal
proceedings, customer and other claims and litigation. As required by SFAS
No. 5, we determine whether an accrual for a loss contingency is
appropriate by assessing whether a loss is deemed probable and can be reasonably
estimated. We analyze our legal proceedings and other claims based on available
information to assess potential liability. We develop our views on estimated
losses in consultation with outside counsel handling our defense in these
matters, which involves an analysis of potential results assuming a combination
of litigation and settlement strategies. The adverse resolution of any one or
more of these matters over and above the amounts that have been estimated and
accrued in the current consolidated financial statements could have a material
adverse effect on our business, results of operations and financial
condition.




Results
of Operations




Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006




Revenues.  Total
net revenues decreased approximately $21.2 million or 22% for the year ended
December 31, 2007. VGM operations accounted for approximately $12.2 million (or
a 16% decrease from 2006) of that reduction and racing accounted for
approximately $9.7 million (or a 54% decrease). The remainder of the decrease
was attributable to food, beverage and other revenues decreasing by
approximately $0.8 million (or 12%) offset by reduced complimentary expenses of
approximately $534,000 (or 17%).




26
 INDEX


We
believe that the decrease in VGM revenues can be attributed primarily to more
competition from VGM facilities at Yonkers Raceway (opened November, 2006) and
new casinos opening in Pennsylvania in 2007. Patron visits decreased by 20.6%
and the average daily win per unit was reduced from $132.63 to $110.19 (or 17%).
The average number of machines in operation was 1,587 in 2007 and 1,580 in
2006.  The decrease in complimentary expenses is primarily a result of
reduced volume of play.




The
decrease in racing revenue was primarily a result of reduced revenue allocations
from OTB facilities. Yonkers Raceway, which normally shares in those revenues
with us, was not in operation for the last 6 months of 2005 and for eleven
months in 2006. When that facility reopened in November with a new VGM facility
and other improvements, the normal sharing arrangement went back into effect and
our share of revenue allocations dropped significantly. As a result of the OTB
Appellate Decision, our revenues for the fourth quarter of 2007 were reduced by
approximately $350,000.




Gaming
costs.  Gaming (VGM) costs decreased by approximately $8.2
million (or 13%) to approximately $56.3 million for 2007 compared with
2006.  This percentage decrease is less than the percentage decrease
in VGM revenues because not all of our operating expenses vary directly with
revenue changes.




Racing
costs.  Racing costs decreased in 2007 by approximately $4.9
million (or 41%) to approximately $7.0 million. This percentage decrease is less
than the percentage decrease in racing revenues because not all of our operating
expenses will vary directly with revenue changes.




Food, beverage and other
costs.  These costs decreased by approximately $261,000 (or
10%) to approximately $2.4 million for 2007 compared with
2006.  Revenues in this category decreased 12%.




Selling, General and Administrative
expenses.  Selling, general and administrative expenses
decreased approximately $3.2 million (or 18%) in 2007 to approximately $15.0
million.  The decrease is comprised of a reduction in stock-based
compensation of approximately $4.0 million, an increase in other compensation of
approximately $266,000, a decrease in marketing costs of approximately $484,000
and an increase in other expenses of approximately $1,012,000. The stock-based
compensation in 2006 included approximately $3.5 million for the expense, on
December 28, 2006, of extending the expiration date for one year on options to
purchase 2.5 million shares of our common stock at $7.50 per share. The options
to purchase those shares were exercised and we received $18,750,000 as proceeds
from the exercise in January, 2007.




Impairment loss – Deferred
development costs. On January 4, 2008, the BIA announced the denial of
the land to trust application from the St. Regis Mohawk Tribe for the site on
which our joint efforts had been focused. In light of that decision, we
determined that the carrying value of our deferred development costs was likely
not recoverable and recorded an impairment loss of approximately $12.8 million
as of December 31, 2007.




Interest
expense.  Interest expense was approximately $5.9 million and
$6.0 million, respectively, for the years 2007 and 2006.




Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005




Revenues.  Total
net revenues increased approximately $11.2 million or 13% for the year ended
December 31, 2006. VGM operations contributed approximately $8.5 million (or a
12% increase over 2005) of that increase and racing contributed approximately
$2.3 million (or a 15% increase). The remainder of the increase was attributable
to food, beverage and other revenues increasing by approximately $1.5 million
(or 32%) offset by increased complimentary expenses of approximately $1.2
million (or 62%).




We
believe that the increase in VGM revenues can be attributed primarily to more
effective marketing for that facility. Patron visits increased by 2% while the
average daily win per unit increased from $110.19 to $132.63 (or 20%). The
average number of machines in operation was 1,580 during 2006 compared to 1,692
during 2005 (a reduction of 7%).  The increase in complimentary
expenses is a result of increased volume of play and additional marketing
programs.




27
 INDEX


The
increase in racing revenue was primarily a result of increased revenue
allocations from OTB facilities. A track, Yonkers Raceway, which normally shares
in those revenues with us was not in operation for the last 6 months of 2005 and
for eleven months in 2006. We believe that our racing revenues in the future
will be reduced significantly after the Yonkers Raceway track reopens as our
allocable share of OTB revenues will decrease.




Gaming
costs.  Gaming (VGM) costs increased by approximately $4.4
million (or 7%) to approximately $64.5 million for 2006 compared with
2005.  This percentage increase is less than the percentage increase
in VGM revenues almost solely as a result of the increase in fees for VGM agents
(an additional 3% of VGM revenue) and the marketing allowance granted to VGM
agents by the New York State Lottery as reimbursement for qualified marketing
expenses incurred by the agents.




Racing
costs.  Racing costs increased in 2006 by approximately $2.9
million (or 33%) to approximately $11.9 million.  This is primarily as
a result of increases in racing purses reflecting the share of our increased
revenues which we allocate to racing purses for our horsemen.  Our
racing purse costs will increase in the future as a result of the arbitration
award relating to our horsemen as described in more detail in the following
section.




Food, beverage and other
costs.  These costs increased by approximately $625,000 (or
31%) to approximately $2.7 million for 2006 compared with
2005.  Revenues in this category increased 32%.




Selling, General and Administrative
expenses.  Selling, general and administrative expenses
increased approximately $4.9 million (or 37%) in 2006 to approximately $18.2
million.  The increase is comprised of an increase in stock-based
compensation of approximately $3.1 million, an increase in other compensation of
approximately $693,000, an increase in marketing costs of approximately $1.5
million and a reduction of other expenses of approximately $357,000. The
increase in stock-based compensation is primarily related to the costs
associated with extending the expiration date for options to purchase 1 million
shares of our common stock. The extension was granted in connection with a
modification of an earlier agreement which provided for an option to purchase
approximately 5.2 million shares of our common stock. The modified agreement
provides that the holder of the option will exercise the right to purchase 2.5
million shares of our common stock at $7.50 per share with payment made on
January 26, 2007 and had the right to purchase 1 million shares at $7.50 until
December 29, 2007. The option to purchase the remaining 1,688,913 shares expired
on December 29, 2006.




Impairment loss – Deferred
development costs.  During the year ended December 31, 2005, we
recognized the following impairment losses:




Costs
incurred in connection with efforts to develop a casino resort with the
Seneca-Cayuga Tribe of Oklahoma – approximately $ 2.4 million;




Costs
incurred in connection with efforts to develop casino resorts with the Cayuga
Nation of New York – approximately $ 8.5 million;




Costs
associated with a proposed merger related to resort developments and other
activities – approximately $3.4 million.




Our
review of the circumstances of the project in development at December 31, 2006
concluded that recognition of an impairment loss at that date was not
appropriate.




Interest
expense.  Interest expense was approximately $6.0 million and
$4.8 million, respectively, for the years 2006 and 2005.  Our senior
convertible notes issued in July 2004 carried an annual interest rate of 5.5%
until July 31, 2005 and a rate of 8% thereafter.  This resulted in an
increase in interest expense of approximately $948,000 for the year 2006 as
compared to 2005.  The remainder of the increase is due to higher
interest rates on our revolving credit line which had approximately $7.6 million
outstanding at December 31, 2006.




Liquidity
and Capital Resources




We
believe that we will have adequate working capital to fund our operations for
the year ending December 31, 2008. Beginning April 1, 2008, the results of
operations of our VGM facility will benefit from legislation
that was passed on February 13, 2008. We estimate that the benefit could be as
much as $4.8 million for the year ending December 31, 2008.




28
 INDEX




Our
credit facility with the Bank of Scotland requires repayment of approximately $
7,162,000 (outstanding balance of $ 7,617,000 less restricted cash on deposit of
$455,000) on May 29, 2009.




The
holders of our Senior Convertible Notes ($65,000,000 principal balance due) have
the right to demand repayment of the principal amount due on July 31, 2009. We
do not presently have a source for repayment of these notes and our operations
will not provide sufficient cash flow to repay this obligation.




Net cash
used in operating activities during the year ended December 31, 2007 was
approximately $7.4 million compared to net cash provided by operating activities
of approximately $5.3 million in 2006. The decrease in cash provided of
approximately $12.7 million is primarily the result of the following
items:




-
            losses
      from operations excluding impairment loss increased from approximately
      $616,000 in 2006 to approximately $6.2 million in 2007 resulting primarily
      from reduced revenues for both VGM and racing
  operations,




-
            the
      receipts from restricted cash accounts for VGM operations provided a net
      positive effect on net cash from operations of approximately $609,000 in
      2007 compared to approximately $3.1 million in
  2006,




-
            a
      reduction in accounts receivable of approximately $2.4 million in 2007
      provided a net positive comparative effect of approximately $3.7 million
      when compared to 2006 during which accounts receivable increased by
      approximately $1.3 million,




-
            during
      2007, we reduced our purse liability by approximately $3.7 million as
      compared with an increase in that account in 2006 of approximately $1.5
      million resulting in a negative comparative effect of approximately $5.2
      million,




-
            the
      positive effect of stock-based compensation in 2007 was less than that in
      2006 by approximately $4.0 million,




-
            the
      effect of the valuation reserve for advances to the Litigation Trust was
      $985,000 in 2007 and $505,000 in 2006, a net negative comparative effect
      of $480,000,




-
            the
      changes in other net working capital items account for the remaining
      negative comparative effect on net cash from operations of approximately
      $100,000.




The
relatively large changes in accounts receivable and the purse liability are
related to the higher revenues from racing in 2006. The higher revenues resulted
in increased accounts receivable at December 31, 2006 and as those receivables
were collected we directed a substantial amount of the collections to increased
payments for purses during 2007. These payments had the effect of reducing the
amount of the purse liability at December 31, 2007.




Net cash
used in investing activities was approximately $6.0 million for the year ended
December 31, 2007, consisting primarily of approximately $4.5 million expended
for casino development costs. During the year ended December 31, 2006 net cash
used in investing activities in was approximately $3.3 million, and consisted
primarily of approximately $2.4 million in costs associated with casino
development projects.




Net cash
provided by financing activity for 2007 was approximately $18.9 million
representing proceeds from the exercise of options to purchase our common stock.
In 2006, net cash provided by financing activity was approximately $488,000
representing net proceeds from borrowings under our revolving credit facility of
approximately $141,000 and proceeds from the exercise of options to purchase our
common stock of approximately $1.2 million. These amounts were offset by
approximately $798,000 in financing costs reflecting the cost of recording a
mortgage on the 232 acres at the Raceway as security for the holders of our
Senior Convertible Notes.




29
 INDEX


On
January 11, 2005, we entered into a credit facility with Bank of Scotland,
pursuant to which Bank of Scotland agreed to provide us with a $10 million
senior secured revolving loan (subject to certain reserves) that was to mature
in two years. To secure the timely repayment of any borrowings by us under this
credit facility, among other things, we agreed to:




·
            cause
      Monticello Raceway Management to grant Bank of Scotland a mortgage over
      the 232 acres of land and improvements in Monticello, New York owned by
      Monticello Raceway Management;




·
            cause
      our material subsidiaries to guarantee our obligations under the credit
      facility;




·
            pledge
      our equity interests in each of our current and future subsidiaries;
      and




·
            grant
      Bank of Scotland a first priority secured interest in all of its assets,
      now owned or later acquired.




Interest
on any loans made pursuant to the credit facility bore interest, at our option,
at the rate of prime plus 2% or Libor plus 4% until the amendment on June 21,
2007. In connection with this credit facility, the Bank of New York, the
noteholders’ trustee under the indenture, and Bank of New York, also entered
into an Intercreditor Agreement so that the Bank of New York will have a first
priority position, notwithstanding the indenture and security documents we
executed on July 26, 2004 in connection with our issuance of $65 million of
senior convertible notes due 2014.




On
December 12, 2005, we entered into an amendment to our credit facility with Bank
of Scotland.  This amendment, which is effective as of November 30,
2005, among other things, (i) extends the maturity date of the loan agreement
from January 11, 2007 to January 11, 2008, (ii) increases our permissible
capital expenditures in each of 2005, 2006 and 2007 from $100,000 to $350,000
and (iii) deletes all references to the Cayuga Nation of New York and replaces
them with a reference to any Indian tribe that is developing a casino in
conjunction with us.




On June
21, 2007, we entered into another amendment to our credit facility with Bank of
Scotland. The amendment, dated as of June 20, 2007, among other things, (i)
extends the maturity date of the loan agreement from January 11, 2008 to January
7, 2009, (ii) amends the interest rates of loans under the credit facility to a
rate of prime plus 1.5% until July 31, 2008 and prime plus 2.0% thereafter or
LIBOR plus 3.5% until July 31, 2008 and LIBOR plus 4.0% thereafter and (iii)
deletes all references to Interest Advances and Line of Credit Cash Collateral
Advances such that the Loan Agreement now provides for total loans of up to $10
million.  In addition, pursuant to this amendment, we are required to
maintain an unrestricted cash balance of an amount that, when added to the
unused balance available under the credit facility, is not less than $5
million.  On March 14, 2008, we entered into an additional amendment
to our credit facility with Bank of Scotland that extends the maturity date of
the loan agreement from January 7, 2009 to May 29, 2009.




On March
8, 2007, we authorized issuance of 18,884 shares of our common stock as payment
of dividends due for the year ended December 31, 2006 on our Series B preferred
stock.  The approximate value of $190,000 was recorded as a reduction
of retained earnings and an increase in common stock and additional paid in
capital.




On March
8, 2006, our Board of Directors authorized the issuance of 23,103 shares of our
common stock in payment of dividends on our Series B Preferred Stock for 2005.
The recorded value of these shares was approximately $98,000.




At
December 31, 2007, we had undeclared dividends on our Series E Preferred Stock
of approximately $7.0 million and undeclared dividends for 2007 on our Series B
Preferred Stock of approximately $167,000. We paid the dividends on Series B
Preferred Stock by issuing common stock in February 2008. We are in compliance
with our Certificates of Designations, Preferences and Rights of the issued and
outstanding preferred shares.




We are
currently exploring certain strategic alternatives in order to raise
capital.  Although an evaluation process is underway, we have not set
any time frame for the conclusion of the process. There can be no assurance that
this process will result in any specific transaction. We do not expect to
disclose developments with respect to the exploration of strategic alternatives
unless and until our Board of Directors has approved a definitive transaction or
it has concluded its evaluation efforts.




30
 INDEX


Recent
Accounting Pronouncements




In
October 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. Financial Accounting Standard (“FAS”) 123(R)-5, Amendment of FSP FAS
123(R)-1, (“FSP FAS123(R)-5”) to address whether a change to an equity
instrument in connection with an equity restructuring should be considered a
modification for the purpose of applying FSP No. FAS 123(R)-1, Classification and Measurement of
Freestanding Financial Instruments Originally Issued in Exchange for Employee
Services under FAS Statement No123(R) (“FSP
FAS123(R)-1”).  FSP FAS 123(R)-1 states that financial instruments
issued to employees in exchange for past or future services are subject to the
provisions of SFAS 123(R) unless the terms of the award are modified when the
holder is no longer an employee.  In FSP FAS 123(R)-5, the FASB staff
concluded that changes to the terms of an award that are made solely due to an
equity restructuring are not considered modifications as described in FSP FAS
123(R)-1 unless the fair value of the award increases, anti-dilution provisions
are added, or holders of the same class of equity instruments are treated
unequally.  FSP FAS 123(R)-5 is effective for the first reporting
period beginning after October 10, 2006. The adoption of FSP FAS 123(R)-5
did not have a material impact on our consolidated results of operations,
financial condition and cash flows.





In June
2007, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”)
Issue No. 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards ("EITF 06-11"). EITF 06-11
requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to
employees for non-vested equity-classified employee share-based payment awards
as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal
years beginning after September 15, 2007 (fiscal year 2008 for us). The
adoption is not expected to have a material impact on our consolidated results
of operations, financial condition and cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008.  We are currently evaluating the potential impact,
if any, of the adoption of SFAS No. 141(R) on our consolidated results of
operations, financial condition and cash flows.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. We are
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 160 on our consolidated results of operations, financial condition
and cash flows.






31
 INDEX





Contractual
Obligations




Contractual
      Obligations
            
            Payments
      due by period
              (in
      thousands)Total
            
            
            Less
      than 1 year
            
            
            1 –
      3 years
            
            
            3 –
      5 years
            
            
            More
      than 5 yearsSenior
      Convertible Notes (a):Principal
            
            $
            65,000
            
            
            $
            ----
            
            
            $
            ----
            
            
            $
            ----
            
            
            $
            65,000Estimated
      interest (b)
            
            
            33,800
            
            
            
            5,200
            
            
            
            10,400
            
            
            
            10,400
            
            
            
            7,800Revolving
      credit facility:Principal
            
            
            7,617
            
            
            
            ----
            
            
            
            7,617
            
            
            
            ----
            
            
            
            ----Estimated
      interest (b)
            
            
            750
            
            
            
            730
            
            
            
            20
            
            
            
            ----
            
            
            
            ----Operating
      lease obligations
            
            
            309
            
            
            
            191
            
            
            
            118
            
            
            
            ---
            
            
            
            ---Total
            
            $
            107,476
            
            
            $
            6,121
            
            
            $
            18,155
            
            
            $
            10,400
            
            
            $
            72,800





(a)
            The
      holders of our Senior Convertible Notes have the right to require us to
      repurchase the notes at 100% of the principal amount outstanding on July
      31, 2009.




