`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, 2006

                                       OR

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

      For the transition period from ________________ to ________________

      Commission file number 1-12522

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

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


     701 N. Green Valley Parkway, Suite 200, Henderson, NV       89074
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          (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 Market
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  5-1/2% Secured Convertible Notes Due 2014         The PORTAL Market
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         Securities registered under Section 12(g) of the Exchange Act:
                     Common Stock, $.01 par value per share
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                                (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 [ ] No [X]

      Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ] No [X]

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




      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.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. [ ]

      Indicate  by check mark  whether  the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

 Large accelerated filer [ ]   Accelerated filer [X]   Non-accelerated filer [ ]

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

      The  aggregate  market  value  of  the  issuer's  common  equity  held  by
non-affiliates, as of June 30, 2006 was $154,338,650, based on the closing price
of the common stock on the Nasdaq Small Cap Market.

      As of March 7, 2007,  there were 29,429,902  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.





PART I........................................................................1
      Item 1. Business........................................................1
      Item 1A Risk Factors...................................................12
      Item 1B Unresolved Staff Comments......................................22
      Item 2. Properties.....................................................22
      Item 3. Legal Proceedings..............................................23
      Item 4. Submission of Matters to a Vote of Security Holders............24

PART II......................................................................24
      Item 5. Market for Registrant's Common Equity, Related
              Stockholder Matters and Issuer Purchases of Equity
              Securities.....................................................24
      Item 6. Selected Financial Data........................................26
      Item 7. Management's Discussion and Analysis of Financial
              Condition and Results of Operation.............................27
      Item 7A Quantitative and Qualitative Disclosures About Market Risk.....35
      Item 8. Financial Statements and Supplementary Data....................36
      Item 9. Changes In and Disagreements With Accountants on
              Accounting and Financial Disclosure............................68
      Item 9A Controls and Procedures........................................68
      Item 9B Other Information..............................................69

PART III.....................................................................70
      Item 10 Directors and Executive Officers of the Registrant.............70
      Item 11 Executive Compensation.........................................73
      Item 12.Security Ownership of Certain Beneficial Owners
              and Management and Related Stockholder Matters.................73
      Item 13 Certain Relationships and Related Transactions.................75
      Item 14 Principal Accounting Fees and Services.........................75

PART IV......................................................................76
      Item 15 Exhibits, Financial Statement Schedules........................76


                                       i



                                     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. 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 subsidiaries, we currently:

      o  own and operate  Monticello  Raceway,  a harness  horseracing  facility
         located in Monticello,  New York, 90 miles  Northwest of New York City.
         At Monticello  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.

      o  operate in conjunction  with the New York State Lottery more than 1,500
         video gaming machines ("VGMs") at the grandstand of Monticello Raceway.

      o  have an  agreement  with the St.  Regis  Mohawk  Tribe to  develop  and
         manage, subject to regulatory approval, a Class III Indian casino on 29
         acres of land adjacent to Monticello Raceway.

      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  acquisitions,  joint  ventures  or other  growth
opportunities.

MONTICELLO RACEWAY

      Monticello Raceway began operations in 1958 and currently features:

      o  1,587 VGMs;

      o  year-round live harness horse racing;


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

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

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

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

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

      o  an entertainment lounge with seating for 75 people.

      Monticello Raceway derives its racing revenue principally from:

      o  wagering at Monticello Raceway on live races run at Monticello Raceway;

      o  fees from wagering at out-of-state locations on races run at Monticell
         Raceway using export simulcasting;

      o  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;

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

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

      SIMULCASTING.  Over the past  several  years,  import  and,  particularly,
export  simulcasting  has become an  increasingly  important  part of Monticello
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 Raceway offers year-round simulcast wagering from
racetracks across the country,  including Churchill Downs, Hollywood Park, Santa
Anita Racetrack,  Gulfstream Park,  Aqueduct Raceway,  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  Raceway  also exports  live  broadcasts  of its races to casinos and
off-track betting facilities in other states.

      PARI-MUTUEL WAGERING.  Monticello 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  Raceway's  pari-mutuel
commission  rates  are fixed as a  percentage  of the  total  handle or  amounts
wagered.

MONTICELLO GAMING AND RACEWAY

      We currently  operate a 45,000 square foot VGM facility called  Monticello
Gaming and Raceway (formerly called Mighty M Gaming at Monticello 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


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traditional slot machines. VGM operations at Monticello Gaming and Raceway began
on June 30,  2004.  At December 31,  2006,  the number of VGMs in operation  was
1,587.

      Each of the VGMs is owned by the State of New York and, by statute, 32% of
the first fifty million,  29% of the next one hundred million and 26% thereafter
of gross revenue from our VGM  operations is distributed to us. The statute also
provides a vendor's marketing  allowance for racetracks  operating video lottery
programs of 8% on the first  $100.0  million of net  revenues  generated  and 5%
thereafter.

      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.

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

CASINO DEVELOPMENT

      We have  agreements  with the St. Regis Mohawk Tribe to develop and manage
an Indian casino. The casino is proposed on land adjacent to Monticello Raceway.

ST. REGIS MOHAWK RESORT DEVELOPMENT

      We had previously  attempted to develop a casino with the St. Regis Mohawk
Tribe  beginning in 1996. On April 6, 2000, the United States  Department of the
Interior  advised New York State  Governer  George Pataki that it had determined
that the acquisition of 29 acres adjacent to Monticello  Raceway would be in the
best interest of the St.Regis  Mohawk Tribe and would not be  detrimental to the
community.  Such determinations  required the concurrence of the Governor of New
York in order for the project to proceed.  For a period of time thereafter,  the
St. Regis Mohawk Tribe agreed to work exclusively with Park Place  Entertainment
Corporation  (now part of  Harrah's  Entertainment,  Inc.),  which  proposed  to
develop a casino for the St. Regis Mohawk Tribe at the nearby Kutsher's Sporting
Academy. However, by Summer 2005, the needed approvals for a casino at Kutsher's
Sporting Academy had not  materialized,  and we and the St. Regis Mohawk Tribe's
leaders discussed the possibility of moving forward with the previously obtained
approvals for the casino project at Monticello Raceway.

      On August 1, 2005, we entered into a letter  agreement  with the St. Regis
Mohawk Tribe under which we and the St. Regis Mohawk Tribe affirmed,  subject to
the requested  concurrence by Governor Pataki, all prior contracts to develop an
Indian casino at Monticello  Raceway.  The St. Regis Mohawk Tribe further agreed
to (1) satisfy all  requirements for the Bureau of Indian Affairs (the "BIA") in
connection  with  the  transfer  of the 29 acres  of land to the  United  States
government  in trust for the St. Regis Mohawk  Tribe,  (2) resolve any remaining
issues for the finalization of the pre-existing management agreement with one of
our  subsidiaries  for the project  previously  submitted to the National Indian
Gaming  Commission  (the "NIGC"),  (3) execute any amendment or revision to such
management agreement, or any collateral agreements,  that may be mutually agreed
upon in such process, (4) support the approval of such management agreement,  as
so amended or revised,  by the NIGC and (5) take any and all reasonably required
steps to  consummate  the land to trust  transfer of the parcel  pursuant to the
April 6, 2000 determination as promptly as practicable following the concurrence
of Governor Pataki.

      On September 9, 2005,  in response to a letter from Governor  Pataki,  the
Acting Deputy  Secretary for Economic  Development and Policy,  wrote to the St.
Regis Mohawk Tribe to confirm that the Department of the Interior considered the
2000  Secretarial  determination  to be of  continuing  validity  and subject to
concurrence  by the Governor.

      After  notification  from the St. Regis Mohawk Tribe,  the BIA recommenced
review  process for the  acquisition  of the 29 acres adjacent to the Raceway by
the St.  Regis  Mohawk  Tribe.  On April 13, 2006 the St. Regis Mohawk Tribe was
notified that the BIA had completed its review of the  Environmental  Assessment
("EA") for a proposed transfer of land into trust for a casino at the Monticello
Raceway site. The review identified  certain additional areas to address and the
St. Regis Mohawk Tribe  completed  the filing of the responses to those items on
July  5,  2006.  Following  this  filing,  the  review  of the EA by the BIA was
completed on September  12, 2006 and the document was made  available for public
review and comment on that date.  The St. Regis Mohawk Tribe has provided to the
BIA responses to all of the comments received during the comment period.

      On December  21, 2006,  the St. Regis Mohawk Tribe  received a letter from
James  R.  Cason  of the  BIA  stating  that  the  Tribe's  Final  Environmental
Assessment  for the project had been deemed  sufficient,  that an  Environmental
Impact Study will be not be required and that a formal Finding of No Significant
Impact ("FONSI") related to the proposed federal action approving the request of
the Tribe to take 29.31 acres into trust for the purpose of building a Class III
gaming  facility to be located at Monticello  Raceway,  in  accordance  with the
Indian Gaming  Regulatory  Act of 1988 (the  "Land-to-Trust  Transfer") has been
issued. On February 16, 2007, its partner, the St. Regis Mohawk Tribe,  received
a copy of a complaint filed in the United States District Court for the Southern


                                       3

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 Finding of No Significant Impact
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  Raceway and prior to the  Department of the  Interior's  causing the
transfer of the subject land into federal trust.

      On  February  19,  2007,  New  York  Governor  Eliot  Spitzer  issued  his
concurrence with regard to the April 2000 Secretarial  Determination  that found
that the  acquisition of the 29 acres adjacent to Monticello  Raceway by the St.
Regis Mohawk Tribe for the purpose of building and  operating a Class III gaming
facility would be in the Tribe's and its members' best interest and would not be
detrimental  to the  surrounding  communities.  In addition to the  concurrence,
Governor  Spitzer 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 percent of  slot-machine  revenues  for the first two years after the
St. Regis Mohawk  Tribe's Class III casino to be located at  Monticello  Raceway
opens,  23 percent  for the next two years and 25 percent  thereafter.  The U.S.
Department of the Interior can now begin its final administrative review so that
the  Secretary of the Interior can  determine  whether to approve the request of
the Tribe to take the 29 acres into trust.

      The current plans for the Indian  casino resort at Monticello  Raceway are
expected to feature:

      o  160,000  square feet of gaming  space with 3,500 slot  machines and 125
         table games,  with  sufficient  space to  accommodate an additional 500
         slot machines;

      o  nine restaurants, including a fine dining restaurant and a buffet;

      o  several bars and a nightclub;

      o  5,000  parking  spaces,  including  4,200  covered  spaces all  located
         directly underneath or adjacent to the casino;

      o  an enclosed retail corridor connected to Monticello Raceway;

      o  a central entertainment lounge; and

      o  a 40,000 square foot multi-function room.

      The plans are only in a  preliminary  stage and are  subject to approval
by relevant government authorities and the St. Regis Mohawk Tribe.

      On March 20, 2006,  we  submitted a proposed  form of amended and restated
gaming  facility   management   agreement  (the  "Gaming   Facility   Management
Agreement")  and  collateral  agreements  to the NIGC for review and approval or
disapproval.  Until  approved by the Chairman of the NIGC,  the gaming  facility
management agreement is not in force. Neither the St. Regis Mohawk Tribe nor the
St. Regis Mohawk  Gaming  Authority  (the  "Authority")  has approved the Gaming
Facility  Management  Agreement.  We expect, but cannot guarantee,  that the St.
Regis Mohawk Tribe will approve the Gaming Facility Management Agreement.

      Under  the  currently  proposed  form of the  Gaming  Facility  Management
Agreement,  the  Authority  will  retain us to manage  all casino  style  gaming
activities,  other than  horserace  wagering  and Class II  gaming,  that may be
conducted  on the land for seven years  commencing  upon  opening and the NIGC's
approval  of the  agreement.  We would  also be  retained  to manage  all lawful
commercial  activities  on the land related to gaming such as  automatic  teller
machines, food service,  lodging and retail. At the same time, we have agreed to


                                       4


assist the  Authority  to obtain  financing  for the gaming  enterprise  and all
related commercial  activities.  In exchange for these services, we are entitled
to receive a management  fee equal to 30% of the net  revenues  derived from the
operations it manages.

      Under  the  Gaming  Facility  Management  Agreement,  before  we  can  pay
ourselves  our fee,  we must  first pay to the  Authority  a  minimum  return of
approximately  $517,000 per month.  These  minimum  priority  payments are to be
charged against the Authority's  distribution of net revenues and, when there is
insufficient  net  revenue in a given month to pay the  minimum  return,  we are
obligated to advance the funds necessary to compensate for the deficiency,  with
the Authority reimbursing us in the next succeeding month or months. The minimum
return is required to be paid to the Authority  every month gaming is conducted,
including on a pro rata basis during those months when gaming is conducted  only
for part of a month.

      While the  terms of the  proposed  Gaming  Facility  Management  Agreement
provide us with wide  discretion as to the  day-to-day  management of the gaming
facilities,  all major  decisions  or  expenditures  must first be approved by a
management business board to be comprised of four persons, two of whom are to be
appointed by the Authority and the other two of whom are to be appointed by us.

      In  carrying  out our duties as manager  of the  gaming  facility,  we are
required to provide  the St.  Regis  Mohawk  Tribe and other  recognized  Indian
tribes with certain  preferences  including  giving  preference  in  recruiting,
training  and  employment  first to  qualified  members of the St.  Regis Mohawk
Tribe,  and  secondly  to  other  qualified  Indians  and the  local  community,
providing  training  programs for members of the St. Regis Mohawk Tribe;  and in
entering  into  contracts  for the supply of goods and  services  for the gaming
enterprise, giving preference first to qualified members of the St. Regis Mohawk
Tribe,  and qualified  business  entities  certified by the Authority or the St.
Regis Mohawk Tribe as being controlled by members of the St. Regis Mohawk Tribe,
and second to other qualified Indians and qualified  business entities certified
by the Authority to be controlled by Indians and to the local community.

      We also  entered  into a  gaming  facility  development  and  construction
agreement  with the  Authority  and the St.  Regis  Mohawk  Tribe  (the  "Gaming
Facility  Development and  Construction  Agreement"),  pursuant to which we were
granted the exclusive right to design, engineer,  construct, furnish and develop
a Class III Indian casino resort with the St. Regis Mohawk Tribe,  and we agreed
to help arrange  financing of the project.  In exchange for these services,  the
Authority  agreed to pay us a  development  fee  equal to 5% of the  first  $505
million of the project's construction costs, not to exceed $15 million,  payable
monthly as the project costs are incurred. However, the Authority is entitled to
retain 10% of such  development fees until the project is 50% completed and then
5% until the project is  completed.  On the  completion  date,  the Authority is
required to pay us these retained fees.

      Similar to the Gaming Facility Management  Agreement,  in the execution of
our duties under the Gaming Facility Development and Construction  Agreement, we
must first seek  approval  from a  development  business  board before any major
decisions or material  expenditures  are made.  The  development  business board
shall be  comprised  of four  persons,  two of whom are to be  appointed  by the
Authority and the other two of whom are to be appointed by us. Finally,  similar
to the  covenants  of the  Gaming  Facility  Management  Agreement,  the  Gaming
Facility  Development  and  Construction  Agreement  provides  that any  general
contractor hired by Monticello Raceway Development shall use its reasonable best
efforts to give,  and to cause  subcontractors  to give, a hiring  preference to
qualified members of the St. Regis Mohawk Tribe.


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COMPETITIVE ADVANTAGES

      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 is approximately 90 miles northwest of New York City, making it 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 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 75 miles of Monticello Raceway.

GOVERNMENT REGULATION

      INDIAN  GAMING  REGULATORY  ACT. The terms and  conditions  of  management
contracts for the operation of Indian-owned casinos, and of all gaming on Indian
land in the United  States,  are subject to the Indian Gaming  Regulatory Act of
1988, as amended, which is administered by the NIGC, and also are subject to the
provisions  of statutes  relating to  contracts  with Indian  tribes,  which are
administered  by the Secretary of the Interior and the BIA.  More  specifically,
the  NIGC  regulates  Class II  gaming,  reviews  and  approves  ordinances  and
management contracts,  conducts background investigations and approves licensing
of key personnel.  The Secretary of Interior has authority over Class III gaming
which  includes  approval of compacts,  per capita plans,  leasing and gaming on
lands acquired in trust after 1988. The regulations  and guidelines  under which
the NIGC will  administer  the Indian Gaming  Regulatory  Act are evolving.  The
Indian Gaming Regulatory Act and those regulations and guidelines are subject to
interpretation  by the Secretary of the Interior and the NIGC and may be subject
to judicial and legislative clarification or amendment.

      We may need to provide the BIA or the NIGC with background  information on
a variety of people,  including each person with management  responsibility  for
the gaming facility management agreement, our directors and the directors of our
operating   subsidiaries,   and  our  ten   largest   stockholders.   Background
investigations of others may also be required.

      The Indian Gaming Regulatory Act of 1988, as amended,  currently  requires
the NIGC to approve management  contracts and certain collateral  agreements for
Indian casinos. The NIGC will review our gaming facility management contract and
collateral  agreements for compliance with the Indian Gaming Regulatory Act, and
approve or reject the gaming facility  management  contract and any other of the
collateral agreements constituting a management contract.

      The NIGC has broad  discretion  to  approve  or not  approve a  management
contract.  A management  contract can be approved only after the NIGC determines
that the contract provides, among other things, for:

      o  adequate accounting procedures and verifiable financial reports,  which
         must be furnished to the tribe;


                                       6


      o  tribal  access  to  the  daily  operations  of the  gaming  enterprise,
         including the right to verify daily gross revenues and income;

      o  minimum guaranteed payments to the tribe, which must have priority over
         the retirement of development and construction costs;

      o  a ceiling on the repayment of such development and construction  costs;
         and

      o  a  contract  term not  exceeding  five years and a  management  fee not
         exceeding  30% of profits;  provided  that the NIGC may approve up to a
         seven  year term and a  management  fee not to exceed 40% of profits if
         the NIGC is satisfied that the capital  investment  required,  the risk
         exposure, and the income projections for the particular gaming activity
         justify the larger profit allocation and longer term.

      The Indian Gaming  Regulatory Act of 1988, as amended,  established  three
separate  classes of tribal gaming -- Class I, Class II, and Class III.  Class I
gaming  includes all traditional or social games played by a tribe in connection
with  celebrations or ceremonies.  Class II gaming includes games such as bingo,
pull-tabs,  punch  boards,  instant  bingo and card  games  that are not  played
against the house. Class III gaming includes casino-style gaming including table
games such as blackjack,  craps and roulette, as well as gaming machines such as
slots, video poker, lotteries, and pari-mutuel wagering.

      Class I gaming on Indian  lands is within the  exclusive  jurisdiction  of
Indian tribes and is not subject to the Indian Gaming Regulatory Act of 1988, as
amended. Class II gaming is permitted on Indian lands if:

      o  the state in which the Indian  lands lie  permits  such  gaming for any
         purpose by any person, organization or entity;

      o  the gaming is not otherwise specifically  prohibited on Indian lands by
         federal law;

      o  the  gaming is  conducted  in  accordance  with a tribal  ordinance  or
         resolution which has been approved by the NIGC;

      o  an Indian tribe has sole proprietary  interest and  responsibility  for
         the conduct of gaming;

      o  the  primary  management  officials  and  key  employees  are  tribally
         licensed; and

      o  several other requirements are met.

      Class III gaming is permitted on Indian lands if the conditions applicable
to Class II  gaming  are met and,  in  addition,  the  gaming  is  conducted  in
conformance  with the  terms of a  tribal-state  compact  (a  written  agreement
between the tribal  government  and the  government  of the state  within  whose
boundaries the tribe's lands lie).

