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                  September 30, 2005
                               -------------------------------------------------
                                                        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
   ---------    ----------

Indicate by check as to whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
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 November 18, 2005
------------------------------           --------------------------------
Common Stock, $ 2.00 par value                  10,567,487 Shares

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.

                                    FORM 10-Q

                                QUARTERLY REPORT
                  for the Three Months ended September 30, 2005
                                   (Unaudited)


                                TABLE OF CONTENTS

                                                                          PAGE
PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements:

     Consolidated Balance Sheets
              as of September 30, 2005 and June 30, 2005..................1-2

     Consolidated Statements of Operations
              for the Three Months ended
              September 30, 2005 and 2004.................................3

     Consolidated Statement of Stockholders' Equity
              for the Three Months ended September 30, 2005...............4

     Consolidated Statements of Cash Flows
              for the Three Months ended
              September 30, 2005 and 2004.................................5

Notes to Consolidated Financial Statements................................6-29

     Item 2. Management's Discussion and Analysis of
                Financial Condition and Results of Operations.............30-37

     Item 3. Quantitative and Qualitative Disclosures About Market Risk...38

     Item 4.  Controls and Procedures.....................................38

PART II. OTHER INFORMATION

     Item 2. Unregistered Sales of Equity Securities and Use of
              Proceeds....................................................39

     Item 6. Exhibits ....................................................39

SIGNATURES................................................................40

CERTIFICATIONS............................................................41

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                   AS OF SEPTEMBER 30, 2005 AND JUNE 30, 2005

                                     ASSETS
<TABLE>
                                                              September 30,
                                                                   2005                  June 30,
                                                                (UNAUDITED)               2005
                                                             ------------------     ------------------
<CAPTION>
<S>                                                      <C>                      <C>
 CURRENT ASSETS:
       Cash and Cash Equivalents                         $           2,044,886    $         1,204,384
       Accounts Receivable                                              53,529              1,879,088
       Prepaid Expenses                                              1,631,554              1,392,315
       Other Current Assets                                            372,769                443,481
       Assets of Discontinued Operations                               401,710                401,747
                                                             ------------------     ------------------
            TOTAL CURRENT ASSETS                                     4,504,448              5,321,015
                                                             ------------------     ------------------


 VESSELS, EQUIPMENT & LIVESTOCK:
       Vessel - Palm Beach Princess - under Capital Lease           17,500,000             17,500,000
       Equipment                                                     3,164,503              3,118,284
       Leasehold Improvements - Port of Palm Beach                     987,974                987,267
       Livestock                                                       328,247                328,247
       Vessel Not Placed in Service - Big Easy -
        under Capital Lease                                         24,501,803             24,318,989
       Vessel Not Placed in Service - Royal Star                     3,011,292              2,971,141
                                                             ------------------     ------------------
                                                                    49,493,819             49,223,928
       LESS: Accumulated Depreciation and Amortization               3,166,917              2,625,763
                                                             ------------------     ------------------

            TOTAL VESSELS, EQUIPMENT & LIVESTOCK- NET               46,326,902             46,598,165
                                                             ------------------     ------------------



 OTHER ASSETS:
       Notes Receivable                                             14,278,651             14,278,651
       Vessel Deposits - Related Parties                            10,262,758             10,228,758
       Deposits and Other Assets - Related Parties                   4,558,028              4,482,171
       Deposits and Other Assets - Non-Related Parties               1,001,635              1,435,923
       Spare Parts Inventory                                           999,998              1,018,982
                                                             ------------------     ------------------
            TOTAL OTHER ASSETS                                      31,101,070             31,444,485
                                                             ------------------     ------------------


 TOTAL ASSETS                                            $          81,932,420    $        83,363,665
                                                             ==================     ==================
</TABLE>

See Notes to Consolidated Financial Statements.