(b)
            Interest
      is payable at 8% semi-annually on the Senior Convertible Notes and at
      either Prime plus 2 or Libor plus 4 on the revolving credit
      facility.




Subsequent
Events




We were
advised, that on January 4, 2008, the St. Regis Mohawk Tribe received a letter
from James E. Cason of the BIA denying the St. Regis Mohawk Tribe's request to
take 29.31 acres into trust for the purpose of building a Class III gaming
facility to be located at Monticello Gaming and Raceway, in accordance with the
Indian Gaming Regulatory Act of 1988, as amended.  The request was
denied based upon regulations promulgated under the Indian Gaming Regulatory Act
of 1988, as amended, relating to the need of the St. Regis Mohawk Tribe for
additional land, the purposes for which the land would be used, and the distance
of the land from the St. Regis Mohawk Tribe’s reservation.  In
addition, our agreements with the St. Regis Mohawk Tribe and the St. Regis
Mohawk Gaming Authority expired by their terms on December 31,
2007.  On February 14, 2008, three of our subsidiaries filed for
arbitration with the American Arbitration Association against the St. Regis
Mohawk Tribe and the St. Regis Mohawk Gaming Authority seeking declarations as
to the effectiveness of each of the agreements.  Also, see Item 1. Business–Development – Class III Casino
Development.




On
February 25, 2008, our Board of Directors authorized the issuance of 117,419
shares of our common stock in payment of dividends on our Series B Preferred
Stock for 2007.  The value of these shares was approximately
$261,000.




On March
14, 2008, we entered into an amendment to our credit facility with Bank of
Scotland that extends the maturity date of the loan agreement from January 7,
2009 to May 29, 2009.




Item 7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk




Market
risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates and commodity
prices.  Our primary exposure to market risk is interest rate risk
associated with our $10 million credit facility with Bank of Scotland since it
constitutes variable rate debt.  A hypothetical one hundred basis
point increase in interest rates for our variable rate borrowings would increase
our future interest expense by approximately $0.1 million per
year.  This sensitivity analysis does not factor in potential changes
in the level of our variable interest rate borrowings, or any actions that we
might take to mitigate our exposure to changes in interest rates.  Our
outstanding convertible senior notes are fixed-rate indebtedness.




32
 INDEX


Item 8.
            Financial
      Statements and Supplementary Data.




PageFinancial Statements as of
      December 31, 2007 and 2006 and for the three years ended December 31,
      2007:Report
      of Independent Registered Public Accounting Firm
            34Consolidated
      Balance Sheets
            36Consolidated
      Statements of Operations
            37Consolidated
      Statements of Stockholders’ Deficit
            38Consolidated
      Statements of Cash Flows
            39Notes
      to Consolidated Financial Statements
            41





33
 INDEX


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


Empire
Resorts, Inc.








We have
audited the accompanying consolidated balance sheets of Empire Resorts, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ deficit, and cash flows for each of the
years in the three-year period ended December 31, 2007.  We also have
audited Empire Resorts, Inc. and subsidiaries’ internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Empire Resorts, Inc. and
subsidiaries’ management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the company’s internal
control over financial reporting based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principals used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audits provide a reasonable
basis for our opinions.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




34
 INDEX


In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Empire Resorts, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.  Also in our opinion, Empire
Resorts, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).









/s/
Friedman LLP




New York,
New York


March 14,
2008


35
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31


(In
thousands, except for per share data)




2007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            15,008
            
            
            $
            9,471Restricted
      cash
            
            
            1,266
            
            
            
            1,747Accounts
      receivable
            
            
            1,401
            
            
            
            3,802Prepaid
      expenses and other current assets
            
            
            2,967
            
            
            
            2,996Total
      current assets
            
            
            20,642
            
            
            
            18,016Property
      and equipment, net
            
            
            30,860
            
            
            
            31,703Deferred
      financing costs, net of accumulated amortization
              of
      $ 1,783 in 2007 and $ 1,364 in 2006
            
            
            2,697
            
            
            
            3,116Deferred
      development costs
            
            
            ---
            
            
            
            7,729TOTAL
      ASSETS
            
            $
            54,199
            
            
            $
            60,564LIABILITIES AND STOCKHOLDERS’
      DEFICITCurrent
      liabilities:Account
      payable
            
            $
            3,530
            
            
            $
            3,734Accrued
      expenses and other current liabilities
            
            
            6,129
            
            
            
            9,936Total
      current liabilities
            
            
            9,659
            
            
            
            13,670Revolving
      credit facility
            
            
            7,617
            
            
            
            7,617Senior
      convertible notes
            
            
            65,000
            
            
            
            65,000Total
      liabilities
            
            
            82,276
            
            
            
            86,287Commitments
      and contingenciesStockholders’
      deficit:Preferred
      stock, 5,000 shares authorized; $0.01 par value -Series
      B, $29 per share liquidation value, 44 shares issued and
      outstanding
            
            
            ---
            
            
            
            ----Series
      E, $10.00 redemption value, 1,731 shares issued and
      outstanding
            
            
            6,855
            
            
            
            6,855Common
      stock, $0.01 par value, 75,000 shares authorized,
              29,582
      and 29,428 shares issued and outstanding in 2007
              and
      2006, respectively
            
            
            296
            
            
            
            294Amount
      due from exercise of option
            
            
            ---
            
            
            
            (18,750
            )Additional
      paid in capital
            
            
            52,845
            
            
            
            49,113Accumulated
      deficit
            
            
            (88,073
            )
            
            
            (63,235
            )Total
      stockholders’ deficit
            
            
            (28,077
            )
            
            
            (25,723
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            54,199
            
            
            $
            60,564





The
accompanying notes are an integral part of these consolidated financial
statements.




36
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED DECEMBER 31


(In
thousands, except for per share data)




2007
            
            
            2006
            
            
            2005REVENUES:Racing
            
            $
            8,280
            
            
            $
            17,997
            
            
            $
            15,652Gaming
            
            
            64,290
            
            
            
            76,510
            
            
            
            68,059Food,
      beverage and other
            
            
            5,655
            
            
            
            6,428
            
            
            
            4,885GROSS
      REVENUES
            
            
            78,225
            
            
            
            100,935
            
            
            
            88,596Less
      promotional allowances
            
            
            (2,532
            )
            
            
            (3,064
            )
            
            
            (1,888
            )NET
      REVENUES
            
            
            75,693
            
            
            
            97,871
            
            
            
            86,708COSTS
      AND EXPENSES:Racing
            
            
            7,026
            
            
            
            11,914
            
            
            
            8,979Gaming
            
            
            56,334
            
            
            
            64,533
            
            
            
            60,159Food,
      beverage and other
            
            
            2,400
            
            
            
            2,661
            
            
            
            2,036Selling,
      general and administrative expense
            
            
            14,990
            
            
            
            18,235
            
            
            
            13,352Depreciation
            
            
            1,180
            
            
            
            1,144
            
            
            
            1,121Impairment
      loss - deferred development costs
            
            
            12,822
            
            
            
            ---
            
            
            
            14,291TOTAL
      COSTS AND EXPENSES
            
            
            94,752
            
            
            
            98,487
            
            
            
            99,938LOSS
      FROM OPERATIONS
            
            
            (19,059
            )
            
            
            (616
            )
            
            
            (13,230
            )Amortization
      of deferred financing costs
            
            
            (419
            )
            
            
            (655
            )
            
            
            (575
            )Interest
      expense
            
            
            (5,932
            )
            
            
            (5,989
            )
            
            
            (4,778
            )Interest
      income
            
            
            761
            
            
            
            184
            
            
            
            56NET
      LOSS
            
            
            (24,649
            )
            
            
            (7,076
            )
            
            
            (18,527
            )Undeclared
      dividends on preferred stock
            
            
            (1,551
            )
            
            
            (1,551
            )
            
            
            (1,551
            )NET
      LOSS APPLICABLE TO COMMON SHARES
            
            $
            (26,200
            )
            
            $
            (8,627
            )
            
            $
            (20,078
            )Weighted
      average common shares outstanding,
              basic
      and diluted
            
            
            29,523
            
            
            
            26,703
            
            
            
            26,149Loss
      per common share, basic and diluted
            
            $
            (0.89
            )
            
            $
            (0.32
            )
            
            $
            (0.77
            )





The
accompanying notes are an integral part of these consolidated financial
statements.




37
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT


YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005


(In
thousands)




Preferred
      StockSeries
      B
              
              Series
      E
              
              Common
      StockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Amount
                due from exercise of
      option
              
              
              Additional
      paid in Capital
              
              
              Accumu­lated
      DeficitBalances,
      January 1, 2005
              
              
              44
              
              
              $
              ---
              
              
              
              1,731
              
              
              $
              6,855
              
              
              
              26,080
              
              
              $
              261
              
              
              $
              ---
              
              
              $
              15,284
              
              
              $
              (37,392
              )Declared
      and paid dividends on preferred stock
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              13
              
              
              
              ---
              
              
              
              ---
              
              
              
              142
              
              
              
              (142
              )Common
      stock issued from exercise of stock options
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              133
              
              
              
              1
              
              
              
              ---
              
              
              
              282
              
              
              
              ---Stock-based
      compensation
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              86
              
              
              
              1
              
              
              
              ---
              
              
              
              4,308
              
              
              
              ---Stock-based
      compensation, termination of merger
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              1,712
              
              
              
              ---Net
      loss
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (18,527
              )Balances,
      December 31, 2005
              
              
              44
              
              
              
              ---
              
              
              
              1,731
              
              
              
              6,855
              
              
              
              26,312
              
              
              
              263
              
              
              
              ---
              
              
              
              21,728
              
              
              
              (56,061
              )Declared
      and paid dividends on preferred stock
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              23
              
              
              
              ---
              
              
              
              ---
              
              
              
              98
              
              
              
              (98
              )Common
      stock issued from exercise of stock options
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              3,007
              
              
              
              30
              
              
              
              (18,750
              )
              
              
              19,886
              
              
              
              ---Stock-based
      compensation
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              86
              
              
              
              1
              
              
              
              ---
              
              
              
              7,401
              
              
              
              ---Net
      loss
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (7,076
              )Balances,
      December 31, 2006
              
              
              44
              
              
              
              ---
              
              
              
              1,731
              
              
              
              6,855
              
              
              
              29,428
              
              
              
              294
              
              
              
              (18,750
              )
              
              
              49,113
              
              
              
              (63,235
              )Declared
      and paid dividends on preferred stock
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              19
              
              
              
              ---
              
              
              
              ---
              
              
              
              189
              
              
              
              (189
              )Collection
      of amount due for December 2006 exercise
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              18,750
              
              
              
              ---
              
              
              
              ---Common
      stock issued from exercise of stock options
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              46
              
              
              
              1
              
              
              
              ---
              
              
              
              181
              
              
              
              ---Stock-based
      compensation
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              89
              
              
              
              1
              
              
              
              ---
              
              
              
              3,362
              
              
              
              ---Net
      loss
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (24,649
              )Balances,
      December 31, 2007
              
              
              44
              
              
              $
              ---
              
              
              
              1,731
              
              
              $
              6,855
              
              
              
              29,582
              
              
              $
              296
              
              
              $
              ---
              
              
              $
              52,845
              
              
              $
              (88,073
              )




The
accompanying notes are an integral part of these consolidated financial
statements.




38
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31


(In
thousands)




2007
            
            
            2006
            
            
            2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (24,649
            )
            
            $
            (7,076
            )
            
            $
            (18,527
            )Adjustments
      to reconcile net loss to net cash provided by
              (used
      in) operating activities:Depreciation
            
            
            1,180
            
            
            
            1,144
            
            
            
            1,121Amortization
      of deferred financing costs
            
            
            419
            
            
            
            655
            
            
            
            575Allowance
      for doubtful accounts – Advances
              to
      Litigation Trust
            
            
            985
            
            
            
            505
            
            
            
            505Impairment
      loss - deferred development costs
            
            
            12,822
            
            
            
            ---
            
            
            
            14,291Stock
      – based compensation
            
            
            3,363
            
            
            
            7,401
            
            
            
            4,309Loss
      on disposal of property and equipment
            
            
            1
            
            
            
            11
            
            
            
            10Changes
      in operating assets and liabilities:Restricted
      cash (VGM Marketing Accounts)
            
            
            609
            
            
            
            3,076
            
            
            
            (4,151
            )Accounts
      receivable
            
            
            2,401
            
            
            
            (1,286
            )
            
            
            (39
            )Prepaid
      expenses and other current assets
            
            
            29
            
            
            
            (1,041
            )
            
            
            (878
            )Accounts
      payable
            
            
            (766
            )
            
            
            396
            
            
            
            (1,383
            )Accrued
      expenses and other current liabilities
            
            
            (3,806
            )
            
            
            1,480
            
            
            
            2,962NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            (7,412
            )
            
            
            5,265
            
            
            
            (1,205
            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
            
            
            (339
            )
            
            
            (320
            )
            
            
            (1,967
            )Restricted
      cash (Racing capital improvement)
            
            
            (106
            )
            
            
            (86
            )
            
            
            6Advances
      to Litigation Trust
            
            
            (985
            )
            
            
            (505
            )
            
            
            (505
            )Deferred
      development costs
            
            
            (4,531
            )
            
            
            (2,363
            )
            
            
            (3,309
            )NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (5,961
            )
            
            
            (3,274
            )
            
            
            (5,775
            )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from revolving credit facility
            
            
            ---
            
            
            
            141
            
            
            
            7,476Proceeds
      from exercise of stock options
            
            
            18,932
            
            
            
            1,166
            
            
            
            283Deferred
      financing costs
            
            
            ---
            
            
            
            (798
            )
            
            
            (539
            )Restricted
      cash (Revolving credit facility)
            
            
            (22
            )
            
            
            (21
            )
            
            
            (412
            )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            18,910
            
            
            
            488
            
            
            
            6,808Net
      increase (decrease) in cash and cash equivalents
            
            
            5,537
            
            
            
            2,479
            
            
            
            (172
            )Cash
      and cash equivalents, beginning of year
            
            
            9,471
            
            
            
            6,992
            
            
            
            7,164Cash
      and cash equivalents, end of year
            
            $
            15,008
            
            
            $
            9,471
            
            
            $
            6,992





The
accompanying notes are an integral part of these consolidated financial
statements.







(Continued)




39
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31


(In
thousands)




2007
            
            
            2006
            
            
            2005SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest during the year
            
            $
            5,932
            
            
            $
            5,989
            
            
            $
            4,033SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIESCommon
      stock issued in settlement of preferred stock dividends
            
            $
            190
            
            
            $
            98
            
            
            $
            142Amount
      due from exercise of option
            
            
            ---
            
            
            
            18,750
            
            
            
            ---Noncash
      additions to deferred development costs
            
            
            562
            
            
            
            192
            
            
            
            1,108





The
accompanying notes are an integral part of these consolidated financial
statements.




40
 INDEX


EMPIRE
RESORTS, INC. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
A. Summary of Business and Basis for Presentation




Basis
for Presentation




The
consolidated balance sheets as of December 31, 2007 and 2006, the consolidated
statements of operations, stockholders’ deficit and cash flows for the years
ended December 31, 2007, 2006 and 2005 include the accounts of Empire Resorts,
Inc and our subsidiaries (“Empire”, “the Company”, “us” or “we”).




Liquidity




We
believe that we will have adequate working capital to fund our operations for
the year ending December 31, 2008. Beginning April 1, 2008, the results of
operations of our Video Gaming Machine (“VGM”) facility will benefit from
legislation that was passed on February 13, 2008.  We estimate that
the benefit could be as much as $4.8 million for the year ending December 31,
2008.




Our
credit facility with the Bank of Scotland requires repayment of approximately $
7,162,000 (outstanding balance of $ 7,617,000 less restricted cash on deposit of
$455,000) on May 29, 2009.




The
holders of our Senior Convertible Notes ($65,000,000 principal balance due) have
the right to demand repayment of the principal amount due on July 31,
2009.  We do not presently have a source for repayment of these notes
and our operations will not provide sufficient cash flow to repay this
obligation.




Nature
of Business




During
the past four years, we have concentrated on developing gaming operations in New
York State.  Through our subsidiaries, we currently own and operate
Monticello Gaming and Raceway, a video gaming and harness horseracing facility
located in Monticello, New York.