      Under the Indian Gaming  Regulatory  Act of 1988,  regulated  gaming by an
Indian tribe is permitted only if the casino is located on an Indian reservation
or land held by the United States in trust for the nation (or subject to similar
restrictions on transfer),  and only if that tribe exercises governmental powers
over the casino site. That same Act, however, generally prohibits gaming on land
acquired  in trust after  October  17,  1988.  A tribe can  overcome  the gaming
prohibition if one of the exceptions provided in Section 20 of the Indian Gaming
Regulatory  Act of 1988 applies.  We believe that two  exceptions to the general
prohibition  of gaming on newly  acquired  trust lands are  available to the St.
Regis Mohawk  Tribe.  The  so-called two part  determination  exception  permits
gaming on land taken into trust after  October 17, 1988 if,  after  consultation
with the tribe and applicable  state,  local and other nearby tribal  officials,
the Secretary of the Interior  determines that a gaming  establishment  on newly
acquired  land would be in the best  interest of the tribe and its members,  and
would not be detrimental to the surrounding community,  but only if the Governor
of the applicable State concurs. Another exception to the general prohibition of
gaming on newly  acquired  trust lands is the  exception  that allows  gaming on
lands taken into trust as part of a settlement of a land claim.


                                       7


      TRIBAL-STATE  COMPACTS.  The  Indian  Gaming  Regulatory  Act of 1988,  as
amended, requires states to negotiate in good faith with Indian tribes that seek
to enter into  tribal-state  compacts for the conduct of Class III gaming.  Such
tribal-state  compacts may include provisions for the allocation of criminal and
civil  jurisdiction  between the state and the Indian  tribe  necessary  for the
enforcement of such laws and regulations, taxation by the Indian tribe of gaming
activities  in amounts  comparable  to those  amounts  assessed by the state for
comparable  activities,  remedies  for  breach of  compacts,  standards  for the
operation of gaming and maintenance of the gaming facility,  including licensing
and any other  subjects  that are  directly  related to the  operation of gaming
activities.  While the terms of tribal-state  compacts vary from state to state,
compacts  within  one  state  tend  to be  substantially  similar.  Tribal-state
compacts  usually  specify the types of  permitted  games,  establish  technical
standards  for  gaming,  set maximum and  minimum  machine  payout  percentages,
entitle the state to inspect  casinos,  require  background  investigations  and
licensing of casino  employees and may require the tribe to pay a portion of the
state's  expenses for  establishing and maintaining  regulatory  agencies.  Some
tribal-state  compacts  are for  set  terms,  while  others  are for  indefinite
duration.

      Our jointly  developed  Indian casino resort would therefore be subject to
the requirements and restrictions contained in the compact with the State of New
York.  An  outline  of the  basic  terms  for this  compact  is set forth in the
proposed  Tribal-State  Compact between the St. Regis Mohawk Tribe and the State
of New York governing Class III Gaming in Sullivan County. Pursuant to the terms
of this document, the tribe would be permitted to develop a tribal casino in the
Town of Thompson in Sullivan County,  New York that will permit the operation of
slot machines,  but not VGMs, for an initial term of 14 years, with an automatic
seven year renewal and shall provide the tribe,  along with certain other Indian
tribes,  the exclusive  right to operate slot machines in the counties of Bronx,
Delaware, Greene, Kings, New York, Orange, Queens, Richmond, Rockland, Sullivan,
Ulster and Westchester (which includes all of New York City). Under the proposed
compact, the tribe is required to contribute 20% of its slot machine net revenue
to the State of New York  during  the first  two years of  operation,  with such
contribution  subsequently  increasing  to 25%.  The St. Regis Mohawk Tribe must
commence gaming operations within 24 months of receiving all requisite state and
federal approvals.  Finally,  the tribe agreed to collect and remit to the State
of New York,  all state and local  taxes in  connection  with all sales  made by
vendors with respect to the gaming facility of alcoholic beverages,  cigarettes,
tobacco  products,  gas and all other personal property and services sold to non
members of the tribe. This compact, however, does not become effective until the
enactment of federal and state legislation and tribal  resolutions that formally
implement its terms.

      There is an existing  compact  between the St.  Regis Mohawk Tribe and the
State of New York,  which was amended on February 19, 2007 to incorporate  terms
relevant to the project at Monticello Raceway under existing  legislation.  This
compact,  however,  does not become effective until the enactment of federal and
state legislation and tribal  resolutions that formally implement its terms. The
following  is a summary of certain  terms of the compact  between the St.  Regis
Mohawk Tribe and the State of New York, as amended:

      o  The St. Regis Mohawk Tribe may  establish  one gaming  facility  within
         Town of Thompson in Sullivan County, New York.

      o  The St. Regis Mohawk Tribe shall commence  construction  of a permanent
         gaming  facility within 180 days of the latter of the effective date of
         the compact or when a qualifying  parcel is acquired or accepted by the
         Secretary  of the  Interior in trust for the  benefit of the St.  Regis
         Mohawk  Tribe;  and  commence  Class  III  gaming  activities  within a
         permanent  gaming  facility on such site within 24 months of the latter
         of the  effective  date of the compact or when a  qualifying  parcel is
         acquired or accepted by the  Secretary of the Interior in trust for the
         benefit of the St. Regis Mohawk Tribe.

      o  The St. Regis Mohawk Tribe is specifically  authorized to conduct Class
         III gaming  including slot machines  ,baccarat,  bang, beat the dealer,
         best poker hand, blackjack, Caribbean stud poker, chuck-a-luck,  craps,
         gaming  devices,   hazard,  joker  seven,  keno,  let  it  ride  poker,
         minibaccarat,  pai gow poker,  red dog,  roulette,  sic bo,  super pan,
         under and over  seven,  wheel  games,  casino war,  Spanish  blackjack,
         multiple action blackjack and three card poker.


                                       8


      o  The compact  provides for a term of 14 years following the commencement
         of gaming  activities,  unless renewed or terminated as provided in the
         compact. The compact allows for automatic renewal unless objected to by
         the State of New York. Video lottery terminals are not permitted.

      o  The St. Regis Mohawk Tribe will provide  reasonable access to the Class
         III gaming and related  facilities  to labor union  organizers  and for
         union  purposes  and shall  enter into an  agreement  with the New York
         Hotel & Motel Trades Council for the unionization of certain employees.

      o  The St. Regis Mohawk  Tribe,  along with certain  other Indian  tribes,
         receives the  exclusive  right to operate slot machines in the counties
         of Bronx, Delaware,  Greene, Kings, New York, Orange, Queens, Richmond,
         Rockland, Sullivan, Ulster and Westchester.

      o  New York State would  receive 20 percent of  slot-machine  revenues for
         the first two years after the St. Regis Mohawk Tribe's Class III casino
         to be located at Monticello  Raceway opens, 23 percent for the next two
         years and 25 percent thereafter

      o  The St. Regis Mohawk Tribe shall  collect and remit to the State of New
         York all state and local  taxes in  connection  with all sales  made by
         vendors  with respect to the gaming  facility of  alcoholic  beverages,
         cigarettes,  tobacco products,  gas and all other personal property and
         services sold to non members of the tribe.

      o  The St.  Regis  Mohawk  Tribe  waives any  defense  that it may have by
         virtue of  sovereign  immunity  with  respect to any action  brought in
         United States District Court to enforce an arbitration  award under the
         compact.

      o  The St. Regis  Mohawk Tribe and the State of New York will  establish a
         method of non-judicial  dispute  resolution.  The parties shall meet to
         negotiate in good faith any unresolved disputes which are to be settled
         by arbitration.  The decision of the arbitrator shall be final, binding
         and not subject to appeal. For breaches of the compact,  the arbitrator
         may impose as a remedy only specific performance. Either party may seek
         a temporary  restraining order or preliminary  injunction in accordance
         with the Indian  Gaming  Regulatory  Act and either  party may bring an
         action in the United States District Court of the Northern  District of
         New York to enforce the arbitrator's decision and award.

      In  addition  to the Indian  Gaming  Regulatory  Act of 1988,  as amended,
tribally-owned gaming facilities on Indian land are subject to a number of other
federal  statutes.  The  operation  of gaming on Indian land is  dependent  upon
whether  the law of the state in which the casino is located  permits  gaming by
non-Indian entities, which may change over time.

COMPETITION

      MONTICELLO RACEWAY

      Generally, Monticello Raceway does not compete directly with other harness
racing  tracks in New York State for live racing  patrons.  However,  Monticello
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 Raceway has been a significant
limitation on its ability to compete for off-track wagering revenues.

      MONTICELLO GAMING AND RACEWAY

      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  Raceway.  Yonkers  Raceway  re-opened  during the
fourth  quarter of 2006.  It appears that the VGM  facility at Aqueduct  Raceway
will not be opened until at least late 2007.  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.


                                       9


      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 at their  racetracks  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.

      COMPETING CASINOS AND PROPOSED CASINO PROJECTS

      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 Raceway.

      In  November  of  2004,  a number  of other  Indian  tribes  entered  into
agreements  with the State of New York with  respect to land claims  against the
State.  As in the case of the St.  Regis Mohawk  Tribe,  these  agreements  also
require state and federal  legislation to be enacted in order to implement their
provisions.

      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 will 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.  Such parcel of land will be
Indian Country under 18 U.S.C. ss.1151.

      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 with the State of New York.

      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


                                       10



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  hotel  guest  room 34  story  tower  with
convention facilities and a spa and opened in the summer of 2002.

      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.
No  trial  date  has  been  scheduled,  but if the  court  determines  that  the
Shinnecocks  are  immune  from the suit,  the  injunction  may be lifted and the
Shinnecocks  may move  ahead  with  their  casino  in  Southampton.  Should  the
Shinnecocks  operate  a gaming  facility  in  Southampton,  New  York,  which is
approximately  90 miles from New York City, it is expected to have some level of
economic impact on any casino in the Catskills region of the State of New York.

      In Atlantic City there are currently more than 10 casino hotels. Moreover,
substantial new expansion and development  activity has recently been completed,
is under  construction,  or has been announced in Atlantic  City,  including the
summer of 2003  opening of the Borgata  Casino  developed by MGM Mirage and Boyd
Gaming and the expansions at Harrah's, Tropicana and Showboat.

      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   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 and in Pennsylvania.

EMPLOYEES

      As of March 8, 2007, we and our subsidiaries  employed  approximately  370
people.


                                       11


ITEM 1A.    RISK FACTORS.

RISKS RELATED TO OUR BUSINESS

      IF REVENUES AND OPERATING INCOME FROM OUR VGMS AT MONTICELLO  RACEWAY DO
NOT  INCREASE OR IF WE ARE UNABLE TO DEVELOPA  SUCCESSFUL  INDIAN  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  successfully  develop and manage an Indian casino
for the St. Regis Mohawk Tribe and our ability to attract sufficient attendance.

      There can be no assurance that VGMs will draw sufficiently large crowds to
Monticello  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.  Until  recently,  our VGM operations were losing money, as we are
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% our VGM gross revenue in excess
of $150 million.  Moreover,  the legislation  authorizing the  implementation of
VGMs at Monticello  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
our proposed Indian 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.

      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  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 THE COMPLETION OF OUR
CURRENT CASINO DEVELOPMENT PROJECTS, PREVENT US FROM PURSUING FUTURE 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 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.


                                       12


      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 the St.  Regis
Mohawk  Tribe,  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.

      During 2002,  certain  affiliates  of Bryanston  Group,  Inc.  ("Bryanston
Group"),  our former  largest  stockholder,  and six of our former  officers and
directors were indicted for various  counts of tax and bank fraud.  On September
5, 2003, one of these former  directors  pleaded guilty to felony tax fraud, and
on  February  4, 2004,  four  additional  former  officers  and  directors  were
convicted of tax and bank fraud. None of the acts these individuals were charged
with or  convicted  of  relate  to  their  former  positions  with or  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, 2006, was approximately  $22.9 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
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  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.
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 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 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.


                                       13


      BECAUSE OF THE UNIQUE STATUS OF INDIAN  TRIBES,  GENERALLY,  OUR ABILITY
TO SUCCESSFULLY  DEVELOP AND MANAGE OUR PROPOSED INDIAN CASINO WILL BE SUBJECT
TO UNIQUE RISKS.

      We have limited experience in managing or developing Indian 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 casino developed with the St. Regis Mohawk
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 ourselves and the St. Regis
Mohawk Tribe may arise. With respect to disputes  concerning our existing gaming
facility  management  agreement  and  development  agreement  with the St. Regis
Mohawk  Tribe,  the St. Regis Mohawk  Tribe has waived its  sovereign  immunity,
although if for any reason that waiver should be ineffective, we might be unable
to enforce our rights under such  agreement.  Also, it is possible that we might
be  required  to seek  enforcement  of our  rights  in a court or other  dispute
resolution  forum of the St.  Regis  Mohawk  Tribe,  instead of state or federal
courts or arbitration.  As discussed below, until the gaming facility management
agreement has been  approved by the NIGC and by the St. Regis Mohawk 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
some or all of our 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 casino
with the St. Regis Mohawk Tribe.  Several  companies with gaming experience that
have tried to become  involved in the  management  and/or  development of Indian
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.

      GAMING IS A HIGHLY REGULATED  INDUSTRY AND CHANGES IN THE LAW COULD HAVE
A MATERIAL  ADVERSE EFFECT ON US AND OUR ABILITY TO CONDUCT  GAMING,  AND THUS
ON OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.

      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. As is the case with any casino, changes in applicable laws and regulations
could limit or materially  affect the types of gaming that may be conducted,  or
services provided, by our planned casino and the revenues realized from it.

      Currently,  the  operation of all gaming on Indian lands is subject to the
Indian Gaming Regulatory Act. Over the past several years,  legislation has been
introduced in the United States Congress with the intent of addressing a variety
of perceived  problems  with the Indian  Gaming  Regulatory  Act.  Specifically,
legislation  has been proposed  which would have the effect of  prohibiting  the
operation of particular classes of gaming on parcels of land, such as ours, that
are not located on existing Indian  reservations.  While none of the substantive
proposed  amendments to the Indian Gaming  Regulatory Act have been enacted,  we
cannot  predict  future  legislative  acts.  In the event that  Congress  passes
prohibitory legislation,  and if such legislation is sustained in the courts, we
may be unable to move forward in  developing  our planned  Indian casino and our
ability to meet our debt service  obligations  would be materially and adversely
affected. In addition,  under federal law, gaming on Indian land is dependent on
the  permissibility  under  state law of  specific  forms of  gaming or  similar
activities.  If the  State  of New York  were to make  various  forms of  gaming
illegal or against public policy,  such action may have an adverse effect on our
ability to develop Indian gaming operations in the Catskills region of the State
of New York.

      A TRANSFER OF A PROPOSED  CASINO SITE TO THE UNITED STATES,  TO BE HELD IN
TRUST FOR THE BENEFIT OF THE ST.  REGIS  MOHAWK  TRIBE MIGHT NOT OCCUR OR MAY BE
DELAYED FOR A SUBSTANTIAL  PERIOD OF TIME; AND UNTIL SUCH A TRANSFER OCCURS,  IT
WILL NOT BE POSSIBLE  FOR THE ST.  REGIS MOHAWK TRIBE TO OPERATE A CASINO IN THE
CATSKILLS REGION OF THE STATE OF NEW YORK FOR US TO MANAGE.


                                       14


      Under the Indian Gaming Regulatory Act of 1988, as amended,  the St. Regis
Mohawk  Tribe  will be able to operate a casino in the  Catskills  region of the
State of New York only if the  casino  is  located  on land  held by the  United
States in trust for the tribe (or subject to similar  restrictions on transfer),
and only if such tribe exercises  governmental powers over the casino site. That
same Act, however,  generally  prohibits Indian casinos on land transferred into
trust after  October 17, 1988,  subject to certain  exceptions,  one of which is
being pursued by the St. Regis Mohawk Tribe,  without any assurance that it will
be obtained.

      The exception  being pursued by the St. Regis Mohawk Tribe permits land to
be transferred after October 17, 1988, if, after consultation with the tribe and
applicable state, local and other nearby tribal officials,  the Secretary of the
Interior (who acts through the Bureau of Indian Affairs (the "BIA"))  determines
that a gaming  establishment  on the land proposed for transfer  would be in the
best interest of the tribe and its members,  and would not be detrimental to the
surrounding community,  and the Governor of the applicable State concurs in such
determination.  To date, the instances are very limited where this exception has
been successful for  off-reservation  land,  particularly in circumstances where
the land to be  placed  in trust is  located  a  substantial  distance  from the
ancestral lands or reservation of a tribe.  While the St. Regis Mohawk Tribe has
certain  ancestral  ties to the  Catskills  region of New York,  the region is a
substantial  distance from land  recognized to be a part of the Tribe's  current
reservation.  Nevertheless,  we were  advised  that on December 21, 2006 the St.
Regis Mohawk Tribe received a letter from the Secretary of the Interior  stating
that the St. Regis Mohawk Tribe's Final Environmental Assessment had been deemed
sufficient, that an Environmental Impact Study would not be required, and that a
FONSI related to the proposed  federal  action  approving 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  Raceway,  in accordance
with the Indian Gaming  Regulatory Act of 1988 had been issued.  On February 19,
2007,  New  York  Governor  Eliot  Spitzer  issued  his  concurrence  with  this
determination  by the  Secretary of the Interior and signed the amendment to the
Class III gaming compact between the St. Regis Mohawk Tribe and the State of New
York.  Such amendment to the gaming  compact  between the St. Regis Mohawk Tribe
and New York State  effecting  the  Land-to-Trust  Transfer must be reviewed and
approved by the BIA and the BIA must take the necessary administrative action to
effect the Land-to-Trust  Transfer.  No assurance can be given that the BIA will
provide such approval or take the necessary  administrative action to effect the
Land-to Trust Transfer.

      IF OUR GAMING  FACILITY  MANAGEMENT  AGREEMENT  IS NOT  APPROVED  BY THE
NIGC,  WE WILL NOT BE ABLE TO EXECUTE OUR CURRENT  BUSINESS PLAN OF DEVELOPING
AND MANAGING AN INDIAN CASINO.

      Our  agreement  with the St.  Regis  Mohawk Tribe will not be effective to
allow us to commence the  development  or management of a gaming  facility until
our management  agreement is first approved by the NIGC, and that approval might
not be obtained or might be  obtained  only after we agree to modify  terms that
either reduce our revenues under the agreement or otherwise adversely affect us.

      No management  contract for tribally operated Class II or Class III gaming
is valid until  approved by the NIGC,  and under  current  case law in New York,
provisions of any agreement  collateral  to a management  contract,  such as our
development agreement,  are likewise not valid until the management agreement is
so  approved.  The NIGC has broad  discretion  to  approve  or  reject  proposed
management contracts,  and by law the NIGC can approve management fees exceeding
30% of related net gaming revenues only if the Chairman of the NIGC is satisfied
that the  capital  investment  required,  and income  projections,  require  the
additional fee. The St. Regis Mohawk Tribe has agreed to pay us a 30% management
fee, as well as other compensation under the development  agreement.  Our gaming
facility  management  agreement  with the St.  Regis Mohawk Tribe had been under
review with the NIGC for  approximately 3 1/2 years when, in 2000, the St. Regis
Mohawk Tribe  renounced  their  agreements with us and entered into an agreement
with Park Place Entertainment  Corporation (now Harrah's  Entertainment,  Inc.).
Consequently,  our  request  for  review  by the  NIGC  of the  gaming  facility
management agreement was subsequently  withdrawn.  On August 1, 2005, we entered
into a letter agreement with the St. Regis Mohawk Tribe pursuant to which, among
other items, both parties  re-affirmed their prior contracts.  In March 2006, we
re-submitted a gaming facility management agreement to the NIGC, which contained
revisions to address  certain  comments made by the NIGC in their prior reviews.
No  assurance  can be given  that the NIGC  will  approve  the  gaming  facility
management  agreement,  as  amended,  or  that  further  modifications  to  such
agreement  will  not be  required  prior  to the NIGC  granting  approval.  Such
modifications could include a material reduction in the management fees or other
compensation we have negotiated with the St. Regis Mohawk Tribe. As amended, and
approved by the NIGC,  the gaming  facility  management  agreement  will require
formal  approval by the St. Regis Mohawk  Tribe  before such  agreement  becomes


                                       15


effective.  We cannot guarantee that the St. Regis Mohawk Tribe will approve the
amended gaming  facility  management  agreement in order to obtain approval from
the NIGC.

