FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

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

For the quarterly period ended               December 31, 2004
                               -------------------------------------------------

                                       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                            0-9624
                      ----------------------------------------------------------

                    International Thoroughbred Breeders, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                               22-2332039
--------------------------------------------------------------------------------
(State or other jurisdiction of       (I.R.S. Employer Identification No.)
 incorporation or organization)

       Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
--------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (302) 427-7599
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report.)

     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 last 90 days.
Yes    X     No
   ---------    ----------

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes         No     X
   --------    ----------

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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


           Class                        Outstanding at February 14, 2005
------------------------------          --------------------------------
Common Stock, $ 2.00 par value                10,567,487 Shares


<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.


                                    FORM 10-Q


                                QUARTERLY REPORT
                   FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
                                   (Unaudited)


                                TABLE OF CONTENTS

                                                                         PAGE
PART I.           FINANCIAL INFORMATION

     Item 1.         Financial Statements:

              Consolidated Balance Sheets
                     as of December 31, 2004 and June 30, 2004............1-2

              Consolidated Statements of Operations
                     for the Three Months and Six Months ended
                     December 31, 2004 and 2003 ..........................3

              Consolidated Statement of Stockholders' Equity
                     for the Six Months ended December 31, 2004...........4

              Consolidated Statements of Cash Flows
                     for the Six Months ended
                     December 31, 2004 and 2003...........................5

              Notes to Financial Statements...............................6-21

     Item 2.  Management's Discussion and Analysis of
                     Financial Condition and Results of Operations........22-30

     Item 3. Quantitative and Qualitative Disclosures About Market Risk...30

     Item 4.  Controls and Procedures.....................................31


PART II.          OTHER INFORMATION

     Item 1.  Legal Proceedings...........................................32

     Item 6.         Exhibits and Reports on Form 8-K.....................32

SIGNATURES................................................................33

CERTIFICATIONS............................................................34-36


<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    AS OF DECEMBER 31, 2004 AND JUNE 30, 2004

                                     ASSETS

<TABLE>
                                                                      December 31,
                                                                         2004          June 30,
                                                                      (UNAUDITED)        2004
                                                                      -----------     -----------
<CAPTION>
<S>                                                                 <C>             <C>
CURRENT ASSETS:
       Cash and Cash Equivalents                                    $  1,640,895    $  7,508,632
       Accounts Receivable                                               596,314         223,411
       Prepaid Expenses                                                1,032,933         738,504
       Other Current Assets                                              203,725         153,625
       Assets of Discontinued Operations                                 401,822         400,835
                                                                      ----------     -----------
       TOTAL CURRENT ASSETS                                            3,875,688       9,025,007
                                                                      ----------     -----------


VESSELS, EQUIPMENT & LIVESTOCK:
       Vessel - Palm Beach Princess                                   17,500,000               0
       Leasehold Improvements - Port of Palm Beach                       958,946         913,394
       Equipment                                                       2,086,940       2,217,322
       Livestock                                                         303,022               0
       Vessel Not Placed in Service - Big Easy (formerly Empress II)   5,639,168               0
       Vessel Not Placed in Service - Royal Star                       2,406,912       1,321,494
                                                                      ----------     -----------
                                                                      28,894,988       4,452,210
       LESS: Accumulated Depreciation and Amortization                 1,688,940         916,186

       TOTAL VESSELS, EQUIPMENT & LIVESTOCK- NET                      27,206,048       3,536,024
                                                                      ----------     -----------



OTHER ASSETS:
       Notes Receivable                                               14,428,651      14,778,651
       Mortgage Contract Receivable - Related Party                            0      13,750,000
       Deposits and Other Assets - Related Parties                     8,136,957       8,410,940
       Deposits and Other Assets - Non-Related Parties                 1,290,820         334,975
       Spare Parts Inventory                                             993,509         978,119
                                                                      ----------     -----------
       TOTAL OTHER ASSETS                                             24,852,697      38,252,685
                                                                      ----------     -----------


TOTAL ASSETS                                                        $ 55,934,433    $ 50,813,716
                                                                      ==========     ===========
</TABLE>


See Notes to Consolidated Financial Statements.


                                        1
<PAGE>


                   INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    AS OF DECEMBER 31, 2004 AND JUNE 30, 2004

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
                                                                    December 31,
                                                                        2004            June 30,
                                                                    (UNAUDITED)          2004
                                                                   -------------     -------------
<CAPTION>
<S>                                                              <C>               <C>
CURRENT LIABILITIES:
       Accounts Payable                                          $    1,721,366    $    1,104,721
       Accrued Expenses                                               2,876,429         2,169,197
       Short-Term Debt                                                  178,896         4,186,012
       Deferred Interest - Short-Term                                   485,586           514,440
       Vessel Lease Payable - Current Portion                           879,238                 0
       Short-Term Debt - Related Parties                                183,164           183,164
       Liabilities of Discontinued Operations                           315,598           310,798
                                                                   -------------     -------------
       TOTAL CURRENT LIABILITIES                                      6,640,277         8,468,332
                                                                   -------------     -------------

LONG-TERM LIABILITIES:
       Vessel Lease Payable - Long Term Portion                      13,120,762                 0
       Long-Term Debt - Net of Current Portion                           10,459         4,095,827
       Deferred Interest - Long-Term                                  1,750,028         1,957,920
       Long-Term Debt - Related Parties                                 218,242           285,649
                                                                   -------------     -------------
       TOTAL LONG-TERM LIABILITIES                                   15,099,491         6,339,396
                                                                   -------------     -------------

DEFERRED INCOME                                                       1,630,815         5,439,951

COMMITMENTS AND CONTINGENCIES                                             -                 -


STOCKHOLDERS' EQUITY:
       Series A Preferred Stock, $100 Par Value,
       Authorized 500,000 Shares, 362,489
       Issued and Outstanding                                        36,284,375        36,248,875
       Common Stock, $2 Par Value, Authorized 25,000,000 Shares,
       Issued, 11,480,563, and Outstanding,
       10,567,487 and 7,802,134, respectively                        22,965,125        22,960,557
       Capital in Excess of Par                                      20,151,914        20,191,982
       (Deficit) (subsequent to June 30, 1993,
       date of quasi-reorganization)                                (46,375,860)      (46,989,638)
                                                                   -------------     -------------
                                                                     33,025,554        32,411,776
       LESS:
       Treasury Stock, 915,077 and 3,678,146 Shares,
       respectively, at Cost                                           (457,538)       (1,839,073)
       Deferred Compensation, Net                                        (4,166)           (6,666)
                                                                   -------------     -------------
       TOTAL STOCKHOLDERS' EQUITY                                    32,563,850        30,566,037
                                                                   -------------     -------------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $   55,934,433    $   50,813,716
                                                                   =============     =============
</TABLE>


See Notes to Consolidated Financial Statements.

                                        2
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
          FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
                                   (UNAUDITED)


<TABLE>
                                                                      Three Months Ended                    Six Months Ended
                                                                          December 31,                        December 31,
                                                               --------------------------------     -------------------------------
                                                                    2004              2003              2004              2003
                                                               --------------     -------------     ------------     --------------
<CAPTION>
<S>                                                          <C>                <C>               <C>              <C>
OPERATING REVENUES:
       Gaming                                                $     6,317,979    $    5,948,208    $  11,647,486    $    12,442,895
       Fare                                                          627,617           626,197        1,168,282          1,281,568
       On Board                                                      479,140           425,606          890,468            850,705
       Other                                                          90,257           101,599          187,079            144,510
                                                               --------------     -------------     ------------     --------------
           NET OPERATING REVENUES                                  7,514,993         7,101,610       13,893,315         14,719,678
                                                               --------------     -------------     ------------     --------------

OPERATING COSTS AND EXPENSES:
       Gaming                                                      2,138,334         2,079,088        4,252,422          4,158,704
       Fare                                                          986,218           954,532        1,946,416          1,711,197
       On Board                                                      240,690           231,356          451,803            426,597
       Maritime & Legal Expenses                                   1,424,555         1,519,678        2,892,336          3,268,948
       General & Administrative Expenses                             480,048           809,083        1,484,240          1,719,518
       General & Administrative Expenses - Parent                    581,423           385,428        1,009,006            615,589
       Ship Development Costs - Big Easy                             597,622                 0          629,064                  0
       Ship Development Costs - Royal Star                            39,573                 0          106,418                  0
       Development Costs - Other                                     309,132           110,119          735,658            159,196
       Depreciation & Amortization                                   566,222           133,841          965,101            309,719
       ITG Vegas Bankruptcy Costs                                          0           173,186                0            368,681
                                                               --------------     -------------     ------------     --------------
           TOTAL OPERATING COSTS AND EXPENSES                      7,363,817         6,396,311       14,472,464         12,738,149
                                                               --------------     -------------     ------------     --------------

OPERATING INCOME (LOSS)                                              151,176           705,299         (579,149)         1,981,529
                                                               --------------     -------------     ------------     --------------

OTHER INCOME (EXPENSE):
       Interest and Financing Expenses                              (376,290)         (497,281)      (1,387,891)          (993,743)
       Interest and Financing Expenses - Related Party              (253,820)           (3,990)        (409,811)            (7,980)
       (Loss) on Impairment of Note Receivable                      (150,000)                0         (350,000)                 0
       Interest Income                                                 1,656            26,835            8,027             26,840
       Interest Income Related Parties                                71,945            71,945          143,891            143,889
       Other Income (Expense)                                            (30)           90,227              211             19,161
                                                               --------------     -------------     ------------     --------------
           TOTAL OTHER INCOME (EXPENSE)                             (706,539)         (312,264)      (1,995,572)          (811,833)
                                                               --------------     -------------     ------------     --------------


INCOME (LOSS) BEFORE TAX PROVISION                                  (555,363)          393,035       (2,574,722)         1,169,696
AND EXTRAORDINARY ITEM
       Income Tax (Benefit) Expense                                  (49,000)           30,000          (91,000)            47,600
                                                               --------------     -------------     ------------     --------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                             (506,363)          363,035       (2,483,722)         1,122,096

EXTRAORDINARY ITEM -  Fees charged to related
       parties for Master Settlement Agreement ( Note 12),
       less income tax of $440,000.                                        0                 0        3,560,000                  0
                                                               --------------     -------------     ------------     --------------

NET INCOME (LOSS)                                            $      (506,363)  $       363,035   $    1,076,278  $       1,122,096
                                                               ==============     =============     ============     ==============


NET BASIC INCOME PER COMMON SHARE                            $         (0.06)  $          0.05   $         0.14  $            0.14
                                                               ==============     =============     =============    ==============

NET DILUTED INCOME PER COMMON SHARE                          $         (0.06)  $          0.04   $         0.13  $            0.11
                                                               ==============     =============     ============     ==============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING - Basic                                      7,804,418         7,849,227        7,803,015          8,063,818
                                                               ==============     =============     ============     ==============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING - Diluted                                    7,804,418         9,949,537        8,260,287         10,008,039
                                                               ==============     =============     ============     ==============
</TABLE>


See Notes to Consolidated Financial Statements.

                                        3
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
                                   (UNAUDITED)

<TABLE>
                                                              Preferred                           Common
                                                          --------------------------  ----------------------------
                                                            Number of                   Number of
                                                             Shares        Amount         Shares         Amount
                                                          -----------   ------------   ------------   ------------
<CAPTION>
<S>            <C> <C>                                        <C>     <C>                <C>          <C>
BALANCE - JUNE 30, 2004                                       362,489 $   36,248,875     11,480,279   $ 22,960,557

   Shares Issued for Fractional Exchanges
      With Respect to the One-for-twenty Reverse
      Stock Split effected on March 13, 1992                      355         35,500          2,283          4,568
   Shares Issued for Options Granted
   Options Issued at Less than Treasury Stock Cost                  0              0              0              0
   Amortization of Deferred Compensation Costs                      0              0              0              0
   Net Income for the Six Months Ended December 31, 2004            0              0              0              0
                                                          -----------   ------------   ------------   ------------
BALANCE - DECEMBER 31, 2004                                   362,844 $   36,284,375     11,482,562   $ 22,965,125
                                                          ===========   ============   ============   ============
</TABLE>

<TABLE>
                                                              Capital                    Treasury       Deferred
                                                             in Excess                     Stock         Compen-
                                                              of Par      (Deficit)        At Cost         sation         Total
                                                           ------------  ------------   ------------   ------------  ------------
<CAPTION>
<S>                                                       <C>           <C>           <C>             <C>            <C>
BALANCE - JUNE 30, 2004                                   $ 20,191,982  $(46,989,638) $   (1,839,073) $      (6,666) $ 30,566,037

   Shares Issued for Fractional Exchanges
      With Respect to the One-for-twenty Reverse
      Stock Split effected on March 13, 1992                  (40,068)            0               0              0             0
   Shares Issued for Options Granted                                                         919,035                      919,035
   Options Issued at Less than Treasury Stock Cost                   0      (462,500)        462,500              0             0
   Amortization of Deferred Compensation Costs                       0             0               0          2,500         2,500
   Net Income for the Six Months Ended December 31, 2004             0     1,076,278               0              0     1,076,278
                                                           ------------  ------------   ------------   ------------   -----------
BALANCE - DECEMBER 31, 2004                               $ 20,151,914  $(46,375,860) $     (457,538) $      (4,166) $ 32,563,850
                                                          ============   ===========    ============   ============   ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       4
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
                                                                          December 31,
                                                                 ------------------------------
                                                                     2004              2003
                                                                 ------------     -------------
<CAPTION>
<S>                                                            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
       INCOME BEFORE DISCONTINUED OPERATIONS                   $   1,076,278    $    1,122,096
       Adjustments to reconcile income to net cash provided by
        operating activities:
           Depreciation and Amortization                             965,101           309,719
           Gain on Sale of Assets                                          0             3,853
           Impairment of Note                                        350,000                 0
           Increase in Deferred Income                               190,863                 0
           (Decrease) in Deferred Income - Related Parties        (4,000,000)                0
           Changes in Operating Assets and Liabilities -
             (Increase) in Restricted Cash & Investments                   0          (210,000)
              Decrease (Increase) in Accounts Receivable            (372,902)          (76,532)
             (Increase) in Other Assets                              (50,100)         (164,982)
             (Increase) in Prepaid Expenses                         (294,430)         (539,982)
             Increase in Accounts Payable and Accrued Expenses     1,583,876          (847,516)
                                                                 ------------     -------------
       CASH (USED BY) OPERATING ACTIVITIES BEFORE
        DISCONTINUED OPERATIONS                                     (551,313)         (403,344)
       CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES              4,800             4,800
                                                                 ------------     -------------
       NET CASH (USED BY) OPERATING ACTIVITIES                      (546,513)         (398,544)
                                                                 ------------     -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase and Improvements of Vessels                          (7,018,281)         (741,265)
    Loans Paid by Related Parties                                  3,374,623                 0
    Capital and Livestock Expenditures                              (777,305)         (515,859)
    (Increase) Decrease in Other Investment Activity                (664,910)          861,324
                                                                 ------------     -------------
       CASH (USED IN) INVESTING ACTIVITIES
       BEFORE DISCONTINUED INVESTING ACTIVITIES                   (5,085,873)         (395,800)
       CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES                  0                 0
                                                                 ------------     -------------
       NET CASH (USED IN) INVESTING ACTIVITIES                    (5,085,873)         (395,800)
                                                                 ------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal Payments on Short Term Notes                           (50,958)       (1,964,978)
    Principal Payments on Loans to Related Parties                  (183,405)                0
    Decrease in Balances Due to/From Discontinued Subsidiaries         3,813             4,875
                                                                 ------------     -------------
       CASH (USED IN) FINANCING ACTIVITIES
       BEFORE DISCONTINUED FINANCING ACTIVITIES                     (230,550)       (1,960,103)
       CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES               (3,813)           (4,875)
                                                                 ------------     -------------
       NET CASH (USED IN) FINANCING ACTIVITIES                      (234,363)       (1,964,978)
                                                                 ------------     -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (5,866,749)       (2,759,322)
          LESS CASH AND CASH EQUIVALENTS  FROM
            DISCONTINUED OPERATIONS                                     (987)               75
       CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD        7,508,632         6,123,641
                                                                 ------------     -------------
       CASH AND CASH EQUIVALENTS AT END OF THE PERIOD          $   1,640,896    $    3,364,394
                                                                 ============     =============
       Supplemental Disclosures of Cash Flow Information:
          Cash paid during the period for:
          Interest                                             $   2,611,503    $      434,949
          Income Taxes                                         $           0    $            0

</TABLE>

See Notes to Consolidated Financial Statements.