On
February 8, 2008, we entered into an Agreement to Form Limited Liability Company
and Contribution Agreement with Concord (the “Contribution Agreement”), pursuant
to which we and Concord Associates, L.P. (“Concord”) will form a limited
liability company (the “LLC”) and enter into an Operating
Agreement.  In addition, pursuant to the Contribution Agreement, we
will move our existing operations at Monticello Gaming and Raceway to 160 acres
of land located in Kiamesha Lake, New York in order to develop an entertainment
complex consisting of a hotel, convention center, gaming facility and harness
horseracing track (the “Entertainment City
Project”).  Concord
will be responsible for the development of the Entertainment City
Project.  Concord’s affiliate, George A. Fuller Company, will be the
general contractor.  We will be responsible for development of the
gaming facility and for managing and operating the hotel, gaming facility and
harness horseracing track. We and Concord will share equally the fees that we
each earn in connection with our respective development and management efforts,
as well as share equally any distributions available following the repayment of
any debt service and the payment of any preferred returns due to any of the
members of the LLC.  We will receive a preference on the first $8
million of distributions.  Construction fees earned by George A.
Fuller Company will not be shared with us.  The closing of the
transaction is conditioned on, among other things, (i) distribution to us of at
least $50 million (less amounts outstanding under our existing credit facility
with Bank of Scotland that are to be assumed by the LLC); (ii) receipt of all
necessary approvals for the transfer of our gaming and racing licenses,
including from the Bank of Scotland, holders of our convertible senior notes,
the New York State Racing and Wagering Board and the New York State Lottery;
(iii) transfer of our obligations related to our credit facility to the LLC;
(iv) entry into construction, development, casino development, casino and hotel
management contracts; and (v) approval by our stockholders, if required by
law.  No assurance can be given that the conditions to the closing of
the transaction will be satisfied in order to complete the transaction, as
planned.




In
addition, we continue to set aside 29.31 acres of land adjacent to Monticello
Gaming and Raceway for the development of a Class III casino. We will also
continue to explore other possible development projects.




41
 INDEX


We
operate through three principal subsidiaries, Monticello Raceway Management,
Inc. (“Monticello Raceway Management”), Monticello Casino Management, LLC
(“Monticello Casino Management”) and Monticello Raceway Development Company, LLC
(“Monticello Raceway Development”).  Currently, only Monticello
Raceway Management has operations which generate revenue.




Raceway
and VGM Operations




Monticello
Raceway Management, a wholly owned subsidiary, is a New York corporation that
operates Monticello Gaming and Raceway (the “Raceway”), a harness horse racing
facility and a VGM facility (Monticello Gaming and Raceway) in Monticello, New
York.




The
Raceway began operation in 1958 and offers pari-mutuel wagering, live harness
racing and simulcasting from various harness and thoroughbred racetracks across
the country.  The Raceway derives its revenue principally from (i)
wagering at the Raceway on live races run at the Raceway; (ii) fees from
wagering at out-of-state locations on races simulcast from the Raceway using
export simulcasting; (iii) revenue allocations, as prescribed by law, from
betting activity at New York City, Nassau and Catskill Off Track Betting
facilities ; (iv) wagering at the Raceway on races broadcast from out-of-state
racetracks using import simulcasting; and (v) admission fees, program and racing
form sales, the sale of food and beverages and certain other ancillary
activities.




A VGM is
an electronic gaming device which allows a patron to play electronic versions of
various lottery games of chance and is similar in appearance to a traditional
slot machine.  On October 31, 2001, the State of New York enacted a
bill designating seven racetracks, including the Raceway, to install and operate
VGMs.  Under the program, the New York State Lottery has authorized an
allocation of up to 1,800 VGMs to the Raceway.  Currently, Monticello
Raceway Management operates 1,587 VGMs on 45,000 square feet of floor space at
the Raceway after expending approximately $27 million in 2004 on renovations to
the facility and start-up expenses.




Note
B.  Summary of Significant Accounting Policies




Revenue and expense
recognition. Revenues represent (i) revenues from pari-mutuel wagering
earned from live harness racing and simulcast signals from other tracks, (ii)
the net win from VGMs and (iii) food and beverage sales, net of promotional
allowances and other miscellaneous income.  We recognize revenues from
pari-mutuel wagering earned from live harness racing and simulcast signals from
other tracks, before deductions of such related expenses as purses, stakes and
awards. Revenue from the VGM operations is the difference between the amount
wagered by bettors and the amount paid out to bettors and is referred to as the
net win.  The net win is included in the amount recorded in our
consolidated financial statements as gaming revenue. We report incentives
related to VGM play and points earned in loyalty programs as a reduction of
gaming revenue. Operating costs include (i) the amounts paid to the New York
State Lottery for the State’s share of the net win, (ii) amounts due to the
Horsemen and Breeder’s for their share of the net win and (iii) amounts paid for
harness racing purses, stakes and awards. Also included in operating costs are
the costs associated with the sale of food, beverage and other miscellaneous
items and the marketing allowance from the New York State Lottery.




We
currently have a point loyalty program (“Player’s Club”) for our VGM customers
which allows them to earn points based on the volume of their VGM activity. The
estimated redemption value of points earned by customers is recorded as an
expense in the period the points are earned. We estimate the amount of points
which will be redeemed and record the estimated redemption value of those points
as a reduction from revenue in promotional allowances. The factors included in
this estimation process include an overall redemption rate, the cost of awards
to be offered and the mix of cash, goods and services for which the points will
be redeemed. We use historical data to estimate these amounts.  The
liability recorded for unredeemed points was approximately $191,000 and $202,000
at December 31, 2007 and 2006, respectively.  These amounts are
reflected in accrued expenses and other current liabilities.




Principles of
Consolidation.  The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.




42
 INDEX


Cash and Cash
Equivalents.  Cash and cash equivalents include cash on
account, demand deposits and certificates of deposit with original maturities of
three months or less at acquisition.  The Company maintains
significant cash balances with financial institutions, which are not covered by
the Federal Deposit Insurance Corporation. The Company has not incurred any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash. Approximately $1.1 million of cash is held in reserve and we
granted the New York State Lottery a security interest in the segregated cash
account used to deposit New York State Lottery’s share of net win in accordance
with the New York State Lottery Rules and Regulations.




Restricted
Cash.  We have three types of restricted cash
accounts.




Under New
York State Racing, Pari-Mutuel Wagering and Breeding Law, Monticello Raceway
Management is obliged to withhold a certain percentage of certain types of
wagers towards the establishment of a pool of money, the use of which is
restricted to the funding of approved capital
improvements.  Periodically during the year, Monticello Raceway
Management petitions the Racing and Wagering Board to certify that the noted
expenditures are eligible for reimbursement from the capital improvement
fund.  The balances in this account were approximately $346,000 and
$239,000 at December 31, 2007 and 2006, respectively.




In April
2005, the New York law governing VGM operations was modified to provide an
increase in the revenues retained by the VGM operator. A portion of that
increase was designated as a reimbursement of marketing expenses incurred by the
VGM operator. The amount of revenues directed toward this reimbursement is
deposited in a bank account under the control of the New York State Lottery and
the VGM operator. The funds are transferred from this account to the operator
upon the approval by the Lottery officials of the reimbursement requests
submitted by the operator. The balances in this account were approximately
$466,000 and $1,076,000 at December 31, 2007 and 2006,
respectively.




In
connection with our revolving credit agreement, we agreed to maintain a
restricted reserve bank account with the lending institution. The balances in
this account were approximately $455,000 and $432,000 at December 31, 2007 and
2006, respectively.




Accounts
Receivable.  Accounts receivable are stated at the amount we
expect to collect. If needed, an allowance for doubtful accounts is recorded
based on information on specific accounts.  In the normal course of
business, we settle wagers for other racetracks and are potentially exposed to
credit risk.  We have not experienced significant losses regarding the
settlement of wagers.  These wagers are included in accounts
receivable.  Account balances are written off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote.




Property and
Equipment.  Property and equipment is stated at cost less
accumulated depreciation. The Company provided for depreciation on property and
equipment used by applying the straight-line method over the following estimated
useful lives:




Assets
            Estimated
              Useful
              LivesVehicles
            5-10
      yearsFurniture,
      fixtures and equipment
            5-10
      yearsLand
      improvements
            20
      yearsBuilding
      improvements
            40
      yearsBuildings
            40
      years





Deferred Financing
Costs.  Deferred financing costs are amortized on the
straight-line method over the term of the related debt.






43
 INDEX




Deferred Development
Costs.  Deferred development costs are recorded at cost. In
connection with our development activities, we may make advances to tribes for
development assistance and to facilitate the establishment and initial
operations of tribal gaming authorities. We also incur costs associated with
development activities,
including salaries of employees engaged in those activities which we capitalize
as deferred development costs. We provide technical assistance, engage and pay
attorneys and consultants and provide other support for our Indian partners in
matters relating to land claims against the State of New York and agreements for
development and operation of the proposed Class III casino developments. We
periodically review deferred development costs for impairment as further
described below.




Impairmentof Long-Lived
Assets.  We periodically review the carrying value of our
long-lived assets in relation to historical results, as well as management's
best estimate of future trends, events and overall business climate. If such
reviews indicate an issue as to whether that the carrying value of such assets
may not be recoverable, we will then estimate the future cash flows generated by
such assets (undiscounted and without interest charges). If such future cash
flows are insufficient to recover the carrying amount of the assets, then
impairment is triggered and the carrying value of any impaired assets would then
be reduced to fair value.




On
January 4, 2008, the BIA announced the denial of the land to trust application
from the St. Regis Mohawk Tribe for the site on which our joint efforts had been
focused. In light of that decision, we determined that the carrying value of our
deferred development costs was likely not recoverable and recorded an impairment
loss for the amounts incurred as of December 31, 2007. The impairment loss
recorded in 2007 is approximately $ 12.8 million.




Loss
Contingencies.  There are times when non-recurring events occur
that require management to consider whether an accrual for a loss contingency is
appropriate. Accruals for loss contingencies typically relate to certain legal
proceedings, customer and other claims and litigation. As required by SFAS
No. 5, we determine whether an accrual for a loss contingency is
appropriate by assessing whether a loss is deemed probable and can be reasonably
estimated. We analyze our legal proceedings and other claims based on available
information to assess potential liability. We develop our views on estimated
losses in consultation with outside counsel handling our defense in these
matters, which involves an analysis of potential results assuming a combination
of litigation and settlement strategies. The adverse resolution of any one or
more of these matters over and above the amounts that have been estimated and
accrued in the current consolidated financial statements could have a material
adverse effect on our business, results of operations and financial
condition.




Loss Per Common
Share.  We compute basic loss per share by dividing loss
applicable to common shares by the weighted-average common shares outstanding
for the year. Diluted loss per share reflects the potential dilution of losses
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the losses of the entity.  Since the effect
of outstanding options and warrants is anti-dilutive with respect to losses,
they have been excluded from our computation of loss per common
share.  Therefore, basic and diluted losses per common share for the
years ended December 31, 2007, 2006 and 2005 are the same amount.




The
following table shows the securities outstanding at December 31, 2007, 2006 and
2005 that could potentially dilute basic earnings per share in the future but
were not included in the calculation of diluted loss per share because their
inclusion would have been anti-dilutive.




Outstanding
      at December 31,2007
            
            
            2006
            
            
            2005Options
            
            
            2,403,000
            
            
            
            3,284,000
            
            
            
            7,786,000Warrants
            
            
            250,000
            
            
            
            250,000
            
            
            
            250,000Shares
      issuable upon conversion of convertible debt
            
            
            5,175,000
            
            
            
            5,175,000
            
            
            
            5,175,000Unvested
      restricted stock
            
            
            ---
            
            
            
            89,000
            
            
            
            175,000Total
            
            
            7,828,000
            
            
            
            8,798,000
            
            
            
            13,386,000





Advertising.  We
record as current operating expense the costs of general advertising, promotion
and marketing programs at the time those costs are incurred. Advertising expense
was approximately $949,000, $1,740,000 and $890,000 for the years ended December
31, 2007, 2006 and 2005, respectively.






44
 INDEX




Income Taxes.We apply the
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases
of assets and liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates for the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




Use of Estimates. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.




Stock-BasedCompensation. Effective
January 1, 2006, we adopted the fair value recognition provisions of Statement
of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), "Share Based
Payment"("SFAS No. 123(R)") using the modified-prospective method. We had
adopted the fair value approach contained in SFAS No. 123 effective January 1,
2003 and we have consistently used the Black-Scholes-Merton formula to estimate
the fair value of stock options granted in the periods since that time. As of
December 31, 2007, there was approximately $655,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under our plans. That cost is expected to be recognized over a period of
3 years. This expected cost does not include the impact of any future
stock-based compensation awards.




Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year
presentation.




Recent Accounting
Pronouncements.




In
October 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. Financial Accounting Standard (“FAS”) 123(R)-5,
Amendment of FSP FAS 123(R)-1, (“FSP FAS123(R)-5”) to address whether a change
to an equity instrument in connection with an equity restructuring should be
considered a modification for the purpose of applying FSP No. FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FAS Statement No 123(R) (“FSP
FAS123(R)-1”).  FSP FAS 123(R)-1 states that financial instruments
issued to employees in exchange for past or future services are subject to the
provisions of SFAS 123(R) unless the terms of the award are modified when the
holder is no longer an employee.  In FSP FAS 123(R)-5, the FASB staff
concluded that changes to the terms of an award that are made solely due to an
equity restructuring are not considered modifications as described in FSP FAS
123(R)-1 unless the fair value of the award increases, anti-dilution provisions
are added, or holders of the same class of equity instruments are treated
unequally.  FSP FAS 123(R)-5 is effective for the first reporting
period beginning after October 10, 2006. The adoption of FSP FAS 123(R)-5
did not have a material impact on our consolidated results of operations,
financial condition and cash flows.




In June
2007, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”)
Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards ("EITF 06-11"). EITF 06-11 requires companies to
recognize the income tax benefit realized from dividends or dividend equivalents
that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to
additional paid-in capital. EITF 06-11 is effective for fiscal years beginning
after September 15, 2007 (fiscal year 2008 for us). The adoption is not
expected to have a material impact on our consolidated results of operations,
financial condition and cash flows.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008.  We are currently evaluating the potential impact,
if any, of the adoption of SFAS No. 141(R) on our consolidated results of
operations, financial condition and cash flows.






45
 INDEX




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. We are
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 160 on our consolidated results of operations, financial condition
and cash flows.




Note
C.  Property and Equipment




Property
and equipment at December 31 consists of:




(in
      thousands)2007
            
            
            2006Land
            
            $
            770
            
            
            $
            770Land
      improvements
            
            
            1,539
            
            
            
            1,510Buildings
            
            
            4,583
            
            
            
            4,583Building
      improvements
            
            
            24,621
            
            
            
            24,513Vehicles
            
            
            137
            
            
            
            140Furniture,
      fixtures and equipment
            
            
            3,150
            
            
            
            2,94934,800
            
            
            
            34,465Less
      – Accumulated depreciation
            
            
            (3,940
            )
            
            
            (2,762
            )$
            30,860
            
            
            $
            31,703





Depreciation
expense was approximately $1,180,000, $1,144,000 and $1,121,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.




The
VGM’s in our facility are owned by the New York State Lottery and, accordingly,
our consolidated financial statements include neither the cost of those devices
nor the depreciation for them.




Note
D.  Deferred Development Costs




We have
made payments to fund certain expenses of the Cayuga Nation of New York (the
“Cayuga Nation”), the Seneca-Cayuga Tribe of Oklahoma (the “Seneca-Cayugas”) and
the St. Regis Mohawk Tribe in connection with the development of proposed Indian
tribal Class III casino facilities. We also incur development costs associated
with other development projects.




We have
been working to develop a Class III casino with various Indian tribes beginning
in 1996.  Our most recent efforts have been in partnership with the
St. Regis Mohawk Tribe focused on a site owned by us adjacent to our Monticello,
New York facility.




We were
advised, however, that on January 4, 2008, the St. Regis Mohawk Tribe received a
letter from James E. Cason of the Bureau of Indian Affairs (the “BIA”) denying
the St. Regis Mohawk Tribe's request to take 29.31 acres into trust for the
purpose of building a Class III gaming facility to be located at Monticello
Gaming and Raceway.  On January 11, 2008, the St. Regis Mohawk Tribe
filed a lawsuit against the United States Department of the Interior, Dirk
Kempthorne, in his official capacity as Secretary of the Interior, James E.
Cason, in his official capacity as Associate Deputy Secretary of the Interior,
and Carl J. Artman, in his official capacity as Associate Secretary of the
Interior for Indian Affairs, in federal district court in New York for
unlawfully rejecting the St. Regis Mohawk Tribe’s application under the Indian
Gaming Regulatory Act of 1988 to place 29.31 acres of land in Sullivan County in
trust for the St. Regis Mohawk Tribe.




46
 INDEX


The St.
Regis Mohawk Gaming Authority failed to establish a closing date by December 31,
2007 for the consummation of the transactions contemplated by the Second Amended
and Restated Land Purchase Agreement by and between St. Regis Mohawk Gaming
Authority and Monticello Raceway Management, dated as of December 1, 2005, as
amended.  As a result, the Second Amended and Restated Land Purchase
Agreement, and related agreements, expired by their terms.  On
February 5, 2008, we notified the St. Regis Mohawk Tribe that as a result of the
BIA decision we were postponing further development efforts, but would continue
to work with the St. Regis Mohawk Tribe with respect to their litigation to
overturn the Secretary of the Interior's decision. On February 6, 2008, the St.
Regis Mohawk Tribe issued a press release accusing us of abandoning the St.
Regis Mohawk Tribe and breaching our gaming agreements with it.  We
issued a press release on February 6, 2008 in which we confirmed that we had not
abandoned the St. Regis Mohawk casino project in Monticello and had no intention
of doing so. On February 13, 2008, the St. Regis Mohawk Tribe issued a press
release stating that they were formally parting ways with us and had notified
local officials and leaders in New York State and Congress, including the
National Indian Gaming Commission (the “NIGC”), of their formal departure from
our proposed project. Additionally, the St. Regis Mohawk Tribe announced on
February 13, 2008 that it had formally withdrawn its federal lawsuit against the
Secretary of the Interior.  On February 14, 2008, three of our
subsidiaries filed for arbitration with the American Arbitration Association
against the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming Authority
seeking declarations as to the effectiveness of each of the
agreements.  On February 20, 2008, however, the St. Regis Mohawk Tribe
announced in a news article that it did not view arbitration as necessary since
it acknowledges that the agreements have expired.