                                        1
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                   AS OF SEPTEMBER 30, 2005 AND JUNE 30, 2005

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
                                                              September 30,
                                                                   2005                  June 30,
                                                                (UNAUDITED)               2005
                                                             ------------------     ------------------
<CAPTION>
<S>                                                      <C>                      <C>

 CURRENT LIABILITIES:
       Accounts Payable                                  $           5,068,244    $         5,505,374
       Accrued Expenses                                              3,707,751              2,710,584
       Short-Term Debt                                                 935,717              1,090,479
       Vessel Lease Payable - Current Portion                        6,164,293              5,020,136
       Current Advances From Related Parties                         3,276,705              2,983,271
       Deferred Interest - Short-Term                                  504,053                497,685
       Short-Term Debt - Related Parties                               496,164                196,164
       Liabilities of Discontinued Operations                          403,400                401,000
                                                             ------------------     ------------------
            TOTAL CURRENT LIABILITIES                               20,556,327             18,404,693
                                                             ------------------     ------------------

 LONG-TERM LIABILITIES:
       Vessel Lease Payable - Long Term Portion                     27,581,056             29,530,585
       Long-Term Debt - Net of Current Portion                       2,623,611              2,683,432
       Deferred Interest - Long-Term                                 1,370,396              1,501,185
       Long-Term Advances From Related Parties                          77,650                 98,099
                                                             ------------------     ------------------
            TOTAL LONG-TERM LIABILITIES                             31,652,713             33,813,301
                                                             ------------------     ------------------

 DEFERRED INCOME                                                     1,577,304              1,595,220

 COMMITMENTS AND CONTINGENCIES                                               -                      -


 STOCKHOLDERS' EQUITY:
       Series A Preferred Stock, $100 Par Value,
          Authorized 500,000 Shares, 362,844
          Issued and Outstanding                                    36,284,375             36,284,375
       Series B Convertible Preferred Stock,
          $10 Par Value, Authorized 500,000 Shares,
          197,300 Issued and Outstanding                             1,973,000                      -
       Common Stock, $2 Par Value, Authorized
          25,000,000 Shares, Issued, 11,482,564 and
          Outstanding, 10,567,487                                   22,965,125             22,965,125
       Capital in Excess of Par                                     20,855,833             20,112,328
       (Deficit) (subsequent to June 30, 1993,
          date of quasi-reorganization)                            (53,474,303)           (49,352,173)
                                                             ------------------     ------------------
                                                                    28,604,030             30,009,655
       LESS:
          Treasury Stock, 915,077 Shares                              (457,538)              (457,538)
          Deferred Compensation, Net                                      (416)                (1,666)
                                                             ------------------     ------------------
            TOTAL STOCKHOLDERS' EQUITY                              28,146,076             29,550,451
                                                             ------------------     ------------------


 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $          81,932,420    $        83,363,665
                                                             ==================     ==================
</TABLE>

See Notes to Consolidated Financial Statements.

                                        2

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                   (UNAUDITED)


<TABLE>
                                                                          September 30,
                                                            -----------------------------------------
                                                                  2005                    2004
                                                            ------------------     ------------------
<CAPTION>
<S>                                                      <C>                      <C>
 OPERATING REVENUES:
       Gaming                                            $          6,232,595     $        5,329,507
       Fare                                                           627,080                540,665
       On Board                                                       467,529                411,328
       Other                                                           63,863                 96,822
                                                            ------------------     ------------------
            NET OPERATING REVENUES                                  7,391,067              6,378,322
                                                            ------------------     ------------------

 OPERATING COSTS AND EXPENSES:
       Gaming                                                       2,142,029              2,114,088
       Fare                                                           975,632                960,198
       On Board                                                       218,295                211,113
       Maritime & Legal Expenses                                    1,846,962              1,467,781
       General & Administrative Expenses                              611,824              1,004,193
       General & Administrative Expenses - Parent                     573,730                427,583
       Ship Development Costs - Big Easy                            2,332,773                      -
       Ship Development Costs - Royal Star                            350,569                      -
       Equine Costs                                                   241,504                      -
       Development Costs - Other                                      274,019                524,814
       Depreciation & Amortization                                    657,198                398,879
                                                            ------------------     ------------------
            TOTAL OPERATING COSTS AND EXPENSES                     10,224,535              7,108,649
                                                            ------------------     ------------------

 OPERATING INCOME (LOSS)                                           (2,833,468)              (730,327)
                                                            ------------------     ------------------

 OTHER INCOME (EXPENSE):
       Interest and Financing Expenses                             (1,216,779)            (1,011,600)
       Interest and Financing Expenses - Related Party               (151,438)              (155,991)
       (Loss) on Impairment of Note Receivable                              -               (200,000)
       Interest Income                                                 13,667                 74,343
       Interest Income Related Parties                                 64,541                  3,974
       Other Income                                                     8,347                    241
                                                            ------------------     ------------------
            TOTAL OTHER INCOME (EXPENSE)                           (1,281,662)            (1,289,033)
                                                            ------------------     ------------------