      A CLASS III  GAMING  COMPACT  BETWEEN  THE STATE OF NEW YORK AND THE ST.
REGIS MOHAWK TRIBE MUST BE NEGOTIATED AND BECOME  EFFECTIVE  BEFORE SUCH TRIBE
CAN OPERATE A CASINO FOR US TO MANAGE.

      The St. Regis Mohawk Tribe can not 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.  Although
courts have  invalidated  two other Class III gaming  compacts  between New York
tribes  and the  State  of New York due to lack of  legislative  authority,  the
Governor has received requisite legislative  authorization to enter into a Class
III gaming  compact with the St. Regis Mohawk Tribe in the  Catskills  region of
the State of New York.  Such gaming  compacts will not be entered into until the
appropriate  land has been taken into trust by the United States for the benefit
of such tribe. On February 19, 2007, the St. Regis Mohawk Tribe and the State of
New York  entered  into an  amendment  to their  compact  for Class III  gaming,
pursuant to which,  among other things,  New York State would receive 20 percent
of  slot-machine  revenues  for the first two years after the Tribe's  Class III
casino to be located at Monticello  Raceway  opens,  23 percent for the next two
years and 25 percent thereafter.

      Pursuant  to the Indian  Gaming  Regulatory  Act of 1988,  the compact for
Class III gaming  entered into by the State of New York and the St. Regis Mohawk
Tribe  does  not  become  effective  until an  approval  of the  compact  by the
Secretary  of  the  Interior  has  been  published  in  the  Federal   Register.
Additionally,  the compact could become effective,  but only to the extent it is
consistent with the Indian Gaming  Regulatory Act of 1988, upon publication of a
notice in the Federal  Register  that  forty-five  days have  elapsed  after the
compact was  submitted  for  approval to the  Secretary  of the Interior and the
Secretary  of the Interior  neither  approved nor  disapproved  the compact.  No
assurance can be given that the Secretary of the Interior will approve the terms
of any  compact  agreed to by the St.  Regis  Mohawk  Tribe and the State of New
York. In particular, the existence of revenue sharing provisions in a compact by
which a state  receives a share of tribal  gaming  revenues has provided a basis
for the  Secretary of the Interior to  disapprove a compact.  The Indian  Gaming
Regulatory Act of 1988 generally prohibits a state from imposing a tax on tribes
for the privilege of conducting gaming in the state. The Seneca  Nation-State of
New York gaming  compact  that  governs the Seneca  Niagara  Falls  Casino,  for
example, was neither approved nor disapproved within the required 45-day period,
and  therefore  became  effective  upon  publication  of a notice in the Federal
Register.  In the letter to the Seneca Nation and the Governor of New York,  the
Secretary of the  Interior  stated that the State of New York's right to receive
up to 25% of gross  gaming  revenues  was  primarily  based on the  State of New
York's  grant of an extensive  area in which the Seneca  Nation would have broad
exclusive gaming rights. If the Secretary of the Interior disapproves any agreed
upon  compact,  the compact will not become  effective  and the St. Regis Mohawk
Tribe will not be able to conduct gaming under its terms. Since 2003, a bill has
been pending in Congress  that would limit a State's right to share in a tribe's
gaming  revenues  unless the State  provided the tribe a  "substantial  economic
benefit." We cannot predict if this or other  legislation will be enacted or, if
enacted,  would prevent a gaming compact  between the St. Regis Mohawk Tribe and
the State of New York.

      WE MAY REQUIRE  ADDITIONAL  FINANCING  IN ORDER TO DEVELOP OUR  PROPOSED
INDIAN  CASINO  AND WE MAY BE UNABLE TO MEET OUR FUTURE  CAPITAL  REQUIREMENTS
AND EXECUTE OUR BUSINESS STRATEGY.

      Because we may not be able to continue to generate sufficient cash to fund
our  operations,  we may be forced to rely on external  financing to develop our
Indian casino project 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,  revenues  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  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 delay,
scale back or eliminate some of our expansion and  development  goals related to


                                       16


the 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.

      In addition, the construction of the Indian casino project may depend upon
the ability of the St. Regis Mohawk Tribe to obtain  financing  for the project.
In order to assist the St. Regis Mohawk Tribe to obtain any such financing,  we,
or one of our  subsidiaries,  may be required to guarantee  the St. Regis Mohawk
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 St. Regis Mohawk Tribe.

      OUR  MANAGEMENT   REVENUES  FROM  OUR  PROPOSED  INDIAN  CASINO  MAY  BE
ADVERSELY  AFFECTED BY MATTERS  ADVERSE TO THE ST. REGIS MOHAWK TRIBE THAT ARE
UNRELATED TO US.

      When constructed,  our proposed Indian casino site will be either owned by
the St.  Regis  Mohawk  Tribe,  or held by the  United  States  in trust for the
benefit of the St.  Regis  Mohawk  Tribe.  We and our  subsidiaries  will derive
revenues from the site based on our management and development contracts. If the
St. Regis Mohawk Tribe does not adequately  shield its gaming  operations at the
site from obligations arising from its other non-gaming operations,  and the St.
Regis  Mohawk  Tribe  suffers a material  adverse  event such as  insolvency,  a
default  or  civil  damages  in a matter  in  which  it did not  have  sovereign
immunity,  creditors could attempt to seize some or all of the personal property
or profits from the St. Regis Mohawk Tribe's gaming operations or move to have a
receiver  or trustee  appointed.  Such a result  could lead to the  voidance  or
indirect modification by a court of our subsidiaries' management and development
contracts with the St. Regis Mohawk Tribe,  leading to a material adverse affect
on our  operations.  We may be  required  by lenders  who  finance the casino to
subordinate  all or part of our management  fees to the prior payment in full of
their financing.  In addition,  if creditors were to seize any or all of the St.
Regis  Mohawk  Tribe's  revenues  from  gaming  operations,   our  subsidiaries'
management and  development  agreements with the St. Regis Mohawk Tribe would be
rendered  worthless,  as the ability to conduct  casino  style  gambling on that
property may no longer be permissible.

      THE CONTINUING  DECLINE IN THE POPULARITY OF HORSE RACING AND INCREASING
COMPETITION IN SIMULCASTING  COULD ADVERSELY IMPACT THE BUSINESS OF MONTICELLO
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 Raceway.  Our business plan anticipates the possibility of
Monticello Raceway attracting new customers to its racetrack wagering operations
through VGM operations and potential  casino  development in order to offset the
general  decline  in  raceway   attendance.   However,   even  if  the  numerous
arrangements, approvals and legislative changes necessary for casino development
occur,  Monticello  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
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.


                                       17


      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,  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:

      o  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;

      o  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

      o  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:

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

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

      o  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.

      WE  MAY  NOT  HAVE  THE  ABILITY  TO  REPURCHASE   OUR  SENIOR   SECURED
CONVERTIBLE NOTES.

      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,  we may be required to repurchase
our senior secured convertible 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 of 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.

      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.


                                       18


      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 7,
2007, we had 29,429,902 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,  the existence of our senior secured
convertible notes may encourage short selling by market participants due to this
dilution  or  facilitate  trading   strategies   involving  our  senior  secured
convertible notes and our common stock.

      On January 12,  2004,  18,219,075  shares of our common  stock were issued
pursuant to our acquisition of Monticello Raceway Management,  Inc.,  Monticello
Casino Management,  LLC, Monticello Raceway Development  Company, LLC and Mohawk
Management,  LLC,  all  of  which  may  be  sold  to the  public  pursuant  to a
registration statement under the Securities Act. We also issued 4,050,000 shares
of our  common  stock  to  multiple  investors  in  February  2004 in a  private
placement.  On December  28,  2006,  we entered into an Amendment to that option
agreement,  dated November 12, 2004,  between the Company and Concord Associates
Limited Partnership  ("Concord") pursuant to which (i) Concord exercised options
for  2,500,000  shares  of the  Company's  common  stock for an  aggregate  cash
consideration of $18,750,000 which was paid on January 26, 2007 and (ii) Concord
retained the right to exercise options for an additional 1,000,000 shares of the
Company's  common stock at $7.50 per share until  December 27, 2007. At December
31,  2006,  we had  outstanding  options to purchase an  aggregate  of 3,283,909
shares  of  common  stock at an  average  exercise  price of $6.06 per share and
250,000 warrants at $7.50 per warrant.  If the holders of these shares,  options
or warrants  were to attempt to sell a substantial  amount of their  holdings 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,  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.  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.

      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  YOU  FROM
REALIZING A PREMIUM RETURN ON YOUR 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


                                       19


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.

      YOUR 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 your 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 YOU WANT TO SELL YOUR
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, 2004 and March
9, 2007,  the closing bid price of our common stock has ranged between $3.30 and
$15.00.  A variety of events may cause the market  price of our common  stock to
fluctuate significantly, including but not necessarily limited to:

      o  quarter to quarter variations in operating results;

      o  adverse news announcements; and

      o  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 you want to sell your 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  casino.  We
are  subject to greater  risks than more  geographically  diversified  gaming or


                                       20


resort  operations and may continue to be subject to these risks upon completion
of our expansion projects, including:

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

      o  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 casinos and VGMs at certain  racetracks  and other  locations in
         New York, Connecticut and Pennsylvania;

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

      o  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  casino to ensure  adequate  cash flow during  expected  periods of lower
revenues,  we cannot assure you 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.

      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 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 ($10,000,000) limit of coverage for
the perils of flood and earthquake, we can not assure 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.  For  example,  Senator
John  McCain of  Arizona,  the  former  chairman  of the Senate  Indian  Affairs
Committee, - announced in 2006 that he is calling for hearings on all aspects of


                                       21


Indian  gaming.  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.

      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.

      Former New York State Governor  George Pataki  proposed  legislation  that
would result in up to five Indian casinos being developed in Sullivan County. It
is  uncertain  whether the local  governments  have the ability to support  this
level of economic  development.  The demands place 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 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 the grandstand portion of Monticello  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.

      Of these 232 acres of land,  we plan to convey a 29 acre parcel of land 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
December 12, 2005,  the  agreement was amended to provide for a maturity date of
January 11,  2008,  among other  things.  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.


                                       22


      We  also  lease  a  warehouse   located  at  222  South  Theobald  Street,
Greenville, Mississippi for $850 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 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 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
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  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.  This  consolidated  action is
pending.  There has been certain paper discovery completed (bill of particulars)
and there are  outstanding  requests for further  interrogatories  and discovery
items.  Depositions have not yet been held. There have been numerous  settlement
conferences in the context of the ongoing global contract  negotiations  between
the parties.

      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  Raceway and
Yonkers  Raceway  seeking  the  return to the OTBs of  various  racing  revenues
previously  paid by the OTBs to  Monticello  Raceway and Yonkers  Raceway,  more
commonly  known in the  industry  as "dark  day  monies"  and  out-of-state  OTB
commissions. 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  Raceway, as
prosecuted,  is in excess of $4.0 million  together with ongoing  payments which
the OTBs are making to  Monticello  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.  An appeal by the
petitioners is pending in the appellate court.

      In August 2006,  The New York State  Racing and  Wagering  Board issued an
arbitrator's  award defining the contract terms between  Monticello  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,  which appeal is pending. The import of the escrow provision
is that,  if the lower court is reversed and the escrow  provision is reinstated
as part of the arbitration award, we will have to deposit into an escrow account
an amount,  which at this time, is approximately  $5.0 million,  as security for
payment of future horsemens' purses.


                                       23


      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
[Object Omitted]

        COMPANY/INDEX           12/31/01 12/31/02 12/31/03 12/31/04 12/30/05 12/29/06
-----------------------------  --------- -------- -------- -------- -------- --------
Empire Resorts, Inc..........    100.00    16.81    66.78    82.59    54.81    64.22
Resorts and Casinos..........    100.00   105.11   137.98   234.04   228.64   357.68
NASDAQ Market Index..........    100.00    69.75   104.88   113.70   116.19   128.12

      Assumes $100 invested on December 31, 2001 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.


                                       24


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        Low
                                       ----        ---
Year ended December 31, 2005
      First Quarter                 $  12.21   $   6.96
      Second Quarter                    7.25       3.25
      Third Quarter                     5.67       3.71
      Fourth Quarter                    8.10       3.91

Year ended December 31, 2006
      First Quarter                 $   8.29   $   4.12
      Second Quarter                    6.95       4.80
      Third Quarter                     7.76       5.04
      Fourth Quarter                   10.20       6.25

HOLDERS

      According to Continental  Stock  Transfer & Trust Company,  there were 244
holders of record of our common stock at March 7, 2007.

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  unpaid  Series  E  preferred  dividends  of
approximately, $5.6 million as of December 31, 2006.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The  following  table  provides  information  as of December 31, 2006 with
respect to the shares of our common  stock that may be issued under our existing
equity compensation plans.

                                                                                                      Number of
                                                                                                     securities
                                                                                                      remaining
                                                                                                    available for
                                                             Number of                             future issuance
                                                          securities to be                           under equity
                                                            issued upon       Weighted-average       compensation
                                                            exercise of       exercise price of    plans (excluding
                                                            outstanding          outstanding          securities
                                                         options, warrants    options, warrants      reflected in
                                                             and rights           and rights          column (a))
                                                                (a)                  (b)                  (c)
                                                         -----------------    -----------------    -----------------
Equity compensation plans approved by
     security holders...............................          2,123,909       $        5.12            772,051
Equity compensation plans not approved by
     security holders...............................          1,410,000                7.59               --
                                                         -----------------    -----------------    -----------------
     Total..........................................          3,533,909       $        6.11            772,051
                                                         =================    =================    =================


                                       25


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,
2006,  2005,  and 2004 and the selected  consolidated  balance  sheet data as of
December 31, 2006 and 2005 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, 2003 and
2002 and the selected  consolidated  balance sheet data as of December 31, 2004,
2003 and 2002 are derived  from the  Company's  audited  consolidated  financial
statements not included herein.

STATEMENT OF OPERATIONS DATA                                    (All dollar amounts in thousands, except per share data)
                                                           -----------------------------------------------------------------
                                                                                Years ended December 31,
                                                           -----------------------------------------------------------------
                                                             2006          2005          2004          2003          2002
                                                           -----------------------------------------------------------------
NET REVENUES                                               $ 98,110      $ 86,764      $ 45,006      $  9,740      $ 11,366
                                                           -----------------------------------------------------------------
Operating costs and expenses, including depreciation         98,542        85,647        55,514        11,263        12,678
Impairment loss - deferred development costs                   --          14,291          --           4,243          --
LOSS FROM OPERATIONS                                           (432)      (13,174)      (10,508)       (5,766)       (1,312)
NET LOSS                                                     (7,076)      (18,527)      (12,745)       (6,524)       (1,933)
Dividends paid on preferred stock                              --            --             (30)         --            --
Cumulative undeclared dividends on preferred stock           (1,551)       (1,551)       (1,510)         --            --
                                                           -----------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON SHARES                       $ (8,627)     $(20,078)     $(14,285)     $ (6,524)     $ (1,933)
                                                           =================================================================
                                                           $  (0.32)     $  (0.77)     $  (0.57)     $  (0.36)     $  (0.11)
                                                           ========      ========      ========      ========      ========
Loss per common share, basic and diluted


OTHER FINANCIAL DATA:
Capital Expenditures                                       $    320      $  1,967      $ 31,079      $  1,382      $    171
                                                           ========      ========      ========      ========      ========

BALANCE SHEET DATA:
Cash and cash equivalents                                  $  9,471      $  6,992      $  7,164      $  1,354      $    644
Total assets                                                 60,564        57,245        60,753        13,825        13,980
Long-term debt                                               65,000        65,000        65,000         7,503         6,821
Total shareholders' equity  (deficit)*                      (25,723)      (27,215)      (14,992)       (1,662)        4,572


*     For the years ended December 31, 2003 and 2002, total shareholders' equity
      (deficit) was members' equity (deficit)


                                       26


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 gaming and hospitality 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.

      On October  31,  2001,  the State of New York  enacted a bill  designating
seven racetracks,  including  Monticello  Raceway,  to install and operate VGMs.
Under the  program,  the New York State  Lottery made an initial  allocation  of
1,800 VGMs to Monticello  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  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 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 Raceway and commenced
the VGM  operations  under the auspices of the New York State  Lottery.  We also
pursued  continuing  efforts to develop an Indian  casino  resort on a parcel of
land adjacent to Monticello 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 acres of land  adjacent  to  Monticello  Raceway.  Under  this
agreement,  we are 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 casino.

      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  Raceway  and as a  condition  to the  closing of the
consolidation with Catskill Development,  L.L.C., 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 in which our common  stockholders of record


                                       27


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 each of the years ended  December 31, 2006,  2005 and 2004, we provided
$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 of $505,000 against the receivable from the Litigation Trust
in each of those  years.  The  aggregate  amount  due at  December  31,  2006 is
$1,515,000  and there is a valuation  allowance  recorded for the full amount of
those advances.

      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 any
draws 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 our  development  project  with the St. Regis Mohawk
Tribe we have agreed to make payments to the tribe to support  operations of the
Tribal  Gaming  Authority  and will  provide  technical  assistance,  payment of
professional  and legal  consultants  and other support as we seek the necessary
licenses and approvals to commence  construction.  Our payments to the tribe are
estimated to be approximately $25,000 per month in 2007.

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  to  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.  Also, see 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 at the end of each  racing  day,  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.  We  recognize  revenues  from
pari-mutuel wagering and VGM operations at the end of each day of operation. The


                                       28


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.

      Accounts  Receivable.  Accounts  receivable  are  reported  at the  amount
outstanding.  Management expects to collect the entire amount and,  accordingly,
determined  that no  allowance  is required at  December  31, 2006 or 2005.  The
Company,  in the normal course of business,  settled wagers for other racetracks
and is potentially  exposed to credit risk. We have not experienced  significant
losses regarding the settlement of wagers. These wagers are included in accounts
receivable.

      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
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 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.

      Stock-Based  Compensation.  In December  2004,  the  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS") No. 123 (revised 2004), "Share Based Payment" ("SFAS No. 123(R)"). SFAS
No.  123(R)  supersedes  Accounting  Principles  Board  ("APB")  Opinion No. 25,
"Accounting for Stock Issued to Employees,"  and amends SFAS No. 95,  "Statement
of Cash Flows." Generally, the fair value approach in SFAS No. 123(R) is similar
to the fair value approach described in SFAS No. 123. Effective January 1, 2003,
we have  adopted  SFAS  No.  123 and used the  Black-Scholes-Merton  formula  to
estimate the fair value of stock options  granted to employees.  We adopted SFAS
No. 123(R), using the  modified-prospective  method,  beginning January 1, 2006.
Based on the terms of our plans, we did not have a cumulative  effect related to
our plans.  We also  elected to  continue  to  estimate  the fair value of stock
options using the  Black-Scholes-Merton  formula.  In the first quarter of 2006,
the  adoption  of SFAS No.  123(R) did not have a  material  impact on our first
quarter stock-based  compensation  expense.  Further, we believe the adoption of
SFAS No.  123(R)  will not have a  material  impact  on our  future  stock-based
compensation  expense.  As of December 31, 2006,  there was  approximately  $1.7
million  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, warranty and other claims and litigation based on
available  information to assess  potential  liability.  We develop our views on


                                       29


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, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

      REVENUES.  Total net revenues increased approximately $11.3 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 $1.7 million (or 34%) offset by increased  complimentary  expenses
of approximately $1.1 million (or 59%).

      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.

      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 34%.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  general  and
administrative expenses increased approximately $4.9 million (or 37%) in 2006 to
approximately  $18.3  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 will have 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:


                                       30


      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.

      YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

      Our  operations  for the years ended  December  31, 2005 and 2004 were not
similar due to the commencement of the new VGM operations on June 30, 2004.

      REVENUES.  Total net revenues increased approximately $41.8 million or 93%
for the year ended  December 31, 2005  primarily as a result of our VGM facility
operating a full year in 2005  compared  with only a little more than six months
in 2004.  Racing revenue for 2005 was  approximately  $5.0 million or 47% higher
than 2004. This was primarily a result of increased revenue allocations from OTB
facilities.  A track which normally  shares in those revenues with us was not in
operation  for the last 6 months of 2005 and our share of the total OTB revenues
was significantly higher as a result. That track was in operation for the entire
year of 2004.

      VGM revenues for the six months  ended  December 31, 2005  compared to the
six months ended December 31, 2004 increased from approximately $32.0 million to
approximately $37.2 million,  approximately $5.2 million or 16%. We believe that
this  increase  was  largely a result of our  continued  marketing  efforts  and
greater  customer  awareness  of our  facility.  VGM revenues for the year ended
December  31, 2005 were  approximately  $68.1  million and  approximately  $32.3
million for the year ended  December 31, 2004.  These amounts are not comparable
because our VGM facility was open for a little over six months in the year ended
December 31, 2004.

      COSTS AND  EXPENSES.  Total costs and  expenses  (excluding  depreciation)
increased  from  approximately  $55.0  million  in 2004 to  approximately  $84.5
million in 2005.  This  increase of  approximately  $29.5 million or 53% was the
result  of the VGM  facility  being in  operation  for the  entire  year 2005 as
compared to a little more than six months in 2004,  increased salaries and other
compensation  as the result of a change in senior  management  at the end of the
second  quarter  of  2005,  costs  related  to  the  termination  of  a  planned
acquisition and increased write-offs related to development activity.

      VGM costs and expenses for the six months ended December 31, 2005 compared
to the six months ended  December 31, 2004 increased  from  approximately  $31.4
million to approximately $31.6 million,  approximately $200,000 or less than 1%.
The fact that these  costs  were  almost  unchanged  despite a 16%  increase  in
related revenues is primarily a result of a change in April 2005 in the New York
State law governing VGM operations like ours. The change increased the amount of
VGM revenues retained by the operator and provided for the Lottery commission to
reimburse  operators for certain  qualified  marketing  expenses by allowing the
operators  to  receive  an  additional  amount of VGM  revenues  to cover  those
qualified   expenses.   Lottery   commission   officials   must  approve   those
reimbursements and they are paid from a restricted cash account created for that
purpose. VGM costs and expenses for the year ended December 31, 2005 compared to
the year ended December 31, 2004 increased from  approximately  $31.7 million to
approximately  $60.2 million.  These amounts are not comparable  because our VGM
facility  was open for a little over six months in the year ended  December  31,
2004.


                                       31


      DEPRECIATION.  Depreciation expense increased from approximately  $507,000
in 2004 to  approximately  $1.1  million  in 2005.  This is a result  of the VGM
facility  operating  for the full year in 2005  compared  with a little over six
months in 2004. A significant  portion of our  depreciable  assets is associated
with our VGM facility.

      INTEREST AND AMORTIZATION OF DEFERRED  FINANCING  COSTS.  Interest expense
increased from  approximately $1.9 million in 2004 to approximately $4.8 million
in 2005. In 2004,  interest expense was comprised of interest on our Convertible
Notes  at 5.5% for  about 5 months  (approximately  $1.5  million)  and on other
borrowing  repaid  during  that  year.  In 2005,  we  incurred  interest  on our
Convertible Notes at 5.5% for seven months and 8% for five months (approximately
$4.3 million) and on borrowings  under our  revolving  credit  facility at LIBOR
plus 4%  (approximately  $526,000).  The  increase in  amortization  of deferred
financing  costs is primarily a result of the  Convertible  Notes being in place
for the full year 2005 compared with a little more than five months in 2004.

      IMPAIRMENT OF DEFERRED  DEVELOPMENT COSTS. In 2005, our routine review for
impairment  led to our  conclusion  that it was no longer  appropriate  to defer
certain costs associated with some development  projects and certain other costs
connected  to a merger  agreement  that the  parties  elected  to  terminate  on
December  30,  2005.   The  total  charge  for  those   impairment   losses  was
approximately $14.3 million.

LIQUIDITY AND CAPITAL RESOURCES

      We believe  that we have  access to sources  of working  capital  that are
sufficient  to fund our  operations  for the year ended  December 31, 2007.  The
results of  operations  of our VGM facility have been improved by the changes in
the amount of revenue retained by VGM agents, we have approximately $2.5 million
available from our revolving  credit  facility and we received $18.75 million in
January, 2007 from the exercise of options to purchase 2.5 million shares or our
common stock. We believe that any significant  capital  requirements  associated
with our  development  projects can be met by  additional  debt or equity issues
when needed.

      Net cash provided by operating  activities  during the year ended December
31, 2006 was  approximately  $5.3 million compared to net cash used in operating
activities of approximately  $1.2 million in 2005. The increase in cash provided
of  approximately  $6.5 million is primarily the result of the reduction in loss
from operations plus the effect of the collecting  approximately $3.1 million of
amounts due from the New York Lottery for the marketing allowance (approximately
$4.2 million in restricted cash at December 31, 2005).

      Net cash used in investing  activities was approximately  $3.3 million for
the year ended December 31, 2006,  consisting  primarily of  approximately  $2.4
million expended for deferred  development costs (net of approximately  $192,000
in non-cash additions). During the year ended December 31, 2005 net cash used in
investing  activities in was approximately $5.8 million, and consisted primarily
of approximately  $2.0 million for improvements and equipment and  approximately
$3.3  million in costs  associated  with  casino  development  projects  (net of
approximately $1.1 million in non-cash additions).

      Net cash  provided  by  financing  activity  for  2006  was  approximately
$488,000  representing  net proceeds from borrowings  under our revolving credit
facility  (approximately  $141,000) and proceeds from the exercise of options to
purchase our common  stock  (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.  Net cash provided by financing  activity for
2005 was  approximately  $6.8 million  representing net proceeds from borrowings
under our revolving credit facility.

      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 matures
in two years. To secure the timely  repayment of any borrowings by us under this
credit facility, among other things, we agreed to:

      o  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;

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


                                       32


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

      o  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 bear interest,
at our option, at the rate of prime plus 2% or Libor plus 4%. 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 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.

      On February 16, 2005,  we issued  12,640 shares of common stock in payment
of  dividends  on our Series B Preferred  Stock for the year ended  December 31,
2004. The recorded value of these shares was approximately $142,000.

      At  December  31,  2006,  we had  undeclared  dividends  on our  Series  E
Preferred Stock of approximately $5.6 million and undeclared  dividends for 2006
on our Series B Preferred Stock of approximately  $167,000. We intend to pay the
dividends  on  Series B  Preferred  Stock by  issuing  common  stock.  We are in
compliance with our Certificates of Designations,  Preferences and Rights of the
issued and outstanding preferred shares.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS NO. 155

      In February  2006, the FASB issued SFAS No. 155,  "Accounting  for Certain
Hybrid Financial  Instruments--an  Amendment of FASB Statements No. 133 and 140"
("SFAS No.  155").  SFAS No. 155 allows  financial  instruments  that contain an
embedded derivative and that otherwise would require bifurcation to be accounted
for as a whole on a fair value  basis,  at the holders'  election.  SFAS No. 155
also clarifies and amends certain other  provisions of SFAS No. 133 and SFAS No.
140.  This  statement is effective  for all  financial  instruments  acquired or
issued in fiscal years  beginning after September 15, 2006. The adoption of SFAS
No. 155 did not have an impact on our consolidated financial condition,  results
of operations, or cash flows.

SFAS NO. 156

      In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing of
Financial Assets--an Amendment of FASB Statement No. 140" ("SFAS No. 156"). SFAS
No. 156 provides guidance on the accounting for servicing assets and liabilities
when an entity undertakes an obligation to service a financial asset by entering
into a servicing  contract.  This statement is effective for all transactions in
fiscal years  beginning  after  September 15, 2006. The adoption of SFAS No. 156
did not have an impact  on our  consolidated  financial  condition,  results  of
operations, or cash flows.

FIN NO. 48

      In June 2006, the FASB issued FASB  Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN
48"). We will adopt the  provisions of FIN 48 for fiscal years  beginning  after


                                       33


December  15,  2006.  We do not expect  FIN 48 to have a material  impact on our
consolidated results of operations, financial position, or cash flows.

SFAS NO. 157

      In September 2006, the FASB issued SFAS No. 157,"FAIR VALUE  MEASUREMENTS"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted  accounting  principles  ("GAAP"),  and expands
disclosures about fair value measurements.  We will adopt the provisions of SFAS
157  effective  January  1, 2008.  We do not expect  SFAS 157 to have a material
impact on our consolidated  results of operations,  financial position,  or cash
flows.

SFAS NO. 158

      In September  2006, the FASB issued SFAS No. 158,  "EMPLOYERS'  ACCOUNTING
FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS--AN amendment of FASB
Statements  No. 87,  88,  106,  and  132(R)"  ("SFAS  158").  SFAS 158  improves
financial  reporting by requiring an employer to  recognize  the  overfunded  or
underfunded  status  of a  defined  benefit  postretirement  plan as an asset or
liability in its  statement of  financial  position and to recognize  changes in
that funded status in the year in which the changes occur through  comprehensive
income.  SFAS 158  will  not  have an  impact  on our  consolidated  results  of
operations, financial position, or cash flows.

STAFF ACCOUNTING BULLETIN ("SAB") NO. 108

      In September 2006, the Securities and Exchange  Commission  ("SEC") issued
SAB No. 108, "Quantifying Financial Statement  Misstatements".  Due to diversity
in practice  among  registrants,  the SEC staff in SAB 108  expresses  its views
regarding  the  process  by which  misstatements  in  financial  statements  are
evaluated for purposes of determining whether financial statement restatement is
necessary.  We will be required to adopt SAB 108 in fiscal  2007.  We are in the
process of evaluating SAB 108, but do not believe it will have a material impact
on consolidated results of operations, financial position, or cash flows.

SFAS NO. 159

      On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for  Financial  Assets  and  Financial  Liabilities"  ("SFAS  159").  Under this
standard,  we may elect to report financial  instruments and certain other items
at fair value on a contract-by-contract  basis with changes in value reported in
earnings.  This election is  irrevocable.  SFAS 159 provides an  opportunity  to
mitigate  volatility  in reported  earnings  that is caused by measuring  hedged
assets  and  liabilities  that  were  previously  required  to  use a  different
accounting method than the related hedging contracts when the complex provisions
of SFAS 133  hedge  accounting  are not met.  SFAS 159 is  effective  for  years
beginning  after  November  15,  2007.  Early  adoption  within  120 days of the
beginning of our 2007 fiscal year is permissible,  provided that we have not yet
issued interim  financial  statements for 2007 and have adopted SFAS 159. We are
currently  evaluating the impact SFAS 159 will have on our consolidated  results
of operations, financial position, and cash flows.

CONTRACTUAL OBLIGATIONS

Contractual Obligations                                                      Payments due by period
--------------------------------------------------                              (in thousands)
                                                               Less                                       More
                                                               than 1       1 - 3         3 - 5          than 5
                                                  Total         year        years         years          years
                                               ----------    ----------    ----------    ----------    -----------
          Senior Convertible Notes (a):
Principal                                       $ 65,000      $   --        $   --        $   --         $ 65,000
Estimated interest (b)                            39,000         5,200        10,400        10,400         13,000
           Revolving credit facility:
Principal                                          7,617          --           7,617          --             --
Estimated interest (b)                               745           685            60          --             --

           Operating lease obligations               467           204           261             2           --
                                               ----------    ----------    ----------    ----------    -----------
Total                                           $112,829      $  6,089      $ 18,338      $ 10,402       $ 78,000
                                               ==========    ==========    ==========    ==========    ===========


                                       34



(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

      On January 26, 2007, we received $18.75 million as payment for 2.5 million
shares of our common stock issued as a result of an option exercised on December
28, 2006 pursuant to an option granted in 2004 and modified in December 2006.

      On March 8, 2007, our Board of Directors authorized the issuance of 18,884
shares of our common  stock in payment of  dividends  on our Series B  Preferred
Stock for 2006. The value of these shares was approximately $190,000.

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  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.


                                       35


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                                                            Page
                                                                            ----

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND 2005 AND FOR THE
THREE YEARS ENDED DECEMBER 31, 2006:
Report of Independent Registered Public Accounting Firm....................  37
Report of Independent Registered Public Accounting Firm on Internal
  Control over Financial Reporting.........................................  38
Consolidated Balance Sheets................................................  39
Consolidated Statements of Operations......................................  40
Consolidated Statements of Stockholders' Deficit...........................  41
Consolidated Statements of Cash Flows......................................  42
Notes to Consolidated Financial Statements.................................  44


                                       36


             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, 2006 and 2005, 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,  2006.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Empire Resorts, Inc.
and  subsidiaries  as of  December  31,  2006 and 2005,  and the  results of its
operations  and its cash  flows for each of the years in the  three-year  period
ended  December 31, 2006 in  conformity  with  accounting  principles  generally
accepted in the United States of America.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal  control over  financial  reporting  as of December 31, 2006,  based on
criteria  established in Internal  Control - Integrated  Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 7, 2007  expressed  an  unqualified  opinion on  management's
assessment  of internal  control over  financial  reporting  and an  unqualified
opinion on the effectiveness of internal control over financial reporting.


/s/ Friedman LLP

New York, New York
March 7, 2007


                                       37


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Empire Resorts, Inc.

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal Control Over Financial  Reporting,  that Empire
Resorts,  Inc.  and  subsidiaries  maintained  effective  internal  control over
financial  reporting as of December 31, 2006,  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  maintaining  effective  internal
control over financial  reporting and for its assessment of the effectiveness of
internal control over financial  reporting.  Our responsibility is to express an
opinion on management's  assessment and an opinion on the  effectiveness  of the
company's internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides 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.

In  our  opinion,   management's   assessment  that  Empire  Resorts,  Inc.  and
subsidiaries  maintained  effective internal control over financial reporting as
of December 31, 2006,  is fairly  stated,  in all  material  respects,  based on
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in
our opinion, Empire Resorts, Inc. and subsidiaries  maintained,  in all material
respects, effective internal control over financial reporting as of December 31,
2006,  based on criteria  established in Internal  Control-Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Empire Resorts,  Inc. and  subsidiaries as of December 31, 2006 and 2005 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, 2006,
and our report dated March 7, 2007 expressed an unqualified opinion.


/s/ Friedman LLP

New York, New York
March 7, 2007


                                       38


                      EMPIRE RESORTS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   DECEMBER 31
                    (In thousands, except for per share data)

                                                              2006       2005
                                                              ----       ----
     ASSETS
Current assets:
     Cash and cash equivalents                             $  9,471    $  6,992
     Restricted cash                                          1,747       4,716
     Accounts receivable                                      5,253       3,358
     Prepaid expenses and other current assets                1,545       1,112
                                                           --------    --------
               Total current assets                          18,016      16,178
Property and equipment, net                                  31,703      32,536
Deferred financing costs, net of accumulated
amortization
     of $ 1,364 in 2006 and $ 709 in 2005                     3,116       2,973
Deferred development costs                                    7,729       5,558
                                                           --------    --------
TOTAL ASSETS                                               $ 60,564    $ 57,245
                                                           ========    ========


     LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
     Revolving credit facility                             $  7,617    $  7,476
     Accounts payable                                         3,734       3,529
     Accrued expenses and other current liabilities           9,936       8,455
                                                           --------    --------
               Total current liabilities                     21,287      19,460
Senior convertible notes                                     65,000      65,000
                                                           --------    --------
Total liabilities                                            86,287      84,460
                                                           --------    --------


Commitments and contingencies                                  --          --


Stockholders' deficit:
     Preferred stock, 5,000 shares authorized; $0.01
par value -
          Series B, 44 shares issued and outstanding           --          --
          Series E, $10.00 redemption value, 1,731
shares issued and outstanding                                 6,855       6,855
     Common stock, $0.01 par value, 75,000 shares
authorized, 29,428 and 26,312 shares issued and
outstanding in 2006 and 2005, respectively                      294         263
     Amount due from exercise of option                     (18,750)       --
     Additional paid in capital                              49,113      21,728
     Accumulated deficit                                    (63,235)    (56,061)
                                                           --------    --------
               Total stockholders' deficit                  (25,723)    (27,215)
                                                           --------    --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                $ 60,564    $ 57,245
                                                           ========    ========

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


                                       39


                      EMPIRE RESORTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             YEARS ENDED DECEMBER 31
                    (In thousands, except for per share data)

                                                   2006       2005          2004
                                                   ----       ----          ----
     REVENUES:
Racing                                        $  17,997    $  15,652    $  10,657
Gaming                                           76,510       68,059       32,285
Food, beverage and other                          6,612        4,941        2,772
                                              ---------    ---------    ---------
GROSS REVENUES                                  101,119       88,652       45,714
Less promotional allowances                      (3,009)      (1,888)        (708)
                                              ---------    ---------    ---------
          NET REVENUES                           98,110       86,764       45,006
                                              ---------    ---------    ---------
     COSTS AND EXPENSES:
Racing                                           11,914        8,979       11,253
Gaming                                           64,533       60,159       31,672
Food, beverage and other                          2,661        2,036        1,246
Selling, general and administrative
   expense *                                     18,290       13,352       10,836
Depreciation                                      1,144        1,121          507
Impairment loss - deferred development
   costs                                           --         14,291         --
                                              ---------    ---------    ---------
     TOTAL COSTS AND EXPENSES                    98,542       99,938       55,514
                                              ---------    ---------    ---------
LOSS FROM OPERATIONS                               (432)     (13,174)     (10,508)
Amortization of deferred financing costs           (655)        (575)        (378)
Interest expense                                 (5,989)      (4,778)      (1,859)
                                              ---------    ---------    ---------
          NET LOSS                               (7,076)     (18,527)     (12,745)
                                              ---------    ---------    ---------
Dividends paid on preferred stock                  --           --            (30)
Cumulative undeclared dividends on
   preferred stock                               (1,551)      (1,551)      (1,510)
                                              ---------    ---------    ---------
NET LOSS APPLICABLE TO COMMON SHARES          $  (8,627)   $ (20,078)   $ (14,285)
                                              =========    =========    =========

Weighted average common shares outstanding,
          basic and diluted                      26,703       26,149       25,199
                                              ---------    ---------    ---------
Loss per common share, basic and diluted      $   (0.32)   $   (0.77)   $   (0.57)
                                              =========    =========    =========
* Includes stock-based compensation
expense of                                    $   7,401    $   4,309    $   2,959
                                              =========    =========    =========

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


                                       40


                                                EMPIRE RESORTS, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                            YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                           (In thousands)

                                             Preferred Stock
                              --------------------------------------------
                                      Series B             Series E             Common Stock
                              ----------------------  --------------------   -------------------
                                                                                                               Capital
                                                                                                    Amount        In
                                                                                                   due from     Excess    Accumu-
                                                                                                   exercise     of Par     lated
                                Shares       Amount     Shares     Amount     Shares     Amount    of option     Value    Deficit*
--------------------------    ---------    ---------  ---------- ---------  ---------  ---------   ---------    --------- ---------