Since
2003, we had been working with the Cayuga Nation of New York to develop and
conduct gaming operations and had entered into agreements which provided for us
to supply technical and financial assistance to the Cayuga Nation of New York
and to serve as its exclusive partner in the development, construction,
financing, operation and management of a proposed Class III casino in the
Monticello area.  The principal agreements were extended in December
2005 to December 31, 2006.  Leadership issues arose within the Cayuga
Nation of New York and we did not attempt to extend the principal agreements
beyond December 31, 2006.




In
accordance with our accounting policy on impairment of long-lived assets, we
reviewed the carrying value of the deferred development costs and determined
that circumstances warranted the recognition of an impairment loss for the years
ended December 31, 2007 and December 31, 2005.




The
following tables reflect activity in the deferred development cost accounts for
the years ended December 31, 2007 and 2006.




Activity
      for the Year
                Ended
      December 31, 2007Balance
                January
      1, 2007
            
            
            Additions
            
            
            Impairment
            
            
            Balance
                December
      31, 2007(in
      thousands)Advances
      to and payments on behalf of the St. Regis Mohawk Tribe:Advances
      for operations of Tribal Gaming Authority
            
            $
            381
            
            
            $
            759
            
            
            $
            (1,140
            )
            
            $
            ---Legal
      fees and other professional fees relating to casino resort
      development
            
            
            1,895
            
            
            
            4,205
            
            
            
            (6,100
            )
            
            
            ---Costs
      specifically associated with site at Raceway
            
            
            5,453
            
            
            
            129
            
            
            
            (5,582
            )
            
            
            ---Total
      development costs
            
            $
            7,729
            
            
            $
            5,093
            
            
            $
            (12,822
            )
            
            $
            ---






47
 INDEX




Activity
      for the Year
                Ended
      December 31, 2006Balance
                  January
      1, 2006
              
              
              Additions
              
              Impairment
              
              
              Balance
                  December
      31, 2006(in
      thousands)Advances
      to and payments on behalf of the St. Regis Mohawk Tribe:Advances
      for operations of Tribal Gaming Authority
              
              $
              67
              
              
              $
              314
              
              
              $
              ---
              
              
              $
              381Legal
      fees and other professional fees relating to casino resort
      development
              
              
              163
              
              
              
              1,732
              
              
              
              ---
              
              
              
              1,895Costs
      specifically associated with site at Raceway
              
              
              5,328
              
              
              
              125
              
              
              
              ---
              
              
              
              5,453Total
      development costs
              
              $
              5,558
              
              
              $
              2,171
              
              
              $
              ---
              
              
              $
              7,729




Note
E.  Accrued Expenses and Other Current Liabilities




Accrued
expenses and other current liabilities is comprised of the following at December
31, 2007 and 2006:




2007
            
            
            2006(in
      thousands)Liability
      for horseracing purses
            
            $
            1,113
            
            
            $
            4,862Accrued
      interest
            
            
            2,167
            
            
            
            2,167Accrued
      payroll
            
            
            716
            
            
            
            710Accrued
      other
            
            
            2,133
            
            
            
            2,197Total
      accrued expenses and other current liabilities
            
            $
            6,129
            
            
            $
            9,936





Note
F.  Senior Convertible Notes




On July
26, 2004, we issued $65 million of 5.5% senior convertible notes (the “notes”)
presently convertible into approximately 5.2 million shares of common stock,
subject to adjustment upon the occurrence or non-occurrence of certain
events.  The notes were issued with a maturity date of July 31, 2014
and the holders have the right to demand that we repurchase the notes at par
plus accrued interest on July 31, 2009.  Interest is payable
semi-annually on January 31 and July 31.




The notes
are our senior obligations, ranking senior in right of payment to all of our
existing and future subordinated indebtedness and ranking equally in right of
payment with existing and future senior indebtedness.  The notes are
guaranteed on a senior basis by all of our material subsidiaries. The guarantee
of each material subsidiary guarantor is a senior obligation of the guarantor,
ranking senior in right of payment to all existing and future subordinated
indebtedness of our guarantors and ranking equally in right of payment with any
existing and future senior indebtedness of such guarantor.  The notes
are secured by our tangible and intangible assets and by a pledge of the equity
interests of each of our material subsidiaries and a mortgage on our property in
Monticello, New York.




The notes
initially accrued interest at an annual rate of 5.5%, subject to the occurrence
of the “Trigger Event”.  Since the events that constitute the “Trigger
Event” have not occurred, the notes have accrued interest from and after July
31, 2005 at an annual rate of 8%.  The interest rate will return to
5.5% upon the occurrence of the Trigger Event. All of the following events must
occur to create the “Trigger Event” under the notes: publication in the Federal
Register of approval by the Secretary of the Interior of a Class III gaming
compact for the Cayuga Catskill Resort; written approval of a gaming facility
management agreement on behalf of the chairman of the National Indian Gaming
Commission; and the land in Monticello, New York to be used for the development
of the Cayuga Catskill Resort having been transferred to the United States in
trust for the Cayuga Nation of New York.




The notes
can be converted into shares of our common stock at any time prior to maturity,
redemption or repurchase.  The initial conversion rate is 72.727
shares per each $1,000 principal amount of notes, subject to
adjustment.  This conversion rate was equivalent to an initial
conversion price of $13.75 per share. Since the Trigger Event did not occur on
or prior to July 31, 2005, the initial conversion rate per each $1,000 principal
amount of notes was reset to $12.56 per share. This rate would result in the
issuance of 5,175,159 shares upon conversion.




48
 INDEX


We
recognized approximately $5.2 million, $5.2 million and $4.3 million in interest
expense associated with the senior convertible notes for the years ended
December 31, 2007, 2006 and 2005, respectively.




Note
G.  Revolving Credit Facility




On
January 11, 2005, we entered into a credit facility with Bank of
Scotland.  The credit facility provides for a $10 million senior
secured revolving loan (subject to certain reserves) that matures on January 11,
2008. As security for borrowings under the facility, we agreed to have our
wholly owned subsidiary, Monticello Raceway Management, grant a mortgage on the
Raceway property and our material subsidiaries guarantee its obligations under
the credit facility.  We also agreed to pledge our equity interests in
all of our current and future subsidiaries, maintain certain reserves, and grant
a first priority secured interest in all of our assets, now owned or later
acquired.  This arrangement contains financial
covenants.  The credit facility also contains an acceleration clause
which states that Bank of Scotland may accelerate the maturity in the event of a
default by the Company.




At our
option, loans under the Credit Facility bore interest at the rate of prime plus
2% or LIBOR plus 4% until the amendment on June 21, 2007. In connection with
this credit facility, the Bank of Scotland has also entered into an
Inter-creditor Agreement with The Bank of New York so that Bank of Scotland will
be entitled to a first priority position notwithstanding the Indenture and
security documents entered into on July 26, 2004 in connection with our issuance
of $65 million of senior convertible notes.




On June
21, 2007, we entered into another amendment to our credit facility with Bank of
Scotland. The amendment, dated as of June 20, 2007, among other things, (i)
extends the maturity date of the loan agreement from January 11, 2008 to January
7, 2009, (ii) amends the interest rates of loans under the credit facility to a
rate of prime plus 1.5% until July 31, 2008 and prime plus 2.0% thereafter or
LIBOR plus 3.5% until July 31, 2008 and LIBOR plus 4.0% thereafter and (iii)
deletes all references to Interest Advances and Line of Credit Cash Collateral
Advances such that the Loan Agreement now provides for total loans of up to $10
million.  In addition, pursuant to this amendment, we are required to
maintain an unrestricted cash balance of an amount that, when added to the
unused balance available under the credit facility, is not less than $5
million.  On March 14, 2008, we entered into an additional amendment
to our credit facility with Bank of Scotland that extends the maturity date of
the loan agreement from January 7, 2009 to May 29, 2009.




At
December 31, 2006, we believed liquidation of the revolving credit facility was
reasonably expected to require the use of existing resources and was classified
as current even though such borrowings were not contractually due until 2008.
Since repayment was not made during 2007, we reclassified the revolving credit
facility at December 31, 2006 as noncurrent according to its contractual
terms.




We
recognized approximately $732,000, $789,000 and $526,000 in interest expense
associated with the facility for the years ended December 31, 2007, 2006 and
2005, respectively. At December 31, 2007, we were in compliance with the
financial covenants contained in our agreement with the Bank of
Scotland.




49
 INDEX


NoteH.  Supplemental Guarantor
Information




As
described in Notes F and G, our obligations with respect to our Senior
Convertible Notes and Revolving Credit Facility are guaranteed by our operating
subsidiaries.




EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONSOLIDATING
      BALANCE SHEETDECEMBER
      31, 2007(
      in thousands) (Unaudited)ASSETS
            
            Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedCash
      and cash equivalents
            
            $
            11,192
            
            
            $
            3,816
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            15,008Restricted
      cash
            
            
            454
            
            
            
            812
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,266Accounts
      receivable
            
            
            ---
            
            
            
            1,401
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,401Prepaid
      expenses and other assets
            
            
            147
            
            
            
            2,820
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,967Investments
      in subsidiaries
            
            
            5,060
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,060
            )
            
            
            ---Inter-company
      accounts
            
            
            147,551
            
            
            
            ---
            
            
            
            ---
            
            
            
            (147,551
            )
            
            
            ---Property
      and equipment, net
            
            
            2
            
            
            
            30,858
            
            
            
            ---
            
            
            
            ---
            
            
            
            30,860Deferred
      financing costs, net
            
            
            2,697
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,697Total
      assets
            
            $
            167,103
            
            
            $
            39,707
            
            
            $
            ---
            
            
            $
            (152,611
            )
            
            $
            54,199LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Accounts
      payable
            
            $
            664
            
            
            $
            2,866
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            3,530Accrued
      expenses and other liabilities
            
            
            2,391
            
            
            
            3,738
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,129Inter-company
      accounts
            
            
            ---
            
            
            
            53,969
            
            
            
            93,582
            
            
            
            (147,551
            )
            
            
            ---Revolving
      credit facility
            
            
            7,617
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,617Senior
      convertible notes
            
            
            65,000
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            65,000Total
      liabilities
            
            
            75,672
            
            
            
            60,573
            
            
            
            93,582
            
            
            
            (147,551
            )
            
            
            82,276Stockholders’
      equity (deficit)
            
            
            91,431
            
            
            
            (20,866
            )
            
            
            (93,582
            )
            
            
            (5,060
            )
            
            
            (28,077
            )Total
      liabilities
              and
      stockholders’ equity (deficit)
            
            $
            167,103
            
            
            $
            39,707
            
            
            $
            ---
            
            
            $
            (152,611
            )
            
            $
            54,199





50
 INDEX





EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONSOLIDATING
      BALANCE SHEETDECEMBER
      31, 2006(in
      thousands) (Unaudited)ASSETS
            
            Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedCash
      and cash equivalents
            
            $
            383
            
            
            $
            9,088
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            9,471Restricted
      cash
            
            
            432
            
            
            
            1,315
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,747Accounts
      receivable
            
            
            ---
            
            
            
            3,802
            
            
            
            ---
            
            
            
            ---
            
            
            
            3,802Prepaid
      expenses and other assets
            
            
            115
            
            
            
            2,881
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,996Investments
      in subsidiaries
            
            
            5,060
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,060
            )
            
            
            ---Inter-company
      accounts
            
            
            146,977
            
            
            
            ---
            
            
            
            ---
            
            
            
            (146,977
            )
            
            
            ---Property
      and equipment, net
            
            
            6
            
            
            
            31,697
            
            
            
            ---
            
            
            
            ---
            
            
            
            31,703Deferred
      financing costs, net
            
            
            3,116
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            3,116Deferred
      development costs
            
            
            125
            
            
            
            7,604
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,729Total
      assets
            
            $
            156,214
            
            
            $
            56,387
            
            
            $
            ---
            
            
            $
            (152,037
            )
            
            $
            60,564LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Accounts
      payable
            
            $
            1,136
            
            
            $
            2,598
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            3,734Accrued
      expenses and other liabilities
            
            
            2,313
            
            
            
            7,623
            
            
            
            ---
            
            
            
            ---
            
            
            
            9,936Inter-company
      accounts
            
            
            ---
            
            
            
            53,395
            
            
            
            93,582
            
            
            
            (146,977
            )
            
            
            ---Revolving
      credit facility
            
            
            7,617
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,617Senior
      convertible notes
            
            
            65,000
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            65,000Total
      liabilities
            
            
            76,066
            
            
            
            63,616
            
            
            
            93,582
            
            
            
            (146,977
            )
            
            
            86,287Stockholders’
      equity (deficit)
            
            
            80,148
            
            
            
            (7,229
            )
            
            
            (93,582
            )
            
            
            (5,060
            )
            
            
            (25,723
            )Total
      liabilities
              and
      stockholders’ equity (deficit)
            
            $
            156,214
            
            
            $
            56,387
            
            
            $
            ---
            
            
            $
            (152,037
            )
            
            $
            60,564








EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSYEAR
      ENDED DECEMBER 31, 2007(in
      thousands) (Unaudited)Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      revenues
            
            $
            ---
            
            
            $
            75,693
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            75,693Operating
      costs
            
            
            ---
            
            
            
            65,760
            
            
            
            ---
            
            
            
            ---
            
            
            
            65,760Selling,
      general and administrative
            
            
            9,562
            
            
            
            5,428
            
            
            
            ---
            
            
            
            ---
            
            
            
            14,990Depreciation
            
            
            4
            
            
            
            1,176
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,180Impairment
      loss - deferred development costs
            
            
            254
            
            
            
            12,568
            
            
            
            ---
            
            
            
            ---
            
            
            
            12,822Total
      costs and expenses
            
            
            9,820
            
            
            
            84,932
            
            
            
            ---
            
            
            
            ---
            
            
            
            94,752Loss
      from operations
            
            
            (9,820
            )
            
            
            (9,239
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (19,059
            )Amortization
      of deferred finance costs
            
            
            (419
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (419
            )Inter-company
      interest and other
            
            
            4,441
            
            
            
            (4,441
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---Interest
      expense
            
            
            (5,932
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,932
            )Interest
      income
            
            
            719
            
            
            
            42
            
            
            
            ---
            
            
            
            ---
            
            
            
            761Net
      loss
            
            $
            (11,011
            )
            
            $
            (13,638
            )
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (24,649
            )





51
 INDEX





EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSYEAR
      ENDED DECEMBER 31, 2006(in
      thousands) (Unaudited)Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      revenues
            
            $
            ---
            
            
            $
            97,871
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            97,871Operating
      costs
            
            
            ---
            
            
            
            79,108
            
            
            
            ---
            
            
            
            ---
            
            
            
            79,108Selling,
      general and administrative
            
            
            12,048
            
            
            
            6,187
            
            
            
            ---
            
            
            
            ---
            
            
            
            18,235Depreciation
            
            
            4
            
            
            
            1,140
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,144Total
      costs and expenses
            
            
            12,052
            
            
            
            86,435
            
            
            
            ---
            
            
            
            ---
            
            
            
            98,487Income
      (loss)  from operations
            
            
            (12,052
            )
            
            
            11,436
            
            
            
            ---
            
            
            
            ---
            
            
            
            (616
            )Amortization
      of deferred finance costs
            
            
            (655
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (655
            )Inter-company
      interest and other
            
            
            4,889
            
            
            
            (4,889
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---Interest
      expense
            
            
            (5,989
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,989
            )Interest
      income
            
            
            21
            
            
            
            163
            
            
            
            ---
            
            
            
            ---
            
            
            
            184Net
      income (loss)
            
            $
            (13,786
            )
            
            $
            6,710
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (7,076
            )








EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSYEAR
      ENDED DECEMBER 31, 2005(in
      thousands) (Unaudited)Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      revenues
            
            $
            ---
            
            
            $
            86,708
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            86,708Operating
      costs
            
            
            ---
            
            
            
            71,174
            
            
            
            ---
            
            
            
            ---
            
            
            
            71,174Selling,
      general and administrative
            
            
            9,201
            
            
            
            4,151
            
            
            
            ---
            
            
            
            ---
            
            
            
            13,352Depreciation
            
            
            2
            
            
            
            1,119
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,121Impairment
      loss - deferred development costs
            
            
            1,712
            
            
            
            12,579
            
            
            
            ---
            
            
            
            ---
            
            
            
            14,291Total
      costs and expenses
            
            
            10,915
            
            
            
            89,023
            
            
            
            ---
            
            
            
            ---
            
            
            
            99,938Loss
      from operations
            
            
            (10,915
            )
            
            
            (2,315
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (13,230
            )Amortization
      of deferred finance costs
            
            
            (575
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (575
            )Inter-company
      interest and other
            
            
            6,012
            
            
            
            (6,012
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---Interest
      expense
            
            
            (4,778
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (4,778
            )Interest
      income
            
            
            16
            
            
            
            40
            
            
            
            ---
            
            
            
            ---
            
            
            
            56Net
      loss
            
            $
            (10,240
            )
            
            $
            (8,287
            )
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (18,527
            )





52
 INDEX





EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSYEAR
      ENDED DECEMBER 31, 2007(in
      thousands) (Unaudited)Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      cash used in operating
              activities
            
            $
            (6,411
            )
            
            $
            (1,001
            )
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (7,412
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            ---
            
            
            
            (339
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (339
            )Restricted
      cash (Racing capital imp.)
            