 INCOME (LOSS) BEFORE TAX PROVISION
 AND EXTRAORDINARY ITEM                                            (4,115,130)            (2,019,360)
        Income Tax Expense (Benefit)                                    7,000                (42,000)
                                                            ------------------     ------------------

 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                           (4,122,130)            (1,977,360)

 EXTRAORDINARY ITEM -  Fees charged to related
       parties for Master Settlement Agreement ( Note 13)                   -              3,560,000
                                                            ------------------     ------------------

 NET INCOME (LOSS)                                       $         (4,122,130)    $        1,582,640
                                                            ==================     ==================


 NET BASIC INCOME (LOSS) PER COMMON SHARE                $              (0.39)    $             0.16
                                                            ==================     ==================

 NET DILUTED INCOME (LOSS) PER COMMON SHARE              $              (0.39)    $             0.15
                                                            ==================     ==================

 WEIGHTED AVERAGE COMMON
    SHARES OUTSTANDING - Basic                                     10,567,487              9,718,796
                                                            ==================     ==================

 WEIGHTED AVERAGE COMMON
    SHARES OUTSTANDING - Diluted                                   10,567,487             10,258,358
                                                            ==================     ==================
</TABLE>


See Notes to Consolidated Financial Statements.

                                        3
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
                                   (UNAUDITED)

<TABLE>
                                                                  Series A                    Series B Convertible
                                                                  Preferred                         Preferred
                                                         ----------------------------   ------------------------------
                                                            Number of                     Number of
                                                             Shares       Amount           Shares           Amount
                                                         -------------   ------------   --------------  --------------
<CAPTION>
<S>                                                           <C>      <C>                             <C>
BALANCE - JUNE 30, 2005                                       362,844  $  36,284,375                -  $            -

   Series B Convertible Preferred Shares Issued                                               197,300       1,973,000
   Compensation for Options Granted to Non-Employees
   Amortization of Deferred Compensation Costs                      -              -                -               -
Net (Loss) for the Three Months Ended September 30, 2005            -              -                -               -
                                                         -------------   ------------   --------------  --------------

BALANCE - SEPTEMBER 30, 2005                                  362,844  $  36,284,375          197,300  $    1,973,000
                                                         =============   ============   ==============  ==============
</TABLE>
<TABLE>
                                                                    Common
                                                         -------------------------------
                                                           Number of
                                                             Shares          Amount
                                                         -------------   ---------------
<CAPTION>
<S>                                                        <C>         <C>
BALANCE - JUNE 30, 2005                                    11,482,564  $     22,965,125

   Series B Convertible Preferred Shares Issued
   Compensation for Options Granted to Non-Employees
   Amortization of Deferred Compensation Costs                      -                 -
Net (Loss) for the Three Months Ended September 30, 2005            -                 -
                                                         -------------   ---------------

BALANCE - SEPTEMBER 30, 2005                               11,482,564  $     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, 2005                                  $     20,112,328  $  (49,352,173) $  (457,538) $    (1,666) $   29,550,451

   Series B Convertible Preferred Shares Issued                   656,915                                                 2,629,915
   Compensation for Options Granted to Non-Employees               86,590                                                    86,590
   Amortization of Deferred Compensation Costs                          -               -            -        1,250           1,250
Net (Loss) for the Three Months Ended September 30, 2005                -      (4,122,130)           -            -      (4,122,130)
                                                           ---------------   -------------   ----------   ----------   -------------