                                        5

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A) Nature of Operations - ITG Vegas, Inc. ("ITGV") is currently engaged in
an entertainment cruise and casino ship business under a bareboat charter of the
vessel  M/V Palm Beach  Princess  (the "Palm  Beach  Princess").  The Palm Beach
Princess  performs  fourteen  cruises weekly,  that is, a daytime and an evening
cruise  each day.  Each  cruise is of five to six hours  duration.  During  each
cruise,  the Palm Beach Princess offers a range of amenities and services to her
passengers, including a full casino, sit-down buffet dining, live musical shows,
discotheque,  bars and lounges,  swimming pool and sundecks. The casino occupies
15,000 square feet aboard the ship and is equipped with  approximately  425 slot
machines,  all major table games (blackjack,  dice,  roulette and poker),  and a
sports wagering book.

     During the first quarter of Fiscal 2005, we re-entered the equine  business
for which the Company  was  originally  established.  We  currently  own several
horses  of  different  ages.  Some are  currently  racing  and a few are held as
broodmares  but the majority are yearlings and two year olds in training.  It is
our plan to bring these horses into racing if we consider them competitive after
completion of training.

     Using the funding  provided by the PDS Transaction (see Note 2) and working
capital,  the Company's  subsidiary,  ITG Palm Beach,  LLC (ITGPB") began making
alterations,  retrofits and improvements to the Empress II (subsequently renamed
the Big Easy) in our  second  fiscal  quarter  to prepare it for use as a casino
cruise ship. It is  anticipated  that this vessel will be ready for operation in
late  February  or early  March  2005.  During the past six  months the  Company
incurred  approximately  $630,000  of  start up costs  which,  according  to the
appropriate  accounting  pronouncement,  have  been  expensed  as they have been
incurred.

     (B)  Principles of  Consolidation  - The accounts of all  subsidiaries  are
included in the consolidated financial statements.  All significant intercompany
accounts and transactions have been eliminated in consolidation.

     (C)  Classifications  - Certain prior years' amounts have been reclassified
to conform with the current years' presentation.

     (D) Spare Parts  Inventory - Spare parts  inventory  consists of  operating
supplies,  maintenance materials and spare parts. The inventories are carried at
cost.  It is necessary  that these parts be readily  available so that the daily
cruise operations are not cancelled due to mechanical failures.

     (E)  Depreciation and Amortization - Depreciation of property and equipment
were computed by the  straight-line  method at rates  adequate to allocate their
cost or  adjusted  fair  value  in  accordance  with U.  S.  generally  accepted
accounting   principles  over  the  estimated  remaining  useful  lives  of  the
respective  assets.  Amortization  expense  consists  of the  write off of major
vessel repairs and maintenance work completed at dry dock period. These expenses
are written off during a two year period following the dry dock period.  For the
three ended  December 31, 2004 and 2003,  the amortized  expense was $43,373 and
$37,809,  respectively. For the six months ended December 31, 2004 and 2003, the
amortized expense was $86,746 and $37,809, respectively.

     As a result of the PDS  transaction  (see  Footnote  2) we are  leasing the
vessel M/V Palm Beach  Princess under a Capital lease  arrangement.  The Company
began  depreciating  the M/V Palm Beach Princess during the first quarter of our
current fiscal year.

     Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment  whenever events or changes in circumstances
warrant  such a  review.  The  carrying  value of a  long-lived  or  amortizable
intangible asset is considered  impaired when the anticipated  undiscounted cash
flow from such asset is  separately  identifiable  and is less than its carrying
value.  In that  event,  a loss is  recognized  based on the amount by which the
carrying value exceeds the fair value of the asset.  Losses on long-lived assets
to be disposed of are  determined in a similar  manner,  except that fair values
are reduced for the cost of  disposition.  Effective  January 4, 2002,  SFAS 142
requires  an annual  impairment  review  based on fair value for all  intangible
assets with indefinite lives.

     (F) Net Assets of Discontinued  Operations - At December 31, 2004 and 2003,
the  remaining  net assets and  liabilities  of Garden  State Park and  Freehold
Raceway were classified as "Assets of Discontinued Operations." and "Liabilities
of Discontinued Operations."

                                        6

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



     (G) Recent  Accounting  Pronouncements  - In January  2003,  the  Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN") No. 46,
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
FIN No. 46  (Revised)  ("FIN  46-R") to address  certain  FIN 46  implementation
issues. This interpretation requires that the assets,  liabilities,  and results
of operations of a Variable  Interest  Entity ("VIE") be  consolidated  into the
financial  statements of the enterprise  that has a controlling  interest in the
VIE. The provisions of this  interpretation  were effective  immediately for all
arrangements  entered into with new VIEs  created  after  January 31, 2003,  and
became  effective  during the period ended March 31, 2004 for any VIE created on
or before January 31, 2003. Based upon our review, we do not believe we have any
such entities or arrangements that would require disclosure or consolidation.

     In March,  2003, the Emerging  Issues Task Force  published Issue No. 00-21
"Accounting for Revenue  Arrangements with Multiple  Deliverables" (EITF 00-21).
EITF  00-21  addresses  certain  aspects  of  the  accounting  by a  vendor  for
arrangements under which it performs multiple revenue generating  activities and
how to determine  whether such an arrangement  involving  multiple  deliverables
contains more than one unit of accounting  for purposes of revenue  recognition.
The  guidance in this Issue is  effective  for revenue  arrangements  entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements.

     (H) Revenue Recognition - Casino revenue consists of gaming winnings net of
losses. Net income is the difference between wagers placed and winning payout to
patrons and is recorded  at the time wagers are made.  The vast  majority of the
wagers are in the form of cash and we do not grant credit to our  customers to a
significant  extent.  Fare revenues  consist of admissions to our vessel and are
recognized  as  earned.   On  board  revenues  consist  primarily  of  ancillary
activities  aboard  the  vessel  such as the sale of food and  beverages,  cabin
rental,  gift  shop,  spa  facility  and  skeet  shooting.  These  revenues  are
recognized on the date they are earned.

     (I) Income Taxes - The Company has adopted the  provisions  of Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income Taxes" ("SFAS
109").  SFAS 109 requires a company to recognize  deferred tax  liabilities  and
assets  for the  expected  future  tax  consequences  of  events  that have been
recognized  in its  financial  statements  or tax  returns.  Under this  method,
deferred  tax  liabilities  and assets are  determined  based on the  difference
between the  financial  statement  carrying  amounts and tax bases of assets and
liabilities. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

     (J) Cash and Cash  Equivalents  - The Company  considers  all highly liquid
investments  with  an  original  maturity  of  three  months  or less to be cash
equivalents.

     (K) Concentrations of Credit Risk - Financial instruments which potentially
subject  the  Company  to  concentrations  of  credit  risk  are  cash  and cash
equivalents.  The Company places its cash  investments  with high credit quality
financial  institutions  and  currently  invests  primarily  in U.S.  government
obligations that have maturities of less than 3 months. The amount on deposit in
any one institution that exceeds  federally  insured limits is subject to credit
risk.

     (L)  Use  Of  Estimates  -  The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and disclosure of contingent  assets and liabilities at the dates of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting periods. Actual results could differ from those estimates.

     (M)  Deferred  Income - The gain  from the sale of our  Garden  State  Park
property on  November  28, 2000 in the amount of  $1,439,951  has been  deferred
until  such  time as the note  receivable  on the sale  has been  collected.  In
connection  with the PDS  Transaction  we have  deferred the gain on the sale of
equipment of $190,863 over the term of the equipment  lease. The deferred income
recorded as of June 30, 2004 included fees charged to Leo Equity Group,  Inc. in
the amount of $3,000,000 and to Palm Beach  Maritime Corp.  (formerly MJQ Corp.)
in the amount of  $1,000,000 in connection  with the final  settlement  with the
Brennan  Trustee.  These amounts were deferred until the first quarter of Fiscal
2005 when we received payment for these charges.

                                        7

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (N) Net Income per Common  Share  -Basic  earnings per share is computed as
net income  available to common  shareholders  divided by the  weighted  average
number of common shares  outstanding  during the quarter.  Diluted  earnings per
share  reflects  the  potential  dilution  that could occur from  common  shares
issuable through stock options and warrants utilizing the treasury stock method.
Diluted earnings per share is calculated by using the weighted average number of
common shares outstanding adjusted to include the potentially dilutive effect of
these occurrences.

         (O) Capitalized Interest - during the six months ended December 31,
2004, we capitalized interest payments made under the Empress II (subsequently
renamed the Big Easy) sublease in the amount of $1,187,282. The interest
payments will be capitalized until the vessel is placed in service, estimated to
be during our third fiscal quarter, beginning on January 1, 2005.

(2)  PDS TRANSACTION

     On July 7, 2004,  the Company and its  subsidiaries  ITG Vegas,  Inc. ("ITG
Vegas") and ITG Palm Beach, LLC ("ITGPB") and its affiliates Palm Beach Maritime
Corporation  ("PBMC")  (formerly MJQ Corp.) and Palm Beach Empress,  Inc.("PBE")
closed on a series of related transactions (the "PDS Transactions")  pursuant to
which PBMC sold and then leased back the casino cruise ship Palm Beach  Princess
("Princess"),  PBE  leased  (as  lessee)  the  casino  cruise  ship  Empress  II
(subsequently  renamed the Big Easy) ("Big Easy"),  ITG Vegas and ITGPB obtained
long-term  charters to operate,  and options to  purchase,  the Princess and Big
Easy. By way of these sales/lease transactions,  PBMC, ITG Vegas and the Company
were able to  extinguish  their  joint  debts to the  Chapter 11 Trustee for the
Bankruptcy  Estate of Robert E. Brennan  ("the  Brennan  Trustee").  ITG Vegas's
investment in the Ship Mortgage  Note,  described  below,  was converted into an
investment in the options to purchase the two vessels.

     All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
the Chief Executive Officer of the Corporation. PBMC owns 50% of the outstanding
capital stock of PBE. The remaining 50% of the outstanding  capital stock of PBE
is owned by  Raymond  Parello  and has been  pledged  to the  Company  to secure
payment of the Second Cherry Hill Note described in Note 5 below.

     The following is a summary of the principal terms of the PDS  Transactions.
The summary  does not purport to be a complete  summary and is  qualified in its
entirety by reference to the documents  which were filed as exhibits to the Form
8-K filed on July 21, 2004.

     Sale-Leaseback   of  the  Princess.   Prior  to  the  closing  of  the  PDS
Transactions  (the "Closing"),  the Princess was owned by PBMC. On May 13, 1999,
PBMC issued to Cambridge  Capital Group,  Inc. a note in the original  principal
amount of  $12,000,000  (the  "Ship  Mortgage  Note"),  which  was  subsequently
acquired by Donald F. Conway,  as Chapter 11 Trustee of the Bankruptcy Estate of
Robert E. Brennan (the "Brennan Trustee"). The Ship Mortgage Note was secured by
a  Second  Naval  Mortgage  over the  Princess  (which  became a first  priority
mortgage when  obligations  secured by the first  mortgage were paid) (the "Ship
Mortgage").  Pursuant to a Purchase and Sale agreement  dated February 22, 2002,
ITG Vegas agreed to purchase the Ship  Mortgage  Note and Ship Mortgage from the
Brennan Trustee for a purchase price of $13,750,000 (the "Purchase Obligation").
In addition,  the Company was indebted to the Brennan Trustee in connection with
the  Company's  repurchase  of  3,678,145  shares of its common  stock (the "ITB
Obligation").  As of Closing,  the aggregate  outstanding amount of the Purchase
Obligation  and ITB  Obligation  was  $7,916,451.71,  for all of which PBMC, ITG
Vegas and the Company were jointly and severally liable. At the Closing,  Cruise
Holdings I, LLC ("Cruise  I"), a subsidiary of PDS Gaming  Corporation  ("PDS"),
purchased the Princess  from PBMC for  $14,000,000;  $7,916,451.71  of which was
paid by PBMC directly to the Brennan Trustee to satisfy the Purchase  Obligation
and ITB Obligation.

     Also at  Closing,  Cruise I entered  into a Bareboat  Charter and Option to
Purchase (the "Princess  Charter") and a Master Lease  Agreement  (together with
Lease Schedule No. 1 thereto,  the "Princess Master Lease") to charter and lease
the Princess to PBMC and PBE for a period of five years.  The charter  hire/rent
payable  by  PBMC  and  PBE is  $178,500  per  month  for the  first  12  months
(equivalent to interest only on a capital lease  obligation of $14,000,000)  and
$391,762.80 for the remaining term (amortizing the capital lease obligation over
the next four years) of the  Princess  Charter.  In  addition,  PBMC and PBE are
required  to make  annual  cash flow sweep  payments  (equivalent  to  mandatory
principal  prepayments)  (the "Cash Flow Sweep") if the EBITDAR (earnings before
interest, taxes, depreciation, amortization and rents) from the operation of the
Princess and the Big Easy  ("EBITDAR")  is less than  $10,000,000  per year. Any
Cash Flow

                                        8

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Sweep payments to be made under the Princess  Charter will ultimately be made by
ITG Vegas and ITGPB (as the operators of the Princess), as described below.

     The Princess  Charter  includes an option for PBMC to purchase the Princess
at the end of the term and is  structured  such that the  monthly  charter  hire
payments  under the  Princess  Charter  will reduce the  purchase  price for the
Princess  to zero in five years  (assuming  there are no payment  defaults)  and
title will  automatically  pass to PBMC at (or, if Cash Flow Sweep  payments are
made, before) the end of the term of the Princess Charter.

     PBMC  and  PBE  entered  into  a   Sub-Bareboat   Charter  (the   "Princess
Sub-Charter")  at Closing to charter the Princess to ITG Vegas and ITGPB for the
same five year period.  ITG Vegas will operate the  Princess,  with ITGPB having
joined in the  Sub-Bareboat  Charter in order to be jointly and severally liable
with ITG Vegas for charter  hire  thereunder.  The charter  hire  payable by ITG
Vegas and ITGPB to PBMC and PBE under the  Princess  Sub-Charter  is $50,000 per
month ($600,000 per year) plus one percent (1%) of the gross operating  revenues
of the Princess.  Under the Princess Sub-Charter,  PBMC granted to ITG Vegas and
ITGPB an option to purchase  PBMC's  right to acquire the Princess at the end of
the term,  for an exercise  price equal to the appraised  value of the Princess,
$17,500,000, to which certain amounts are to be credited as described below (the
"Princess Purchase Option").  As consideration for the Princess Purchase Option,
ITG Vegas will make Cash Flow Sweep  payments  on the same terms as PBMC and PBE
are required to make such payments under the Princess  Charter (and  effectively
will make such  payments  directly  to Cruise I on behalf of PBMC and PBE to the
extent any such  payments are due).  As further  consideration  for the Princess
Purchase Option,  ITG Vegas and ITGPB are to make payments of $178,500 per month
for the first 12 months and $391,762.80 for the remaining  four-year term of the
Princess Sub-Charter (i.e., the same amounts as the charter hire payable by PBMC
and PBE under the Princess Charter) (the "Princess Additional Payments"). If ITG
Vegas and ITGPB fail to make any Cash Flow Sweep payment or Princess  Additional
Payment when due, PBMC may terminate the Princess Purchase Option. Upon exercise
of the Princess Purchase Option, ITG Vegas and ITGPB will be entitled to credits
against the exercise price of the Princess  Purchase  Option for (i) ITG Vegas's
investment  of  $7,244,000  in the Ship  Mortgage  Note  (except  to the  extent
credited toward payment of the exercise price for the purchase option on the Big
Easy under the Big Easy Sub-Charter,  described below),  plus (ii) the aggregate
amount of all Cash Flow Sweep payments made under the Princess Sub-Charter, plus
(iii) the portion of the Princess  Additional  Payments  made for the 13th month
through the 60th month of the term of the  Princess  Sub-Charter  which would be
considered  principal  payments if such  Additional  Payments  were  payments of
principal and interest on a loan of  $14,000,000  amortized over 48 months at an
interest  rate of 15.3%.  In  addition,  the exercise  price for the  assignment
option may be offset by any debts owing by PBMC to ITG Vegas and/or ITGPB.