            
            ---
            
            
            
            (106
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (106
            )Advances
      to Litigation Trust
            
            
            (985
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (985
            )Deferred
      development costs
            
            
            (129
            )
            
            
            (4,402
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (4,531
            )Advances
      to subsidiaries
            
            
            (576
            )
            
            
            ---
            
            
            
            ---
            
            
            
            576
            
            
            
            ---Net
      cash used in investing activities
            
            
            (1,690
            )
            
            
            (4,847
            )
            
            
            ---
            
            
            
            576
            
            
            
            (5,961
            )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
            
            
            18,932
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            18,932Advances
      from Empire Resorts, Inc.
            
            
            ---
            
            
            
            576
            
            
            
            ---
            
            
            
            (576
            )
            
            
            ---Restricted
      cash (revolving credit facility)
            
            
            (22
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (22
            )Net
      cash provided by financing activities
            
            
            18,910
            
            
            
            576
            
            
            
            ---
            
            
            
            (576
            )
            
            
            18,910Net
      increase (decrease) in cash and cash equivalents
            
            
            10,809
            
            
            
            (5,272
            )
            
            
            ---
            
            
            
            ---
            
            
            
            5,537Cash
      and cash equivalents, beginning of year
            
            
            383
            
            
            
            9,088
            
            
            
            
            
            
            
            
            
            
            
            9,471Cash
      and cash equivalents, end of year
            
            $
            11,192
            
            
            $
            3,816
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            15,008





53
 INDEX





EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSYEAR
      ENDED DECEMBER 31, 2006(
      in thousands ) ( Unaudited )Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      cash provided by (used in) operating activities
            
            $
            (5,243
            )
            
            $
            10,508
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            5,265Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            ---
            
            
            
            (320
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (320
            )Restricted
      cash (Racing capital imp.)
            
            
            ---
            
            
            
            (86
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (86
            )Advances
      to Litigation Trust
            
            
            (505
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (505
            )Deferred
      development costs
            
            
            (125
            )
            
            
            (2,238
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (2,363
            )Advances
      to Empire Resorts
            
            
            ---
            
            
            
            (5,133
            )
            
            
            ---
            
            
            
            5,133
            
            
            
            ---Net
      cash used in investing activities
            
            
            (630
            )
            
            
            (7,777
            )
            
            
            ---
            
            
            
            5,133
            
            
            
            (3,274
            )Cash
      flows from financing activities:Proceeds
      from revolving credit facility
            
            
            141
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            141Proceeds
      from exercise of stock options
            
            
            1,166
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,166Deferred
      financing costs
            
            
            (798
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (798
            )Advances
      from subsidiaries
            
            
            5,133
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,133
            )
            
            
            ---Restricted
      cash (revolving credit facility)
            
            
            (21
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (21
            )Net
      cash provided by financing activities
            
            
            5,621
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,133
            )
            
            
            488Net
      increase (decrease) in cash and cash equivalents
            
            
            (252
            )
            
            
            2,731
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,479Cash
      and cash equivalents, beginning of year
            
            
            635
            
            
            
            6,357
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,992Cash
      and cash equivalents, end of year
            
            $
            383
            
            
            $
            9,088
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            9,471





54
 INDEX





EMPIRE
      RESORTS, INC AND SUBSIDIARIESCONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSYEAR
      ENDED DECEMBER 31, 2005( in thousands ) (
      Unaudited )Empire
      Resorts
            
            
            Guarantor
      Subsidiaries
            
            
            Non-Guarantor
      Subsidiaries
            
            
            Eliminating
      Entries
            
            
            ConsolidatedNet
      cash provided by (used in) operating activities
            
            $
            (2,748
            )
            
            $
            1,543
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            (1,205
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (13
            )
            
            
            (1,954
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (1,967
            )Restricted
      cash (Racing capital imp.)
            
            
            ---
            
            
            
            6
            
            
            
            ---
            
            
            
            ---
            
            
            
            6Advances
      to Litigation Trust
            
            
            (505
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (505
            )Deferred
      development costs
            
            
            ---
            
            
            
            (3,309
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (3,309
            )Advances
      to subsidiaries
            
            
            (4,810
            )
            
            
            ---
            
            
            
            ---
            
            
            
            4,810
            
            
            
            ---Net
      cash used in investing activities
            
            
            (5,328
            )
            
            
            (5,257
            )
            
            
            ---
            
            
            
            4,810
            
            
            
            (5,775
            )Cash
      flows from financing activities:Proceeds
      from revolving credit facility
            
            
            7,476
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,476Proceeds
      from exercise of stock options
            
            
            283
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            283Deferred
      financing costs
            
            
            (539
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (539
            )Advances
      from Empire Resorts, Inc.
            
            
            ---
            
            
            
            4,810
            
            
            
            ---
            
            
            
            (4,810
            )
            
            
            ---Restricted
      cash (revolving credit facility)
            
            
            (412
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (412
            )Net
      cash provided by financing activities
            
            
            6,808
            
            
            
            4,810
            
            
            
            ---
            
            
            
            (4,810
            )
            
            
            6,808Net
      increase (decrease) in cash and cash equivalents
            
            
            (1,268
            )
            
            
            1,096
            
            
            
            ---
            
            
            
            ---
            
            
            
            (172
            )Cash
      and cash equivalents, beginning of year
            
            
            1,903
            
            
            
            5,261
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,164Cash
      and cash equivalents, end of year
            
            $
            635
            
            
            $
            6,357
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            6,992





Note
I.  Stockholders’ Equity




Common
Stock




On May
23, 2005 we granted our Chief Executive Officer 261,023 restricted shares of
common stock pursuant to his employment agreement, of which 86,138 shares vested
on August 17, 2005, 86,138 shares vested on May 23, 2006 and 88,747 vested on
May 23, 2007. The expense associated with these issues was approximately
$109,000, $387,000 and $530,000 for the years ended December 31, 2007, 2006 and
2005, respectively.




Preferred
Stock and Dividends




Our
Series B Preferred Stock has voting rights of 0.8 votes per share and each share
is convertible into 0.8 shares of common stock. It has a liquidation value of
$29 per share and is entitled to annual cumulative dividends of $2.90 per share
payable quarterly in cash. We have the right to pay the dividends on an annual
basis by issuing shares of our common stock at the rate of $3.77 per share. The
value of common shares issued as payment is based upon the average closing price
for the common shares for the 20 trading days preceding January 30 of the year
following that for which the dividends are due. At December 31, 2007 and 2006,
there were 44,258 shares of Series B Preferred Shares outstanding.




55
 INDEX


At
December 31, 2007, we had undeclared dividends on the Series B Preferred Stock
of approximately $167,000. On February 25 2008 our Board of Directors authorized
issuance of 117,419 shares of common stock in payment of the amount
due.  The value of these shares when issued was approximately
$261,000.




At
December 31, 2006, we had undeclared dividends on the Series B Preferred Stock
of approximately $167,000. On March 8, 2007, our Board of Directors authorized
the issuance of 18,884 shares of our common stock in payment of the amount due.
The value of these shares when issued was approximately $190,000.




At
December 31, 2005, we had undeclared dividends on the Series B Preferred Stock
of approximately $167,000. On March 8, 2006, our Board of Directors authorized
the issuance of 23,103 shares of our common stock in payment of the amount due.
The value of these shares when issued was approximately $98,000.




Our
Series E Preferred Stock is non-convertible and has no fixed date for redemption
or liquidation. It has a redemption value of $10 per share plus accrued but
unpaid dividends. It is entitled to cumulative dividends at the annual rate of
8% of redemption value and the holders of these shares are entitled to voting
rights of 0.25 per share. Dividends on common stock and certain other uses of
our cash are subject to restrictions for the benefit of holders of the Series E
Preferred Stock.




At
December 31, 2007, we had cumulative undeclared dividends on our Series E
Preferred Stock of approximately $7.0 million.




Note
J.  Stock Options and Warrants




On August
17, 2005 our shareholders approved the 2005 Equity Incentive Plan. We have
reserved 3.5 million shares of common stock for issuance in connection with this
plan.




On May
12, 2004 our shareholders approved the 2004 Stock Option Plan. We have reserved
250,000 shares of common stock for issuance in connection with this
plan.




On May
23, 2005 we granted one year extensions of the expiration dates of options to
purchase 598,878 shares of common stock held by our former Chief Executive
Officer and two other officers who resigned their positions at that time. The
original terms of those options provided for an expiration date 90 days after
such an event. The options involved had been issued in 2003 and have a strike
price of $2.12. We recorded stock based compensation expense associated with
this action of approximately $234,000 in 2005.




On
November 12, 2004 we granted an option to purchase, under certain conditions,
5,188,913 shares of our common stock at $7.50 per share to entities with whom we
had reached a merger and contribution agreement. The grant became effective on
August 20, 2005. On December 30, 2005 we reached an agreement with those
entities to terminate the agreement. The options expired on December 29, 2006
and we recorded the value of those options at the effective date (approximately
$1.7 million) as stock based compensation, which was included in the write off
of deferred development costs for the year ended December 31,
2005.  On December 28, 2006 the grantee elected to exercise 2.5
million of the options pursuant to this agreement and we agreed that receipt of
the option purchase price be no later than January 31, 2007. Also on December
28, 2006, we modified the agreement to extend the expiration date for 1.0
million of the original options to December 27, 2007 and to let expire the
balance of 1,688,913 of the options granted on November 12, 2004. In January
2007, we received proceeds of $18.75 million for the option purchase price as
mentioned above. Stock based compensation expense for the year ended December
31, 2006 includes approximately $3.5 million in expense for this
extension.




Stock-based
compensation expense totaled approximately $3,363,000, $7,401,000 and $4,309,000
for the years ended December 31, 2007, 2006 and 2005, respectively.




During
the years ended December 31, 2007, 2006 and 2005 we received approximately
$18,932,000, $1,166,000 and $283,000, respectively, of proceeds from shares of
common stock issued as a result of the exercise of stock options.  We
issued approximately 2,546,000, 507,000 and 133,000 shares of common stock as a
result of these exercises.




56
 INDEX


The
following table sets forth the weighted average assumptions used in applying the
Black Sholes option pricing model to the option grants in 2007, 2006 and
2005.




2007
            2006
            2005Weighted
      average fair value of options granted
            $7.35
            $5.19
            $
      6.81Expected
      dividend yield
            0
      %
            0
      %
            0
      %Expected
      volatility
            82.4%
      - 85.1%
            89.5%
      - 96.2%
            91.1%
      - 100.3%Risk
      – free interest rate
            4.1%
      - 4.9%
            4.7%
      - 4.9%
            3.7%
      - 4.5%Expected
      life of options
            9 -
      10 years
            10
      years
            0.5
      – 10 years





The
following table reflects stock option activity in 2007, 2006 and
2005.




Approximate
              number
      of
              shares
            Range
      of exercise
              prices per
      share
            Weighted
      average
              exercise
              price per
      shareOptions
      outstanding at January 1, 2005
            1,028,000
            
            $
      5.00Granted
      in 2005
            6,913,000
            $3.93
      - $8.51
            $
      6.81Exercised
      in 2005
            (134,000)
            $2.12
            $2.12Cancelled
      in 2005
            (21,000)
            $14.25
            $14.25Options
      outstanding at December 31, 2005
            7,786,000
            
            $
      6.63Granted
      in 2006
            245,000
            $4.26
      - $5.53
            $5.19Exercised
      in 2006
            (3,007,000)
            $2.12
      - $7.50
            $6.62Cancelled
      in 2006
            (1,740,000)
            $2.12
      - $11.97
            $7.51Options
      outstanding at December 31, 2006
            3,284,000
            
            $
      6.06Granted
      in 2007
            385,000
            $
      4.53 - $8.74
            $
      7.35Exercised
      in 2007
            (47,000)
            $
      2.12 - $ 6.75
            $
      3.90Cancelled
      in 2007
            (1,219,000)
            $
      2.12 - $ 14.25
            $
      7.57Options
      outstanding at December 31, 2007
            2,403,000
            
            $
5.54





57
 INDEX


The
following table reflects information on stock options outstanding at December
31, 2007.




Options
      Outstanding
            
            
            Options
      ExercisableExercise
      Price
            
            
            Number
      of Shares
            
            
            Average
      Contractual Life
            
            
            Weighted
      Average Exercise Price
            
            
            Number
      of Shares
            
            
            Weighted
      Average Exercise Price$
            2.12
            
            
            
            29,800
            
            
            
            3.0
            
            
            $
            2.12
            
            
            
            29,800
            
            
            $
            2.12$
            4.40
            
            
            
            5,500
            
            
            
            1.5
            
            
            $
            4.40
            
            
            
            5,500
            
            
            $
            4.40$
            7.00
            
            
            
            45,000
            
            
            
            4.6
            
            
            $
            7.00
            
            
            
            45,000
            
            
            $
            7.00$
            11.97
            
            
            
            40,000
            
            
            
            6.2
            
            
            $
            11.97
            
            
            
            40,000
            
            
            $
            11.97$
            14.25
            
            
            
            71,500
            
            
            
            6.4
            
            
            $
            14.25
            
            
            
            71,500
            
            
            $
            14.25$
            8.63
            
            
            
            10,000
            
            
            
            6.6
            
            
            $
            8.63
            
            
            
            10,000
            
            
            $
            8.63$
            8.51
            
            
            
            40,000
            
            
            
            2.0
            
            
            $
            8.51
            
            
            
            40,000
            
            
            $
            8.51$
            8.26
            
            
            
            30,000
            
            
            
            7.2
            
            
            $
            8.26
            
            
            
            30,000
            
            
            $
            8.26$
            3.99
            
            
            
            1,214,092
            
            
            
            7.4
            
            
            $
            3.99
            
            
            
            1,214,092
            
            
            $
            3.99$
            4.02
            
            
            
            15,000
            
            
            
            7.6
            
            
            $
            4.02
            
            
            
            15,000
            
            
            $
            4.02$
            3.93
            
            
            
            35,000
            
            
            
            7.6
            
            
            $
            3.93
            
            
            
            35,000
            
            
            $
            3.93$
            5.10
            
            
            
            15,000
            
            
            
            7.9
            
            
            $
            5.10
            
            
            
            15,000
            
            
            $
            5.10$
            6.75
            
            
            
            259,100
            
            
            
            8.0
            
            
            $
            6.75
            
            
            
            172,733
            
            
            $
            6.75$
            4.26
            
            
            
            55,000
            
            
            
            8.2
            
            
            $
            4.26
            
            
            
            55,000
            
            
            $
            4.26$
            5.53
            
            
            
            163,334
            
            
            
            8.6
            
            
            $
            5.53
            
            
            
            96,667
            
            
            $
            5.53$
            8.74
            
            
            
            65,000
            
            
            
            9.1
            
            
            $
            8.74
            
            
            
            50,000
            
            
            $
            8.74$
            7.40
            
            
            
            240,000
            
            
            
            9.4
            
            
            $
            7.40
            
            
            
            121,667
            
            
            $
            7.40$
            5.25
            
            
            
            25,000
            
            
            
            9.6
            
            
            $
            5.25
            
            
            
            25,000
            
            
            $
            5.25$
            4.53
            
            
            
            30,000
            
            
            
            9.6
            
            
            $
            4.53
            
            
            
            30,000
            
            
            $
            4.53$
            8.74
            
            
            
            15,000
            
            
            
            9.0
            
            
            $
            8.74
            
            
            
            15,000
            
            
            $
            8.742,403,326
            
            
            
            
            
            
            $
            5.54
            
            
            
            2,116,959
            
            
            $
            5.37





Note
K.  Income Taxes




The
Company and all of its subsidiaries file a consolidated income tax return. At
December 31, 2007 and 2006, the estimated Company’s deferred income tax assets
and liability were comprised of the following:




2007
            
            
            2006(in thousands)Deferred tax assets:Net
      operating loss carry forwards
            
            
            59,903
            
            
            $
            50,447Stock
      – based compensation
            
            
            1,384
            
            
            
            242Allowance
      for doubtful accounts – Litigation Trust
            
            
            1,100
            
            
            
            667Contributions
            
            
            113
            
            
            
            96Depreciation
            
            
            2
            
            
            
            ---62,502
            
            
            
            51,452Deferred
      tax liabilities:Depreciation
            
            
            ---
            
            
            
            (168
            )Net
      deferred tax assets
            
            
            62,502
            
            
            
            51,284Valuation
      allowance
            
            
            (62,502
            )
            
            
            (51,284
            )Deferred
      tax assets, net
            
            $
            ----
            
            
            $
            ----





58
 INDEX


The
following is a reconciliation of the federal statutory tax rate to our effective
tax rate:




Year ended December 31,2007
            
            
            2006
            
            
            2005Tax
      provision at federal statutory tax rate
            
            
            35.0
            %
            
            
            35.0
            %
            
            
            35.0
            %State
      income taxes, net
            
            
            9.0
            %
            
            
            9.0
            %
            
            
            9.0
            %Permanent
      items
            
            
            1.5
            %
            
            
            29.9
            %
            
            
            1.2
            %Change
      in valuation allowance
            
            
            (45.5
            )%
            
            
            (73.9
            )%
            
            
            (45.2
            )%Effective
      tax rate
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %







There are
limits on our ability to use our current net operating loss carry forwards,
potentially increasing future tax liability.  As of December 31, 2007,
we had net operating loss carry forwards of approximately $136 million that
expire between 2008 and 2027.   The 2004 merger of our operations
with Catskills Development LLC, however, will not permit us to use the entire
amount of the net operating losses due to the change in control of the
Company.  A limited amount of the net operating loss carry-forward may
be applied in future years based upon the change of control and existing income
tax laws.