Balances, January 1, 2004         --       $   --         --     $   --        --      $   --      $   --     $   --      $ (1,662)
                                 -----     --------      -----   --------    ------    --------    --------   --------    --------
Recapitalization effect of
   reverse acquisition              44         --        1,731      6,855    24,206         242        --       18,372     (22,745)
Declared and paid
   dividends on preferred
   stock                          --           --         --         --          16        --          --          210        (240)
Stock based compensation          --           --         --         --          40        --          --        2,959        --
Common stock issued
   through private
   placement sales                --           --         --         --       4,050          41        --       30,335        --
Warrants issued through
   private placement              --           --         --         --        --          --          --        2,103        --
Stock issuance expenses           --           --         --         --        --          --          --       (4,420)       --
Common stock issued
   from exercise of stock
   options                        --           --         --         --          61           1        --          150        --
Common stock converted
   to long term debt              --           --         --         --      (2,393)        (24)       --       (5,049)       --
Excess of market value
   over carrying value of
   property and equipment
   purchased from a
   related party                  --           --         --         --        --          --          --      (30,825)       --
Common stock issued for
   development costs              --           --         --         --         100           1        --        1,449        --
Net loss                          --           --         --         --        --          --          --         --       (12,745)
                                 -----     --------      -----   --------    ------    --------    --------   --------    --------
Balances, December 31, 2004         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)
                                 =====     ========      =====   ========    ======    ========    ========   ========    ========


* For the year 2003, Accumulated Deficit was Members' Equity (Deficiency)

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


                                                                 41


                                     EMPIRE RESORTS, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            YEARS ENDED DECEMBER 31
                                                (In thousands)

                                                                   2006              2005              2004
                                                                 ---------         ---------         ---------
                    CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         $ (7,076)         $(18,527)         $(12,745)
Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
          Depreciation                                              1,144             1,121               507
          Amortization of deferred financing costs                    655               575               378
          Allowance for doubtful accounts - Advances
                to Litigation Trust                                   505               505               505
          Impairment loss - deferred development costs               --              14,291              --
          Stock - based compensation                                7,401             4,309             2,959
          Loss on disposal of property and equipment                   11                10              --
   Changes in operating assets and liabilities:
          Restricted cash (VGM Marketing Accounts)                  3,076            (4,151)             --
          Accounts receivable                                      (1,894)             (679)           (1,921)
          Prepaid expenses and other current assets                  (433)             (238)             (620)
          Accounts payable                                            396            (1,383)           (2,208)
          Accrued expenses and other current liabilities            1,480             2,962             4,504
                                                                 --------          --------          --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                 5,265            (1,205)           (8,641)
                                                                 --------          --------          --------
                   CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                   (320)           (1,967)          (31,079)
Restricted cash (Racing capital improvement)                          (86)                6               (37)
Cash acquired in acquisition                                         --                --                  18
Advances to Litigation Trust                                         (505)             (505)             (505)
Deferred development costs                                         (2,363)           (3,309)           (4,614)
                                                                 --------          --------          --------
NET CASH USED IN INVESTING ACTIVITIES                              (3,274)           (5,775)          (36,217)
                                                                 --------          --------          --------
                    CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock                               --                --              30,375
Proceeds from issuance of senior convertible notes                   --                --              65,000
Proceeds from revolving credit facility                               141             7,476              --
Proceeds from exercise of stock options                             1,166               283               151
Stock issuance expenses                                              --                --              (2,317)
Deferred financing costs                                             (798)             (539)           (3,143)
Restricted cash (related to revolving credit facility)                (21)             (412)             --
Excess of market value over carrying value of property and
     equipment purchased from related party                          --                --             (30,825)
Repayment of bank loan and promissory notes                          --                --              (8,543)
Dividends paid on preferred stock                                    --                --                 (30)
                                                                 --------          --------          --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                             488             6,808            50,668
                                                                 --------          --------          --------
Net increase (decrease) in cash and cash equivalents                2,479              (172)            5,810
Cash and cash equivalents, beginning of year                        6,992             7,164             1,354
                                                                 --------          --------          --------
Cash and cash equivalents, end of year                           $  9,471          $  6,992          $  7,164
                                                                 ========          ========          ========

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


                                                      42


                                     EMPIRE RESORTS, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            YEARS ENDED DECEMBER 31
                                                (In thousands)

                                                                           2006          2005         2004
                                                                         ---------     --------     --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid for interest during the year                              $  5,989      $  4,033     $    319

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

     Common stock issued in settlement of preferred stock dividends      $     98      $    142     $    210
      Amount due from exercise of option                                   18,750          --           --
     Noncash additions to deferred development costs                          192         1,108          665
     Common stock issued for deferred development costs                      --            --          1,450
     Accrued construction costs                                              --            --          1,447
     Issuance of promissory note to redeem outstanding common stock          --            --          5,073
     Warrants issued in settlement of stock issuance expenses                --            --          2,103

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


                                                      43


                      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, 2006 and 2005,  the
consolidated statements of operations,  stockholders' deficit and cash flows for
the years ended December 31, 2006,  2005 and 2004 include the accounts of Empire
Resorts,  Inc ("Empire",  "the Company" or "we"),  and certain of the assets and
liabilities of Catskill Development,  L.L.C. ("CDL"), which were merged into the
Company effective January 12, 2004. The operations of CDL for the period January
1, 2004 through January 11, 2004, which were not significant, have been included
in the  consolidated  statement of  operations,  stockholders'  deficit and cash
flows for the year ended  December 31, 2004.  For  accounting  purposes,  CDL is
deemed  to have  been the  acquirer  in the  merger.  The  assets  that were not
transferred  through the merger  were  leased to the  Company  and  subsequently
purchased on July 26, 2004 from CDL, a related party.  The amount  recorded upon
that  acquisition  was the amount at which those  assets had been carried on the
records of CDL.

      Although  Empire was the legal  survivor  in the merger  and  remains  the
registrant  with  the  Securities  and  Exchange  Commission,  under  accounting
principles generally accepted in the United States, the merger was accounted for
as a reverse  acquisition,  whereby CDL was considered the acquirer of more than
50% of the post  transaction  combined  company.  Among other  matters,  reverse
merger  accounting  requires  Empire to present in all financial  statements and
other public information filings, prior historical and other information of CDL,
and a retroactive  restatement of CDL historical shareholders investment for the
equivalent number of shares of common stock received in the merger. Accordingly,
the accompanying  consolidated  financial  statements reflect the acquisition of
Empire as of January 1, 2004 under the purchase method of accounting. Subsequent
to  January  1,  2004,  the  operations  of the  Company  reflect  the  combined
operations of the former Empire and CDL.

LIQUIDITY

      We believe  that we have  access to sources  of working  capital  that are
sufficient  to fund our  operations  for the year ended  December 31, 2007.  The
results of operations  of our Video Gaming  Machine  ("VGM")  facility have been
improved by the changes in the amount of revenue retained by VGM agents, we have
approximately  $2.5 million  available from our revolving credit facility and we
received  $18.75  million  in  January,  2007 from the  exercise  of  options to
purchase  2.5 million  shares or our common  stock (see Note P). We believe that
any significant capital  requirements  associated with our development  projects
can be met by additional debt or equity issues when needed.

NATURE OF BUSINESS

      During the past three years,  we have  concentrated  on developing  gaming
operations in New York State.  Through our subsidiaries,  we intend to develop a
gaming resort in Monticello,  New York that includes harness horse racing,  VGMs
and an Indian casino in New York State.  We continue to explore  other  possible
development projects.

      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 generates revenue.


                                       44


      RACEWAY AND VGM OPERATIONS

      Monticello Raceway  Management,  a wholly owned subsidiary,  is a New York
corporation that operates  Monticello  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.

      ST. REGIS MOHAWK RESORT DEVELOPMENT

      We had previously  attempted to develop a casino with the St. Regis Mohawk
Tribe  beginning in 1996. On April 6, 2000, the United States  Department of the
Interior  advised New York State  Governer  George Pataki that it had determined
that the acquisition of 29 acres adjacent to Monticello  Raceway would be in the
best interest of the St.Regis  Mohawk Tribe and would not be  detrimental to the
community.  Such determinations  required the concurrence of the Governor of New
York in order for the project to proceed.  For a period of time thereafter,  the
St. Regis Mohawk Tribe agreed to work exclusively with Park Place  Entertainment
Corporation  (now part of  Harrah's  Entertainment,  Inc.),  which  proposed  to
develop a casino for the St. Regis Mohawk Tribe at the nearby Kutsher's Sporting
Academy. However, by Summer 2005, the needed approvals for a casino at Kutsher's
Sporting Academy had not  materialized,  and we and the St. Regis Mohawk Tribe's
leaders discussed the possibility of moving forward with the previously obtained
approvals for the casino project at Monticello Raceway.

      On August 1, 2005, we entered into a letter  agreement  with the St. Regis
Mohawk Tribe pursuant to which the St. Regis Mohawk Tribe  acknowledged  that on
April 6, 2000,  the United States  Department  of the Interior  advised New York
State  Governor  George Pataki that the  acquisition of 29 acres adjacent to the
Raceway  would be in the best  interest of the St.  Regis Mohawk Tribe and would
not be detrimental to the community.  Under the letter agreement, we and the St.
Regis  Mohawk  Tribe  affirmed,  subject  to the  requested  concurrence  by the
Governor of New York State,  all prior  contracts to develop an Indian casino at
the  Raceway.  The St.  Regis  Mohawk  Tribe  further  agreed to (1) satisfy all
requirements for the Bureau of Indian Affairs (the "BIA") in connection with the
transfer of the 29 acres of land to the United  States  government  in trust for
the  St.  Regis  Mohawk  Tribe,   (2)  resolve  any  remaining  issues  for  the
finalization  of  the  pre-existing   management   agreement  with  one  of  our
subsidiaries for the project previously  submitted to the National Indian Gaming
Commission  (the  "NIGC"),  (3)  execute  any  amendment  or  revision  to  such
management agreement, or any collateral agreements,  that may be mutually agreed
upon in such process, (4) support the approval of such management agreement,  as
so amended or revised,  by the NIGC and (5) take any and all reasonably required
steps to  consummate  the land to trust  transfer of the parcel  pursuant to the
April 6, 2000 determination as promptly as practicable following the concurrence
of the Governor of New York State.

      The  current  plans  for the St.  Regis  Mohawk  Tribe  casino  resort  at
Monticello  Raceway  include  160,000 square feet of gaming space for 3,500 slot
machines and 125 table games, with sufficient space to accommodate an additional
500 slot machines and a variety of food and beverage offerings and entertainment
venues.

      On March 20, 2006,  we  submitted a proposed  form of amended and restated
gaming  facility   management   agreement  (the  "Gaming   Facility   Management
Agreement")  and  collateral  agreements  to the NIGC for review and approval or


                                       45


disapproval.  Until  approved by the Chairman of the NIGC,  the gaming  facility
management agreement is not in force. Neither the St. Regis Mohawk Tribe nor the
St. Regis Mohawk  Gaming  Authority  (the  "Authority")  has approved the Gaming
Facility  Management  Agreement.  We expect, but cannot guarantee,  that the St.
Regis Mohawk Tribe will approve the Gaming Facility Management Agreement.

      Under  the  currently  proposed  form of the  Gaming  Facility  Management
Agreement,  the  Authority  will  retain us to manage  all casino  style  gaming
activities,  other than  horserace  wagering  and Class II  gaming,  that may be
conducted on the land for seven years commencing upon the NIGC's approval of the
agreement.  We would also be retained to manage all lawful commercial activities
on the land related to gaming such as automatic teller  machines,  food service,
lodging and retail.  At the same time, we have agreed to assist the Authority to
obtain  financing  for  the  gaming   enterprise  and  all  related   commercial
activities.  In  exchange  for these  services,  we are  entitled  to  receive a
management  fee equal to 30% of the net revenues  derived from the operations we
manage.

      Under  the  Gaming  Facility  Management  Agreement,  before  we  can  pay
ourselves  our fee,  we must  first pay to the  Authority  a  minimum  return of
$516,667 per month.  These minimum  priority  payments are to be charged against
the Authority's distribution of net revenues and, when there is insufficient net
revenue in a given month to pay the minimum return,  we are obligated to advance
the  funds  necessary  to  compensate  for the  deficiency,  with the  Authority
reimbursing  us in the next  succeeding  month or months.  The minimum return is
required to be paid to the Authority every month gaming is conducted,  including
on a pro rata basis during  those months when gaming is conducted  only for part
of a month.

      While the  terms of the  proposed  Gaming  Facility  Management  Agreement
provide us with wide  discretion as to the  day-to-day  management of the gaming
facilities,  all major  decisions  or  expenditures  must first be approved by a
management business board to be comprised of four persons, two of whom are to be
appointed by the Authority and the other two of whom are to be appointed by us.

      In  carrying  out our duties as manager  of the  gaming  facility,  we are
required to provide  the St.  Regis  Mohawk  Tribe and other  recognized  Indian
tribes with certain  preferences  including  giving  preference  in  recruiting,
training  and  employment  first to  qualified  members of the St.  Regis Mohawk
Tribe,  and  secondly  to  other  qualified  Indians  and the  local  community,
providing  training  programs for members of the St. Regis Mohawk Tribe;  and in
entering  into  contracts  for the supply of goods and  services  for the gaming
enterprise, giving preference first to qualified members of the St. Regis Mohawk
Tribe,  and qualified  business  entities  certified by the Authority or the St.
Regis Mohawk Tribe as being controlled by members of the St. Regis Mohawk Tribe,
and second to other qualified Indians and qualified  business entities certified
by the Authority to be controlled by Indians and to the local community.

      We also  entered  into a  gaming  facility  development  and  construction
agreement  with the  Authority  and the St.  Regis  Mohawk  Tribe  (the  "Gaming
Facility  Development and  Construction  Agreement"),  pursuant to which we were
granted the exclusive right to design, engineer,  construct, furnish and develop
a Class III Indian casino resort with the St. Regis Mohawk Tribe,  and we agreed
to help arrange  financing of the project.  In exchange for these services,  the
Authority  agreed to pay us a  development  fee  equal to 5% of the  first  $505
million of the project's construction costs, not to exceed $15 million,  payable
monthly as the project costs are incurred. However, the Authority is entitled to
retain 10% of such  development fees until the project is 50% completed and then
5% until the project is  completed.  On the  completion  date,  the Authority is
required to pay us these retained fees.

      Similar to the Gaming Facility Management  Agreement,  in the execution of
our duties under the Gaming Facility Development and Construction  Agreement, we
must first seek  approval  from a  development  business  board before any major
decisions or material  expenditures  are made.  The  development  business board
shall be  comprised  of four  persons,  two of whom are to be  appointed  by the
Authority and the other two of whom are to be appointed by us. Finally,  similar
to the  covenants  of the  Gaming  Facility  Management  Agreement,  the  Gaming
Facility  Development  and  Construction  Agreement  provides  that any  general
contractor hired by Monticello Raceway Development shall use its reasonable best
efforts to give,  and to cause  subcontractors  to give, a hiring  preference to
qualified members of the St. Regis Mohawk Tribe.

      The plans  are in a  preliminary  stage and are  subject  to  approval  by
relevant government authorities and the St. Regis Mohawk Tribe.


                                       46


      After  notification  from the St. Regis Mohawk Tribe,  the BIA recommenced
review  process for the  acquisition  of the 29 acres adjacent to the Raceway by
the St.  Regis  Mohawk  Tribe.  On April 13, 2006 the St. Regis Mohawk Tribe was
notified that the BIA had completed its review of the  Environmental  Assessment
("EA") for a proposed transfer of land into trust for a casino at the Monticello
Raceway site. The review identified  certain additional areas to address and the
St. Regis Mohawk Tribe  completed  the filing of the responses to those items on
July  5,  2006.  Following  this  filing,  the  review  of the EA by the BIA was
completed on September  12, 2006 and the document was made  available for public
review and comment on that date.  The St. Regis Mohawk Tribe has provided to the
BIA responses to all of the comments received during the comment period.

      On December 21, 2006 the St. Regis Mohawk Tribe received a letter from the
BIA  stating  that  the St.  Regis  Mohawk  Tribe's  Final  EA has  been  deemed
sufficient,  an Environmental Impact Study will be not be required and a Finding
of No  Significant  Impact  ("FONSI")  related to the  proposed  federal  action
approving  the  request  of the Tribe to take  29.31  acres  into  trust for the
purpose  of  building a Class III gaming  facility  to be located at  Monticello
Raceway,  in  accordance  with the  Indian  Gaming  Regulatory  Act of 1988 (the
"Land-to-Trust Transfer") has been issued.

      On  February  19,  2007,  New  York  Governor  Eliot  Spitzer  issued  his
concurrence with regard to the April 2000 Secretarial  Determination which found
that  gaming in Sullivan  County by the St.  Regis  Mohawk  would be in the best
interest  of the St.  Regis  Mohawk  Tribe  and its  members  and  would  not be
detrimental to the surrounding  communities.  In addition, on February 19, 2007,
Governor Spitzer 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 percent of slot-machine  revenues for the first two years after the St. Regis
Mohawk Tribe's Class III casino to be located at Monticello  Raceway  opens,  23
percent for the next two years and 25 percent thereafter.

      On February 19, 2007 we were  notified by the St. Regis Mohawk Tribe that,
on February 16, 2007, a complaint was 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  ("NEPA")  and the  Administrative  Procedure  Act by
issuing a Finding of No Significant  Impact without  requiring an  environmental
impact  statement  ("EIS")  under  NEPA.  The  plaintiffs  are  seeking an order
requiring  the  preparation  of an EIS  prior to  Department  of the  Interior's
granting final  approvals for the proposed St. Regis Mohawk Casino at Monticello
Raceway and prior to the  Department of the  Interior's  causing the transfer of
the subject land into federal trust.  We expect that the defendants will respond
to the complaint within the next 60 days.

      On March 17, 2006,  through our subsidiaries,  we entered into a series of
agreements  with the St. Regis Mohawk Tribe which  provide for the  development,
construction,  financing,  operation and management of a Class III Indian casino
on land  adjacent  to the  Raceway.  On  March  20,  2006,  we  submitted  these
agreements to the NIGC for review.  All of the  provisions  of these  agreements
relating to the  management  of the casino are subject to review and approval by
the NIGC and the Secretary of the Interior prior to becoming effective.  Pending
such approval and as a result of such review,  such provisions may be amended or
supplemented by the parties.

      CAYUGA CATSKILL RESORT DEVELOPMENT

      On April  3,  2003,  we,  the  Cayuga  Nation  of New York and the  Cayuga
Catskill Gaming Authority (the  "Authority"),  an  instrumentality of the Cayuga
Nation of New York formed to develop and conduct  gaming  operations,  signed an
initial form of gaming facility management agreement and related agreements. The
agreements  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
casino in the  Monticello  area.  The  principal  agreements  were  extended  in
December  2005 to December 31,  2006.  Subsequent  to entering  into our initial
agreement  with the Cayuga Nation of New York, but prior to the execution of our
recent extensions, leadership issues arose within the Cayuga Nation of New York,
which resulted in the suspension of federal  processing of the applications made
under  our  earlier  agreements.  We did not  attempt  to extend  the  principal
agreements beyond December 31, 2006.

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 at the end of each  racing  day,  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.  We  recognize  revenues  from
pari-mutuel wagering and VGM operations at the end of each day of operation. 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


                                       47


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 $202,000
and $150,000 at December 31, 2006 and 2005, respectively.

      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.

      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 according to 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  $ 239,000  and  $153,000  at  December  31,  2006 and 2005,
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   $1,076,000  and  $4,151,000  at  December  31,  2006  and  2005,
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  $432,000 and $412,000 at December 31, 2006 and
2005, respectively.

      ACCOUNTS  RECEIVABLE.  Accounts  receivable  are  reported  at the  amount
outstanding.  Management expects to collect the entire amount and,  accordingly,
determined  that no allowance  is required at December 31, 2006 or 2005.  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.

      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:


                                       48


                                         Estimated
                                          Useful
Assets                                     Lives
---------------------------------       ----------
Vehicles                                5-10 years
Furniture, fixtures and equipment       5-10 years
Land improvements                        20 years
Building improvements                    40 years
Buildings                                40 years

      DEFERRED  FINANCING  COSTS.  Deferred  financing  costs are amortized on
the straight-line method over the term of the related debt.