     Acquisition  of the Big  Easy.  On  March  1,  2004,  PBE  entered  into an
agreement  to  purchase  the vessel  known as the M/V  Empress II  (subsequently
renamed  the  Big  Easy)(the  "Empress  Sale  Agreement")  from  Empress  Joliet
Corporation  at  a  purchase   price  of  $3,800,000.   The  Big  Easy  requires
approximately  $8,500,000 of alterations,  retrofits and improvements to prepare
it for use as a  casino  cruise  ship,  a  portion  of which  in the  amount  of
$2,880,652,  is being paid by ITG Vegas.  At  Closing,  PBE  assigned  to Cruise
Holdings II, LLC ("Cruise  II"), a subsidiary  of PDS and affiliate of Cruise I,
all of its rights, title and interest in and to the Empress Sale Agreement,  and
the sum of $6,000,000 was deposited in a blocked account to be used to pay costs
of the alterations,  retrofit and improvements of the Empress.  Such deposit was
funded to the extent of $2,880,652 by ITG Vegas.

     Also at Closing,  Cruise II entered  into a Bareboat  Charter and Option to
Purchase (the "Empress  Charter") and a Master Lease  Agreement  (together  with
Lease Schedule No. 1 thereto,  the "Empress  Master Lease") to charter and lease
the Big Easy to PBMC and PBE for a period of five  years.  The  charter  hire is
$82,695 for the first 12 months  (equivalent  to  interest  only on a $6 million
capital lease obligation) and $171,702.54 for the remaining term (amortizing the
capital lease  obligation over the next four years) of the Big Easy Charter.  In
addition,  PBMC and PBE are  required to make  annual  Cash Flow Sweep  payments
(equivalent  to mandatory  prepayments  of principal)  based on the EBITDAR from
operation  of the  Princess  and Empress as described in respect to the Princess
Charter above.

     The Empress Charter  includes an option for PBE to purchase the Big Easy at
the end of the term and is structured  the same as the Princess  Charter in that
the monthly  payments of charter hire under the Empress  Charter will reduce the
purchase price for the Big Easy to zero (assuming there are no payment defaults)
and title will automatically pass to PBE at (or, if Cash Flow Sweep payments are
made, before) the end of the

                                        9

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

term of the Empress Charter.

     PBMC and PBE also  entered  into a  Sub-Bareboat  Charter  (the  "Big  Easy
Sub-Charter")  at Closing  to charter  the Big Easy to ITG Vegas and ITGPB for a
five  year  period.  ITGPB  plans to  operate  the Big  Easy as a casino  cruise
business  from the Port of Palm  Beach,  with ITG  Vegas  having  joined  in the
Sub-Bareboat  Charter in order to be jointly and severally liable with ITGPB for
charter hire  thereunder.  The charter hire payable by ITG Vegas and ITGPB under
the Big Easy  Sub-Charter is $100,000 per month ($1.2 million per year) plus one
percent (1%) of the gross operating revenues of the Big Easy. Under the Big Easy
Sub-  Charter,  PBE granted to ITG Vegas and ITGPB an option to  purchase  PBE's
right to  acquire  the Big Easy at the end of the term,  for an  exercise  price
equal  to the  appraised  value  of the Big  Easy,  to be  determined  upon  the
retrofitting and  refurbishment of the Big Easy, to which certain amounts are to
be  credited  as  described   below  (The  "Big  Easy  Purchase   Option").   As
consideration  for the Big Easy Purchase  Option,  ITG Vegas will make Cash Flow
Sweep  payments  on the same  terms as PBMC and PBE are  required  to make  such
payments  under the Big Easy Charter (and  effectively  will make such  payments
directly to Cruise II on behalf of PBMC and PBE to the extent any such  payments
are due). As further  consideration for the Big Easy Purchase Option,  ITG Vegas
and ITGPB are to make  payments of $82,695 per month for the first 12 months and
$171,702.54 for the remaining term of the Big Easy  Sub-Charter  (i.e., the same
amounts as the charter hire payable by PBMC and PBE under the Big Easy  Charter)
(the "Big Easy  Additional  Payments").  If ITG Vegas and ITGPB fail to make any
Big Easy  Additional  Payments when due, PBE may terminate the Big Easy Purchase
Option.  Upon exercise of the Big Easy Purchase Option, ITG Vegas and ITGPB will
be  entitled  to credits  against the  exercise  price of the Big Easy  Purchase
Option for (i) ITG Vegas's  investment  in the Ship Mortgage Note (except to the
extent  credited toward payment of the exercise price for the purchase option on
the Princess under the Princess  Sub-Charter,  described  above),  plus (ii) the
amounts of costs for the  retrofit  and  improvements  to the Big Easy which are
paid by ITG  Vegas or ITGPB  plus  (iii) the  aggregate  amount of all Cash Flow
Sweep payments made under the Big Easy Sub-Charter, plus (iv) the portion of the
Big Easy  Additional  Payments made for the 13th month through the 60th month of
the  term of the Big  Easy  Sub-Charter  which  would  be  considered  principal
payments if such Additional  Payments were payments of principal and interest on
a loan of $6,000,000  amortized over 48 months at an interest rate of 16.54%. In
addition,  the  exercise  price for the  assignment  option may be offset by any
debts owing by PBMC to ITG Vegas and/or ITGPB.

     Lease of Gaming Equipment.  At Closing,  ITG Vegas and ITGPB entered into a
Master  Lease,  together  with three  Lease  Schedules  (the  "Gaming  Equipment
Lease"),  to lease certain new and used gaming equipment from PDS for use on the
two vessels.  A portion of the  equipment was  previously  owned and used by ITG
Vegas on the Princess and was sold to PDS at Closing, for $500,000,  pursuant to
a Warranty Bill of Sale and Transfer  Agreement and then leased back pursuant to
the Gaming Master Lease.  Each Schedule of the Gaming Equipment Lease has a term
of three years from the time the  equipment  under that Schedule is delivered to
and  accepted by ITG Vegas and ITGPB.  Aggregate  rent for all gaming  equipment
will be approximately  $1.4 million per year. ITG Vegas and ITGPB have an option
to purchase  the leased  equipment  at the end of the term for a purchase  price
equal to the fair  market  value of the  equipment  at such time  (less,  to the
extent any items of equipment were replaced during the previous 12-month period,
the excess of the then-current book value of the replacement  equipment over the
book value of the old equipment at the time of replacement).

     Guaranty  Agreements.  As a condition to entering into the PDS Transaction,
PDS required International Thoroughbred Breeders, Inc. ("ITB") and together with
its subsidiaries,  collectively "the Company", ITG Vegas, ITGPB, PBMC and PBE to
guaranty  performance  of certain of the PDS  Transactions.  ITB,  ITG Vegas and
ITGPB entered into Guaranty  Agreements  guarantying the obligations of PBMC and
PBE under the Princess Charter,  Princess Master Lease, Big Easy Charter and Big
Easy  Master  Lease.  ITB,  PBMC  and  PBE  entered  into a  Guaranty  Agreement
guarantying  the  obligations of ITG Vegas and ITGPB under the Gaming  Equipment
Lease.

     Additional Security. As security for the performance by ITG Vegas under the
Guaranty Agreements  described above and the Princess and Big Easy Sub-Charters,
ITG Vegas entered into a Collateral  Assignment of the Maritime  Office  Complex
Lease and Operating  Agreement  and Other Lease as well as a Leasehold  Mortgage
pursuant to which it assigned as collateral to Cruise I and Cruise II its rights
under its lease for space, and its operating rights, at the Port of Palm Beach.



                                       10

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     Limitation on Upstream  Payments to ITB.  Upstream payments by ITG Vegas to
the Company are limited under the Princess Sub-Charter and Big Easy Sub-Charter.
If the "YTD Result" (defined as 10/12ths of annualized EBITDAR from operation of
the two vessels) is greater than $8,000,000 at the end of any of the first three
fiscal  quarters or EBITDAR  from  operation  of the two vessels is greater than
$8,000,000  at the end of any fiscal year,  and if ITG Vegas and ITGPB have made
all payments due under the Princess Sub- Charter and Big Easy  Sub-Charter,  ITG
Vegas may make (i) tax sharing  payments to the Company  (payments  equal to the
federal  income tax savings to ITG Vegas  resulting  from its  inclusion  in the
Company's  consolidated group for federal income tax purposes) including any tax
sharing  payments  previously  deferred as a result of the limitation  under the
Princess  Sub-Charter  or Big Easy  Sub-Charter,  and (ii) other payments to the
Company in an amount  which,  together  with charter hire  payments in excess of
$100,000  per  month  to PBMC  and PBE for the two  vessels,  shall  not  exceed
$200,000 per month (a  "Restricted  Payment").  If ITG Vegas is prohibited  from
making any  Restricted  Payment  for any  month,  once such  payments  are again
allowed,  such Restricted Payment may be made to the Company,  provided that the
total amount of Restricted  Payments paid by ITG Vegas to the Company,  PBMC and
PBE in any twelve-month period may not exceed $2,400,000.

(3) DESCRIPTION OF LEASING ARRANGEMENTS

     As  described  in the  footnote 2 above,  on July 7, 2004 the  Company  and
several of its subsidiaries  entered into sub lease transactions for two vessels
and charter  transactions  for  equipment to be placed on the  vessels.  The sub
charter for the Palm Beach  Princess,  which is  currently  in service,  will be
accounted  for as a  capital  lease  and  the  lease  for the  gaming  equipment
currently  aboard  the vessel  and the lease for new  gaming  equipment  will be
accounted for as an operating lease.

     Principal  payments made will reduce the capital lease  purchase  liability
and the interest portion of each monthly payment will be expensed.  Depreciation
expense will be recorded for the Palm Beach Princess  using an estimated  useful
life of 20  years.  Sub  charter  fees of  $50,000  per  month  plus 1% of gross
revenues of the Palm Beach Princess will be expensed as incurred.

     The  transaction  also included the sub charter of the Big Easy and a lease
for  gaming  equipment  aboard  the  vessel.  PDS placed $6 million in a reserve
account which included  $2,880,652 of our funds for the  improvements to be made
to the Big  Easy.  When such  improvements  are  completed  the  vessel  will be
appraised and the accounting  treatment for the transactions  will be determined
at that time.  Sub charter fees of $100,000 per month plus 1% of gross  revenues
will be expensed  as  incurred at the time the vessel is placed in service.  The
gaming  equipment lease will be accounted for as an operating  lease. The gaming
equipment lease requires interest only payments for the first six months.  These
payments for interest will be capitalized  until the vessel is placed in service
and  subsequently  amortized over the life of the equipment.  Interest  payments
made on the Big Easy  sub-lease and payments made for the charter hire fees will
be capitalized until the vessel is placed in service and subsequently  amortized
over the life of the vessel.

     Vessels,  plant and  equipment at December  31, 2004 include the  following
amounts for capitalized leases:


     Vessel, Palm Beach Princess              $ 17,500,000

     Less: allowance for depreciation             (566,687)
                                               -----------
     Capital Leases                           $ 16,933,313
                                               ===========



                                       11

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 2004:

Period ending December 31,

                         2005              $      4,168,315
                         2006                     5,661,156
                         2007                     5,661,156
                         2008                     5,661,156
                         2009                     3,302,341
                                              -------------
Total minimum lease payments               $     24,454,124

Less: amount representing interest              (10,454,124)
                                              -------------
Present value of net minimum lease payment $     14,000,000
                                              =============

     Operating Leases

     The  following  is a schedule by years of future  minimum  rental  payments
required under  operating  leases that have initial or remaining  non-cancelable
lease terms in excess of one year as of December 31, 2004:

Period ending December 31,

                         2005              $      1,281,134
                         2006                     1,362,146
                         2007                     1,248,634
                                              -------------
Total minimum lease payments               $      3,891,914
                                              =============

(4)  ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION

     On January 3, 2003, ITG Vegas, Inc. ("ITG Vegas"), our subsidiary operating
the Palm Beach  Princess,  and Palm Beach Maritime  Corp.("PBMC")  (formerly MJQ
Corp.),  which owned the Palm Beach Princess vessel,  an entity owned by Francis
W. Murray,  filed voluntary  petitions for relief under Chapter 11 of the United
States  Bankruptcy Code (the "Bankruptcy  Code") in the United States Bankruptcy
Court for the Southern District of Florida, Palm Beach Division (the "Bankruptcy
Court"),  In re: ITG Vegas, Inc., Case No. 03-30038.  The petition did not cover
the Parent  company,  ITB, nor any other of ITB's  subsidiaries.  The Palm Beach
Princess continued to operate as  "debtor-in-possession"  under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable  provisions of the
Bankruptcy Code and orders of the Bankruptcy  Court.  We had previously  entered
into a Master  Settlement  Agreement to purchase from the Chapter 11 Trustee for
the  Bankruptcy  Estate  of  Robert  E.  Brennan  (the  "Brennan  Trustee")  the
promissory note of Palm Beach Maritime Corp. for $13.75 million. We did not have
funds  necessary to complete that purchase by January 6, 2003, the date required
for  payment of the balance of such  purchase  price.  Therefore,  on January 3,
2003, in order to protect our invested deposits and operation of the vessel, ITG
Vegas  (together with Palm Beach  Maritime Corp) filed a voluntary  petition for
relief under Chapter 11 of the Bankruptcy Code.

     On September 12, 2003, the Bankruptcy  Court issued an order confirming the
Amended Joint Chapter 11 Plan of  Reorganization  in the Chapter 11 cases of ITG
Vegas,  Inc.  and Palm Beach  Maritime  Corp.  (ITG Vegas,  Inc.  and Palm Beach
Maritime Corp. being hereinafter  called the "Debtors").  The Plan was a plan of
reorganization  (the "Plan") under Chapter 11 of the  Bankruptcy  Code which was
jointly  proposed by the Debtors.  As of October 15, 2003, the effective date of
the Plan, all claims,  debts, liens,  security interests and encumbrances of and
against the Debtors and  against  all  property of their  respective  bankruptcy
estates, which arose before confirmation,  were discharged,  except as otherwise
provided  in the  Plan or  confirmation  order.  Post-confirmation,  each of the
Debtors continued as reorganized debtors.


                                       12

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     With the  consummation of the PDS  Transactions  described above in Note 2,
all of our and the  Debtors'  indebtedness  to the  Brennan  Trustee was paid in
full.

     On July 17, 2004,  the  Bankruptcy  Court issued a final decree closing the
Debtors' Chapter 11 cases.