In
June 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements.  The interpretation
prescribes a recognition threshold and measurement attribute criteria for the
financial statement recognition and measurement of an uncertain tax position
taken or expected to be taken in a tax return.  The interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted the
provisions of FIN 48 and FASB Staff Position No. FIN 48-1 on January 1,
2007.  The implementation of FIN 48 did not have a material impact on
our consolidated financial statements.





As of
December 31, 2007, we do not have any uncertain tax positions under FIN 48. As a
result, there are no unrecognized tax benefits as of December 31, 2007. If we
were to incur any interest and penalties in connection with income tax
deficiencies, we would classify interest in the "interest expense" category and
classify penalties in the "non-interest expense" category within the
consolidated statements of operations.





We
file tax returns in the U.S. federal jurisdiction and in various states. All of
our federal and state tax filings as of December 31, 2006 have been timely
filed.  We are subject to U.S. federal or state income tax
examinations by tax authorities for years after 2003.  During the
periods open to examination, we have net operating loss and tax credit
carry forwards that have attributes from closed periods. Since these net
operating loss and tax credit carry forwards may be utilized
in future periods, they remain subject to examination.




Note
L. Concentration




One
debtor, New York Off-track Betting Corporation (“OTB”), represented
approximately 39% and 58% of the total outstanding accounts receivable as of
December 31, 2007 and 2006, respectively.




Note
M. Employee Benefit Plan




Our
eligible employees may participate in a Company-sponsored 401(k) benefit plan.
This Plan covers substantially all employees not eligible for plans resulting
from collective bargaining agreements and permits employees to defer up to 15%
of their salary up to statutory maximums. The plan also provides for matching
contributions by us of up to 100% of salary deferrals that do not exceed 3% of
compensation plus 50% of salary deferrals between 3% and 5% of compensation. Our
matching contributions for the year ended December 31, 2007 were approximately
$213,000. The plan became effective on August 1, 2006 and the matching
contributions for the year
ended December 31, 2006 were approximately $136,000. As of December 31, 2007,
119 employees participated in the plan.




59
 INDEX




Note
N.  Commitments and Contingencies




Legal
Proceedings.




The
Monticello Harness Horsemen’s Association, Inc. (“Horsemen”, “Horsemen’s
Association”) has brought multiple actions against our subsidiary, Monticello
Raceway Management, Inc.




Monticello
Harness Horsemen’s Association v. Monticello Raceway Management, State of New
York, Supreme Court, Sullivan County Index No.: 1750/03: This is an action
brought by the Horsemen’s Association of Monticello Raceway against Monticello
Raceway Management, Inc.  The claim is that the barn area at
Monticello Gaming and Raceway has been reduced in size and there are less
available stalls for Horsemen at the track than in prior years.  An
additional claim is that some of the Horsemen who are no longer eligible for
stall use due to consolidation of the barn area were discriminated against by
reason of their membership in the Horsemen’s Association.  The action
was commenced July 31, 2003, and the plaintiff obtained a temporary restraining
order upon commencement of the action.  The temporary restraining
order was dismissed and an injunction denied to the Horsemen after a hearing
which was held the following week and the case had not been pursued further by
the plaintiff, although it is still pending.  The consolidation of the
barn area at Monticello Gaming and Raceway was completed.




Monticello
Harness Horsemen’s Association v. Monticello Raceway Management, Supreme Court,
State of New York, Sullivan County Index Numbers: 1765/03 and
2624/03:  These are consolidated actions brought by the Horsemen’s
Association seeking damages for alleged underpayment of purses due to the
Horsemen from various raceway revenue sources.  These actions were
commenced respectively on September 30, 2003 and December 12,
2003.  The actions were consolidated by order of the Sullivan County
Supreme Court in November 2004.  One case alleges that certain monies
designated by contract for the Horsemen’s overnight purses were used to fund a
special racing series at Monticello Gaming and Raceway.  That portion
of the claim seeks a recoupment of approximately $60,000 in purse
monies.  That action also seeks control by the Horsemen of the setting
of purses as opposed to Monticello Gaming and Raceway.  The second
action which was consolidated with the first action involves a claim that the
Horsemen’s purse account has not been properly credited with various
simulcasting revenues and that there were deductions from the Horsemen’s purse
account for simulcast expenses which the plaintiff claims were not authorized by
the parties’ contract.  That complaint seeks approximately $2.0
million in compensatory damages and a similar amount in punitive
damages.  During 2007, we were successful in having a third cause of
action dismissed from the complaint, which cause of action sought control of the
purse account by the Horseman’s Association.  The plaintiff amended
its complaint in 2007 to add a new cause of action seeking approximately $1.4
million in additional damages.  The basis of that claim is that we,
for a period of time in 2005 after the parties’ last written contract had
expired, paid purses to the Horsemen in an amount less than the parties’ written
contract required.  The plaintiff claims that the last written
contract between the parties, which expired by its terms on May 31, 2004, was
agreed between the parties to remain in full force and effect until a new
contract agreement was reached.  Our position is that the contract was
no longer in effect, that there was no agreement to extend the contract terms
until a new contract was in place, and that the setting of the purses at lower
levels during the subject period of time was solely in the our management’s
discretion and not violative of any contract provisions.  This
consolidated action is pending.  There has been extensive exchange of
documentary evidence and there will be further discovery proceedings in light of
the amended claim interposed in 2007. It is anticipated that there will be
depositions conducted in 2008.




On June
15, 2005, various Article 78 proceedings were commenced by the OTBs against the
New York State Racing and Wagering Board, Monticello Gaming and Raceway and
Yonkers Raceway seeking the return to the OTBs of various racing revenues
previously paid by the OTBs to Monticello Gaming and Raceway and Yonkers
Raceway, more commonly known in the industry as “dark day monies” and
out-of-state OTB commissions.  Dark day monies are revenue received
from OTBs when racing is held at Monticello Gaming and Raceway and thoroughbred
racing facilities are closed.All
of the petitions have been consolidated into one proceeding now pending in the
New York State Supreme Court Albany




60
 INDEX


County.  The
approximate amount of reimbursement which the OTBs are seeking from Monticello
Gaming and Raceway, as prosecuted, is in excess of $4.0 million together with
ongoing payments which the OTBs are making to Monticello Gaming and Raceway as
per the direction and rulings of the New York State Racing and Wagering
Board.  In September 2006, a favorable outcome was achieved when the
combined petition was dismissed.  In November 2007, however, the
Appellate Division – Third Department of the New York State Supreme Court
essentially reversed the September 2006 decision as to dark day monies and
out-of-state OTB commissions (“OTB Appellate Decision”).  The
practical result of this reversal is that OTBs are no longer responsible to pay
dark day monies to Monticello Gaming and Raceway or Yonkers Raceway and will
have to pay a lesser amount of out-of-state OTB commissions to the
tracks.  The approximate amount of the revenue shortfall to us going
forward for the fiscal year ending 2008 is estimated to be approximately $1.5
million.  There is presently pending a motion for leave to appeal the
OTB Appellate Decision to the New York State Court of Appeals, which motion was
brought jointly by the New York State Racing and Wagering Board, Monticello
Raceway, Yonkers Raceway and Saratoga Raceway.  Until that motion for
leave to appeal is decided, there is no further activity in any OTB
litigation.  If the Court of Appeals grants leave to hear the appeal,
the matter is not expected to be decided for approximately 12 to 18 months,
during which time there is not expected to be any further action on behalf of
the OTBs to recoup prior dark day monies.  In the event the OTB
Appellate Decision is not overturned on appeal, the OTBs will have to bring a
separate lawsuit claiming entitlement to recoupment of past dark day
monies.  It is possible that such a lawsuit may seek up to $15 million
plus interest.  Any such litigation will be vigorously contested upon
the grounds that there has been no unjust enrichment of Monticello Raceway since
the OTBs voluntarily paid those amounts and there was a general understanding in
the industry that according to statute they were required to pay the dark day
monies to all of their regional tracks.  It is estimated that there
would be no final judgment on any separate action to recoup past payments
brought by the OTBs for at least 24 to 36 months after commencement of such
action.  No provision has been made for this contingent
liability.




In August
2006, the New York State Racing and Wagering Board issued an arbitrator’s award
defining the contract terms between Monticello Gaming and Raceway and the
Horsemen’s Association.  In December 2006, the Sullivan County Supreme
Court granted our petition for modification of the award to strike the provision
that we establish an escrow account for the payment of horsemen’s
purses.  However, the Horsemen’s Association has appealed that
decision to the Third Department Appellate Division.  In October 2007,
the Appellate Division denied the Horsemen’s appeal.




We
believe that the resolution of the claims listed above will not have a material
and adverse effect on our consolidated financial position, results of operations
or cash flows.




We are a
party from time to time to various other legal actions that arise in the normal
course of business.  In the opinion of management, the resolution of
these other matters will not have a material and adverse effect on our
consolidated financial position, results of operations or cash
flows.




Litigation Trust. On January
12, 2004, in order to better focus on the development of a VGM facility at the
Raceway and current business, all interests of the plaintiffs, including any
interest of the Empire, with respect to litigation against Caesars
Entertainment, Inc. were transferred to a liquidating Litigation
Trust.  We agreed to provide the Litigation Trust with a $2.5 million
line of credit.  For the year ended December 31, 2007, we made
advances to the Trust of $985,000 under the line of credit. In the years ended
December 31, 2006 and 2005, we made advances to the Trust of $505,000 under the
line of credit.  Due to the unpredictable nature of the litigation, in
each of those years, we provided for a valuation allowance against the
receivable from the Litigation Trust equal to the total amount of the advances.
If the Litigation Trust receives a settlement, we are entitled to recover our
advances of $2.5 million plus $7.5 million.




Note
O.  Subsequent Events




We were
advised, that on January 4, 2008, the St. Regis Mohawk Tribe received a letter
from James E. Cason of the BIA denying the St. Regis Mohawk Tribe's request to
take 29.31 acres into trust for the purpose of building a Class III gaming
facility to be located at Monticello Gaming and Raceway, in accordance with the
Indian Gaming Regulatory Act of 1988, as amended.  The request was
denied based upon regulations promulgated under the Indian Gaming Regulatory Act
of 1988, as amended, relating to the need of the St. Regis Mohawk Tribe for
additional land, the purposes for which the land would be used, and the distance
of the land from the St. Regis Mohawk Tribe’s reservation.  In
addition, our agreements
with the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming Authority
expired by their terms on December 31, 2007.  On February 14, 2008,
three of our subsidiaries filed for arbitration with the American Arbitration
Association against the St. Regis Mohawk Tribe and the St. Regis Mohawk Gaming
Authority seeking declarations as to the effectiveness of each of the
agreements.




61
 INDEX




On
February 25, 2008, our Board of Directors authorized the issuance of 117,419
shares of our common stock in payment of dividends on our Series B Preferred
Stock for 2007. The value of these shares when issued was approximately
$261,000.




On March
14, 2008, we entered into an amendment to our credit facility with Bank of
Scotland that extends the maturity date of the loan agreement from January 7,
2009 to May 29, 2009.




Note
P.  Unaudited Quarterly Data (in thousands)




First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              Quarter2007Net
      revenue
            
            $
            18,229
            
            
            $
            19,609
            
            
            $
            22,463
            
            
            $
            15,392Net
      loss
            
            
            (4,251
            )
            
            
            (3,274
            )
            
            
            (2,153
            )
            
            
            (14,971
            )Net
      loss applicable to common shares
            
            
            (4,639
            )
            
            
            (3,662
            )
            
            
            (2,541
            )
            
            
            (15,358
            )Net
      loss per common share, basic and diluted
            
            
            (0.16
            )
            
            
            (0.12
            )
            
            
            (0.09
            )
            
            
            (0.52
            )2006Net
      revenue
            
            $
            22,639
            
            
            $
            25,846
            
            
            $
            28,660
            
            
            $
            20,726Net
      income (loss)
            
            
            (1,796
            )
            
            
            (386
            )
            
            
            191
            
            
            
            (5,085
            )Net
      loss applicable to common shares
            
            
            (2,184
            )
            
            
            (774
            )
            
            
            (197
            )
            
            
            (5,472
            )Net
      loss per common share, basic and diluted
            
            
            (0.08
            )
            
            
            (0.03
            )
            
            
            (0.01
            )
            
            
            (0.20
            )2005Total
      revenue
            
            $
            16,683
            
            
            $
            21,935
            
            
            $
            25,631
            
            
            $
            22,459Net
      loss
            
            
            (2,858
            )
            
            
            (2,758
            )
            
            
            (1,194
            )
            
            
            (11,717
            )Net
      loss applicable to common shares
            
            
            (3,246
            )
            
            
            (3,146
            )
            
            
            (1,582
            )
            
            
            (12,104
            )Net
      loss per common share, basic and diluted
            
            
            (0.12
            )
            
            
            (0.12
            )
            
            
            (0.06
            )
            
            
            (0.47
            )





Item 9.
            Changes In and Disagreements
      With Accountants on Accounting and Financial
      Disclosure.




None.




Item 9A.
            Controls
      and Procedures.




We
carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act
of 1934 under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Empire Resorts, Inc.’s “disclosure
controls and procedures” and “internal control over financial reporting” as of
the end of the period covered by this Annual Report.




62
 INDEX





The
evaluation of Empire Resorts, Inc.’s disclosure controls and procedures and
internal control over financial reporting included a review of our objectives
and processes, implementation by us and the effect on the information generated
for use in this Annual Report.  In the course of this evaluation and
in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to
identify material weaknesses in our controls, to determine whether we had
identified any acts of fraud involving personnel who have a significant role in




Because
of inherent limitations, disclosure controls and procedures and internal control
over financial reporting may not prevent or detect misstatements.  In
addition, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or procedures may
deteriorate.  Management applies its judgment in assessing the
benefits of controls relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected.  The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.




Disclosure
Controls and Procedures




Disclosure
controls and procedures are designed with the objective of ensuring that (i)
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC and (ii) information is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures. Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are effective.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those
policies and procedures that (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit the preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of the our management and directors; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on
the financial statements. Based on our evaluation under the framework in
Internal Control - Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2007




Additionally,
Friedman LLP, an independent registered public accounting firm has issued an
attestation report on the Company’s internal control over financial reporting as
of December 31, 2007.  This report is included in Item 8 of this
Annual Report on Form 10-K.




Item 9B.
            Other
      Information.




None.




63
 INDEX


PART III




Item 10.
            Directors
      and Executive Officers of the
Registrant.




Directors
and Executive Officers




Our
directors and executive officers are as follows:




Name
            Age
            PositionJohn
      Sharpe
            65
            Chairman
      of the Board(1)David
      P. Hanlon
            63
            Chief
      Executive Officer, President and Director(2)Paul
      A. deBary
            61
            Director(1)Ralph
      J. Bernstein
            50
            Director(1)Robert
      H. Friedman
            55
            Director(2)Frank
      Catania
            66
            Director(3)Richard
      Robbins
            67
            Director(2)James
      Simon
            61
            Director(3)Ronald
      J. Radcliffe
            64
            Chief
      Financial OfficerThomas
      W. Aro
            65
            Chief
      Operating OfficerHilda
      Manuel
            57
            Senior
      V.P. for Native American Affairs and Chief Compliance
    OfficerClifford
      A. Ehrlich
            48
            Executive
      Vice President and General ManagerCharles
      Degliomini
            49
            Senior
      V.P. – Government Relations and Corporate
  Communications







(1)
            Class
      I Director




(2)
            Class
      II Director




(3)
            Class
      III Director




In
January 2004, we amended our certificate of incorporation and bylaws to create a
staggered board of directors.  The amendment provided for the creation
of three classes of directors, as nearly equal in size as
possible.  Upon their initial election, Class I directors were to hold
office for a term expiring in one year, at the 2004 annual meeting of
stockholders; Class II directors were to hold office for a term expiring in two
years, at the 2005 annual meeting of stockholders; and Class III directors were
to hold office for a term expiring in three years, at the 2006 annual meeting of
stockholders.  Commencing at the 2004 annual meeting of stockholders,
the stockholders would elect only one class of directors each year, beginning
with Class I directors, with each director so elected holding office for a term
of three years.  The initial Class I, Class II and Class III directors
were selected in January 2004, concurrently with the adoption of this amendment,
and the Class I directors were all reelected at the 2004 annual stockholders
meeting in May 2004.




The
business experience of each or our directors and executive officers is as
follows:




John Sharpe. John Sharpe, 65,
is our Chairman of the Board of Directors. Most recently, Mr. Sharpe served as
President and Chief Operating Officer of Four Seasons Hotels & Resorts, from
which he retired in 1999 after 23 years of service.  During his tenure
at Four Seasons, the world’s largest operator of luxury hotels, Mr. Sharpe
directed worldwide hotel operations, marketing and human resources, and helped
create Four Seasons’ renowned reputation for the highest level of service in the
worldwide hospitality industry. In 1999, Mr. Sharpe was bestowed with the
“Corporate Hotelier of the World” award by Hotels Magazine, Inc. Mr. Sharpe also
received the “Silver Plate” award from the International Food Manufacturers
Association, and the “Gold Award” from the Ontario Hostelry
Institute.  Mr. Sharpe graduated with a B.S. in hotel administration
from Cornell University and is a former trustee of the Culinary Institute of
America, and former chair of the Industry Advisory Council at the Cornell Hotel
School.  Mr. Sharpe previously served as executive-in-residence,
School of Hotel Administration, Cornell University; chair, board of governors,
Ryerson University, Toronto, Canada, and co-chair, American Hotel Foundation,
Washington, D.C.  Mr. Sharpe has served as a director since August
2003 and became Chairman of the Board in May 2005.