BALANCE - SEPTEMBER 30, 2005                             $     20,855,833  $  (53,474,303) $  (457,538) $      (416) $   28,146,076
                                                           ===============   =============   ==========   ==========   ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       4
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                   (UNAUDITED)
<TABLE>
                                                                          September 30,
                                                             ----------------------------------------
                                                                   2005                   2004
                                                             ------------------     -----------------
<CAPTION>
<S>                                                       <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS        $        (4,122,130)   $        1,582,640
      Adjustments to reconcile income (loss) to net cash
     (used in) provided by operating activities:
        Depreciation and Amortization                                 657,198               398,879
        Compensation for Options Granted                               86,590                     -
        Impairment of Note                                                  -               200,000
        Increase in Deferred Income                                   (17,916)              190,863
        (Decrease) in Deferred Income - Related Parties                     -            (4,000,000)
        Changes in Operating Assets and Liabilities -
           Decrease in Accounts Receivable
           ($1.3 million received from PDS)                         1,825,554                 4,596
           (Increase) Decrease in Other Assets                         70,712               (14,278)
           (Increase) in Prepaid Expenses                            (239,239)             (259,740)
           Increase in Accounts Payable and
            Accrued Expenses                                          508,586               298,865
                                                            ------------------     -----------------
      CASH (USED IN) OPERATING ACTIVITIES BEFORE
         DISCONTINUED OPERATIONS                                   (1,230,645)           (1,598,175)
      CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES                2,400                 2,400
                                                            ------------------     -----------------
      NET CASH (USED IN) OPERATING ACTIVITIES                      (1,228,245)           (1,595,775)
                                                            ------------------     -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from Sale of Series B Preferred Stock                  2,959,500                     -
    Fees Paid on Sale of Series B Preferred Stock                    (244,500)                    -
    Purchase and Improvements of Big Easy - Related Party            (182,814)           (3,701,297)
    Purchase and Improvements of Royal Star                           (40,151)             (771,196)
    Note Receivable Collected - Related Party                               -             2,600,748
    Advances Collected -  Related Party                                     -               921,789
    Livestock Expenditures                                                  -              (275,971)
    Capital Expenditures                                              (46,217)             (295,313)
    (Increase) Decrease in Other Investment Activity                   24,276               (64,911)
                                                            ------------------     -----------------
      NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES           2,470,094            (1,586,150)
                                                            ------------------     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Advances Received from Related Parties                            100,073                     -
    Principal Payments on Short Term Notes                            (11,026)               (6,029)
    Principal Payments on Long Term Notes                            (490,432)                    -
    Principal Payments on Long Term Debt -
     Related Parties                                                        -              (313,195)
    Decrease in Balances Due to/From
     Discontinued Subsidiaries                                          2,438                 1,687
                                                            ------------------     -----------------
      CASH (USED IN) FINANCING ACTIVITIES
        BEFORE DISCONTINUED FINANCING ACTIVITIES                     (398,947)             (317,537)
      CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES                 (2,438)               (1,687)
                                                            ------------------     -----------------
      NET CASH (USED IN) FINANCING ACTIVITIES                        (401,385)             (319,224)
                                                            ------------------     -----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  840,464            (3,501,149)
          LESS CASH AND CASH EQUIVALENTS  FROM
            DISCONTINUED OPERATIONS                                        38                  (713)
      CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD          1,204,384             7,508,632
                                                            ------------------     -----------------

      CASH AND CASH EQUIVALENTS AT END OF THE PERIOD      $         2,044,886    $        4,006,770
                                                            ==================     =================

      Supplemental Disclosures of Cash Flow Information:
           Cash paid during the period for:
           Interest                                       $         1,434,991    $          654,862
           Income Taxes                                   $                 -    $                -
</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 -  International  Thoroughbred  Breeders,  Inc., a
Delaware corporation ("ITB" and together with its subsidiaries,  the "Company"),
was incorporated on October 31, 1980. Its principal  operating  subsidiary,  ITG
Vegas,  Inc. ("ITG Vegas") 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 from the Port of Palm Beach,  Florida,  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.

     Using the funding provided by the PDS Transactions (see Note 3) and working
capital,   our  subsidiary,   ITG  Palm  Beach,  LLC  ("ITGPB"),   began  making
alterations,  retrofits and  improvements  to a second vessel,  the Big Easy, to
prepare it for use as a casino  cruise ship.  After  numerous  delays  caused by
start up problems and  hurricane  Wilma,  we expect to begin  regular  passenger
service also from the Port of Palm Beach,  Florida on November 19, 2005. The Big
Easy is 237 feet in length and has a passenger capacity of approximately  1,000.
There is 26,000 feet of casino space with  approximately  530 slot machines,  23
table  games,  8 poker  tables and a sports  book.  The  vessel has 3  specialty
restaurants and 4 bars.

     During Fiscal 2005, we re-entered the equine business.  We currently own 55
horses, a share of 15 horses,  and lease 2 other horses,  all of different ages.
Several 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.