(5)  NOTES RECEIVABLE

     (A)  Second Cherry Hill Note

     A portion  of the  proceeds  from the sale of the  non-operating  former El
Rancho  Hotel and  Casino in Las Vegas to  Turnberry/Las  Vegas  Boulevard,  LLC
("Turnberry")  on May 22, 2000 was used by us to purchase a  promissory  note of
the buyer in the face amount of $23,000,000 (the "Las Vegas Note"). The interest
rate under  such note was to be  adjusted  from time to time since the  interest
actually  payable  was to be  dependent  upon,  and  payable  solely out of, the
buyer's  net  cash  flow  available  for   distribution  to  its  equity  owners
("Distributable  Cash").  After the equity  investors  in the buyer had received
total  distributions  equal to their capital  contributions  plus an agreed upon
return on their invested capital, the next $23 million of Distributable Cash was
to be paid to us. We were to receive payments under the note equal to 33 1/3% of
all  Distributable  Cash until the maturity date, which was to occur on the 30th
anniversary  of our  purchase  of the note.  We had the  option to  convert  the
promissory  note into a 33 1/3% equity  interest in the buyer during a six month
period  beginning at the 15th  anniversary  of the issuance of the note.  If not
then  converted,  the note was to be converted into a 33 1/3% equity interest in
the  buyer  at the  30th  anniversary  of  its  issuance.  Fair  value  and  the
collectability of this note was determined by a real estate appraisal  completed
in July, 2003 for a bank in anticipation of financing for Turnberry.

     On June 16, 2004,  the Company sold the Las Vegas Note to Cherry Hill at El
Rancho LP (the  "Buyer"),  a limited  partnership  which is affiliated  with the
maker of the Las Vegas Note.

     In exchange for the Las Vegas Note, the Company received cash payments from
the Buyer of $2.8 million, a non-recourse loan from Turnberry Development,  LLC,
an  affiliate of the Buyer,  in the amount of $5 million and a  promissory  note
issued by Soffer/Cherry  Hill Partners,  L.P. ("Cherry Hill Partners"),  another
affiliate of the Buyer,  in the  principal  amount of  $35,842,027  (the "Second
Cherry Hill Note").  The principal  amount of the Second Cherry Hill Note equals
the difference between the unpaid principal plus all accrued and unpaid interest
(at 22%)  under the Las Vegas  Note,  less the $2.8  million in  purchase  price
payments  and $5  million  non-recourse  loan paid to the  Company.  As  further
consideration, the Company received the right to use aircraft owned or leased by
the  Buyer or its  affiliates,  for up to 64 hours in total,  which the  Company
valued at approximately $224,000.

     The Company is not liable for  repayment of the principal of the $5 million
loan included in the foregoing consideration.  However, the Company is obligated
to pay interest and fees on such loan aggregating $600,000 per year ($50,000 per
month) for five (5) years.

     The Second Cherry Hill Note received by the Company  matures in 2015 and is
similar to the Las Vegas Note which was sold,  in that it  generally  is payable
prior to maturity only from distributable cash of the maker. The maker under the
Second  Cherry Hill Note is one of the  principal  partners in the entity  which
purchased  the Garden  State Park real  property  from a Company  subsidiary  in
November of 2000,  and such  obligor  will only have funds with which to pay the
Second Cherry Hill Note out of its profits from the  development of Garden State
Park. The development of Garden State Park,  located in Cherry Hill, New Jersey,
was  delayed as a result of  community  opposition  to certain  elements  of the
development  plan, and, while the Company  believes that the development plan is
now  moving  forward,  the  timing  and  amount of  profits  there  also  remain
uncertain. The Company already holds a promissory note in the face amount of $10
million, received from the purchaser of Garden State Park in connection with the
sale of such real  property,  which the  Company  expects  will be fully paid in
time. While the Company expects that note to be fully paid, it is not optimistic
that this  Second  Cherry  Hill Note will be fully paid,  and  accordingly,  the
Company has written  down the Second  Cherry  Hill Note  (defined  above) on its
books.  The interest  portion of the Las Vegas Note  amounting to  approximately
$20,866,000 has never been included as income on the Company's books,  therefore
the interest  capitalized  under the Second Cherry Hill Note is not subject to a
write  down.  The  remaining  portion  of the Second  Cherry  Hill Note has been
written down to $4,578,651  which  resulted in an  impairment  charge of the new
note of $12,786,589,  recorded in the 4th quarter of the Company's June 30, 2004
fiscal  year  and  additional  impairment  charges  of  $200,000  and  $150,000,
respectively, recorded during the first and second quarters of

                                       13

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Fiscal 2005. The Company had previously  recorded  deferred income of $2,786,589
on the original sale of the El Rancho  property in May,  2000,  which amount was
used to reduce the  impairment  charge to  $10,000,000  at June 30, 2004. In its
assessment  of the fair  value of the  Second  Cherry  Hill  Note,  the  Company
estimated  that its share of  proceeds  from the sale of the El Rancho  property
prior to July 31, 2005 would generate approximately $500,000. As of December 31,
2004 the Company has recorded an impairment loss on this note of $350,000 and if
a sale does not occur prior to July 31, 2005 it is anticipated  that the Company
will take an  additional  impairment  write down against the Cherry Hill Note of
approximately $150,000 in this fiscal year ending June 30, 2005.

     The  Second  Cherry  Hill Note is  secured  by a pledge  of stock  owned by
Raymond  Parello,  an affiliate of the Buyer,  in the Palm Beach Empress,  Inc.,
representing  fifty  percent  (50%) of the  stock in that  company.  Palm  Beach
Empress,  Inc. is the entity  formed to acquire the Big Easy,  the second vessel
which is chartered to a subsidiary of the Company, and which the Company expects
to operate as a casino  cruise  ship,  similar  to the  operation  of the casino
"cruise to nowhere"  business  conducted  by a subsidiary  of the Company  since
April of 2001. The other fifty percent (50%) of the stock in Palm Beach Empress,
Inc. is owned by PBMC, a corporation  owned by Francis W. Murray,  the Company's
Chief Executive Officer. PBMC presently owns and charters to a subsidiary of the
Company the Palm Beach Princess vessel,  the operation of which is the Company's
primary operating business.

     Mr. Parello will have the right to acquire the Second Cherry Hill Note from
the Company in exchange  for his stock in Palm Beach  Empress,  Inc.  Such "put"
option held by Mr. Parello  (giving him the right to put his stock in Palm Beach
Empress,  Inc.  to the  Company  in  exchange  for the  Cherry  Hill  Note) will
effectively limit the value to the Company of the Second Cherry Hill Note to the
value of Mr.  Parello's  one-half  interest  in Palm  Beach  Empress,  Inc.  Mr.
Parello's put right will be  exercisable  upon the later to occur of (1) payment
by or for the account of Cherry Hill  Partners of  $483,205.48  under the Second
Cherry  Hill  Note,  and (2)  payment  of the  entire  principal  balance of the
non-recourse loan received by our Orion subsidiary in the principal amount of $5
million, referred to above (upon which repayment the Company's obligation to pay
interest and fees of $600,000 per year on such loan would end).  Such put option
is set forth in the  Shareholders'  Agreement  among Palm Beach  Empress,  Inc.,
Raymond  Parello and PBMC, to which our Orion  subsidiary  has joined solely for
the purpose of confirming its agreement to the put option.

     In the event Mr. Parello receives any dividends or other  distributions on,
or proceeds from,  any sale of his shares in Palm Beach Empress,  Inc., the same
will be applied as a mandatory prepayment of the Second Cherry Hill Note.

     In addition, if, before July 31, 2005, there is a sale or other disposition
of the El Rancho Property,  or a sale or other  disposition of the entire direct
or indirect interest of the owner of such property,  then fifty percent (50%) of
any profit in excess of $10 million  realized on such sale also shall be paid to
us as a mandatory  prepayment of the Second Cherry Hill Note.  The July 31, 2005
deadline by which a sale of the El Rancho  Property would have to occur in order
to trigger a possible  prepayment to the Company will be extended to January 31,
2006 if a  portion,  but less than  all,  of the El  Rancho  Property  or of the
Owner's direct or indirect ownership interest is sold before July 31, 2005.

     (B)  Original Cherry Hill Note

     A portion of the proceeds  from the sale on November 30, 2000 of our Garden
State Park property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill,
LLC ("Realen")  was paid in the form of a promissory  note in the face amount of
$10 million (the  "Note.")  Under the Note,  the interest  rate will be adjusted
from time to time since the interest  actually  payable will be dependent  upon,
and payable solely out of, the buyer's net cash flow available for  distribution
to its equity owners ("Distributable  Cash"). After the buyer's equity investors
have received aggregate  distributions equal to their capital contributions plus
an agreed  upon  return  on their  invested  capital,  the next $10  million  of
Distributable Cash will be paid to us. We will thereafter receive payments under
the Note equal to 33 1/3% of all  Distributable  Cash until the  maturity  date,
which occurs on the 15th anniversary of the issuance of the Note. We may convert
the  promissory  note, at our option,  into a 33 1/3% equity  interest in Realen
during the six month period prior to the 15th anniversary of the issuance of the
Note. If not then  converted,  the Note will be payable at maturity on said 15th
anniversary  in an  amount  equal to (i) the  difference,  if any,  between  $10
million and total payments previously made to us under the Note and (ii) 33 1/3%
of any excess of the fair market  value of  Realen's  assets over the sum of its
liabilities  (other than the Note) and any unreturned  equity  investment of its
owners. Fair value and the

                                       14

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

collectability of this note was determined by a real estate appraisal  completed
in March, 2002 for a bank in anticipation of financing for Turnberry.


(6)  DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES

     The  following  items  are  classified  as  deposits  and  other  assets  -
non-related parties:

                                 December 31, 2004       June 30, 2004
                                -------------------    -----------------
Long-Term Prepaid Loan Costs $              958,605 $                  0
Port Lease Rights                           250,000              250,000
Other Misc. Assets                           84,975               84,975
                                -------------------    -----------------
         Total               $            1,293,580 $            334,975
                                ===================    =================


(7)  DEPOSITS AND OTHER ASSETS - RELATED PARTIES - NET

     The following  items are  classified as Deposits and Other Assets - Related
Party Transactions (See Note 14):

                                                     December 31,      June 30,
                                                         2004            2004
                                                      ----------      ---------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $  2,034,405   $  2,034,405

Loan Transferred from Golf Course Project to
OC Realty, LLC                                           735,584        735,584

Accrued Interest on Loans to the
Ft. Lauderdale Project(OC Realty, LLC)                 1,328,105        911,350

Purchase Option Deposits on Vessels                    3,845,117              0

Goodwill on Purchase of GMO Travel                       193,946        193,946

Advances to PBMC                                               0        616,534

Note Receivable from Francis W. Murray                         0      2,600,749

Deposits on new lease for M/V Palm Beach
Princess and the Big Easy with. Palm Beach
Maritime Corp.("PBMC")(formerly MJQ Corp.)                     0        880,783

Accounts Receivable from Francis W. Murray                     0         32,751

Loans to Francis W. Murray                                     0         93,000

Accrued Interest Transferred from Golf Course
Project to OC Realty, LLC                                      0        287,327

Accounts Receivable from Frank Leo                             0         24,512
                                                      ----------     ----------
  Total Deposits and Other Assets - Related Parties $  8,137,157   $  8,410,941
                                                      ==========     ==========



                                       15

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(8)  NOTES AND MORTGAGES PAYABLE

     Notes and Mortgages Payable are summarized below:
<TABLE>
                                                            December 31, 2004           June 30, 2004
                                           Interest %    ----------------------  -------------------------
                                           Per Annum      Current    Long-Term     Current       Long-Term
                                           ----------    ---------   ----------  -----------    -----------
<CAPTION>
<S>                                           <C>      <C>         <C>         <C>            <C>
International Thoroughbred Breeders,
Inc.:
------------------------------------
Chapter 11 Trustee (the "Brennan
Trustee") for the Bankruptcy Estate of
Robert E. Brennan (A)                             12%  $      -0-  $       -0- $   4,038,838  $   4,024,142

Francis X. Murray (B)                              8%     159,164          -0-       159,164            -0-

William H. Warner (B)                             12%      24,000          -0-        24,000            -0-

Other                                         Various      33,207          -0-        25,000            -0-

ITG Vegas, Inc.:
------------------------------------
International Game Technology (C)                  8%     122,489       10,459       122,174         71,685

Other                                         Various      23,200          -0-           -0-            -0-

Garden State Park:
------------------------------------
Service America Corporation (D)                    6%     160,000          -0-       160,000            -0-
                                                         --------    ---------   -----------    -----------
                 Totals                                $  522,060  $    10,459 $   4,529,176  $   4,095,827

 Net Liabilities of Discontinued
  Operations - Long Term                                 (160,000)         -0-      (160,000)           -0-

 Related Party Notes                                     (183,164)         -0-      (183,164)           -0-
                                                         --------    ---------   -----------    -----------
Totals                                                 $  178,896  $    10,459 $   4,186,012  $   4,095,827
                                                         ========    =========   ===========    ===========
</TABLE>
The effective Prime Rate at June 30, 2004 was 4%.

     (A)  In  connection  with  the  PDS  transactions,  on  July  7,  2004  the
outstanding  principal  balance was paid by PBMC directly to the Brennan Trustee
to satisfy this obligation. (See Note 2)

     (B) On March 1, 2003,  we issued a promissory  note for a line of credit up
to $225,000 bearing interest at 8% to Francis X. Murray. The outstanding balance
on the line of  credit  note at  December  31,  2004 was  $159,164  and  accrued
interest was $22,650.  In fiscal 2003,  we issued  promissory  notes for $24,000
bearing interest at 12% to William H. Warner, Secretary of the Company. Interest
is paid monthly on the note to Mr.  Warner.  The proceeds from Mr.  Murray's and
Mr. Warner's notes were used as working capital.

     (C) On December  22,  2003,  ITG Vegas,  Inc.  issued a  twenty-four  month
promissory  note  in  the  amount  of  $231,716  bearing  interest  at  8.5%  to
International Game Technology for the purchase of gaming equipment. A payment of
$30,000  was  paid on  delivery  of the  equipment  and 24  consecutive  monthly
installments of $10,532.85 are to be paid on the balance.  At December 31, 2004,
the principal balance on the International Game Technology note was $132,948.

     (D) In  connection  with the January 28,  1999 lease  transactions  for the
Garden State Park facility,  the Company  purchased a liquor license  located at
Garden  State  Park  owned  by an  unaffiliated  third  party,  Service  America
Corporation (the "Holder"),  for $500,000 financed by a five (5) year promissory
note at a 6% interest rate.  Yearly principal  payments of $80,000 plus interest
were due on December 28, 2002 and December  28, 2003.  On February 1, 2005,  the
Company  negotiated a new promissory  note with Service America in the amount of
the outstanding  principal balance of $160,000 plus unpaid interest accrued from
May 14,  2002 at 6% in the amount of  $26,000.  The new  promissory  note in the
amount of $186,000 at a 6% interest rate will be paid in monthly installments of
$10,000 which will continue until all outstanding principal

                                       16

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

and accrued  interest is paid in full.  It is  estimated  that this note will be
paid in full in August 2006.  The Company is  continuing  to negotiate new terms
under this note and if  successful  the creditor may seek to enforce  payment of
the note. In additional to the principal  amount due of $160,000 the accrued but
unpaid interest is approximately $25,000 as of December 31, 2004.

(9)  COMMITMENTS AND CONTINGENCIES

     See Note 2 for additional commitments and contingencies with respect to the
PDS Transaction.

     See Note 14 for additional commitments and contingencies of the Company and
transactions with related parties.

     In connection with the January 28, 1999 sale and lease transactions for the
Garden  State  Park  facility,  we  purchased  a  liquor  license  owned  by  an
unaffiliated third party, Service America Corporation,  for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest  were due on December  28, 2002 and December 28, 2003 and have not been
paid. The Company  entered into a sale and lease  agreement for the lease of our
premises from Jan. 28, 1999 to May 29, 2001 and the sale of a 10 acre portion to
be used as an OTB facility.  Under the terms of our sale and lease agreement the
lessee/buyer  purchased  the liquor  license for $100,000  and was  obligated to
return it to us in exchange  for a repayment  of the  $100,000  price if, at the
expiration  of the lease,  June 27,  2002,  it did not have a use for the liquor
license at the OTB facility.  During the three year period Jan. 28, 1999 to Jan.
28, 2002 no OTB facility was built and the  lessee/buyer  did not have a use for
the liquor  license at that  property.  By the terms of the contract the Company
has the right to  re-acquire  the liquor  license for $100,000 and has exercised
such  right,  however  the  lessee/buyer  has  refused to  perform.  The Company
believes  it will need to take legal  action to enforce  its right to the liquor
license.