      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 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 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.

      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, warranty and other claims and litigation 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, 2006,
2005 and 2004 were the same.

      The following table shows the securities outstanding at December 31, 2006,
2005 and 2004 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.


                                       49


                                                               Outstanding at December 31,
                                                           2006           2005          2004
                                                        ----------     ----------     ----------
Options                                                  3,284,000      7,786,000      1,028,000
Warrants                                                   250,000        250,000        250,000
Shares issuable upon conversion of convertible debt      5,175,000      5,175,000      4,727,000
Unvested restricted stock                                   89,000        175,000           --
                                                        ----------     ----------     ----------
Total                                                    8,798,000     13,386,000      6,005,000
                                                        ==========     ==========     ==========

      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  $1,740,000,   $890,000  and
$776,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

      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-BASED  COMPENSATION.  In December  2004,  the  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS") No. 123 (revised 2004), "Share Based Payment" ("SFAS No. 123(R)"). SFAS
No.  123(R)  supersedes  Accounting  Principles  Board  ("APB")  Opinion No. 25,
"Accounting for Stock Issued to Employees,"  and amends SFAS No. 95,  "Statement
of Cash Flows." Generally, the fair value approach in SFAS No. 123(R) is similar
to the fair value approach described in SFAS No. 123. Effective January 1, 2003,
our Company has adopted SFAS No. 123 and used the  Black-Scholes-Merton  formula
to estimate the fair value of stock options  granted to  employees.  Our Company
adopted  SFAS No.  123(R),  using  the  modified-prospective  method,  beginning
January 1, 2006.  Based on the terms of our plans,  our  Company  did not have a
cumulative  effect related to our plans. Our Company also elected to continue to
estimate the fair value of stock options using the Black-Scholes-Merton formula.
In the first  quarter of 2006,  the  adoption of SFAS No.  123(R) did not have a
material impact on our first quarter stock-based compensation expense.  Further,
we believe the  adoption of SFAS No.  123(R) will not have a material  impact on
our Company's future stock-based  compensation expense. As of December 31, 2006,
there was  approximately  $1.7 million 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.

SFAS NO. 155

      In February  2006, the FASB issued SFAS No. 155,  "Accounting  for Certain
Hybrid Financial  Instruments--an  Amendment of FASB Statements No. 133 and 140"
("SFAS No.  155").  SFAS No. 155 allows  financial  instruments  that contain an
embedded derivative and that otherwise would require bifurcation to be accounted
for as a whole on a fair value  basis,  at the holders'  election.  SFAS No. 155
also clarifies and amends certain other  provisions of SFAS No. 133 and SFAS No.
140.  This  statement is effective  for all  financial  instruments  acquired or
issued in fiscal years  beginning after September 15, 2006. The adoption of SFAS
No. 155 did not have an impact on our consolidated financial condition,  results
of operations, or cash flows.


                                       50


SFAS NO. 156

      In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing of
Financial Assets--an Amendment of FASB Statement No. 140" ("SFAS No. 156"). SFAS
No. 156 provides guidance on the accounting for servicing assets and liabilities
when an entity undertakes an obligation to service a financial asset by entering
into a servicing  contract.  This statement is effective for all transactions in
fiscal years  beginning  after  September 15, 2006. The adoption of SFAS No. 156
did not have an impact  on our  consolidated  financial  condition,  results  of
operations, or cash flows.

FIN NO. 48

      In June 2006, the FASB issued FASB  Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES--AN  INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN
48"). We will adopt the  provisions of FIN 48 for fiscal years  beginning  after
December  15,  2006.  We do not expect  FIN 48 to have a material  impact on our
consolidated results of operations, financial position, or cash flows.

SFAS NO. 157

      In September 2006, the FASB issued SFAS No. 157,"FAIR VALUE  MEASUREMENTS"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in  generally  accepted  accounting  principles  (GAAP),  and expands
disclosures about fair value measurements.  We will adopt the provisions of SFAS
157  effective  January  1, 2008.  We do not expect  SFAS 157 to have a material
impact on our consolidated  results of operations,  financial position,  or cash
flows.

SFAS NO. 158

      In September  2006, the FASB issued SFAS No. 158,  "EMPLOYERS'  ACCOUNTING
FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS--AN amendment of FASB
Statements  No. 87,  88,  106,  and  132(R)"  ("SFAS  158").  SFAS 158  improves
financial  reporting by requiring an employer to  recognize  the  overfunded  or
underfunded  status  of a  defined  benefit  postretirement  plan as an asset or
liability in its  statement of  financial  position and to recognize  changes in
that funded status in the year in which the changes occur through  comprehensive
income.  SFAS 158  will  not  have an  impact  on our  consolidated  results  of
operations, financial position, or cash flows

STAFF ACCOUNTING BULLETIN ("SAB") NO. 108

      In September 2006, the Securities and Exchange  Commission  ("SEC") issued
SAB No. 108, "Quantifying Financial Statement  Misstatements".  Due to diversity
in practice  among  registrants,  the SEC staff in SAB 108  expresses  its views
regarding  the  process  by which  misstatements  in  financial  statements  are
evaluated for purposes of determining whether financial statement restatement is
necessary.  We will be required to adopt SAB 108 in fiscal  2007.  We are in the
process of evaluating SAB 108, but do not believe it will have a material impact
on consolidated results of operations, financial position, or cash flows.

SFAS NO. 159

      On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for  Financial  Assets  and  Financial  Liabilities"  ("SFAS  159").  Under this
standard,  we may elect to report financial  instruments and certain other items
at fair value on a contract-by-contract  basis with changes in value reported in
earnings.  This election is  irrevocable.  SFAS 159 provides an  opportunity  to
mitigate  volatility  in reported  earnings  that is caused by measuring  hedged
assets  and  liabilities  that  were  previously  required  to  use a  different
accounting method than the related hedging contracts when the complex provisions
of SFAS 133  hedge  accounting  are not met.  SFAS 159 is  effective  for  years
beginning  after  November  15,  2007.  Early  adoption  within  120 days of the
beginning of our 2007 fiscal year is permissible,  provided that we have not yet
issued interim financial statements. We are currently evaluating the impact SFAS
159 will have on our results of operations, financial position, and cash flows.


                                       51


NOTE C. PROPERTY AND EQUIPMENT

Property and equipment at December 31 consists of:

                                                   (in thousands)
                                                 2006         2005
                                              ---------     --------
Land                                          $    770      $    770
Land improvements                                1,510         1,495
Buildings                                        4,583         4,583
Building improvements                           24,513        24,454
Vehicles                                           140           120
Furniture, fixtures and equipment                2,949         2,738
                                              --------      --------
                                                34,465        34,160
Less - Accumulated depreciation                 (2,762)       (1,624)
                                              --------      --------
                                              $ 31,703      $ 32,536
                                              ========      ========

      Depreciation expense was approximately $1,144,000, $1,121,000 and $507,000
for the years ended December 31, 2006, 2005 and 2004, respectively.

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  casino  facilities.   We  also  incur
development costs associated with other development projects.

      In 2003 and 2004, we issued a total of 300,000  shares of our common stock
to the Cayuga Nation as part of our agreement  with them to work together in the
development of a casino in Sullivan County, New York. The aggregate market value
of these shares when issued was  approximately  $3.9 million and was capitalized
as an addition to deferred development costs at that value.

      We may make advances to provide development  assistance in connection with
the  establishment and initial  operations of tribal gaming  authorities for New
York State gaming operations for the St. Regis Mohawk Tribe. Advances made by us
are  non-interest-bearing and any repayment of them is ultimately dependent upon
the completion of the development of the projects.

      We also capitalize costs directly  associated with the development of real
estate for those Indian gaming facilities and other projects.  Some of the costs
capitalized in connection with Indian casinos will be repaid,  with no interest,
from the permanent  financing  for the project or from project cash flow.  Costs
that are not reimbursed  will be  systematically  charged to our operations over
the period covered by our management contract.

      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 year ended December 31, 2005.

The following tables reflect activity in the deferred  development cost accounts
for the years ended December 31, 2006 and 2005.


                                       52


                                                                         Activity for the Year Ended
                                                                              December 31, 2006
                                                          --------        --------------------------      --------
                                                          Balance                                         Balance
                                                         January 1,                                     December 31,
                                                            2006          Additions       Impairment        2006
                                                          --------        ---------       ----------      --------
                                                                  (in thousands)
    Advances to and payments on behalf of the St.
                 Regis Mohawk Tribe:
Advances for operations of Tribal Gaming Authority        $     67        $    314         $  --          $    381
Legal fees and other professional fees relating to
casino resort development                                      163           1,732            --             1,895
                                                          --------        --------         --------       --------
                                                               230           2,046            --             2,276
Costs specifically associated with site at Raceway           5,328             125            --             5,453
                                                          --------        --------         --------       --------
Total development costs                                   $  5,558        $  2,171         $  --          $  7,729
                                                          ========        ========         ========       ========

                                                                         Activity for the Year Ended
                                                                              December 31, 2005
                                                          --------        --------------------------      --------
                                                          Balance                                         Balance
                                                         January 1,                                     December 31,
                                                            2005          Additions       Impairment        2005
                                                          --------        ---------       ----------      --------
                                                                  (in thousands)
   Advances to and payments on behalf of the
           Cayuga Nation of New York:
Advances for operations of Tribal Gaming Authority        $    305        $    410         $   (715)      $   --
Legal fees and other professional fees relating to
casino resort development                                    2,202           1,705           (3,907)          --
Value of common stock issued to Tribe in connection
with exclusive development agreement                         3,890            --             (3,890)          --
                                                          --------        --------         --------       --------
                                                             6,397           2,115           (8,512)          --
                                                          --------        --------         --------       --------
   Advances to and payments on behalf of the
           Seneca-Cayuga Tribe of Oklahoma:
Advances for operations of Tribal Gaming Authority             620            --               (620)          --
Legal fees and other professional fees relating to
casino resort development                                    1,123             620           (1,743)          --
                                                          --------        --------         --------       --------
                                                             1,743             620           (2,363)          --
                                                          --------        --------         --------       --------
   Advances to and payments on behalf of the St
           Regis Mohawk Tribe:
Advances for operations of Tribal Gaming Authority           --                 67            --                67
Legal fees and other professional fees relating to
casino resort development                                    --                163            --               163
Costs specifically associated with site at Raceway
and other activities, including proposed merger              5,580           3,164           (3,416)         5,328
                                                          --------        --------         --------       --------
Total development costs                                   $ 13,720        $  6,129         $(14,291)      $  5,558
                                                          ========        ========         ========       ========

      In connection with our development project with the St. Regis Mohawk Tribe
we have agreed to make payments to the tribe to support operations of the Tribal
Gaming Authority and will provide technical assistance,  payment of professional
and legal  consultants  and other support as we seek the necessary  licenses and
approvals to commence  construction.  Our payments to the tribe are estimated to
be approximately $25,000 per month for the remainder of 2007.


                                       53


NOTE E.  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

      Accrued  expenses  and  other  current  liabilities  is  comprised  of the
following at December 31, 2006 and 2005:

                                                            2006        2005
                                                          ------       ------
                                                            (in thousands)
Liability for horseracing purses                          $4,862       $3,328
Accrued interest                                           2,167        2,284
Accrued payroll                                              710          624
Accrued other                                              2,197        2,219
                                                          ------       ------
   Total accrued expenses and other current liabilities   $9,936       $8,455
                                                          ======       ======

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 to the  persons  who are  registered  holders  at the  close  of
business on each January 15 and July 15  immediately  preceding  the  applicable
interest payment date.

      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".  All of the following events constitute a
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.  Since these events 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.

      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.  In the event that the notes  convert  prior to July 31, 2007, we will be
required to make an additional  make-whole payment equal to the present value of
all  remaining  scheduled  payments  of  interest  on the notes to be  converted
through and including July 31, 2007, assuming for such purpose that the interest
rate in effect as of the conversion date shall apply for all subsequent interest
periods  through July 31, 2007. Any  make-whole  payment will be payable in cash
or, at our option, in shares of our common stock at a 5% discount to the average
closing  bid price of our  common  stock for the 10  trading  days  prior to the
conversion date.

      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.


                                       54


      We recognized approximately $5.2 million, $4.3 million and $1.5 million in
interest  expense  associated  with the senior  convertible  notes for the years
ended December 31, 2006, 2005 and 2004, 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.

      At our option,  loans under the Credit  Facility bear interest at the rate
of prime plus 2% or LIBOR plus 4%. 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.

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

NOTE H. NOTES PAYABLE

Bryanston Group and Beatrice Tollman

      On January 9, 2004,  we  redeemed  2,392,857  shares of common  stock at a
redemption  price of $2.12 per share by issuing  promissory  notes in the sum of
approximately  $5.1  million.  On July 26, 2004,  approximately  $5.3 million of
proceeds  from the  senior  convertible  notes was  expended  to pay in full the
principal  of the notes and accrued  interest to  Bryanston  Group and  Beatrice
Tollman.

      Under  the  terms  of the  notes,  interest  accrued  on  the  outstanding
principal  amount at the rate of 7% per annum.  For the year ended  December 31,
2004  the  Company  recognized   approximately   $195,000  in  interest  expense
associated with the promissory notes.



                                       55


NOTE I.  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 SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
( in thousands) (Unaudited)
                                               Empire       Guarantor     Non-Guarantor    Eliminating
ASSETS                                        Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                             ---------     ------------    ------------     ----------    ------------
Cash and cash equivalents                    $     383      $   9,088       $    --         $    --         $   9,471
Restricted cash                                    432          1,315            --              --             1,747
Accounts receivable                               --            5,253            --              --             5,253
Prepaid expenses and other assets                  115          1,430            --              --             1,545
Investments in subsidiaries                      5,060           --              --            (5,060)           --
Inter-company accounts                         146,977           --              --          (146,977)           --
Property and equipment, net                          6         31,697            --              --            31,703
Deferred financing costs, net                    3,116           --              --              --             3,116
Deferred development costs                         125          7,604            --              --             7,729
                                             ---------      ---------       ---------       ---------       ---------
Total assets                                 $ 156,214      $  56,387       $    --         $(152,037)      $  60,564
                                             =========      =========       =========       =========       =========

LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Revolving credit facility                    $   7,617      $    --         $    --         $    --         $   7,617
Accounts payable                                 1,136          2,598            --              --             3,734
Accrued expenses and other liabilities           2,313          7,623            --              --             9,936
Inter-company accounts                            --           53,395          93,582        (146,977)           --
Senior convertible notes                        65,000           --              --              --            65,000
                                             ---------      ---------       ---------       ---------       ---------
          Total liabilities                     76,066         63,616          93,582        (146,977)         86,287
Stockholders' 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
                                             =========      =========       =========       =========       =========


                                                          56


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
(in thousands)  (Unaudited)
                                               Empire       Guarantor     Non-Guarantor    Eliminating
ASSETS                                        Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                             ---------     ------------    ------------     ----------    ------------
Cash and cash equivalents                    $     636      $   6,356       $    --         $    --         $   6,992
Restricted cash                                    412          4,304            --              --             4,716
Accounts receivable                               --            3,358            --              --             3,358
Prepaid expenses and other assets                   86          1,026            --              --             1,112
Investments in subsidiaries                      5,060           --              --            (5,060)           --
Inter-company accounts                         152,108           --              --          (152,108)           --
Property and equipment, net                         11         32,525            --              --            32,536
Deferred financing costs, net                    2,973           --              --              --             2,973
Deferred development costs                        --            5,558            --              --             5,558
                                             ---------      ---------       ---------       ---------       ---------
Total assets                                 $ 161,286      $  53,127       $    --         $(157,168)      $  57,245
                                             =========      =========       =========       =========       =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Revolving credit facility                    $   7,476           --              --              --         $   7,476
Accounts payable                                   982          2,547            --              --             3,529
Accrued expenses and other liabilities           2,461          5,994            --              --             8,455
Inter-company accounts                            --           58,526          93,582        (152,108)           --
Senior convertible notes                        65,000           --              --              --            65,000
                                             ---------      ---------       ---------       ---------       ---------
          Total liabilities                     75,919         67,067          93,582        (152,108)         84,460
Stockholders' equity (deficit)                  85,367        (13,940)        (93,582)         (5,060)        (27,215)
                                             ---------      ---------       ---------       ---------       ---------
Total liabilities
    and stockholders' equity (deficit)       $ 161,286      $  53,127       $    --         $(157,168)      $  57,245
                                             =========      =========       =========       =========       =========


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
(in thousands)  (Unaudited)
                                               Empire       Guarantor     Non-Guarantor    Eliminating
                                              Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                             ---------     ------------    ------------     ----------    ------------
Net revenues                                 $      21      $  98,089       $    --         $    --         $  98,110
                                             ---------      ---------       ---------       ---------       ---------

Operating costs                                   --           79,108            --              --            79,108
Selling, general and administrative             12,048          6,242            --              --            18,290
Depreciation                                         4          1,140            --              --             1,144
Impairment loss - deferred development costs      --             --              --              --              --
                                             ---------      ---------       ---------       ---------       ---------
     Total costs and expenses                   12,052         86,490            --              --            98,542
                                             ---------      ---------       ---------       ---------       ---------
Income (loss) from operations                  (12,031)        11,599            --              --              (432)
Amortization of deferred finance costs            (655)          --              --              --              (655)
Inter-company interest and other                 4,889         (4,889)           --              --              --
Interest expense                                (5,989)          --              --              --            (5,989)
                                             ---------      ---------       ---------       ---------       ---------
     Net income (loss)                       $ (13,786)     $   6,710       $    --         $    --         $  (7,076)
                                             =========      =========       =========       =========       =========


                                                          57


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
(in thousands)  (Unaudited)
                                               Empire       Guarantor     Non-Guarantor    Eliminating
                                              Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                             ---------     ------------    ------------     ----------    ------------
Net revenues                                 $     16       $  86,748       $    --         $    --         $ 86,764
                                             --------       ---------       ---------       ---------       --------

Operating costs                                  --            71,174            --              --           71,174
Selling, general and administrative             9,201           4,151            --              --           13,352
Depreciation                                        2           1,119            --              --            1,121
Impairment loss - deferred development costs    1,712          12,579            --              --           14,291
                                             --------       ---------       ---------       ---------       --------
     Total costs and expenses                  10,915          89,023            --              --           99,938
                                             --------       ---------       ---------       ---------       --------
Loss  from operations                         (10,899)         (2,275)                                       (13,174)
Amortization of deferred finance costs           (575)           --              --              --             (575)
Inter-company interest and other                6,012          (6,012)           --              --             --
Interest expense                               (4,778)           --              --              --           (4,778)
                                             --------       ---------       ---------       ---------       --------
     Net loss                                $(10,240)      $  (8,287)      $    --         $    --         $(18,527)
                                             ========       =========       =========       =========       ========


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(in thousands)  (Unaudited)
                                               Empire       Guarantor     Non-Guarantor    Eliminating
                                              Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                             ---------     ------------    ------------     ----------    ------------
Net revenues                                 $    118       $ 44,888        $    --         $    --         $ 45,006
                                             --------       --------        ---------       ---------       --------

Operating costs                                  --           44,171             --              --           44,171
Selling, general and administrative             7,593          3,243             --              --           10,836
Depreciation                                     --              507             --              --              507
                                             --------       --------        ---------       ---------       --------
     Total costs and expenses                   7,593         47,921             --              --           55,514
                                             --------       --------        ---------       ---------       --------
Loss from operations                           (7,475)        (3,033)            --              --          (10,508)
Amortization of deferred finance costs           (134)          (244)            --              --             (378)
Inter-company interest and other                2,251         (2,251)            --              --             --
Interest expense                               (1,735)          (124)            --              --           (1,859)
                                             --------       --------        ---------       ---------       --------
     Net loss                                $ (7,093)      $ (5,652)       $    --         $    --         $(12,745)
                                             ========       ========        =========       =========       ========