64
 INDEX


David P.
Hanlon.  David P. Hanlon, 63, is currently our Company’s Chief
Executive Officer and President and a member of the Board of
Directors.  He previously served as Vice Chairman of the Board and has
been a director since 2003. Since October 2006, Mr. Hanlon has also served as a
director for RemoteMDx, Inc., a company that markets and sells patented wireless
location technologies and related monitoring services.  Prior to
starting his own gaming consulting business in 2000, in which he advised a
number of Indian and international gaming ventures, Mr. Hanlon was President and
Chief Operating Officer of Rio Suites Hotel & Casino from 1996-1999, a
period in which the Rio Suites Hotel & Casino underwent a major
expansion.  From 1994-1995, Mr. Hanlon served as President and Chief
Executive Officer of International Game Technology, the world’s leading
manufacturer of microprocessor gaming machines.  From 1988-1993, Mr.
Hanlon served as President and Chief Executive Officer of Merv Griffin’s Resorts
International, and prior to that, Mr. Hanlon served as President of Harrah’s
Atlantic City (Harrah’s Marina and Trump Plaza).  Mr. Hanlon’s
education includes a B.S. in Hotel Administration from Cornell University, an
M.S. in Accounting, an M.B.A. in Finance from the Wharton School, University of
Pennsylvania, and he completed the Advanced Management Program at the Harvard
Business School.




Paul A. deBary. Paul A.
deBary, 61, is a managing director at Marquette deBary Co., Inc., a New York
based broker-dealer, where he serves as a financial advisor for state and local
government agencies, public and private corporations and non-profit
organizations. Prior to assuming his current position, Mr. deBary was a managing
director in the Public Finance Department of Prudential Securities from 1994 to
1997. Mr. deBary was also a partner in the law firm of Hawkins, Delafield &
Wood in New York from 1975 to 1994. Mr. deBary received an AB in 1968, and an
M.B.A. and J.D. in 1971 from Columbia University.  Mr. deBary is a
member of the American Bar Association, the New York State Bar Association, the
Association of the Bar of the City of New York and the National Association of
Bond Lawyers.  Mr. deBary is also a member of the Board of Managers of
Teleoptic Digital Imaging, LLC, and serves as a director of several non-profit
organizations, including New Neighborhoods, Inc., AA Alumni Foundation and the
Society of Columbia Graduates.  Mr. deBary also serves as Chairman of
the Board of Ethics of the Town of Greenwich, Connecticut.  Mr. deBary
has served as a director since March 2002.




Ralph J. Bernstein. Ralph J.
Bernstein, 50, is a co-founder and general partner of Americas Partners, an
investment firm.  Mr. Bernstein also serves as a director for Air
Methods Corporation.  Mr. Bernstein received a B.A. in economics from
the University of California at Davis. Mr. Bernstein has served as a director
since August 2003.




Robert H. Friedman. Robert H.
Friedman, 55, has served as our Secretary since May 2004. Mr. Friedman has been
a partner at Olshan Grundman Frome Rosenzweig & Wolosky LLP, a New York City
law firm, since August 1992. Prior to that time and since September 1983 he was
associated with Cahill Gordon & Reindel, also a New York City law firm. Mr.
Friedman specializes in corporate and securities law matters.  Mr.
Friedman received his B.A. and J.D. degrees from Rutgers
University.  Mr. Friedman became a director in July 2005.




Frank Catania. Frank Catania,
66, has been a principal at Catania Consulting Group and a lawyer at Catania
& Associates since January 1999. Prior to this, he was the assistant
attorney general and director of New Jersey’s Division of Gaming Enforcement, a
position he took in 1994. Mr. Catania was a managing partner at the law offices
of Catania & Harrington up until that time and was engaged in all aspects of
civil and criminal litigation, real estate transactions, and corporate
representation. He was also elected and served as the assemblyman for New
Jersey’s 35th Legislative District from 1990 through 1994. Mr. Catania is
currently a member of the International Masters of Gaming Law association and
was chairman of the International Association of Gaming Regulators from 1998 to
1999. He has a J.D. from Seton Hall University School of Law and a B.A. from
Rutgers College. Mr. Catania became a director in November 2005.




Richard
Robbins.  Richard L. Robbins, 67, served from October 2003
through January 2004 as Senior Vice President, Financial Reporting of Footstar,
Inc., a nationwide retailer of footwear.  He was Senior Vice President
Financial Reporting and Control and Principal Financial Officer of Footstar,
Inc. from January 2004 until March 2006. Footstar, Inc. filed for bankruptcy
protection in March 2004 and emerged from bankruptcy in February 2006. From July
2002 to October 2003, Mr. Robbins was a partner in Robbins Consulting LLP, a
financial, strategic and management consulting firm. From 1978 to 2002, Mr.
Robbins was a partner of Arthur Andersen LLP. Mr. Robbins is currently a member
of the board of directors of BioScrip, Inc., a community pharmacy and specialty
drug company and of Vital Signs, Inc., a manufacturer of medical
products.  Mr. Robbins became a director in August
2007.


65
 INDEX




James Simon.  James
Simon, 61, has served as President and Chief Executive Officer of J. Simon &
Associates Inc., a management and marketing consulting firm, since
1992.  He has also served as President and Chief Executive Officer of
Strategic Marketing Consultants, Inc., a management and marketing consulting
firm that he co-founded in 1994.  Mr. Simon has a BGS undergraduate
degree from University of Nebraska and an MS graduate degree from University of
Kansas.  Mr. Simon became a director in August 2007.





Ronald J. Radcliffe. Ronald J.
Radcliffe, 64, joined us as our Chief Financial Officer in May 2005. Mr.
Radcliffe was previously Chief Financial Officer, Treasurer and Vice President
of the Rio Suites Hotel & Casino in Las Vegas from 1996-2000, where he
negotiated the sale of the company to Harrah’s Entertainment, Inc. He was also
the lead company representative in the company’s $125 million secondary public
offering, negotiating a $300 million revolving line of credit, and a public
offering of $125 million in subordinated debt. In 2001, Mr. Radcliffe started a
gaming consultancy business, and in 2002 became Chief Financial Officer,
Treasurer, Vice President and Principal of Siren Gaming, LLC, a management
company for an Indian Class III casino. From 1993 to 1995, Mr. Radcliffe was
Chief Financial Officer, Treasurer and Vice President of Mikohn Gaming
Corporation, Las Vegas, NV. Prior to this, he was Vice Chairman, President,
Chief Operating Officer and Chief Financial Officer for Sahara Resorts, Las
Vegas, NV. Mr. Radcliffe is a licensed C.P.A. and received a B.S. in business
administration in 1968 from the University of Nevada.




Thomas W. Aro. Thomas W. Aro,
65, is our Chief Operating Officer and was a member of our Board of Directors
from 1994 through July 2003. Mr. Aro was also our Executive Vice President since
our formation in 1993 through November 11, 2003 and served as our Secretary from
1998 until May 2004.  Mr. Aro also serves as our Chief Operating
Officer of our gaming subsidiaries and has over 30 years experience in the
hospitality and gaming industries.  Mr. Aro received a B.S. from the
University of Arizona and is a licensed C.P.A.  On January 16, 2008,
Mr. Aro announced his retirement effective March 31, 2008.




Hilda Manuel. Hilda A. Manuel,
57, joined us in March 2005 as our Senior Vice President for Native American
Affairs and Chief Compliance Officer. From February 2003 through December 2004,
Ms. Manuel served as deputy general counsel for the Gila River Indian Community,
where she supervised general employees and attorneys with respect to civil and
criminal matters. From May 2000 through March 2002, Ms. Manuel served as special
counsel to the law firm of Steptoe & Johnson, LLP, where she oversaw
business development with Indian tribes and Indian organizations, along with
supervising the management of cases for Indian clients. From October 1994
through April 2000, Ms. Manuel served as the Deputy Commissioner of the BIA for
the U.S. Department of the Interior. As Deputy Commissioner, Ms. Manuel was
responsible for the overall management of the BIA, including the maintenance of
government-to-government relationships with Indian tribes, protecting trust
resources and the trust assets of Indian tribes, the fiscal administration and
expenditure of $2.8 billion in appropriated funds and the supervision of 12
regional offices, 83 tribe-agencies and over 13,000 employees. From February
1992 through May 1994, Ms. Manuel served as Staff Director for the Indian Gaming
Management Office of the BIA, where she was responsible for implementing the
responsibilities of the Secretary of the Interior under the Indian Gaming
Regulatory Act of 1988, along with supervising acts related to the approval of
Class III gaming tribal-state compacts, fee to trust land acquisitions for
gaming purposes, revenue allocation plans, including per capita distributions of
gaming revenues, and the development of policy guidelines and directives on
gaming related issues within the authority of the Secretary of the Interior.
Finally, from May 1991 through February 1992, Ms. Manuel served as Division
Chief for Tribal Government Affairs for the BIA and from February 1990 through
July 1991, Ms. Manuel was a Judicial Services Specialist for the
BIA.




Clifford A.
Ehrlich.  Clifford A. Ehrlich, 48, has been an employee of the
Company since 1995.  In February 2008, he was promoted to Executive
Vice President and General Manager.  Prior to his promotion, he most
recently served as Senior Vice President of our subsidiary, Monticello Raceway
Management, Inc.  From 1981 to 1994, Mr. Ehrlich served as Vice
President and an owner of the Pines Resort Hotel & Conference Center in the
Catskills.  Mr. Ehrlich has also held the position of executive
committee member of the Sullivan County Tourism Advisory Board and served as
President of the Catskill Resort Association. Mr. Ehrlich received a bachelor’s
degree in business administration with an emphasis in management and marketing
from the University of Colorado Business School in 1981.




66
 INDEX


Charles
Degliomini.  Charles Degliomini, 49, has been an employee and
consultant of the Company since 2004.  In February 2008, he was
promoted to Senior Vice President - Government Relations and Corporate
Communications. Previously, he was Senior Vice President of Sales and Marketing
of eLottery, Inc., the first firm to advance the technology to facilitate the
sales and marketing of governmental lottery tickets on the Internet. Before
taking the position at eLottery, Mr. Degliomini was President and founder of
Atlantic Communications, a New York-based corporate and government affairs
management company. Mr. Degliomini served in the General Services Administration
(GSA) as Chief of Staff to the Regional Administrator from 1985 to 1998, and was
the New York State Communications Director for Reagan-Bush in 1984. Mr.
Degliomini has a B.A. in political science from Queens College and is an M.A.
candidate at the New York University School of Public
Administration.




Audit
Committee and Audit Committee Financial Expert




We
maintain a separately designated audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
members of our audit committee are Paul A. deBary, Frank Catania, John Sharpe
and Richard Robbins.  Mr. deBary is its chairman.  Each
member of the audit committee is independent, within the meaning of the National
Association of Securities Dealers’ listing standards.  In addition,
each audit committee member satisfies the audit committee independence standards
under the Securities Exchange Act of 1934, as amended.




Our board
of directors believes that Mr. Paul A. deBary is an audit committee financial
expert, as such term is defined in Item 401(h) of Regulation S-K.




Code
of Ethics




We
adopted a code of ethics that is available on our internet website
(www.empireresorts.com) and will be provided in print without charge to any
stockholder who submits a request in writing to Empire Resorts, Inc. Investor
Relations, Route 17B, P.O. Box 5013, Monticello, New York 12701. The code of
ethics applies to each of our directors and officers, including the chief
financial officer and chief executive officer, and all of our other employees
and the employees of our subsidiaries. The code of ethics provides that any
waiver of the code of ethics may be made only by our board of
directors.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors, and persons who beneficially own more than ten percent
of our common stock, to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and greater than ten
percent beneficial owners are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. Based upon a review of the copies
of such forms furnished to us and written representations from our executive
officers and directors, we believe that during the year ended December 31, 2007
there were no delinquent filers except as follows: Thomas W. Aro filed a late
Form 4 for transactions that occurred on March 20, 2007 (two transactions);
Ronald J. Radcliffe filed a late Form 4 for a transaction that occurred on May
24, 2007 (one transaction); John Sharpe filed a late Form 4 for a transaction
that occurred on May 24, 2007 (one transaction); and Paul A. deBary filed a late
Form 4 for transactions that occurred on May 31, 2007 and June 1, 2007 (two
transactions).




Item 11.
            Executive
      Compensation.




The
information required by this Item 11 will be in the Company's definitive proxy
materials to be filed with the SEC and is incorporated in this Annual Report on
Form 10-K by this reference.




Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




Security
Ownership of Certain Beneficial Owners




The
following table sets forth information concerning beneficial ownership of our
capital stock outstanding at March 11, 2008 by (i) each director as of March 11,
2008; (ii) each executive officer of the Company as of March 11, 2008,
(iii) each stockholder known to be the beneficial owner of more than five
percent of any class of the Company’s voting securities and (iv) by all
directors and executive officers of the Company, as a group.




67
 INDEX




The
information regarding beneficial ownership of our common stock has been
presented in accordance with the rules of the SEC. Under these rules, a person
may be deemed to beneficially own any shares of capital stock as to which such
person, directly or indirectly, has or shares voting power or investment power,
and to beneficially own any shares of our capital stock as to which such person
has the right to acquire voting or investment power within 60 days through the
exercise of any stock option or other right. The percentage of beneficial
ownership as to any person as of a particular date is calculated by dividing (a)
(i) the number of shares beneficially owned by such person plus (ii) the number
of shares as to which such person has the right to acquire voting or investment
power within 60 days by (b) the total number of shares outstanding as of such
date, plus any shares that such person has the right to acquire from us within
60 days. Including those shares in the tables does not, however, constitute an
admission that the named stockholder is a direct or indirect beneficial owner of
those shares. Unless otherwise indicated, each person or entity named in the
table has sole voting power and investment power (or shares that power with that
person’s spouse) with respect to all shares of capital stock listed as owned by
that person or entity.




Name
      and Address of Beneficial Owner(1)
            
            Common
      Stock Beneficially Owned
            
            
            Series
      B Preferred Stock Beneficially Owned
            
            
            Series
      E Preferred Stock Beneficially OwnedShares
            
            
            Percentage
            
            
            Shares
            
            
            Percentage
            
            
            Shares
            
            
            Percentage


Thomas
      W. Aro
            
            
            109,700
            (2)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Paul
      A. deBary
            
            
            198,008
            (3)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --John
      Sharpe
            
            
            249,500
            (4)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --David
      P. Hanlon
            
            
            1,327,614
            (5)
            
            
            4.32
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Ralph
      J. Bernstein
            
            
            2,276,243
            (6)
            
            
            7.65
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Robert
      H. Friedman
            
            
            52,500
            (7)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Frank
      Catania
            
            
            52,500
            (8)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Richard
      Robbins
            
            
            32,500
            (9)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --James
      Simon
            
            
            37,020
            (10)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Ronald
      J. Radcliffe
            
            
            173,333
            (11)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Hilda
      Manuel
            
            
            52,333
            (12)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Clifford
      A. Ehrlich
            
            
            107,258
            (13)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Charles
      Degliomini
            
            
            96,101
            (14)
            
            
            *
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Joseph
      E. Bernstein
            
            
            2,036,143
            (15)
            
            
            6.86
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Concord
      Associates, L.P.
              c/o
      Cappelli Enterprises, Inc.
              115
      Stevens Avenue
              Valhalla,
      NY 10595
              Attention:
      Louis R. Cappelli
            
            
            2,500,000
            (16)
            
            
            8.42
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --






68
 INDEX


Name
      and Address of Beneficial Owner(1)
              
              Common
      Stock
                Beneficially
      Owned
              
              
              Series
      B Preferred Stock
                Beneficially
      Owned
              
              
              Series
      E Preferred Stock
                Beneficially
      OwnedShares
              
              
              Percentage
              
              
              Shares
              
              
              Percentage
              
              
              Shares
              
              
              Percentage


Wells
      Fargo & Company
              420
      Montgomery Street
              San
      Francisco, CA 94104
            
            
            2,467,280
            (17)
            
            
            8.31
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Directors
      and Officers as a Group
            
            
            4,764,610
            
            
            
            15.01
            %
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Patricia
      Cohen
              8306
      Tibet Butler Drive
              Windmere,
      FL 34786
            
            
            --
            
            
            
            --
            
            
            
            44,258
            
            
            
            100
            %
            
            
            --
            
            
            
            --Bryanston
      Group, Inc.
              2424
      Route 52
              Hopewell
      Junction, NY 12533
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,551,213
            
            
            
            89.6
            %Stanley
      Tollman
              c/o
      Bryanston Group, Inc.
              2424
      Route 52
              Hopewell
      Junction, NY 12533
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            152,817
            
            
            
            8.8
            %







* less
than 1%




(1)
            Unless
      otherwise indicated, the address of each stockholder, director, and
      executive officer listed above is Empire Resorts, Inc., c/o Monticello
      Gaming and Raceway, Route 17B, P.O. Box 5013, Monticello, New York,
      12701.




(2)
            Includes
      4,200 shares of common stock owned directly by Thomas W. Aro and options
      that are currently exercisable into 105,500 shares of common
      stock.




(3)
            Includes
      82,913 shares of common stock owned directly by Paul deBary, 12,595 shares
      of common stock held in an individual retirement account for Mr. deBary’s
      benefit and options that are currently exercisable into 102,500 shares of
      common stock.




(4)
            Includes
      2,000 shares of common stock owned directly by John Sharpe and options
      that are currently exercisable into 247,500 shares of common
      stock.




(5)
            Consists
      of 261,023 shares of restricted stock andoptions that are currently exercisable into 1,066,591 shares of
      common stock.




(6)
            Includes
      2,221,243 shares of common stock owned directly by Ralph J. Bernstein and
      options that are currently exercisable into 55,000 shares of common
      stock.




(7)
            Consists
      of options that are currently exercisable into 52,500 shares of common
      stock.




(8)
            Consists
      of options that are currently exercisable into 52,500 shares of common
      stock.