     Through ITG Vegas,  we have negotiated with the Port of Palm Beach District
a new operating agreement and lease of space in a new office complex constructed
at the Port of Palm  Beach  adjacent  to a new  cruise  terminal  effective,  as
modified,  May 5, 2003.  The term of the initial lease is five years at $183,200
per year payable monthly. Additionally, we have the right to renew the lease for
two (2)  additional  terms of 5 years each.  We are also required to make tenant
improvements to the new space in a minimum amount of $333,000,  however that the
actual cost to make the improvements was  approximately  $950,000.  We will have
the right to a credit of up to the minimum  amount of  improvements  required of
$333,000 of construction costs against the initial term of our five year lease.

     Through our subsidiary,  Royal Star  Entertainment  LLC, we have negotiated
with the Port of Palm Beach District a second Operating Agreement dated December
18, 2003, as subsequently  amended.  This Operating  Agreement will permit us to
operate  the  Empress II  (subsequently  renamed  the "Big  Easy") in  passenger
service  from the  Cruise  Terminal  at the  Port,  with  certain  berthing  and
scheduling  priorities.  The initial  term of this  Operating  Agreement is five
years from the date of  commencement  of sailings by the Big Easy from the Port,
with subsequent renewal options of four and three years.

     On August 6, 2004 we amended  the Lease and  Operating  Agreement  with the
Port of Palm Beach in order to permit our  construction  of a passenger  gangway
system  and  destination  signage on Port  property  and our  refurbishment  and
upgrading of the  passenger  cruise  terminal  facilities,  which  measures,  we
believe,  will enhance our ability to promote and market our cruise services. We
will  receive a  wharfage  credit  from the Port of Palm  Beach in the amount of
$75,000 with respect to our construction of the gangway. In addition,  we agreed
to pay the Port of Palm Beach $.50 per vehicle  parked in the passenger  parking
lot at the Port, for a minimum period of six months beyond the  commencement  of
cruise services at the Port of Palm Beach by the Big Easy.

     On March 1, 2004 we entered  into a Dockage  Space  Agreement  between  the
Company  and the City of Riviera  Beach for  approximately  160 feet of concrete
dock space at the City Marina. The term is for one year for a fee of $11,000 per
month.  The  lease is  renewable  subject  to the  approval  of the  City.  This
Agreement  is intended  only for the purpose of making  available  the  assigned
space for vessels  other than a  day-cruise  gaming ship.  Further,  the Company
understands that in the event it wishes to dock a day-cruise gaming ship that it
will be required to enter into a new agreement with the City.


                                       17

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The PDS Transaction  involved,  among other things, our chartering a second
vessel,  the Big Easy.  In addition to those costs  recorded as of December  31,
2005 we have committed  approximately  $6,300,000  towards costs of refurbishing
and retrofitting the Big Easy vessel to date. Costs associated with refurbishing
and  retrofitting  the Big Easy  vessel and  placing  it in  service  (including
marketing   expenses  and  other  soft   costs),   are  expected  to  amount  to
approximately $12 million, $6 million of which has been provided for by means of
an  escrow of our  $2,880,652  payment  and  proceeds  of the PDS  Transactions.
Additional  amounts  necessary  to begin  operation  of the Big Easy  vessel are
expected to be provided from working  capital of our ITG Vegas  subsidiary and a
portion of the  financing  for $2.85  million  received  from PDS on January 17,
2005. ITG Vegas' ability to generate  sufficient  working  capital with which to
pay  such  costs  may be  adversely  affected  by  delays  or cost  overruns  in
connection with  refurbishing  and refitting the Big Easy and by weather related
and other  uncertainties  affecting  its  operations.  As indicated by the table
below, our debt service  requirements have increased  significantly with the PDS
financing  due to the  increase  in  amounts  of debt and  rates  involved.  The
increase in the amount is attributed in part to the  arrangement for procurement
and refurbishment  for a second vessel,  the Big Easy. We are dependent upon the
expected  additional  revenue from the  operations of the second vessel to cover
the increased financing costs.

     During the period that our  subsidiary,  ITG Vegas,  Inc.  ("ITGV")  was in
bankruptcy (January 3, 2003 to October 15, 2004) and thereafter, the 8 employees
previously paid by the holding  company,  International  Thoroughbred  Breeders,
Inc.  ("ITB"),  were paid by MJQ,  Inc.  ("MJQ"),a  company  owned by Francis W.
Murray,  our CEO. The wage  expense was recorded by ITB and an accounts  payable
was recorded to MJQ. MJQ was subsequently fully reimbursed by ITB for the wages.
This arrangement was the result of the  restrictions  placed on the flow of cash
to ITB from ITGV by the bankruptcy  court. As a result,  employer  contributions
and employee deferrals to the ITB 401-K plan were suspended. The Company has not
yet decided which action, if any, should be taken with respect to the retirement
benefits.

The following summarizes  commitments on non-cancelable  contracts and leases as
of December 31, 2004:

<TABLE>
                                                Twelve Months Ended December 31,
                              ----------------------------------------------------------------    There-
                                 2005          2006          2007         2008         2009        after       Total
                              ----------    ----------    ----------    ---------    ---------    -------    ----------
<CAPTION>
<S>                          <C>           <C>           <C>           <C>          <C>          <C>       <C>
Capital Lease - PBP          $ 4,168,315   $ 5,661,156   $ 5,661,156   $5,661,156   $3,302,341   $    -0-  $ 24,454,124
 Lease - Big Easy              2,997,378     3,620,430     3,620,430    3,620,430    2,111,918        -0-    15,970,586
Notes and Mortgages:
   Principal                     656,709           -0-           -0-          -0-          -0-        -0-       656,709
    Interest                      26,184           -0-           -0-          -0-          -0-        -0-        26,184
Deferred Interest Payments       300,000       600,000       600,000      600,000      450,000        -0-     2,550,000
Employee Contracts               688,477           -0-           -0-          -0-          -0-        -0-       688,477
Operating Leases:
    Casino Equipment           1,281,134     1,362,146     1,248,634                       -0-        -0-     3,891,914
    Administrative & Office    1,557,792       223,911       144,401       45,046          -0-        -0-     1,971,150
Purchase Obligations-Big Easy  4,947,000           -0-           -0-          -0-          -0-        -0-     4,947,000
Purchase Obligations-Other       125,280        61,006        61,006       61,006       61,006    238,936       608,240
Other Long-Term Debt                 -0-       218,242           -0-          -0-          -0-        -0-       218,242
                              ----------    ----------    ----------    ---------    ---------    -------    ----------
Total                        $16,748,269   $11,746,891   $11,335,627   $9,987,638   $5,925,265   $238,936  $ 55,982,626
                              ==========    ==========    ==========    =========    =========    =======    ==========
</TABLE>

(10) LEGAL PROCEEDINGS

     We are a defendant in various lawsuits incidental to the ordinary course of
business.  It is not  possible to  determine  with any  precision  the  probable
outcome or the amount of liability,  if any, under these lawsuits;  however,  in
the opinion of the Company and its counsel,  the  disposition  of these lawsuits
will not have a material  adverse effect on our financial  position,  results of
operations, or cash flows.




                                       18

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(11) FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of  December  31,  2004,  in  assessing  the  fair  value  of  financial
instruments,  the Company has used a variety of methods and  assumptions,  which
were based on estimates  of market  conditions  and loan risks  existing at that
time. For certain instruments, including cash and cash equivalents, investments,
non- trade accounts  receivable and loans, and short-term debt, it was estimated
that the  carrying  amount  approximated  fair value for the  majority  of these
instruments because of their short-term  maturity.  The carrying amounts of long
term debt approximate fair value since the Company's  interest rates approximate
current  interest  rates.  On our original  Cherry Hill note  receivable  in the
amount of $10  million,  we have  elected  to defer the gain on the sale and the
interest to be accrued until such time that collectability can be determined. On
our second Cherry Hill note  receivable we have  recorded  impairment  losses of
$200,000  and  150,000,  respectively,  during the first and second  quarters of
Fiscal 2005 to reflect the estimated  current  market value of this note. In its
assessment  of the fair  value of the  Second  Cherry  Hill  Note,  the  Company
estimated that its share of proceeds from a sale of the El Rancho property prior
to July 31, 2005 would generate approximately $500,000. If a sale does not occur
prior  to  July  31,  2005 it is  anticipated  that  the  Company  will  take an
additional  impairment  write down against the Cherry Hill Note of approximately
$150,000 in this fiscal year ending June 30, 2005. (See Note 5)

(12) EXTRAORDINARY ITEM

     The  Master  Settlement  Agreement  with the  Chapter  11  Trustee  for the
Bankruptcy Estate of Robert E. Brennan (the "Brennan  Trustee") included a final
settlement  by the Brennan  Trustee with numerous  parties.  Among those parties
were Leo Equity Group,  Inc.,  Michael J. Quigley,  III and Palm Beach  Maritime
Corp. ("PBMC") (formerly MJQ Corp.). During the quarter ended March 31, 2002 the
Company  charged  Leo  Equity  Group $3 million  and PBMC $1  million  for their
portion  of  expenses  incurred  by us and a  success  fee  for the  efforts  of
International   Thoroughbred  Breeders,   Inc.  in  connection  with  the  final
settlement  with the Brennan  Trustee.  Prior to our  acquisition  of Leo Equity
Group,  Inc., Leo Equity Group, Inc.  assigned to us certain  receivables in the
approximate  amount of $3 million,  including the  receivables of  approximately
$2.6 million due it from Michael J. Quigley III, in payment of this  obligation.
We had  deferred all income from these  transactions  until such time as payment
was received.  During the first  quarter of Fiscal 2005 we received  payment for
the previously deferred income in the amount of $4,000,000.

(13) TREASURY SHARES

     On December 13, 2002, the Company issued a promissory note in the amount of
$1,648,403 to purchase 3,228,146 shares of its Common Stock under the control of
the  Chapter 11  Trustee  for the  bankruptcy  estate of Robert E.  Brennan.  In
connection  with our Chapter 11 Plan of  Reorganization,  effective  October 15,
2003, we purchased an  additional  450,000  shares for  $225,000,  and the total
amount  of our  debt for the  purchases  of stock  as of  October  15,  2003 was
$1,873,413 which also includes accrued interest.  Such indebtedness was combined
with the obligations to purchase the Ship Mortgage  Obligation,  and was payable
over the next three years  together with  interest at 12% per annum.  On July 7,
2004 the Company paid in full the amount due with respect to the purchase of all
such shares. (See Note 2).

     On July 28, 2004 Mr.  Francis W. Murray  exercised his option to purchase 2
million  shares of our Common Stock at an exercise  price of $0.26875 per share.
The Company  issued 2 million  shares of Treasury  stock it held in exchange for
proceeds of $537,500.  Also on July 28, 2004 the Company issued 689,730 Treasury
shares to Mr.  Murray in payment of the  deferred  salary of $344,865 we owed to
him for the period from January 3, 2003 until November 18, 2003. The issuance of
shares for deferred salary was approved by the Board of Directors at a time when
the market value was $.50 per share.

     On August 31,  2004 the Company  issued  73,339  Treasury  shares to Robert
Quigley  in  payment  of the  deferred  salary of $36,670 we owed to him for the
period from January 3, 2003 until  November 18, 2003. The issuance of shares for
deferred salary was approved by the Board of Directors at a time when the market
value was $.50 per share.

(14) RELATED PARTY TRANSACTIONS

     See  Footnote  2  for  related   party   transactions   regarding  the  PDS
Transaction.



                                       19

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     Effective December 1, 2000, we entered into a five-year employment contract
with Francis W. Murray, our Chief Executive  Officer.  The contract provides for
annual compensation of $395,000,  a $1,500 monthly automobile expense allowance,
a country club annual dues allowance and travel and entertainment reimbursements
for business expenses reasonably incurred by him in addition to participation in
various other  benefits  provided to our  employees.  As part of his  employment
contract,  Mr. Murray was awarded an option to purchase  2,000,000 shares of our
Common Stock.  On January 4, 2003, we began  deferring  payments of compensation
due to Mr.  Murray  due to a lack of funds  resulting  from the  institution  of
proceedings  by our  subsidiary  ITG Vegas,  under Chapter 11 of the  bankruptcy
code. In November,  2003 the Company's Board of Directors  approved  issuance of
the  Company's  Common  Stock,  valued at $0.50 per share,  in exchange  for the
deferred salary of Mr. Murray.  In July, 2004, Mr. Murray elected to receive his
salary of $344,865  accrued from January 3, 2003 until November 18, 2003,  which
had been deferred,  in the form of 689,730 shares of the Company's Common Stock.
On July 28, 2004 Mr.  Francis W. Murray  exercised  his 2 million  options at an
exercise  price of $0.26875 per share.  The Company  issued 2 million  shares of
Treasury  stock it held in exchange for  proceeds of $537,500.  Also on July 28,
2004 the Company  issued 689,730  Treasury  shares to Mr. Murray in exchange for
the  deferred  salary of  $344,865  which  occurred  from  January 3, 2003 until
November 18, 2003.

     During the third  quarter of Fiscal  2001,  we invested in two  projects in
which our Chairman,  President and Chief Executive  Officer,  Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors  approved  advances,  as  loans,  of up to $1.5  million  to a limited
partnership  in which  Francis W.  Murray  owned,  at that  time,  an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern  California.
In  Fiscal  2003,  the  limited  partnership's  indebtedness  to  us,  including
principal  and accrued  interest,  in the amount of  $929,541  was assumed by OC
Realty,  LLC, a Florida limited  liability  company which is owned by Francis W.
Murray and which owns the second  real estate  project  (Ocean  Club)  described
below. Such indebtedness became due December 31, 2004 and bears an interest rate
of 6% and is now  scheduled  to be paid upon the  completion  of the Ocean  Club
project.

     In the second project, Mr. Murray is participating in the development of an
oceanfront  parcel  of land,  located  in Fort  Lauderdale,  Florida,  which has
received all governmental  entitlements from the City of Fort Lauderdale and the
state of Florida to develop a  14-story  building  to include a 5-story  parking
garage,  approximately  6,000 square feet of commercial  space and a residential
9-story tower.  The property had been owned by MJQ  Development,  LLC, which was
owned by Michael J. Quigley,  III until  December 26, 2002 when the property was
acquired by OC Realty,  LLC, the entity owned by Mr. Murray.  Mr. Quigley has no
relationship to Robert J. Quigley, one of our directors. OC Realty is developing
a condominium  hotel resort on the property as discussed  above.  As of December
31, 2004, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $1,360,143 on the loan.  Upon the  acquisition  of the
property,  OC Realty assumed MJQ  Development's  indebtedness to us. These loans
bear  interest at 12% and will be  repayable  out of the first  proceeds,  after
payment of bank debts,  generated by the sale of the condominiums.  We will also
have the right to receive, as participation  interest,  from available cash flow
of OC Realty if the project is successful,  a priority  return of our investment
and a priority profits interest for up to three times our investment.  Repayment
of these loans and our  participation  interest will be subject to repayment of,
first,  bank debt of  approximately  $5.5 million (at  present)  incurred in the
purchase of the real property and, second,  construction  financing  expected to
amount to $25 to $30 million  and third,  capital  invested  by a joint  venture
partner  (which had been expected to be up to $6.5 million) plus a 15% per annum
return  thereon.  At the time the loans to MJQ  Development  were approved,  Mr.
Murray stood to receive a substantial  contingent  benefit from MJQ  Development
for his  participation  in the  project.  Fair value and  collectability  of the
original  investment of $2,034,405  and accrued  interest was  determined by the
joint venture through  projections  evidencing our collection upon build out and
sale of the project.