                                                          58


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
(in thousands)  (Unaudited)
                                                 Empire       Guarantor     Non-Guarantor    Eliminating
                                                Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                               ---------     ------------    ------------     ----------    ------------
     Net cash provided by (used in)
           operating activities                $ (5,243)      $ 10,508        $   --          $    --         $  5,265
                                               --------       --------        ---------       ---------       --------
     Cash 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           --              --               --              141
Proceeds from exercise of stock options           1,166           --              --               --            1,166
Advances from subsidiaries                        5,133           --              --             (5,133)          --
Deferred financing costs                           (798)          --              --               --             (798)
Restricted cash (revolving credit facility)         (21)          --              --               --              (21)
                                               --------       --------        ---------       ---------       --------
     Net cash provided by financing activities     5,621           --              --             (5,133)           488
                                               --------       --------        ---------       ---------       --------
Net increase (decrease) in cash and cash           (252)         2,731            --               --            2,479
   equivalents
Cash and cash equivalents, beginning of year        635          6,357            --               --            6,992
                                               --------       --------        ---------       ---------       --------
Cash and cash equivalents, end of year         $    383       $  9,088        $   --          $    --         $  9,471
                                               ========       ========        =========       =========       ========


                                                          59


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005
  ( in thousands )  ( Unaudited )
                                                    Empire       Guarantor     Non-Guarantor    Eliminating
                                                   Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                                  ---------     ------------    ------------     ----------    ------------
          Net 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              --            --                  6
Advances 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           --                --            --              7,476
Proceeds from exercise of stock options               283           --                --            --                283
Deferred 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)           6,808
                                                  -------        -------             -----       -------          -------
Net increase (decrease) in cash and cash           (1,268)         1,096              --            --               (172)
equivalents
Cash and cash equivalents, beginning of year        1,903          5,261              --            --              7,164
                                                  -------        -------             -----       -------          -------
Cash and cash equivalents, end of year            $   635        $ 6,357             $--         $  --            $ 6,992
                                                  =======        =======             =====       =======          =======


                                                            60


EMPIRE RESORTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
    ( in thousands )  ( Unaudited )
                                                    Empire       Guarantor     Non-Guarantor    Eliminating
                                                   Resorts      Subsidiaries    Subsidiaries      Entries      Consolidated
                                                  ---------     ------------    ------------     ----------    ------------
     Net cash used in operating activities        $ (2,033)      $ (6,608)           $--         $   --           $ (8,641)
                                                  --------       --------            -----       --------         --------
     Cash flows from investing activities:
Purchase of property and equipment                    --          (31,079)            --             --            (31,079)
Restricted cash (Racing capital imp.)                 --              (37)            --             --                (37)
Cash acquired in acquisition                            18           --               --             --                 18
Advances to Litigation Trust                          (505)          --               --             --               (505)
Deferred development costs                            --           (4,614)            --             --             (4,614)
Advances to subsidiaries                           (49,715)          --               --           49,715             --
                                                  --------       --------            -----       --------         --------
     Net cash used in investing activities         (50,202)       (35,730)            --           49,715          (36,217)
                                                  --------       --------            -----       --------         --------
     Cash flows from financing activities:
Proceeds from issuance of common stock              30,375           --               --             --             30,375
Proceeds from issuance of senior convertible
notes                                               65,000           --               --             --             65,000
Proceeds from exercise of stock options                151           --               --             --                151
Stock issuance expenses                             (2,317)          --               --             --             (2,317)
Deferred financing costs                            (3,143)          --               --             --             (3,143)
Excess of market value over carrying value of
property and equipment purchased from
related party                                      (30,825)          --               --             --            (30,825)
Advances from Empire Resorts, Inc.                    --           49,715             --          (49,715)            --
Repayment of bank loans and promissory
notes                                               (5,073)        (3,470)            --             --             (8,543)
Dividends paid on preferred stock                      (30)          --               --             --                (30)
                                                  --------       --------            -----       --------         --------
     Net cash provided by financing activities      54,138         46,245             --          (49,715)          50,668
                                                  --------       --------            -----       --------         --------
Net increase in cash and cash equivalents            1,903          3,907             --             --              5,810
Cash and cash equivalents, beginning of year          --            1,354             --             --              1,354
                                                  --------       --------            -----       --------         --------
Cash and cash equivalents, end of year            $  1,903       $  5,261            $--         $   --           $  7,164
                                                  ========       ========            =====       ========         ========

NOTE J. 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 on May 23, 2006 and 88,747 will
vest on May 23, 2007. The expense associated with these issues was approximately
$387,000  and  530,000  for  the  years  ended   December  31,  2006  and  2005,
respectively.

      In  January  and June,  2004 we issued a total of 40,000  shares of common
stock to our former Chairman of the Board, David Matheson,  as consideration for
his service on a special  committee of the Board of Directors  involved with the
various regulatory  agencies  considering our development with the Cayuga Nation
of New York. Mr. Matheson  abstained from any votes if the Board of Directors on
this  subject.  The  expense  associated  with these  issues  was  approximately
$541,000  and the  corresponding  credit was  recorded  as an increase in common
stock and additional paid in capital.


                                       61


      In  connection  with our  January 12, 2004  merger,  we issued  18,219,075
shares of our common  for the  acquisition  of  Monticello  Raceway  Management,
Monticello  Casino  Management,   Monticello  Raceway   Development  and  Mohawk
Management, LLC. We also filed a Registration Statement covering these shares.

      On January 30, 2004, we issued  4,050,000  shares of our common stock in a
private placement sale with proceeds of approximately $30.3 million.

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 dividend is due. At December 31, 2006
and 2005 there were 44,258 shares of Series B Preferred Shares outstanding.

      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  issuance of 23,103  shares of common  stock in payment of the amount
due. The value of these shares when issued was approximately $98,000.

      On February 16, 2005 we issued 12,640 shares of common stock in payment of
dividends for the last three  quarters of 2004 on our Series B Preferred  Stock.
The value of these shares when issued was approximately  $142,000.  On April 29,
2004 we paid $30,000 in cash  dividends due for the three months ended March 31,
2004.

      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, 2006 we had undeclared dividends on our Series E Preferred
Stock of approximately $5.6 million.

NOTE K.  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 January 30, 2004,  in connection  with our private  placement of common
stock, we issued a warrant to purchase 250,000 shares of our common stock to the
placement  agent,  Jeffries & Co. The warrant has a five year term and  entitles
the holder to purchase those shares at $7.50 per share.  The estimated  value of
that  warrant  was  approximately  $2.1  million  and was  recorded,  with other
issuance  costs of  approximately  $2.3  million,  as a  financing  cost for the
transaction.

      Stock options issued to employees,  officers and directors are reported as
Stock Based Compensation and include the following grants.


                                       62


                                                                                                 Approximate Compensation Cost
                                                                                                        (in thousands)
                                                                                                     --------------------
                                                                  Term
                                           Number      Strike      in
Date of Grant    Recipient               Of Shares     Price      Years       Vesting Schedule       2006    2005    2004
-------------    ---------               ---------     -----      -----       ----------------       ----    ----    ----
                                                                              33% - 90 days and
                 Employees and                                              one year, remainder
August, 2006     officers                 170,000      $5.53       10      - two to three years       $395   $ ---   $ ---
August, 2006     Director                  10,000      $5.53       10          Fully upon grant         49     ---     ---
                 Directors
March, 2006      (6 directors)             65,000      $4.26       10          Fully upon grant        249     ---     ---
December, 2005   Employees and
                 officers                 309,500      $6.75       10               Three years      1,122      48     ---
November, 2005   Director  (1)             15,000      $5.10       10          Fully upon grant        ---      70     ---
                                                                                  33% -90 days,
                                                                                remainder - two
August, 2005     Employee                  50,000      $3.93       10                     years         66      90     ---
July, 2005       Director  (1)             15,000      $4.02       10          Fully upon grant        ---      54     ---
May, 2005        Non-executive
                 Chairman of the
                 Board  (1)                50,000      $3.99       10          Fully upon grant        ---     175     ---
May, 2005                                                                        33% - 90 days,
                 Chief Financial                                                remainder - two
                 Officer  (1)             150,000      $3.99       10                     years        198     271     ---
May, 2005                                                                        33% - 90 days,
                 Chief Executive                                                remainder - two
                 Officer  (1)           1,044,092      $3.99       10                     years      1,378   1,887     ---
March, 2005      Employee                  30,000      $8.26       10                  One year         10     208     ---
January, 2005    Directors annual
                 grant (6 directors)       60,000      $8.51        5          Fully upon grant        ---     380     ---
November, 2004   Directors (2) for
                 services - new
                 business initiatives     100,000      $8.11        3          Fully upon grant        ---     ---     511
                                                                                33% upon grant,
                                                                                remainder - two
August, 2004     Employees (2)             20,000      $8.63       10                     years          9      32      80
                                                                                50% upon grant,
                                                                                remainder - one
May, 2004        Employee                  50,000     $14.25       10                      year        ---     137     576
                                                                                33% upon grant,
                                                                                remainder - two
May, 2004        Employees                 25,000     $14.25       10                     years        ---     105     229
May, 2004        Employees                 34,500     $14.25       10               Three years         58      85     185
March, 2004      Directors annual
                 grant (7directors)        70,000     $11.97       10          Fully upon grant        ---     ---     838


(1) Option  grant as result of the  appointment  of the grantee to the  position
indicated.

      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.


                                       63


      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 a agreement  with
those  entities to terminate the  agreement.  The options expire on December 29,
2006  and  we  recorded  the  value  of  those  options  at the  effective  date
(approximately  $1.7 million) as stock based compensation  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.

      During  the years  ended  December  31,  2006,  2005 and 2004 we  received
approximately $1,166,000, $283,000 and $151,000,  respectively, of proceeds from
shares of common stock issued as a result of the exercise of stock  options.  We
issued  approximately  507,000,  133,000 and 61,000  shares of common stock as a
result of these exercises.

      The following table sets forth the weighted  average  assumptions  used in
applying the Black Sholes  option  pricing  model to the option  grants in 2006,
2005 and 2004.

                                                        2006                2005               2004
                                                        ----                ----               ----
Weighted average fair value of options granted         $5.19               $ 6.81             $ 11.36
Expected dividend yield                                 0 %                 0 %                 0 %
Expected volatility                                89.5% - 96.17%      91.1% - 100.3%      97.9% - 99.7%
Risk - free interest rate                           4.7% - 4.9%         3.7% - 4.5%         3.1% - 4.2%
Expected life of options                              10 years         0.5 - 10 years      3 - 10 years

The following table reflects stock option activity in 2006, 2005 and 2004.

                                                 Approximate                            Weighted
                                                  number of     Range of exercise   average exercise
                                                    Shares      prices per share     price per share
                                                 -----------    -----------------   ----------------
Options outstanding at January 1, 2004              821,000                             $    2.67
Granted in 2004                                     300,000       $8.11 - $14.25        $   11.36
Exercised in 2004                                   (61,000)      $2.12 - $8.63         $    2.48
Cancelled in 2004                                   (32,000)      $2.12 - $11.97        $    8.83
                                                  ---------
Options outstanding at December 31, 2004          1,028,000                             $    5.00
Granted in 2005                                   6,913,000       $3.93 - $8.51         $    6.81
Exercised in 2005                                  (134,000)          $2.12             $    2.12
Cancelled in 2005                                   (21,000)         $14.25             $   14.25
                                                  ---------
Options outstanding at December 31, 2005          7,786,000                             $    6.63
Granted in 2006                                     245,000       $4.26 - $5.53         $    5.19
Exercised in 2006                                (3,007,000)      $2.12 - $7.50         $    6.62
Cancelled in 2006                                (1,740,000)      $2.12 - $11.97        $    7.51
                                                  ---------
Options outstanding at December 31, 2006          3,284,000                             $    6.06
                                                  =========                             =========


                                                 64


The  following  table  reflects  information  on stock  options  outstanding  at
December 31, 2006.

                    Options Outstanding                            Options Exercisable
                    -------------------                            -------------------
                                                   Weighted
                                   Average         Average                      Weighted
      Exercise     Number of     Contractual       Exercise     Number of        Average
      Price          Shares          Life           Price         Shares      Exercise Price
      --------     ---------     -----------     ----------     ---------     --------------
      $ 2.12          72,250         4.0          $    2.12        72,250       $    2.12
      $ 4.40           5,500         2.5          $    4.40         5,500       $    4.40
      $ 7.00          60,000         5.6          $    7.00        60,000       $    7.00
      $11.97          50,000         7.2          $   11.97        50,000       $   11.97
      $14.25          89,000         7.4          $   14.25        84,333       $   14.25
      $ 8.63          10,000         7.6          $    8.63        10,000       $    8.63
      $ 8.11         100,000         0.9          $    8.11       100,000       $    8.11
      $ 8.51          50,000         3.0          $    8.51        50,000       $    8.51
      $ 8.26          30,000         8.2          $    8.26        30,000       $    8.26
      $ 3.99       1,214,092         8.4          $    3.99       808,101       $    3.99
      $ 4.02          15,000         8.6          $    4.02        15,000       $    4.02
      $ 3.93          35,000         8.6          $    3.93        18,000       $    3.93
      $ 5.10          15,000         8.9          $    5.10        15,000       $    5.10
      $ 6.75         293,067         9.0          $    6.75        96,379       $    6.75
      $ 7.50       1,000,000         1.0          $    7.50     1,000,000       $    7.50
      $ 4.26          65,000         9.2          $    4.26        65,000       $    4.26
      $ 5.53         180,000         9.6          $    5.53        56,667       $    5.53

                   3,283,909         5.8          $    6.06     2,536,230       $    6.36
                   =========         ===          =========     =========       =========

NOTE L.  INCOME TAXES

      The Company and all of its  subsidiaries  file a  consolidated  income tax
return. At December 31, 2006 and 2005, the estimated  Company's  deferred income
tax assets and liability were comprised of the following:

                                                         2006            2005
                                                       ---------       --------
          Deferred tax assets:                              (in thousands)
                                                            --------------
Net operating loss carry forwards                      $ 50,451        $ 39,742
Stock - based compensation                                  242           5,966
Allowance for doubtful accounts - Litigation Trust          667             444
Contributions                                                92              72
                                                       --------        --------
                                                         51,452          46,224
          Deferred tax liabilities:
Depreciation                                               (168)           (168)
                                                       --------        --------
          Net deferred tax assets                        51,284          46,056
Valuation allowance                                     (51,284)        (46,056)
                                                       --------        --------
          Deferred tax assets, net                     $   --          $   --
                                                       ========        ========

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

                                                     Year ended December 31,
                                                     -----------------------
                                                  2006         2005        2004
                                                 -------     -------     -------
Tax provision at federal statutory tax rate       35.0%       35.0%       35.0%
State income taxes, net                            9.0%        9.0%        9.0%
Permanent items                                   29.9%        1.2%        0.2%
Change in valuation allowance                    (73.9)%     (45.2)%     (44.2)%
                                                 -----       -----       -----
Effective tax rate                                 0.0%        0.0%        0.0%
                                                 =====       =====       =====


                                       65


      The Company's merger with CDL will limit the Company's  ability to use its
current net operating loss carry  forwards,  potentially  increasing  future tax
liability.  As of December 31, 2006,  the Company had net  operating  loss carry
forwards of  approximately  $115 million that expire  between 2008 and 2026. The
merger of the  Company's  operations  with CDL,  however,  will not  permit  the
Company 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.

NOTE M. CONCENTRATION

      One debtor, New York Off-track Betting  Corporation  ("OTB"),  represented
approximately  42% of the total outstanding  accounts  receivable as of December
31,  2006 and three  debtors,  New York  OTB,  Nassau  OTB,  and  Catskill  OTB,
represented approximately 52% of the total outstanding accounts receivable as of
December 31, 2005.

Note N: 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  the  first  3% of  salary
deferral and 66.7% of the next 3% of salary deferral. Our matching contributions
in 2006 were  approximately  $136,000.  As of December 31, 2006,  115  employees
participated in the plan.

NOTE O.  COMMITMENTS AND CONTINGENCIES

      CASINO DEVELOPMENT.  We are committed to provide development  assistance
in connection with the establishment  and initial  operations of tribal gaming
authorities  for New York State  gaming  operations  for the St.  Regis Mohawk
Tribe.  We are also committed to incur costs  associated  with the development
of casino resorts with the St. Regis Mohawk Tribe.

      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  Raceway has been reduced in size and there are less available stalls
for Horsemen at the track 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 Raceway was completed.

      Monticello Harness Horsemen's Association v. Monticello Raceway Management
Index Numbers:  1765/03 and 2624/03 Supreme Court,  State of New York,  Sullivan
County.  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 Raceway.  That portion of the
claim seeks a recoupment of approximately  $60,000 dollars in purse monies. That
action also seeks control by the Horsemen of the setting of purses as opposed to
Monticello  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  dollars in  compensatory  damages and a similar amount in punitive
damages.  This  consolidated  action is pending.  There has been  certain  paper
discovery completed (bill of particulars) and there are outstanding requests for
further interrogatories and discovery items. Depositions have not yet been held.
There have been numerous  settlement  conferences  in the context of the ongoing
global contract negotiations between the parties.


                                       66


      On June 15, 2005,  various  Article 78 proceedings  were commenced by four
regional OTBs against the New York State Racing and Wagering  Board,  Monticello
Raceway and  Yonkers  Raceway  seeking the return to the OTBs of various  racing
revenues  previously paid by the OTBs to Monticello Raceway and Yonkers Raceway,
more commonly  known in the industry as "dark day monies" and  out-of-state  OTB
commissions. 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  Raceway, as
prosecuted,  is in excess of $4.0 million  together with ongoing  payments which
the OTBs are making to  Monticello  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.  An appeal by the
petitioners is pending in the appellate court.

      In August 2006,  The New York State  Racing and  Wagering  Board issued an
arbitrator's  award defining the contract terms between  Monticello  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,  which appeal is pending. The import of the escrow provision
is that,  if the lower court is reversed and the escrow  provision is reinstated
as part of the arbitration award, we will have to deposit into an escrow account
an amount,  which at this time, is approximately  $5.0 million,  as security for
payment of future horsemens' purses.

      In the opinion of  management,  the  resolution  of the actions  described
above  will not have a material  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  and as a
condition  to the  consolidation  transaction  with CDL,  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.  The Company agreed to provide the  Litigation  Trust with a $2.5 million
line of credit. For each of the years ended December 31, 2006, 2005 and 2004, we
made  advances  to the Trust of  $505,000  under the line of credit.  Due to the
unpredictable  nature of the litigation we provided for a valuation allowance of
$505,000  in each of those  years  against the  receivable  from the  Litigation
Trust.

NOTE P.  SUBSEQUENT EVENTS

      On January 26, 2007, we received $18.75 million as payment for 2.5 million
shares of our common stock issued as a result of an option exercised on December
28, 2006 pursuant to an option granted in 2004 and modified in December 2006.

       On March 8, 2007,  our Board of  Directors  authorized  the  issuance  of
18,884  shares of our  common  stock in  payment  of  dividends  on our Series B
Preferred   Stock  for  2006.   The  value  of  these  shares  when  issued  was
approximately $190,000.

      On  February  19,  2007,  New  York  Governor  Eliot  Spitzer  issued  his
concurrence with regard to the April 2000 Secretarial  Determination which found
that gaming in Sullivan  County by the St.  Regis  Mohawk  Tribe would be in the
best  interest of the St.  Regis  Mohawk  Tribe and its members and would not be
detrimental to the surrounding  communities.  In addition, on February 19, 2007,
Governor Spitzer 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 percent of slot-machine  revenues for the first two years after the St. Regis
Mohawk Tribe's Class III casino to be located at Monticello  Raceway  opens,  23
percent for the next two years and 25 percent thereafter.