(9)
            Consists
      of options that are currently exercisable into 32,500 shares of common
      stock.




(10)
            Includes
      4,520 shares of common stock owned directly by James Simon and options
      that are currently exercisable into 32,500 shares of common
      stock.




(11)
            Consists
      of options that are currently exercisable into 173,333 shares of common
      stock.




69
 INDEX


(12)
            Consists
      of options that are currently exercisable into 52,333 shares of common
      stock.




(13)
            Includes
      80,592 shares of common stock owned directly by Clifford A. Ehrlich and
      options that are currently exercisable into 26,666 shares of common
      stock.




(14)
            Includes
      62,769 shares of common stock owned by Fox-Hollow Lane LLC, of which
      Charles Degliomini is the managing member, and options that are currently
      exercisable into 33,332 shares of common
stock.




(15)
            Consists
      of 2,036,143 shares of common stock owned directly by Mr.
      Bernstein.




(16)
            Consists
      of 2,500,000 shares of common stock owned directly by Concord Associates
      Limited Partnership.




(17)
            According
      to a Schedule 13G/A filed by Wells Fargo & Company filed on January
      23, 2008, it and Wells Capital Management Incorporated and Wells Fargo
      Funds Management, LLC have sole dispositive power and sole voting power
      with respect to the 2,467,280
shares.




Item 13.
            Certain
      Relationships and Related
Transactions.




On
February 8, 2008, we entered into the Contribution Agreement, pursuant to which
we and Concord, a stockholder that owns more than 5% of our common stock, will
form the LLC and enter into an Operating Agreement.  It is estimated
that our initial capital contribution and Concord’s initial capital contribution
are each valued at not less than $50 million, subject to an appraisal process.
Also, see Item 1. Business–Development –
Entertainment City Project.




The
Company's audit committee charter provides that the audit committee will review
and approve all transactions between the Company and its officers, directors,
director nominees, principal stockholders and their immediate family
members.  The Company intends that any such transactions will be on
terms no less favorable to it than it could obtain from unaffiliated third
parties.




The Board
of Directors evaluates the independence of each nominee for election as a
director of our Company in accordance with the Marketplace Rules of the NASDAQ
Stock Market LLC (“Nasdaq”).  Pursuant to these rules, a majority of
our Board of Directors must be “independent directors” within the meaning of the
Nasdaq listing standards, and all directors who sit on our Corporate Governance
and Nominating Committee, Audit Committee and Compensation Committee must also
be independent directors.




The
Nasdaq definition of independent director includes a series of objective tests,
such as the director is not, and was not during the last three years, an
employee of the Company and has not received certain payments from, or engaged
in various types of business dealings with, the Company.  In addition,
as further required by the Nasdaq Marketplace Rules, the Board of Directors has
made a subjective determination as to each independent director that no
relationships exist which, in the opinion of the Board of Directors, would
interfere with such individual’s exercise of independent judgment in carrying
out his or her responsibilities as a director.  In making these
determinations, the Board of Directors reviewed and discussed information
provided by the directors with regard to each director’s business and personal
activities as they may relate to Company and its management.




As a
result, the Board of Directors has affirmatively determined that none of our
directors has a material relationship with the Company other than Mr. Hanlon,
our President and Chief Executive Officer, who is a full time employee of the
Company, Mr. Friedman, who is a partner with Olshan Grundman Frome Rosenzweig
& Wolosky LLP, a law firm that provides services to our Company and John
Sharpe, who the Board of Directors determined is not independent by virtue of
compensation paid to him by the Company for his services as a
director.  The Board of Directors has also affirmatively determined
that all members of our Audit Committee, Compensation Committee and Corporate
Governance and Nominating Committee are independent directors.




70
 INDEX




Item 14.
              Principal
      Accounting Fees and Services.


Our
principal accountant for the audit and review of our annual and quarterly
financial statements, respectively, during each of the past two fiscal years was
Friedman LLP. Moreover, the following table shows the fees paid or accrued by us
to Friedman LLP during this period.




Type of Service
            
            2007
            
            
            2006Audit
      Fees (1)
            
            $
            682,000
            
            
            $
            564,000Audit-Related
      Fees (2)
            
            
            21,000
            
            
            
            24,000Tax
      Fees (3)
            
            
            45,000
            
            
            
            39,000All
      Other Fees (4)
            
            
            --
            
            
            
            --Total
            
            $
            748,000
            
            
            $
            627,000





(1)
            Comprised
      of the audit of our annual financial statements and reviews of our
      quarterly financial statements.




(2)
            Comprised
      of services rendered in connection with our capital raising efforts,
      registration statements, consultations regarding financial accounting and
      reporting and audit of the Company’s employee benefit
  plan.




(3)
            Comprised
      of services for tax compliance and tax return
  preparation.




(4)
            Fees
      related to other filings with the SEC, including
  consents.




In
accordance with the Sarbanes-Oxley Act of 2002, the Audit Committee established
policies and procedures under which all audit and non-audit services performed
by our principal accountants must be approved in advance by the Audit Committee.
As provided in the Sarbanes-Oxley Act of 2002, all audit and non-audit services
to be provided after May 6, 2003 must be pre-approved by the Audit Committee in
accordance with these policies and procedures.




71
 INDEX







PART IV




Item 15.
            Exhibits,
      Financial Statement Schedules.




Financial
Statements




Schedule
II – Valuation and Qualifying Accounts




Empire
Resorts, Inc and Subsidiaries


Valuation
and Qualifying Accounts


December
31, 2007, 2006 and 2005


(in
thousands)




Description
            
            Balance
      at beginning of year
            
            
            Addition
      charged to costs and expenses
            
            
            Other
      additions (deductions)
            
            
            Less
      deductions
            
            
            Balance
      at end of yearYear ended December 31,
2007Allowance
      for advances to Litigation Trust
            
            $
            1,515
            
            
            $
            985
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            2,500Deferred
      tax asset valuation allowance
            
            $
            51,284
            
            
            $
            ---
            
            
            $
            11,218
            
            
            $
            ---
            
            
            $
            62,502Year ended December 31,
2006Allowance
      for advances to Litigation Trust
            
            $
            1,010
            
            
            $
            505
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            1,515Deferred
      tax asset valuation allowance
            
            $
            46,056
            
            
            $
            ---
            
            
            $
            5,228
            
            
            $
            ---
            
            
            $
            51,284Year ended December 31,
2005Allowance
      for advances to Litigation Trust
            
            $
            505
            
            
            $
            505
            
            
            $
            ---
            
            
            $
            ---
            
            
            $
            1,010Deferred
      tax asset valuation allowance
            
            $
            37,678
            
            
            $
            ---
            
            
            $
            8,378
            
            
            $
            ---
            
            
            $
            46,056







Exhibits




3.1
            Certificate
      of Incorporation, dated March 19, 1993. (4)3.2
            Certificate
      of Amendment of Certificate of Incorporation, dated August 15, 1993.
      (4)3.3
            Certificate
      of Amendment of Certificate of Incorporation, dated December 18, 1996.
      (4)3.4
            Certificate
      of Amendment of Certificate of Incorporation, dated September 22, 1999.
      (4)3.5
            Certificate
      of Amendment of the Certificate of Incorporation, dated June 13, 2001.
      (4)3.6
            Certificate
      of Amendment to the Certificate of Incorporation, dated May 15, 2003.
      (4)3.7
            Certificate
      of Amendment to the Certificate of Incorporation, January 12, 2004.
      (4)3.8
            Second
      Amended and Restated By-Laws, as of Feb. 12, 2002. (4)






72
 INDEX




3.9
            Amendment
      No. 1 to the Second Amended and Restated By-Laws, dated November 11, 2003.
      (4)3.10
            Amendment
      No. 2 to Second Amended and Restated By-Laws, dated August 10,
      2007.  (16)3.11
            Amendment
      No. 3 to Second Amended and Restated By-Laws, dated February 25,
      2008.  (18)4.1
            Form
      of Common Stock Certificate. (2)4.2
            Certificate
      of Designations, Preferences and Rights of Series B Preferred Stock dated
      July 31, 1996. (4)4.3
            Certificate
      of Designation setting forth the Preferences, Rights and Limitations of
      Series B Preferred Stock and Series C Preferred Stock, dated May 29, 1998.
      (4)4.4
            Certificate
      of Amendment to the Certificate of Designation setting forth the
      Preferences, Rights and Limitations of Series B Preferred Stock and Series
      C Preferred Stock, dated June 13, 2001. (4)4.5
            Certificate
      of Designations setting forth the Preferences, Rights and Limitations of
      Series D Preferred Stock, dated February 7, 2000. (10)4.6
            Certificate
      of the Designations, Powers, Preferences and Rights of the Series E
      Preferred Stock, dated December 10, 2002. (4)4.7
            Certificate
      of Amendment of Certificate of the Designations, Powers, Preferences and
      Other Rights and Qualifications of the Series E Preferred Stock, dated
      January 12, 2004. (4)4.8
            Indenture
      dated as of July 26, 2004 among Empire Resorts, Inc., The Bank of New York
      and the Guarantors named therein. (8)10.1
            1998
      Stock Option Plan. (3)10.2
            2004
      Stock Option Plan. (5)10.3
            2005
      Equity Incentive Plan. (12)10.4
            Declaration
      of Trust of the Catskill Litigation Trust, dated as of January 12, 2004,
      made by Catskill Development, L.L.C., Mohawk Management, LLC, Monticello
      Raceway Development Company, LLC, Empire Resorts, Inc., the trustees and
      Christiana Bank & Trust Company. (10)10.5
            Line
      of credit dated January 12, 2004 between Empire Resorts, Inc and Catskill
      Litigation Trust. (8)10.6
            Promissory
      Note issued by Catskill Litigation Trust on January 12, 2004 to Empire
      Resorts, Inc. for the Principal Sum of $10,000,000. (8)10.7
            Five
      Year Warrant issued to Jefferies & Company, Inc., dated January 30,
      2004, to purchase 250,000 shares of Common Stock at an exercise price of
      $7.50 per share. (4)10.8
            Registration
      Rights Agreement, dated as of January 30, 2004, by and among Empire
      Resorts, Inc. and Jefferies & Company, Inc. (4)10.9
            Security
      Agreement dated as of July 26, 2004 between Empire Resorts, Inc., The Bank
      of New York and the Guarantors named therein. (6)10.10
            Pledge
      Agreement dated as of July 26, 2004 Empire Resorts, Inc., The Bank of New
      York and the Guarantors named therein. (6)






73
 INDEX




10.11
            Registration
      Rights Agreement dated as of July 26, 2004 Empire Resorts, Inc., the
      Guarantors named therein and Jefferies & Company, Inc.
    (6)10.12
            Loan
      Agreement, dated as of January 11, 2005, by and among Empire Resorts,
      Inc., Monticello Raceway Management, Inc., Alpha Monticello, Inc., Alpha
      Casino Management Inc., Mohawk Management, LLC, Monticello Raceway
      Development Company, LLC and Monticello Casino Management, LLC and Bank of
      Scotland, as lender and as agent. (9)10.13
            Security
      Agreement, dated as of January 11, 2005, by Empire Resorts, Inc.,
      Monticello Raceway Management, Inc., Alpha Monticello, Inc., Alpha Casino
      Management Inc., Mohawk Management, LLC, Monticello Raceway Development
      Company, LLC and Monticello Casino Management, LLC, in favor of Bank of
      Scotland. (9)10.14
            Pledge
      Agreement, dated as of January 11, 2005, by Empire Resorts, Inc., Alpha
      Monticello, Inc. and Alpha Casino Management Inc. in favor of Bank of
      Scotland. (9)10.15
            Mortgage,
      Security Agreement, Assignment of Leases and Rents, and Fixture Filing,
      dated as of January 11, 2005, by Monticello Raceway Management, Inc., a
      New York corporation to Bank of Scotland. (9)10.16
            Promissory
      Note issued by Empire Resorts, Inc. on January 11, 2005 to Bank of
      Scotland for the Principal Sum of $10,000,000. (9)10.17
            Intercreditor
      Agreement, dated as of January 11, 2005, by and among Bank of Scotland,
      The Bank of New York, Empire Resorts, Inc., Monticello Raceway Management,
      Inc., Alpha Monticello, Inc., Alpha Casino Management Inc., Mohawk
      Management, LLC, Monticello Raceway Development Company, LLC and
      Monticello Casino Management, LLC. (9)10.18
            Employment
      Agreement dated as of May 23, 2005 between Empire Resorts, Inc. and David
      P. Hanlon (filed without exhibits or schedules, all of which are available
      upon request, without cost). (11)10.19
            Employment
      Agreement dated as of May 23, 2005 between Empire Resorts, Inc. and Ronald
      J. Radcliffe. (11)10.20
            Restated
      Amendment No. 2 to Loan Agreement, dated January 11, 2005 by and among
      Empire Resorts, Inc., the guarantors listed on the signature page thereto
      and Bank of Scotland, dated as of November 30, 2005.
  (13)10.21
            Amendment
      No. 3 to Option Agreement, dated November 12, 2004, by and among Empire
      Resorts, Inc. and Concord Associates Limited Partnership, dated as of
      December 28, 2006. (14)10.22
            Amendment
      No. 1 to Loan Agreement, dated January 11, 2005 by and among Empire
      Resorts, Inc., the guarantors listed on the signature page thereto and
      Bank of Scotland, dated as of June 13, 2005. (1)10.23
            Amendment
      No. 3 to Loan Agreement, dated January 11, 2005 by and among Empire
      Resorts, Inc., the guarantors listed on the signature page thereto and
      Bank of Scotland, dated as of June 20, 2007. (15)10.24
            Agreement
      to Form Limited Liability Company and Contribution Agreement, among
      Concord Associates, L.P. and Empire Resorts, Inc., dated as of February 8,
      2008. (17)10.25
            Amendment
      No. 4 to Loan Agreement, dated January 11, 2005 by and among Empire
      Resorts, Inc., the guarantors listed on the signature page thereto and
      Bank of Scotland, dated as of March 14, 2008. (1)14.1
            Code
      of Ethics. (4)






74
 INDEX




21.1
            List
      of Subsidiaries. (1)23.1
            Consent
      of Independent Registered Accounting Firm. (1)31.1
            Section
      302 Certification of Principal Executive Officer. (1)31.2
            Section
      302 Certification of Principal Financial Officer. (1)32.1
            Section
      906 Certification of Principal Executive Officer. (1)32.2
            Section
      906 Certification of Principal Financial Officer.
  (1)




_____________




(1)
            Filed
      herewith.




(2)
            Incorporated
      by reference to Empire Resorts, Inc.’s Registration Statement on Form SB-2
      (File No. 33-64236), filed with the SEC on June 10, 1993 and as amended on
      September 30, 1993, October 25, 1993, November 2, 1993 and November 4,
      1993, which Registration Statement became effective November 5,
      1993.  Such Registration Statement was further amended by Post
      Effective Amendment filed on August 20,
1999.




(3)
            Incorporated
      by reference to Empire Resorts, Inc.’s Definitive Proxy Statement on
      Schedule 14A, filed with the SEC on August 25,
  1999.




(4)
            Incorporated
      by reference to Empire Resorts, Inc.’s Form 10-KSB for the year ended
      December 31, 2003.




(5)
            Incorporated
      by reference to Empire Resorts, Inc.’s Definitive Proxy Statement on
      Schedule 14A, filed with the SEC on April 28,
  2004.




(6)
            Incorporated
      by reference to Empire Resorts, Inc.’s Quarterly Report on Form 10-QSB for
      the quarter ended June 30, 2004.




(7)
            Incorporated
      by reference to Empire Resorts, Inc.’s Quarterly Report on Form 10-QSB for
      the quarter ended September 30,
2004.




(8)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on November 18, 2004.




(9)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on January 14, 2005.




(10)
            Incorporated
      by reference to Empire Resorts, Inc.’s Form 10-KSB for the year ended
      December 31, 2004.




(11)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on May 27, 2005.




(12)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on August 19, 2005.




(13)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K/A, filed
      with the SEC on December 15, 2005.




75
 INDEX


(14)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on January 3, 2007.




(15)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with SEC on June 25, 2007.




(16)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on August 16, 2007.




(17)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on February 11, 2008.




(18)
            Incorporated
      by reference to Empire Resorts, Inc.’s Current Report on Form 8-K, filed
      with the SEC on February 26, 2008.



















76
 INDEX


SIGNATURES




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




EMPIRES
      RESORTS, INC.By:
            /s/
      David P. HanlonName:
            David
      P. HanlonTitle:
            Chief
      Executive OfficerDate:
            March
      17, 2008





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




Signature
            
            Title
            Date


/s/
      David P. Hanlon
            
            Chief
      Executive Officer, President and Director (Principal Executive
      Officer)
            March
      17, 2008David
      P. Hanlon/s/
      Ronald J. Radcliffe
            
            Chief
      Financial Officer (Principal Accounting and Financial
    Officer)
            March
      17, 2008Ronald
      J. Radcliffe


/s/
      John Sharpe
            
            Chairman
      of the Board and Director
            March
      17, 2008John
      Sharpe/s/
      Paul A. deBary
            
            Director
            March
      17, 2008Paul
      A. deBary/s/
      Ralph J. Bernstein
            
            Director
            March
      17, 2008Ralph
      J. Bernstein/s/
      Robert H. Friedman
            
            Director
            March
      17, 2008Robert
      H. Friedman/s/
      Frank Catania
            
            Director
            March
      17, 2008Frank
      Catania/s/
      Richard Robbins
            
            Director
            March
      17, 2008Richard
      Robbins/s/
      James Simon
            
            Director
            March
      17, 2008James
      Simon






77