     In order to raise the capital with which to proceed in the  development  of
the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in
a joint venture in connection  with which the other joint venture partner was to
fund up to $6.5 million for development and receive a 50% equity  interest.  Our
loan and participation  interest will be payable out of OC Realty's 50% share of
distributions  after repayment of debt and the new investor's capital investment
and  15%  annual  return  thereon.   However,  the  joint  venture  partner  has
discontinued  its funding  for the  project.  OC Realty has loaned  funds to the
joint venture to meet its current requirements at a 20% annual interest rate. In
addition,  OC Realty is in  discussions  with third parties to replace its joint
venture partner and is considering entering into a development  agreement with a
recognized developer to aid the marketability of the project, however, such

                                       20
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

arrangements  will vary from the  arrangements  cited  above  with its prior 50%
joint venture.  The Company has assessed the collectability of the advances made
to OC Reality based on comparable  sales of like units in the marketplace  which
suggest  demand is strong and  prospective  sales of the project's  inventory or
units  will  be more  than  adequate  to  meet  its  obligations  including  our
outstanding notes payable.

     At a meeting of the Board of Directors of the Company held on June 29, 2004
the board authorized  reimbursement to Francis W. Murray for tax consequences he
would  incur as a result of the PDS  Transaction.  The  amount  and form of such
reimbursement  will be determined by the full board of directors when data as to
such tax consequences becomes available.

     On July 7,  2004,  the  Company  entered  into a  five-year  charter of two
vessels,  the Palm Beach Princess and the Empress II  (subsequently  renamed the
Big Easy) , under the terms  described  in  footnote 2 above.  The  vessels  are
chartered to us by PBMC and Palm Beach Empress, Inc. Mr. Murray is sole owner of
PBMC and a 50% owner of Palm Beach Empress, Inc. (See Note 2.)

     During the first quarter of fiscal 2005, the Company  re-entered the equine
business for which the Company was originally  established and purchased several
horses of different ages. The Company has purchased several horses, the majority
being one and two year olds,  from Francis W. Murray at prices to be  determined
by a current  appraisal  of their  values.  Payment for such horses will only be
made out of profits realized from the horses purchased from Mr. Murray,  if any.
It is our plan to bring these horses into racing if we consider them competitive
following the training  period to take  advantage of the  projected  increase in
purses  as a result  of the  introduction  of slot  machines  in  several  state
jurisdictions.

(15) SUBSEQUENT EVENTS

     (A)  On  January  5,  2005,  Royal  Star  Entertainment,   LLC  ("RSE"),  a
wholly-owned  indirect  subsidiary  of the  Company,  executed  and  delivered a
promissory note, amended as of January 17, 2005 in the original principal amount
of $2,850,000 (the "Note"),  representing a loan funded on January 17, 2005 (the
"Loan") in such principal  amount.  Also on January 5, 2005, the Company entered
into a Guaranty  Agreement dated as of January 6, 2005,  guarantying  payment of
all sums due and to become due by RSE under the Note.  The Note is also  secured
by RSE's Preferred Mortgage dated as of January 17, 2005, encumbering the vessel
owned by RSE and known as the  "Royal  Star."  The lender and holder of the Note
and Mortgage is Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation.

     The Loan  evidenced  by the Note will be  repayable  on January  17,  2006.
Interest  on the Loan will be payable  monthly  at a rate of 10% per  annum.  At
closing,  RSE paid a closing fee to the lender in an amount equal to $78,375, or
2.75% of the principal  amount of the Note. The sole member of RSE is ITG Vegas,
Inc., an indirect  wholly owned  subsidiary of the Company,  and the proceeds of
the Loan are to be used to make leasehold improvements under the Maritime Office
Complex  Lease and  Operating  Agreement  between ITG Vegas and the Port of Palm
Beach  District,  or to make  improvements  to the  vessel  Royal Star or to the
vessel  Big Easy  (formally  known  as  Empress  II),  a  vessel  which  another
subsidiary of ITG Vegas charters under a capital lease and charter.  The Company
and ITG Vegas  continue to explore  venues for use of the vessel Royal Star in a
casino cruise  operation.  If RSE prepays the Note in connection  with a sale of
the vessel Royal Star, it will be required to pay a 5% prepayment premium to the
lender.

     On January 5, 2005,  RSE entered  into a Master Lease  Agreement  and Lease
Schedule  No. 1, each dated as of January 6, 2005  (collectively,  the  "Lease")
with PDS Gaming  Corporation  providing for the lease by RSE of slot machines to
be located on the  vessel  Royal  Star.  Also on  January 5, 2005,  the  Company
entered  into a Guaranty  Agreement  dated as of January  6, 2005,  agreeing  to
guaranty  payment by RSE of all sums  becoming due under the Lease.  The term of
the Lease is three  years,  with  rental  payments  of $11,879 per month for the
first four months and $95,351.73 for the next thirty-two  months.  RSE will also
pay a  closing  fee of  $57,020.74,  and a  security  deposit  in the  amount of
$95,351.73.

     The foregoing is a summary of the  principal  terms of RSE's loan and lease
transactions.  The  summary  does not  purport to be a complete  summary  and is
qualified  in its  entirety by  reference  to the  documents  which are filed as
exhibits to the Company's Form 8-K dated January 6, 2005.

                                       21

<PAGE>



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

Forward-Looking Statements

     We have made  forward-looking  statements in this Form 10-Q,  including the
information  concerning possible or assumed future results of our operations and
those  preceded  by,  followed by or that include  words such as  "anticipates,"
"believes," "expects," "intends," or similar expressions.  For those statements,
we claim  the  protection  of the safe  harbor  for  forward-looking  statements
contained in the Private  Securities  Litigation  Reform Act of 1995. You should
understand that the following  important factors, in addition to those discussed
under "Risk Factors" in the Company's  Annual Report on Form 10-K, filed for the
year ended June 30, 2004,  could affect our future results and could cause those
results  to  differ  materially  from  those  expressed  in our  forward-looking
statements:

     o    general  economic  and  business  conditions   affecting  the  tourism
          business in Florida;
     o    competition;
     o    execution of our new business strategy;
     o    changes in laws regulating the gaming industry;
     o    the  outcome  of a  pending  vote on March 8, 2005 in  Miami-Dade  and
          Broward  Counties in Florida  that would allow slot  machines at three
          (3)  race  tracks  and one  Jai-alai  in  Broward  County  and two (2)
          racetracks  and  one  Jai-alai  in  Dade  County.  Broward  County  is
          contiguous to Palm Beach County and Miami-Dade County is contiguous to
          Broward County.
     o    fluctuations  in quarterly  operating  results as a result of seasonal
          and weather considerations;
     o    events  directly or  indirectly  relating to our business  causing our
          stock price to be volatile; and
     o    delays or cost-overruns in connection with  refurbishing and refitting
          the vessels,  the Big Easy and the Royal Star,  which we plan to place
          in service.

Background

     The  Company,  through its wholly  owned  subsidiary,  operates an offshore
gaming vessel,  the M/V Palm Beach  Princess  which we sub charter.  This vessel
sails  twice  daily from the Port of Palm Beach,  Florida  and,  once beyond the
state  territorial  water's  limits,  engages in a casino gaming  business.  The
business  of  operating  the  cruise  vessel  includes  a variety  of  shipboard
activities,  including dining,  music and other  entertainment as well as casino
gaming.  We are  expanding  that line of business,  for which on July 7, 2004 we
entered  into a sub  bareboat  charter  for a  second  vessel,  the  Empress  II
(subsequently renamed the "Big Easy") . After refurbishing and retrofitting that
vessel,  we expect  to place  the Big Easy in  service,  during  our 3rd  fiscal
quarter which ends on March 31, 2005.  The Big Easy will be berthed and operated
from the Port of Palm Beach.

     On July 7, 2004 the Company and several of our subsidiaries  entered into a
sublease  and sub  bareboat  charter and  equipment  lease  transaction  for the
purpose of operating and  acquiring the vessels Palm Beach  Princess and the Big
Easy.  The Palm Beach  Princess sub charter is being  accounted for as a capital
lease. The accounting  treatment for the Big Easy sub charter will be determined
after  completion of  improvements  and  appraisal of the vessel.  Through these
transactions,   payments  were  made  on  our  behalf  to  prepay  in  full  all
indebtedness to the Brennan Trustee.  (This  transaction is more fully disclosed
in  footnote  2 of the  financial  statements).  We intend to expand  our gaming
operations by placing the Big Easy in operations during our third fiscal quarter
and we continue to explore  other gaming  opportunities  both  domestically  and
internationally.  During our last fiscal year we purchased a third  vessel,  M/V
Royal Star, however,  this ship will need extensive  improvements and outfitting
before being placed in service.  We are currently  exploring  possible locations
from which to operate the vessel and possible  financing sources to permit us to
make the necessary improvements.

     During the first quarter of fiscal 2005, we re-entered the equine  business
for which the Company  was  originally  established.  We  currently  own several
horses  of  different  ages.  Some are  currently  racing  and a few are held as
broodmares  but the majority are yearlings and two year olds in training.  It is
our plan to bring these horses into racing if we consider them competitive after
completion of training to take advantage of the projected  increase in purses as
a result of the introduction of slot machines in several state jurisdictions. We
are  stabling  and  training  the  majority of these horses in New Jersey and in
Brazil.

     On January 6, 2003 our  subsidiary  which  operates the Palm Beach Princess
filed a voluntary  petition for relief under Chapter 11 of the  Bankruptcy  Code
because it did not have the funds to complete

                                       22

<PAGE>




the  purchase of the Ship  Mortgage on the Palm Beach  Princess.  On October 15,
2003 a Plan of Reorganization under Chapter 11 was approved and on July 17, 2004
the court issued a final decree closing the Chapter 11 case.


Liquidity and Capital Resources

     The Company's  cash flow from  operations is primarily  dependent  upon the
cash flows from our wholly owned subsidiary ITG Vegas ("ITGV")which operates the
vessel, M/V Palm Beach Princess.

     ITGV's cash flow from operations of the vessel is seasonal. The period July
1 to December 31 is a seasonably slow period for vessel  operations.  The period
from  January 1 to June 30 has been a period of  increased  activity and profits
for the Palm Beach Casino Line  operation.  Certain of ITGV's  operating  costs,
including  leasing and charter fees, fuel costs and wages,  are fixed and cannot
be reduced when passageer loads decrease.

     During the first quarter and early in our second quarter of Fiscal 2005 our
operating  business was adversely  affected by four  hurricanes  passing over or
near  Florida.  We suffered  materially  from the direct  effects of  hurricanes
"Frances"  and "Jeanne" that left the area without  power,  resulting in curfews
and  limited  food,  water and life  resources.  These  two  storms  caused  the
evacuation of the population in our area,  and the four storms further  affected
tourism in the area,  severely reducing our pool of potential  passengers,  both
local residents and tourists.  Twenty-nine  (29) of our daily cruises during the
first quarter and four (4) of our daily cruises  during the second  quarter were
cancelled during the period of time that the hurricanes  threatened the area and
for short periods thereafter.  As a result of the seasonably slow period and the
hurricanes our revenues and cash flows from  operations for the six months ended
December 31, 2004 were materially impacted. Our operating revenue was sufficient
to cover operating expenses of the vessel,  however, the operating revenues were
not sufficient to cover expenses of the Parent Company, other subsidiaries,  the
capital lease  payments on the Palm Beach  Princess and the interest  portion of
the lease  payments and the charter fees on the Big Easy which were  capitalized
to the cost of the vessel.

     We were able to utilize a portion of the cash received from the sale of the
Las Vegas Note which transaction  closed in June, 2004, to meet the remainder of
our cash needs during the first six months of fiscal 2005.

     On July 7, 2004 we closed on new financing with PDS Corporation, Palm Beach
Maritime  Corporation  and Palm Beach Empress,  Inc., as more fully described in
Footnote 2 of this  Report and  payments  were made on our behalf to pay in full
all indebtedness to the Brennan Trustee.

     The PDS Transaction  involved,  among other things, our chartering a second
vessel, the Big Easy. In addition to the costs recorded as of December 31, 2004,
we have committed approximatley $6,300,000 to date towards costs of refurbishing
and  retrofitting the Big Easy vessel.  Costs  associated with  refurbishing and
retrofitting the Big Easy vessel and placing it in service (including  marketing
expenses  and other soft  costs) are  expected  to amount to  approximately  $12
million,  $6  million  of which has been  provided  for by means of an escrow of
$2,880,652 of our funds and proceeds of the PDS Transactions. Additional amounts
necessary to begin operations of the Big Easy vessel are expected to be provided
from working  capital of our ITGV  subsidiary and a portion of the financing for
$2.85 million received from PDS on January 17, 2005.  ITGV's ability to generate
sufficient  working  capital  with  which to pay  such  costs  may be  adversely
affected  by  delays  or cost  overruns  in  connection  with  refurbishing  and
refitting the Big Easy and by weather related and other uncertainties  affecting
its operations.  The costs associated with refurbishing and retrofitting the Big
Easy for placing it in service have increased  from our original  projection due
to various  upgrades to the vessel,  and expansion of our Mardi Gras theme build
out, and improvments  required by the Coast Guard.  Any delays in commencing the
Big  Easy  operations  will  adversely  affect  our  cash  flow  because  of the
continuing  costs of carrying the vessel.  As indicated by the table below,  our
debt service  requirements have increased  significantly  with the PDS financing
due to the increase in amounts of debt and rates  involved.  The increase in the
amount  is   attributable  in  part  to  the  arrangement  for  procurement  and
refurbishment  for a second  vessel,  the Big Easy.  We are  dependent  upon the
expected  additional  revenue from the  operations of the second vessel to cover
the increased financing costs.

     In our last fiscal year,  the Company  purchased  the vessel Royal Star. We
anticipate  that the vessel  will need  extensive  improvements  and  outfitting
costing  between $5 and $6 million  before  being  placed in service as a gaming
vessel.  Until the amounts due to the Brennan  Trustee were paid in full on July
7, 2004,  expenditures for  improvements  were restricted by the Brennan Trustee
and we were required to make  simultaneous  dollar  pre-payments  to the Brennan
Trustee for each dollar spent on  improvements.  On January 17, 2005 we borrowed
$2,850,000  from  PDS  Gaming  Corporation.  A  portion  of these  funds  may be
available for improvements to be made to the Royal Star, however,  the funds may
also be used for Maritime  Office  Improvements or improvements on the Big Easy,
thus the portion  available  for the Royal Star is unknown at this time.  We are
currently negotiating with a financial institution to obtain the balance

                                       23

<PAGE>


of the funds necessary to make the required  improvements and lease or otherwise
acquire the gaming equipment to place the ship in service.  No assurances can be
given that we will be successful in obtaining  the necessary  additional  funds.
Delays in  commencing  the  Royal  Star  operations  have and will  continue  to
adversely  affect our cash flows because of the continuing costs of carrying the
vessel.