      On February 19, 2007 we were  notified by the St. Regis Mohawk Tribe that,
on February 16, 2007, a complaint was 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


                                       67


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  ("NEPA")  and the  Administrative  Procedure  Act by
issuing a Finding of No Significant  Impact without  requiring an  environmental
impact  statement  ("EIS")  under  NEPA.  The  plaintiffs  are  seeking an order
requiring  the  preparation  of an EIS  prior to  Department  of the  Interior's
granting final  approvals for the proposed St. Regis Mohawk Casino at Monticello
Raceway and prior to the  Department of the  Interior's  causing the transfer of
the subject land into federal trust.  We expect that the defendants will respond
to the complaint within the next 60 days.

NOTE Q.  UNAUDITED QUARTERLY DATA (IN THOUSANDS)

                                         First            Second             Third            Fourth
                                        Quarter           Quarter           Quarter           Quarter
                                     -------------     -------------     -------------     -------------
2006
----
Net revenue                            $ 22,661          $ 25,882          $ 28,721          $ 20,846
Net 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)

2005
----
Net revenue                            $ 16,690            21,953          $ 25,648          $ 22,473
Net 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)            (0.46)

2004
----
Total revenue                          $  2,511          $  2,654          $ 21,856          $ 17,985
Net loss                                 (3,653)           (4,626)           (1,533)           (2,933)
Net loss applicable to common
shares                                   (4,031)           (5,014)           (1,921)           (3,319)
Net loss per common share, basic
and diluted                               (0.18)            (0.19)            (0.07)            (0.13)

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.

      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 our internal control over financial reporting that would have a material
effect


                                       68


on our  consolidated  financial  statements,  and to confirm that any  necessary
corrective action,  including process improvements,  were being undertaken.  Our
evaluation  of our  disclosure  controls and  procedures  is done  quarterly and
management  reports the  effectiveness  of our  controls and  procedures  in our
periodic  reports  filed  with the SEC.  Our  internal  control  over  financial
reporting is also evaluated on an ongoing basis by our internal  auditors and by
other  individuals  in our  finance  organization.  The  overall  goals of these
evaluation  activities are to monitor our disclosure controls and procedures and
internal  control  over  financial   reporting  and  to  make  modifications  as
necessary.  We  periodically  evaluate our  processes  and  procedures  and make
improvements as required.

      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
Securities  and Exchange  Commission 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 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, 2006.

      Our management's  assessment of the  effectiveness of our internal control
over financial  reporting as of December 31, 2006 and the  effectiveness  of our
internal  control  over  financial  reporting  as of December  31, 2006 has been
audited by Freidman LLP, an independent  registered  public  accounting firm, as
stated in their report which appears in Item 8 of this Annual Report.

Item 9B.    Other Information.

      None.


                                       69


                                    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   Position
----                  ---   --------
John Sharpe            64   Chairman of the Board(1)
David P. Hanlon        62   Chief Executive Officer, President and Director(2)
Paul A. deBary         60   Director(1)
Joseph E. Bernstein    57   Director(3)
Ralph J. Bernstein     48   Director(1)
Robert H. Friedman     53   Director(2)
Frank Catania          65   Director(3)
Ronald J. Radcliffe    63   Chief Financial Officer
Thomas W. Aro          63   Chief Operating Officer
Hilda Manuel           55   Senior V. P. for Native American Affairs and Chief
                            Compliance Officer
-------------
(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,  64, 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.

      RALPH J. BERNSTEIN.  Ralph J. Bernstein, 48, is a co-founder and general
partner of Americas  Partners,  a real estate development and investment firm,
and,  since  1981  has  been  responsible  for  the  acquisition,  renovation,


                                       70


development  and  financing  of  several  million  square  feet of  commercial
space.  Mr.  Bernstein also serves as a director for Air Methods  Corporation,
a publicly  traded  company  that  provides  air medical  emergency  transport
services and systems  throughout the United States of America.  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.

      PAUL A. DEBARY.  Paul A. deBary, 60, 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 has served as a director since March 2002.

      DAVID P. HANLON.  David P. Hanlon,  62, 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. 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.

      ROBERT H. FRIEDMAN.  Robert H. Friedman, 53, has served as our Secretary
since May 2004.  Mr.  Friedman has been a partner with 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,  and has been on the faculty of the  Practicing  Law
Institute since August 2000.  Mr. Friedman became a director in July 2005.

      JOSEPH E.  BERNSTEIN.  Joseph E.  Bernstein,  57,  started his career as a
corporate  tax  attorney  on Wall  Street at Cahill  Gordon & Reindel  and as an
international  tax  attorney  at  Rosenman  & Colin.  He later  started  his own
international tax practice. Since the early 1980s, Mr. Bernstein (along with his
brother Ralph, and their partner, Morad Tahbaz, through Americas Tower Partners)
has been involved in the  development of three million square feet of commercial
property in Manhattan,  including  Americas Tower, a 50-story office building on
Avenue  of the  Americas  and  46th  Street  in New  York  City,  serving  as US
headquarters to Israel's  largest bank, Bank Hapoalim.  Mr. Bernstein has served
as a director since August 2003.

      FRANK  CATANIA.  Frank  Catania,  65,  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.


                                       71


      RONALD J.  RADCLIFFE.  Ronald  J.  Radcliffe,  63,  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 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,  63, 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.

      HILDA MANUEL.  Hilda A. Manuel,  55, 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.

      Ralph J. Bernstein and Joseph E. Bernstein are brothers.

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
and John Sharpe. 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


                                       72


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.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

      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  Securities  and Exchange  Commission.
Executive officers, directors and greater than ten percent beneficial owners are
required by Securities  and Exchange  Commission  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, 2006
there were no delinquent  filers except as follows:  Ralph J. Bernstein  filed a
late Form 4 for a transaction that occurred on March 8, 2006 (one  transaction);
John Sharpe filed a late Form 4 for one  transaction  that  occurred on March 8,
2006 (one transaction); Frank Catania filed a late Form 4 for a transaction that
occurred on March 8, 2006 (one  transaction);  Hilda  Manuel filed a late Form 4
for a transaction that occurred on August 10, 2006 (one transaction);  Ronald J.
Radcliffe filed a late Form 4 for a transaction that occurred on August 10, 2006
(one transaction); and Paul A. deBary filed a late Form 4 for a transaction that
occurred on August 10, 2006 (one transaction).

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  Securities  and  Exchange
Commission  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 9, 2007 by (i) each  director as of
March 9, 2007;  (ii) each executive  officer of the Company as of March 9, 2007,
(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.

      The  information  regarding  beneficial  ownership of our common stock has
been  presented  in  accordance  with the rules of the  Securities  and Exchange
Commission.  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.


                                       73


                                                                       Series B Preferred
Name and Address of                        Common Stock                Stock Beneficially          Series E Preferred Stock
Beneficial Owner(1)                     Beneficially Owned                    Owned                   Beneficially Owned
-------------------------------    -------------- --------------    ------------ -------------    ------------- -------------
                                      Shares       Percentage         Shares      Percentage         Shares      Percentage
                                      ------       ----------         ------      ----------         ------      ----------
Thomas W. Aro                        107,700(2)         *               --            --               --            --

Paul A. deBary                       223,508(3)         *               --            --               --            --

John Sharpe                          157,000(4)         *               --            --               --            --

David P. Hanlon                      933,876(5)        3.09%            --            --               --            --

Joseph E. Bernstein                2,086,143(6)        7.08%            --            --               --            --

Ralph J. Bernstein                 2,276,243(7)        7.72%            --            --               --            --

Robert H. Friedman                    35,000(8)         *               --            --               --            --

Frank Catania                         35,000(9)         *               --            --               --            --

Ronald J. Radcliffe                   89,000(10)        *               --            --               --            --

Hilda Manuel                          49,500(11)        *               --            --               --            --

Concord Associates, L.P.           3,500,000(12)      11.89%            --            --               --            --
c/o Cappelli Enterprises, Inc.
115 Stevens Avenue
Valhalla, NY 10595
Attention: Louis R. Cappelli

Wells Fargo & Company              1,608,845(13)       5.47%            --            --               --            --
420 Montgomery Street
San Francisco, CA 94104

Directors and Officers as a        5,992,970          19.44%            --            --               --            --
Group

Patricia Cohen                          --             --              44,258       100%               --            --
8306 Tibet Butler Drive
Windmere, FL 34786

Bryanston Group, Inc.                   --             --               --            --          1,551,213     89.6%
2424 Route 52
Hopewell Junction, NY 12533

Stanley Tollman                         --             --               --            --          152,817       8.8%
c/o Bryanston Group, Inc.
2424 Route 52
Hopewell Junction, NY 12533

---------------
* 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
      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  103,500  shares of common
      stock.  Does not  include  options  that will be  exercisable  into 10,000
      shares of common stock on December 16, 2007 and into an additional  10,000
      shares of common stock on December 16, 2008.

(3)   Includes  155,913  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
      55,000 shares of common stock.

(4)   Includes  2,000 shares of common  stock owned  directly by John Sharpe and
      options  that are  currently  exercisable  into  155,000  shares of common
      stock.

(5)   Consists  of  172,276  shares of  restricted  stock and  options  that are
      currently  exercisable  into  761,600  shares  of common  stock.  Does not
      include 88,747 shares of restricted  stock which vest on May 23, 2007, and
      options that will be exercisable into 354,991 shares of common stock which
      become exercisable on May 23, 2007.


                                       74


(6)   Includes  2,031,143 shares of common stock owned directly by Mr. Bernstein
      and options that are  currently  exercisable  into 55,000 shares of common
      stock.

(7)   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.

(8)   Consists of options that are  currently  exercisable  into 35,000 shares
      of common stock.

(9)   Consists of options that are  currently  exercisable  into 35,000 shares
      of common stock.

(10)  Consists of options that are currently  exercisable  into 89,000 shares of
      common  stock.  Does not include  options  that will be  exercisable  into
      51,000  shares of common  stock on May 23, 2007,  20,000  shares of common
      stock on August 10, 2007 and into 20,000  shares of common stock on August
      10, 2008.

(11)  Consists of options that are currently  exercisable  into 49,500 shares of
      common  stock.  Does not include  options  that will be  exercisable  into
      16,666  shares of common  stock on August 10,  2007,  into 2,833 shares of
      common stock on December 16, 2007,  into 16,668  shares of common stock on
      August 10, 2008 and into an  additional  2,834  shares of common  stock on
      December 16, 2008.

(12)  Includes  2,500,000  shares of common  stock  owned  directly  by  Concord
      Associates Limited Partnership and options that are currently  exercisable
      into 1,000,000 shares of common stock.

(13)  According  to a  Schedule  13G  filed by Wells  Fargo &  Company  filed on
      February 2, 2007,  it and Wells  Capital  Management  Incorporated,  Wells
      Fargo Funds  Management,  LLC and Wells Fargo Bank,  National  Association
      have sole  dispositive  power and sole  voting  power with  respect to the
      1,608,845 shares.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      None.

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               2006           2005
---------------             --------       --------
Audit Fees (1)              $607,322       $418,194
Audit-Related Fees (2)        23,590         83,486
Tax Fees (3)                  39,277         77,068
All Other Fees (4)              --             --
                            --------       --------
   TOTAL                    $670,189       $578,748

(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,  and consultations regarding financial
      accounting and reporting.

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

(4)   Fees related to other filings with the Securities and Exchange Commission,
      including consents.


                                       75


      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.

                                     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, 2006, 2005 and 2004
                                 (in thousands)

                                                                   Addition
                                                   Balance at     charged to        Other
                                                  beginning of     costs and      additions         Less       Balance at
Description                                           year         expenses      (deductions)    deductions    end of year
-----------                                       ------------    ----------     ------------    ----------    -----------
YEAR ENDED DECEMBER 31, 2006
Allowance for advances to Litigation Trust          $ 1,010        $   505          $  --            $--        $ 1,515
Deferred tax asset valuation allowance              $46,056        $  --              5,228          $--         51,284
YEAR ENDED DECEMBER 31, 2005
Allowance for advances to Litigation Trust          $   505        $   505          $  --            $--        $ 1,010
Deferred tax asset valuation allowance              $37,678        $  --            $ 8,378          $--        $46,056
YEAR ENDED DECEMBER 31, 2004
Allowance for advances to Litigation Trust          $  --          $   505          $  --            $--        $   505
Deferred tax asset valuation allowance              $26,800        $  --            $10,878          $--        $37,678

EXHIBITS

  2.1     Agreement  and Plan of Merger and  Contribution,  dated as of March 3,
          2005, by and among Empire  Resorts,  Inc.,  Empire  Resorts  Holdings,
          Inc.,   Empire  Resorts  Sub,   Inc.,   Concord   Associates   Limited
          Partnership,  and Sullivan  Resorts,  LLC (filed  without  exhibits or
          schedules, all of which are available upon request, without cost) (12)

  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)


                                       76


  3.8     Second Amended and Restated By-Laws, as of Feb. 12, 2002. (4)

  3.9     Amendment  No. 1 to the Second  Amended and  Restated  By-Laws,  dated
          November 11, 2003. (4)

  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. (11)

  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. (15)

 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. (11)

 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     Securities  Purchase  Agreement,  dated as of January 26, 2004,  among
          Empire  Resorts,  Inc. and the purchasers  identified on the signature
          pages thereto. (4)

 10.8     Registration  Rights  Agreement,  dated as of January 26, 2004, by and
          among Empire Resorts, Inc. and the investors signatory thereto. (4)

 10.9     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)

 10.10    Registration  Rights  Agreement,  dated as of January 30, 2004, by and
          among Empire Resorts, Inc. and Jefferies & Company, Inc. (4)

 10.11    Security  Agreement  dated as of July 26, 2004 between Empire Resorts,
          Inc., The Bank of New York and the Guarantors named therein. (6)


                                       77


 10.12    Pledge  Agreement dated as of July 26, 2004 Empire Resorts,  Inc., The
          Bank of New York and the Guarantors named therein. (6)

 10.13    Registration  Rights  Agreement  dated  as of  July  26,  2004  Empire
          Resorts,  Inc., the Guarantors  named therein and Jefferies & Company,
          Inc. (6)

 10.14    Option  Agreement,  dated  November  12,  2004,  by and  among  Empire
          Resorts, Inc. and Concord Associates Limited Partnership. (9)

 10.15    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. (10)

 10.16    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. (10)

 10.17    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. (10)

 10.18    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. (10)

 10.19    Promissory Note issued by Empire Resorts,  Inc. on January 11, 2005 to
          Bank of Scotland for the Principal Sum of $10,000,000. (10)

 10.20    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. (10)

 10.21    Amendment No. 1 to Option  Agreement,  dated November 12, 2004, by and
          among Empire Resorts, Inc. and Concord Associates Limited Partnership,
          dated as of March 3. 2005. (12)

 10.22    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). (13)

 10.23    Employment  Agreement dated as of May 23, 2005 between Empire Resorts,
          Inc. and Ronald J. Radcliffe. (13)

 10.24    Amendment by and among Empire  Resorts,  Inc.,  certain of its current
          and former  affiliates,  the Cayuga  Nation of New York and the Cayuga
          Catskill Gaming Authority, dated June 29, 2005. (14)

 10.25    Agreement,  dated July 22, 2005, between Empire Resorts,  Inc., Cayuga
          Nation of New York and Cayuga Catskill Gaming Authority. (16)

 10.26    Agreement,  dated August 1, 2005, between Empire Resorts, Inc. and St.
          Regis Mohawk Tribe. (16)

 10.27    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. (17)


                                       78


 10.28    Amendment  by and  among  Empire  Resorts,  Inc.,  Monticello  Raceway
          Management,  Inc.,  the  Cayuga  Nation  of New  York  and the  Cayuga
          Catskill Gaming Authority, dated December 19, 2005. (18)

 10.29    Agreement  by and  among  Empire  Resorts,  Inc.,  Concord  Associates
          Limited Partnership and Sullivan Resorts LLC, dated December 30, 2005.
          (19)

 10.30    Second Amended and Restated  Gaming Facility  Management  Agreement by
          and  among  the St.  Regis  Mohawk  Tribe,  St.  Regis  Mohawk  Gaming
          Authority  and  Monticello  Casino  Management,  L.L.C.,  dated  as of
          December 1, 2005. (20)

 10.31    Second  Amended  and  Restated  Gaming  Development  and  Construction
          Agreement by and among the St. Regis  Mohawk  Tribe,  St. Regis Mohawk
          Gaming Authority and Monticello Raceway Development  Company,  L.L.C.,
          dated as of December 1, 2005. (20)

 10.32    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. (20)

 10.33    Second Amended and Restated Shared Facilities Agreement by and between
          St. Regis Mohawk Gaming Authority and Monticello  Raceway  Management,
          Inc., dated as of December 1, 2005. (20)

 10.34    Mortgage,  Security  Agreement,  Assignment  of Leases and Rents,  and
          Fixture  Filing,  dated as of March 22, 2006,  by  Monticello  Raceway
          Management,  Inc.,  a New  York  corporation  to the  Bank of New York
          (filed without exhibits or schedules,  all of which are available upon
          request, without cost). (21)

 10.35    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. (22)

 14.1     Code of Ethics. (4)

 21.1     List of Subsidiaries. (1)

 23.1     Consent of Independent Registered Public 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)

 99.1     Letter from James R. Cason of the Department of the Interior's  Bureau
          of Indian  Affairs,  dated  December 21, 2006, to the St. Regis Mohawk
          Tribe. (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 Securities and Exchange
      Commission 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.


                                       79


(3)   Incorporated  by  reference to Empire  Resorts,  Inc.'s  Definitive  Proxy
      Statement  on  Schedule  14A,  filed  with  the  Securities  and  Exchange
      Commission 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  Securities  and  Exchange
      Commission 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  Securities  and Exchange  Commission on November 18,
      2004.

(9)   Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on January 3, 2005.

(10)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K,  filed with the  Securities  and Exchange  Commission  on January 14,
      2005.

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

(12)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on March 8, 2005.

(13)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on May 27, 2005.

(14)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on July 6, 2005.

(15)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on August 19, 2005.

(16)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K,  filed with the  Securities  and Exchange  Commission on September 1,
      2005.

(17)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K/A,  filed with the Securities and Exchange  Commission on December 15,
      2005.

(18)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K,  filed with the  Securities  and Exchange  Commission on December 22,
      2005.

(19)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on January 4, 2006.

(20)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on March 20, 2006.

(21)  Incorporated by reference to Empire Resorts, Inc.'s Form 10-K for the year
      ended December 31, 2005.


                                       80


(22)  Incorporated by reference to Empire Resorts, Inc.'s Current Report on Form
      8-K, filed with the Securities and Exchange Commission on January 3, 2007.


                                       81


                                   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. Hanlon
                                             -----------------------------------
                                             Name:  David P. Hanlon
                                             Title: Chief Executive Officer
                                             Date:  March  14, 2007

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

                                    Chief Executive Officer, President and
/s/ David P. Hanlon                 Director (Principal Executive Officer)     March 14, 2007
---------------------------------
David P. Hanlon

                                    Chief Financial Officer (Principal
/s/ Ronald J. Radcliffe             Accounting and Financial Officer)          March 14, 2007
---------------------------------
Ronald J. Radcliffe

/s/ John Sharpe                     Chairman of the Board and Director         March 14, 2007
---------------------------------
John Sharpe

/s/ Paul A. deBary                  Director                                   March 14, 2007
---------------------------------
Paul A. deBary

/s/ Joseph E. Bernstein             Director                                   March 14, 2007
---------------------------------
Joseph E. Bernstein

/s/ Ralph J. Bernstein              Director                                   March 14, 2007
---------------------------------
Ralph J. Bernstein

/s/ Robert H. Friedman              Director                                   March 14, 2007
---------------------------------
Robert H. Friedman

/s/ Frank Catania                   Director                                   March 14, 2007
---------------------------------
Frank Catania


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