The following summarizes  commitments on non-cancelable  contracts and leases as
of December 31, 2004:

<TABLE>
                                                Twelve Months Ended December 31,
                             -----------------------------------------------------------------------       There-
                                   2005      2006           2007           2008                2009         after        Total
                             ----------     ----------     ----------      ---------       ---------      -------     ----------
<CAPTION>
<S>                        <C>            <C>            <C>             <C>            <C>            <C>         <C>
Capital Lease - PBP        $  4,168,315   $  5,661,156   $  5,661,156    $ 5,661,156    $  3,302,341   $      -0-  $  24,454,124
 Lease - Big Easy             2,997,378      3,620,430      3,620,430      3,620,430       2,111,918          -0-     15,970,586
Notes and Mortgages:
   Principal                    656,709            -0-            -0-            -0-             -0-          -0-        656,709
    Interest                     26,184            -0-            -0-            -0-             -0-          -0-         26,184
Deferred Interest Payments      300,000        600,000        600,000        600,000         450,000          -0-      2,550,000
Employee Contracts              688,477            -0-            -0-            -0-             -0-          -0-        688,477
Operating Leases:
    Casino Equipment          1,281,134      1,362,146      1,248,634            -0-             -0-          -0-      3,891,914
    Administrative & Office   1,557,792        223,911        144,401         45,046             -0-          -0-      1,971,150
Purchase Obligations-Big Easy 4,947,000            -0-            -0-            -0-             -0-          -0-      4,947,000
Purchase Obligations-Other      125,280         61,006         61,006         61,006          61,006      238,936        608,240
Other Long-Term Debt                -0-        218,242            -0-            -0-             -0-          -0-        218,242
                             ----------     ----------     ----------      ---------       ---------      -------     ----------
Total                      $ 16,748,269   $ 11,746,891   $ 11,335,627    $ 9,987,638    $  5,925,265   $  238,936  $  55,982,626
                             ==========     ==========     ==========      =========       =========      =======     ==========
</TABLE>

     Upstream  payments by ITGV to the Company  are limited  under the  Princess
Sub-Charter and th Big Easy Sub-Charter. If the "YTD Result" (defined as 10/12's
of  annualized  EBITDAR  from  operation  of the two vessels) is greater than $8
million at the end of any of the first three  fiscal  quarters  or EBITDAR  from
operations  of the two  vessels  is  greater  than $8  million at the end of any
fiscal  year,  and if ITG Vegas and ITG Palm  Beach have made all  payments  due
under the Princess Sub-Charter and the Big Easy Sub-Charter,  ITG Vegas may make
(i) tax sharing  payments to the Company  (payments  equal to the federal income
tax  savings  to ITG  Vegas  resulting  from  its  inclusion  in  the  Company's
consolidated  group for federal  income tax purposes)  including any tax sharing
payments  previously  deferred  as a result of  limitation  under  the  Princess
Sub-Charter or the Big Easy Sub-Charter,  and (ii) other payments to the Company
in an amount  which,  together  with charter hire payments in excess of $100,000
per month to PBMC and PBE for the two  vessels,  shall not exceed  $200,000  per
month (a  "Restricted  Payment").  If ITG Vegas is  prohibited  from  making any
Restricted  Payment for any month,  once such payments are again  allowed,  such
Restricted Payment may be made to the Company; provided that the total amount of
Restricted  Payments  (i.e.  payments  other than the tax sharing  payments  and
$100,000 per month in bareboat  charter  fees) paid by ITG Vegas to the Company,
PBMC and PBE in any twelve-month period may not exceed $2,400,000.

     The  Company  anticipates  $2.5  million of capital  expenditures  for Port
improvements the timing of which is subject to financing. The Company expects to
defer making the improvements until financing is in place.

Outlook:

     Based on our historical level of operations for the Palm Beach Princess and
additional revenues  anticipated from the operations of the Big Easy, we believe
that cash generated  from  operations  will be adequate to meet our  anticipated
lease/purchase  and loan payment  requirements  and working  capital  needs.  No
assurances  can be given,  however,  that our business will generate  sufficient
cash flow from operations or that future  borrowings will be available to enable
us to  service  our  lease/purchase  and loan  payments  or to make  anticipated
capital  expenditures.  Our future operating performance and our ability to make
payments  under our  leases and other  debts will be subject to future  economic
conditions  and to  financial,  business  and other  factors,  many of which are
beyond our control.



                                       24

<PAGE>



     On July 7, 2004 we paid off the Brennan  Trustee and entered into long-term
sub charters in connection with capital lease  transactions  for two vessels and
equipment. As a result of these transactions, capital lease payments made to PDS
are at a higher rate of interest  (15.3% to 16.54%) than the  interest  that was
being paid to the Brennan Trustee (12%). The debt outstanding has also increased
significantly.  Additionally,  we must make charter  hire  payments for the Palm
Beach  Princess of $50,000 per month plus 1% of its gross  revenues  and charter
payments for the Big Easy of $100,000  per month plus 1% of its gross  revenues.
Also, on January 17, 2005 , we borrowed an  additional  $2.85 million at 10% per
annum,  adding an additional  $95,352 of payments per month,  after a four month
period of interest only payments,  to our debt service  requirements  per month.
Therefore  our annual  combined  charter  payments  predicated  on capital lease
interest   payments   plus  charter  hire  fees  plus  loan   payments  will  be
significantly higher than the debt service payments were for the year ended June
30, 2004.

     Effective  July 7, 2004 we began leasing a second  vessel,  the Empress II,
(renamed the Big Easy).  The ship will need to be  refurbished  and refitted for
use as an ocean going casino cruise ship and is expected to be placed in service
in February or March 2005 in time to begin operations during our peak season. We
will  continue  to incur  costs for the vessel  while it is being  refitted.  We
anticipate  operating the vessel from the same port as the Palm Beach  Princess.
It is possible that  competition from each vessel will have an adverse effect on
the operations of the other vessel.

     We will  continue  to incur costs on the  vessel,  Royal Star,  while it is
being  refurbished.  The  Company  will need  additional  financing  to make the
improvements  and we will  incur  additional  fees  and  interest  costs on such
financing. We are currently exploring locations from which to operate the vessel
when it is ready to be placed in service.

     During the first  quarter of this fiscal  year,  we  re-entered  the equine
business for which the Company was  originally  established.  We  currently  own
several  horses,  or shares of horses,  of different  ages.  Some are  currently
racing,  and a few are held as broodmares but the majority are yearlings and two
year olds in  training.  It is our plan to bring those  horses into racing if we
consider them competitive  after training is completed.  Our horse operation has
not produced any revenue during the period.  Training and  operational  expenses
are approximately $30,000 per month and we do not expect to have any significant
revenues from the horse operation during our 2005 fiscal year. These costs could
increase substantially in the near future if additional horses are purchased.

     Our working capital as of December 31, 2004 was a negative  $(2,764,588) as
compared to  $556,675  at June 30,  2004.  The  decrease  in working  capital of
$3,321,263  during the past six months  was  primarily  due to the net effect of
cash used by operating activities of $546,514 and disbursements of approximately
$7,800,000  for  improvements  made to the  Big  Easy  and  Royal  Star  and for
purchasing  horse  livestock and equipment,  offset by the payoff of the Brennan
Trustee on our behalf,  which amount of approximately  $4,000,000 was classified
as a current liability as of June 30, 2004 and current liabilities recorded as a
result of our leasing arrangements with PDS of approximately $900,000.


Results of Operations for the Three Months Ended December 31, 2004 and 2003

     Overall

     Revenue for for the three months ended December 31, 2004 increased $413,383
from  $7,101,610  in Fiscal 2004 to  $7,514,993  in Fiscal 2005  primarily  as a
result of increase in revenues  generated by the Palm Beach Princess  operations
during the  comparable  periods.  Operating  expenses  increased  $967,506  from
$6,396,311 in the three month period in Fiscal 2004 to $7,363,817 in Fiscal 2005
primarily  as the  result  of 1)  recording  start up costs  for the Big Easy of
$597,622  and for the Royal Star of $39,573  wherein last year no start up costs
were  recorded  because  we did not own the Big Easy and the Royal Star had just
recently been purchased,  2) an increase in other  development costs of $199,013
as a result of our continued search both  domestically and  internationally  for
additional gaming  opportunities  and our entry into the equine business,  3) an
increase  in  Depreciation   and   Amortization  of  $432,381  as  a  result  of
depreciation  being  recorded on the Palm Beach  Princess as a result of capital
leasing  arrangements  effective  in July,  2004.  Such  increases  in operating
expenses were offset by a decrease in the  operating  expenses of the Palm Beach
Princess of approximately $300,000 as detailed in the "vessel" section below and
a decrease in the  bankruptcy  costs of  $173,186  due to the  bankruptcy  being
finalized in July 2004.

     Operating  income for the three months ended December 31, 2004 was $151,176
as compared  to  $705,299  for the  comparative  period of last year.  Operating
Income before  depreciation  for the current  period was $717,398 as compared to
$839,140 for the comparative period of last year.


                                       25

<PAGE>



     Other expense  increased by $ 394,276 as a result of (1) an increase in the
interest and  financing  due to the higher debt level on the vessel  leases than
that amount  previously owed to the Brennan Trustee and an increase in the rates
of  interest  and (2) during the second  quarter  of Fiscal  2005,  the  Company
recorded an impairment  loss in the amount of $150,000 on the Second Cherry Hill
Note Receivable.

     Net (Loss) for the three months ended  December 31, 2004 was  $(506,363) or
$(.06) per  diluted  share as compared to income of $363,035 or $.04 per diluted
share for the three months ended December 31, 2003.

     For the three months  earnings before  interest,  taxes,  depreciation  and
amortization and our unusual items of  extraordinary  income and vessel start up
costs  (Adjusted  EBITDA)  was  $1,354,564  as  compared  to  $929,367  for  the
comparable period last year.

Reconciliation of Non-GAAP Measures to GAAP

     Adjusted  EBITDA or  earnings  before  interest,  taxes,  depreciation  and
amortization  and unusual  items is not a measure of  performance  or  liquidity
calculated in accordance with generally accepted accounting  principles.  EBITDA
information  is  presented  as  a  supplemental  disclosure  because  management
believes  that it is a widely  used  measure of such  performance  in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the  operating  performance  of its  operations,  including  the  evaluation  of
operating  personnel.  Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance,  or
as an  alternative  to cash flows  from  operating  activities,  as a measure of
liquidity,  or as any other measure of performance determined in accordance with
generally accepted  accounting  principles.  The Company has significant uses of
cash flows, including capital expenditures,  interest payments, taxes, lease and
debt principal repayments, which are not reflected in Adjusted EBITDA. It should
also be noted that other gaming  companies  that report EBITDA  information  may
calculate EBITDA in a different manner than the Company. A reconciliation of the
Company's  Adjusted  EBITDA and  unusual  items to net income  (GAAP),  is shown
below.

Reconciliation of Adjusted EBITDA to Net Income (GAAP)
<TABLE>
                                           Three Months Ended December 31,  Six Months Ended December 31,
                                           ------------------------------   -----------------------------
                                                2004            2003            2004              2003
                                           --------------     ----------    ------------      -----------
<CAPTION>
<S>                                    <C>                <C>            <C>              <C>
Total Adjusted EBDITA                  $        1,354,564 $      929,367 $     1,121,645  $     2,310,409
     Depreciation & Amortization                (566,222)      (133,841)       (965,101)        (309,719)
     Interest & Financing Expenses              (630,111)      (501,271)     (1,797,702)      (1,001,723)
     Interest Income                               73,601         98,780         151,918          170,729
     Tax Benefit (Expense) on Income               49,000       (30,000)          91,000         (47,600)
Net Income (Loss) before Unusual Items            280,832        363,035     (1,398,240)        1,122,096
     Extraordinary Item                                 0              0       3,560,000                0
     Start Up Costs for Vessels                 (637,195)              0       (735,482)                0
     Impairment Loss                            (150,000)              0       (350,000)                0
                                           --------------     ----------    ------------      -----------
Net Income (Loss)                      $        (506,363) $      363,035 $     1,076,278  $     1,122,096
                                           ==============     ==========    ============      ===========
</TABLE>


     Vessel Operations

     During the three  months ended  December  31, 2004,  total net revenue from
vessel  operations was $7,424,736 as compared to $7,000,011 for the three months
ended  December  31,  2003.  The  increase  in  revenue of  $424,725  during the
comparable  quarters  was  the  result  of a  6.5%  increase  in the  number  of
passengers during the comparable period last year,  (despite  completing 4 fewer
cruises in fiscal 2005 vs. fiscal 2004,) which resulted in an increase in gaming
and on board  revenue of 6%.  Revenue  per  passenger  during the  quarter  fell
slightly  when  compared  to the  comparable  quarter of last  year.  During our
quarter  ending  December 31, 2004 revenue per passenger was $122.43 as compared
to $122.97 during the quarter ending December 31, 2003. More significantly,  the
revenue per passenger during our latest quarter of

                                       26

<PAGE>



$122.43  reversed a downward  trend in revenue per passenger  which began in the
quarter  ending June 30, 2004.  Casino  operating  expenses  which also includes
food,  beverage and  entertainment  increased $3,190 from $2,079,088,  or 35% of
casino revenue in fiscal 2004 to $2,082,278,  or 33% of casino revenue in fiscal
2005  primarily the result of dividing  costs,  many of which are fixed by their
nature, over increased revenues.

     During the most recent  quarter a portion of the  employee  costs  normally
incurred by the Palm Beach Princess for  operational and  administrative  salary
expenses were  allocated to the Big Easy start up operation.  These  allocations
were made to more accurately  reflect the cost of preparing the Big Easy for use
as a casino gaming vessel.  Approximately  $620,000 of salaries allocated to the
Big Easy were  expensed as  developmental  costs and  approximately  $100,000 of
salary costs were  capitalized  as part of the vessel costs.  These  capitalized
costs reflect the value of vessel  improvements  completed by company employees.
This  allocation  should be taken into  consideration  when comparing  operating
results from year to year for the Palm Beach Princess.

     Sales,  marketing and advertising  expenses increased $50,839 from $852,933
in fiscal  2004 to  $903,772  in fiscal  2005.  The  increase  was the result of
additional   advertising   and  promotions  to  attract   customers   after  the
cancellation  of cruises due to the  hurricanes,  inclement  weather and curfews
following the hurricanes in the quarter ending  September 30, 2004 and the first
week in the current quarter.  Maritime and legal expenses  decreased $120,604 or
8% primarily as a result of the allocation of salaries to the Big Easy as stated
above.  Finance  expenses  increased  $873,966  from  $3,078 in  fiscal  2004 to
$877,044 in fiscal 2005 as a result of the  interest  paid on the capital  lease
and the charter hire  payments for the Palm Beach  Princess  which was effective
July 7, 2004.  Depreciation and amortization increased $348,230 from $170,346 in
fiscal  2004 to  $518,576  in  fiscal  2005.  As a result of the  capital  lease
arrangement for the Palm Beach Princess the Company is recording depreciation on
the vessel as compared to last year when the Company did not record depreciation
on the  vessel  because  it  operated  the  vessel  under  an  operating  lease.
Administration expense decreased $414,824 or 10% from $977,955 in fiscal 2004 to
$563,131 in fiscal 2005 due to a decrease  in bonus  accrual  during the current
quarter as  compared  to the  comparable  quarter of last year,  steps  taken to
reduce  expenses  during this quarter and the  allocation of salaries to the Big
Easy as stated above. Income before income tax expense for the second quarter of
operation in fiscal 2005 was $840,171 as compared to income before Income Tax of
$1,165,577 in the comparable quarter of fiscal 2004.

     The Palm  Beach  Princess  performs  fourteen  cruises  weekly,  that is, a
daytime  and an evening  cruise  each day.  Each  cruise is of five to six hours
duration.  During  each  cruise,  the  Palm  Beach  Princess  offers  a range of
amenities  and services to her  passengers,  including a full  casino,  sit-down
buffet dining, live musical shows, discotheque,  bars and lounges, swimming pool
and  sundecks.  The casino  occupies  15,000  square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book. During the second quarter
of Fiscal 2004 the ship completed 172 cruises compared to 176 cruises during the
same period last year.  During the current  quarter 8 cruises were cancelled due
to hurricanes and inclement weather.



                                       27

<PAGE>



     The following is a  comparative  summary of income and expenses of the Palm
Beach Princess operation for the three months ended December 31, 2004 and 2003:

                                           Three Months Ended
                                              December 31,
                                       ---------------------------
             Description                   2004            2003        Change
--- ---------------------------------  -----------     -----------    ---------
Passenger Count                             60,646          56,922        3,724
Number of Cruises                              172            176            (4)

Revenue:
    Gaming                           $   6,317,979   $   5,948,208 $    369,771
    Fare                                 1,697,175       1,916,722     (219,547)
    On Board                               993,730         930,832       62,898

    Less: Promotional Allowances
    Fare                                (1,069,558)     (1,290,525)     220,967
    On Board                              (514,590)       (505,226)      (9,364)
                                       -----------     -----------    ---------
    Total Revenue                        7,424,736       7,000,011      424,725
                                       -----------     -----------    ---------
Expenses:
    Casino Operating Expenses            2,082,278       2,079,088        3,190
    Hotel and Gift Shop Expenses           240,690         231,356        9,334
    Sales, Marketing and
    Advertising Expenses                   903,772         852,933       50,839
    Maritime and Legal Expenses          1,399,074       1,519,678     (120,604)
    Finance Expenses - Net                 877,044           3,078      873,966
    Depreciation and Amortization          518,576         170,346      348,230
    Administrative                         563,131         977,955     (414,824)
                                       -----------     -----------    ---------
    Total Expenses                       6,584,565       5,834,434      750,131
                                       -----------     -----------    ---------
      Income (Loss) Before Income
      Tax Expense                    $     840,171   $   1,165,577  $  (325,406)
                                       ===========     ===========    =========

Results of Operations for the Six Months Ended December 31, 2004 and 2003

     Overall

     Revenue from for the six months ended December 31, 2004 decreased  $826,363
from  $14,719,678  in Fiscal 2004 to  $13,893,315  in Fiscal 2005 primarily as a
result of decrease in revenues  generated by the Palm Beach Princess  operations
during the  comparable  periods.  Operating  expenses  increased  $1,734,315from
$12,738,149 in the six month period in Fiscal 2004 to $14,472,464 in Fiscal 2005
primarily the result of 1) recording start up costs for the Big Easy of $629,064
and for the Royal  Star of  $106,418  wherein  last year no start up costs  were
recorded  because  we did not own the Big  Easy  and the  Royal  Star  had  just
recently been purchased,  2) an increase in other  development costs of $576,462
as a result of our continued search both  domestically and  internationally  for
additional gaming  opportunities  and our entry into the equine business,  3) an
increase  in  Depreciation   and   Amortization  of  $655,382  as  a  result  of
depreciation  being  recorded on the Palm Beach  Princess as a result of leasing
arrangements  effective in July,  2004.  The increase in operating  expenses was
offset in part by a decrease  in the  bankruptcy  costs of  $368,681  due to the
bankruptcy being finalized in July 2004.

     The  Operating  (loss)  for the six  months  ended  December  31,  2004 was
$(579,149) as compared to income of  $1,981,569  for the  comparative  period of
last year.  Operating  Income  before  depreciation  for the current  period was
$385,952 as compared to $2,291,248 for the comparative period of last year.

     Other  expenses  increased by  $1,183,739 as a result of (1) an increase in
the interest  and  financing  due to the higher debt level on the vessel  leases
than that amount  previously  owed to the Brennan Trustee and an increase in the
rates of  interest  and (2)  during the first  half of Fiscal  2005 the  Company
recorded an impairment  loss in the amount of $350,000 on the Second Cherry Hill
Note Receivable.

     For the six months ended December 31, 2004 the loss before an extraordinary
item was  $(2,483,722)  as compared to income of  $1,122,096  for the six months
ended December 31, 2003. During the first quarter

                                       28

<PAGE>



of the current fiscal year the Company  recorded  extraordinary  income,  net of
tax,  of  $3,560,000.  This was the result of the  collection  of  success  fees
charged to Leo Equity Group, Inc. and Palm Beach Maritime Corporation  (formerly
MJQ) for our efforts in connection with the final settlement with the Chapter 11
Trustee for the  Bankruptcy  Estate of Robert E.  Brennan.  We had  deferred all
income from these transactions until such time as payment was received.

     Net Income for the six months  ended  December 31, 2004 was  $1,076,278  or
$.13 per diluted  share as compared to  $1,122,096 or $.11 per diluted share for
the six months ended December 31, 2003.

     For the six months  ending  December  31, 2004  earnings  before  interest,
taxes,  depreciation  and  amortization  and our unusual items of  extraordinary
income and vessel start up costs (Adjusted EBITDA) was $1,121,645 as compared to
$2,310,409  for the  corresponding  period.  The decrease in Adjusted  EBITDA of
$1,188,764  was  primarily  due to the  losses  sustained  in the first  quarter
because of the hurricanes which is reflected in the six month operating results.
See the  reconciliation  of  Adjusted  EBITDA to net  income in the three  month
operating results paragraphs of this section.

     Vessel Operations

     Operations  for the six months were  materially  impacted by hurricanes and
inclement  weather which struck Florida and the Palm Beach area during our first
quarter of operations. The negative effect of those hurricanes on our operations
during the first quarter is also reflected in the financial  results for the six
months ended  December 31, 2004.  During the six months ended December 31, 2004,
total net operating  revenue from vessel  operations was $13,706,236 as compared
to  $14,575,168  for the six months ended  December  31,  2003.  The decrease in
revenue of $868,932  during the  comparable  six months was due to a decrease in
the  number of  cruises  which  resulted  in a  decrease  in  passenger  counts.
Additionally,  during the current six months our revenue per passenger fell 5.3%
from $123.09 per passenger in fiscal 2004 to $116.55 in fiscal 2005. The revenue
per passenger during the first quarter was $112.22 which negatively effected our
6 month  performance.  Revenue per passenger has recovered to $122.43 during the
second  quarter of fiscal  2005.  During the  current  six month  period  gaming
revenues  decreased  $795,409 from $12,442,895 in the first six months of fiscal
2004 to  $11,647,486  in the first six  months of fiscal  2005.  Net fare and on
board income decreased  $73,523,  or 3.4%. Casino operating  expenses which also
includes food,  beverage and entertainment  increased $37,662 from $4,158,704 or
33.4% of casino revenue in fiscal 2004 to $4,196,366 or 36% of casino revenue in
fiscal 2005 primarily the result of dividing  costs,  many of which are fixed by
their nature, over reduced revenues.

     During  the six month  period  ending  December  31,  2004 a portion of the
employee costs normally  incurred by the Palm Beach Princess for operational and
administrative  salary  expenses  were  allocated  to  the  Big  Easy  start  up
operation.  These  allocations were made to more accurately  reflect the cost of
preparing the Big Easy for use as a casino gaming vessel. Approximately $620,000
of salaries  allocated to the Big Easy were expensed as developmental  costs and
approximately  $100,000 of salary costs were  capitalized  as part of the vessel
costs.  These  capitalized  costs  reflect  the  value  of  vessel  improvements
completed  by  company   employees.   This  allocation   should  be  taken  into
consideration  when comparing  operating  results from year to year for the Palm
Beach Princess.

     Sales,   marketing  and  advertising   expenses   increased  $212,274  from
$1,566,687  in fiscal 2004 to  $1,778,961  in fiscal 2005.  The increase was the
result of additional  advertising and promotions to attract  customers after the
cancellation  of cruises due to the  hurricanes,  inclement  weather and curfews
following the hurricanes.  Maritime and legal expenses decreased $402,094 or 12%
as a result of fewer cruises being performed during the current six month period
and the  allocation  of  salary  expenses  as  stated  above.  Finance  expenses
increased  $1,324,214  from $233,381 in fiscal 2004 to $1,557,595 in fiscal 2005
as a result of the  interest  paid on the  capital  lease and the  charter  hire
payments  for the  Palm  Beach  Princess  which  was  effective  July  7,  2004.
Depreciation and amortization increased $568,740 from $300,743 in fiscal 2004 to
$869,483 in fiscal 2005.  As a result of the capital lease  arrangement  for the
Palm Beach  Princess  the  Company is  recording  depreciation  on the vessel as
compared to last year when the Company  did not record  depreciation  because it
operated the vessel under an operating lease.  Administrative expenses decreased
$537,396  from  $2,103,174  in fiscal 2004 to  $1,565,778  in fiscal 2005 due to
fewer days of operation, steps taken to reduce expenses during this quarter, and
the  allocation  of salary  expenses as stated  above.  Income before income tax
expense  for the first  quarter of  operation  in fiscal  2005 was  $419,395  as
compared to income before Income Tax of $2,516,933 in the  comparable  six month
period of fiscal 2004.

     The Palm  Beach  Princess  performs  fourteen  cruises  weekly,  that is, a
daytime  and an evening  cruise  each day.  Each  cruise is of five to six hours
duration.  During  each  cruise,  the  Palm  Beach  Princess  offers  a range of
amenities  and services to her  passengers,  including a full  casino,  sit-down
buffet dining, live

                                       29

<PAGE>



musical shows,  discotheque,  bars and lounges,  swimming pool and sundecks. The
casino  occupies  15,000  square  feet  aboard  the  ship and is  equipped  with
approximately  400 slot  machines,  all  major  table  games  (blackjack,  dice,
roulette and poker),  and a sports  wagering  book.  During the first quarter of
fiscal 2005 the ship  completed  328  cruises and 33 cruises  were missed due to
hurricanes and inclement  weather.  Whereas during the six months of fiscal 2004
the ship completed 343 cruises.

     The following is a  comparative  summary of income and expenses of the Palm
Beach Princess operation for the six months ended December 31, 2004 and 2003:

                                            Six Months Ended
                                              December 31,
                                      ----------------------------
             Description                  2004            2003         Change
--- -------------------------------   ------------     -----------   ----------
Passenger Count                            117,603         118,409         (806)
Number of Cruises                              328             343          (15)
Revenue:
    Gaming                          $   11,647,486   $  12,442,895 $   (795,409)
    Fare                                 3,177,007       4,052,914     (875,907)
    On Board                             1,861,213       1,848,188       13,025
    Less: Promotional Allowances
    Fare                                (2,008,725)     (2,771,346)     762,621
    On Board                              (970,745)       (997,483)      26,738
                                      ------------     -----------   ----------
    Total Revenue                       13,706,236      14,575,168     (868,932)
                                      ------------     -----------   ----------
Expenses:
    Casino Operating Expenses            4,196,366       4,158,704       37,662
    Hotel and Gift Shop Expenses           451,803         426,597       25,206
    Sales, Marketing and
    Advertising Expenses                 1,778,961       1,566,687      212,274
    Maritime and Legal Expenses          2,866,855       3,268,949     (402,094)
    Finance Expenses - Net               1,557,595         233,381    1,324,214
    Depreciation and Amortization          869,483         300,743      568,740
    Administrative                       1,565,778       2,103,174     (537,396)
                                      ------------     -----------   ----------
    Total Expenses                      13,286,841      12,058,235    1,228,606
                                      ------------     -----------   ----------
      Income (Loss) Before Income
      Tax Expense                   $      419,395   $   2,516,933  $(2,097,538)
                                      ============     ===========   ==========

Horse Operations

     During the first  quarter of this fiscal  year,  we  re-entered  the equine
business for which the Company was  originally  established.  We  currently  own
several  horses,  or shares of horses,  of different  ages.  Some are  currently
racing,  and a few are held as broodmares but the majority are yearlings and two
year olds in  training.  It is our plan to bring those  horses into racing if we
consider  them  competitive  after  training is  completed.  We are stabling and
training the majority of these horses in New Jersey and in Brazil. Additionally,
the Company has purchased  several  horses,  the majority being one and two year
olds,  from Francis W. Murray at values to be determined by a current  appraisal
of their  values.  Payment  for such  horses  will  only be made out of  profits
realized from the horses purchased from Mr. Murray,  if any. Our horse operation
did not produce any revenue during the period. Training and operational expenses
of $147,757 for the six month period are reported in Development Costs-Other. It
is our plan to bring these horses into racing to take advantage of the projected
increase in purses as a result of the  introduction  of slot machines in several
state jurisdictions.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is not subject to material interest rate risk, foreign currency
exchange rate risk,  commodity price risk or other relevant market rate or price
risks.



                                       30

<PAGE>



ITEM 4. - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Controls and Procedures

     We maintain  disclosure controls and procedures that are designed to ensure
that  information  required  to be  disclosed  in our  Exchange  Act  reports is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's  rules and forms,  and that such  information  is  accumulated  and
communicated to our management,  including our chief executive officer and chief
financial officer, as appropriate,  to allow timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and procedures,
management  recognized  that any  controls  and  procedures,  no matter how well
designed and operated,  can provide only  reasonable  assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the  cost-benefit  relationship of possible  controls and
procedures.

     Within  90 days  prior  to the  filing  of this  report,  we  completed  an
evaluation,  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 our  disclosure  controls  and
procedures.  Based on the  foregoing,  our  chief  executive  officer  and chief
financial  officer  concluded  that  the  Company's   disclosure   controls  and
procedures were effective.

     There have not been any significant changes that occurred during the fiscal
quarter ended December 31, 2004 in the Company's  internal  controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.



                                       31

<PAGE>




                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Our  subsidiary,  ITG  Vegas,  Inc.,  successor  by  merger  to Palm  Beach
Pricness, Inc., initiated proceedings under Chapter 11 of the Bankruptcy Code on
January 3, 2003. Such Chapter 11 case was closed on July 17, 2004. (See Note 4)


ITEM 6. EXHIBITS

Exhibit                       Description of Exhibit

31.1 CEO  Certification   pursuant  to  rule  13a-14(a)  and  15d-14(a)  of  the
     Securities Exchange Act of 1934

31.2 CFO  Certification   pursuant  to  rule  13a-14(a)  and  15d-14(a)  of  the
     Securities Exchange Act of 1934

32   CEO & CFO  Certification  pursuant to 18 U.S.C.  Section  1350,  As Adopted
     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



                                       32

<PAGE>



                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                                   SIGNATURES



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


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.



February 22, 2005                    /s/Francis W. Murray
                                     -----------------------------
                                     Francis W. Murray, President,
                                     Chief Executive Officer
                                     and Chief Financial Officer



                                       33

<PAGE>




                                                                    Exhibit 31.1

             CEO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
                     THE SECURITIES AND EXCHANGE ACT OF 1934

I, Francis W. Murray, certify that:

     1.   I have reviewed this  quarterly  report on Form 10-Q of  International
          Thoroughbred Breeders;

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this quarterly report is being prepared;

               b)   evaluated the  effectiveness of the registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this  quarterly  report (the  "Evaluation
                    Date"); and

               c)   presented in this quarterly report our conclusions about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions);

               a)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    registrant's  auditors any material  weaknesses  in internal
                    controls; and

               b)   any fraud, whether or not material, that involves management
                    or  other  employees  who  have a  significant  role  in the
                    registrant's internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


Date: February 22, 2005

                                            /s/Francis W. Murray
                                            ---------------------------------
                                            Chairman/Chief Executive Officer/
                                            Chief Financial Officer



                                       34

<PAGE>



                                                                    Exhibit 31.2

             CFO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
                     THE SECURITIES AND EXCHANGE ACT OF 1934

I, Francis W. Murray, certify that:

     1.   I have reviewed this  quarterly  report on Form 10-Q of  International
          Thoroughbred Breeders;

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this quarterly report is being prepared;

               b)   evaluated the  effectiveness of the registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this  quarterly  report (the  "Evaluation
                    Date"); and

               c)   presented in this quarterly report our conclusions about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions);

               a)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    registrant's  auditors any material  weaknesses  in internal
                    controls; and

               b)   any fraud, whether or not material, that involves management
                    or  other  employees  who  have a  significant  role  in the
                    registrant's internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


Date: February 22, 2005

                                            /s/Francis W. Murray
                                            ---------------------------------
                                            Chairman/Chief Executive Officer/
                                            Chief Financial Officer



                                       35

<PAGE>


                                                                      Exhibit 32

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                      AS ADOPTED PURSUANT TO SECTION 906 OF
                         THE SARBANES-OXLEY ACT OF 2002

     In  connection  with the  filing  of the  Quarterly  Report on Form 10-Q of
International  Thoroughbred Breeders, Inc. (the "Company") for the three and six
months  ended  December  31,  2004 as filed  with the  Securities  and  Exchange
Commission  on the date hereof  (the  "Report"),  I,  Francis W.  Murray,  Chief
Financial Officer of the Company,  hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002, that, to
the best of my knowledge:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.



/s/ Francis W. Murray
------------------------------
Name: Francis W. Murray
Title: Chief Financial Officer
February 22, 2005


                                       36


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