     (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) 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.

     (E) Accounting Periods - ITG Vegas ends its quarterly  accounting period on
the last  Sunday of each  quarter.  These end of the week cut offs  create  more
comparability  of the Company's  quarterly  operations,  by generally  having an
equal number of weeks (13) and week-end days in each quarter. Periodically, this
system  necessitates  a 14 week quarter which results in a 53 week year.  During
the quarter ended  September  30, 2005,  ITG Vegas'  accounting  period ended on
October 2, 2005 as compared to October 1, 2004 in the  quarter  ended  September
30, 2004.

                                        6

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (F) 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.  The inventory
was purchased  from Palm Beach Maritime  Corporation  ("PBMC") at a time when we
were operating the Palm Beach Princess under a bare boat charter with PBMC. PBMC
is owned by Mr.  Francis W. Murray.  Fair value of this inventory was determined
by  actual  invoice  prices  and  estimates  made  by the  Palm  Beach  Princess
engineers.

     (G) Livestock - Livestock  consists of  thoroughbred  horses and the assets
are stated at cost.  Costs of maintaining  horses and other direct horse related
costs are expensed in the period incurred.  Stud fees are capitalized and become
the basis of the resulting foal.

     (H)  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 includes 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 months ended  September  30, 2005 and 2004,  the  amortized  expense was $
44,976 and $43,373, respectively.

     As a result of the PDS  transactions  (see  Footnote  2) we are leasing the
vessel  M/V  Palm  Beach   Princess  and  the  Big  Easy  under   capital  lease
arrangements.  The Company began depreciating the M/V Palm Beach Princess during
Fiscal 2005.  Financing fees in connection  with the PDS  financings,  are being
amortized over the life of the loans.  For the three months ended  September 30,
2005 and 2004,  the amortized  expense  associated  with these finance costs was
$131,069 and $25,684, respectively.

     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.  Beginning  with fiscal years starting
after December 15, 2001, SFAS 142 requires an annual  impairment review based on
fair value for all intangible assets with indefinite lives.

     (I) Net Assets of Discontinued  Operations - At June 30, 2005 and 2004, 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."

     (J) Recent  Accounting  Pronouncements  - In December 2004, the FASB issued
Statement  No. 123 (revised  2004),  "Stock-Based  Payment"  (SFAS  123R).  This
statement  replaces  SFAS  123,   "Accounting  for  Stock-Based   Compensation",
supersedes APB Opinion No. 25,  "Accounting  for Stock Issued to Employees" (APB
25) and amends SFAS 95,  "Statement  of Cash Flows",  to require that excess tax
benefits be reported as a financing  cash inflow  rather than as a reduction  of
taxes paid.  SFAS 123R is  effective  for the period  covered by this  quarterly
report on Form 10-Q for the first quarter of fiscal 2006.

     (K) 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

                                        7

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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 basis 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.

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

     (M) 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.

     (N)  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.

     (O)  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 $137,353 over the term of the equipment lease.

     (P) 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.

     (Q) Goodwill - Through the purchase of Leo Equity,  we purchased the assets
and  operations  of GMO Travel which was a 100% owned  subsidiary of Leo Equity.
GMO Travel provides reservations and travel services for our Palm Beach Princess
subsidiary and other non-ship related travel activities. Travel services for the
Palm Beach Princess  include  reservations  and travel services for its numerous
foreign  employees and our customers,  many of which rely on air travel to reach
our location.  The goodwill  recorded in the amount of $193,946  represents  the
fair value of GMO Travel based on its  discounted  cash flows and the  synergies
and cost savings gained by the Palm Beach Princess.

(2)  UNREGISTERED SALES OF EQUITY SECURITIES

     On July 13, 2005 the Company began accepting subscriptions for the purchase
of shares of the  Company's  Series B  Convertible  Preferred  Stock,  par value
$10.00 per share (the "Series B Preferred Stock").  The subscriptions for Series
B  Preferred  Stock  have  been  received  by the  Company  as part of a private
offering  of up to  500,000  shares  of  its  Series  B  Preferred  Stock,  at a
subscription price of $15.00 per share ($7.5 million,  in the aggregate,  if all
500,000 shares of Series B Preferred Stock are sold in the offering).  Under the
Subscription  Agreement,  each such subscriber  will be entitled to receive,  in
addition  to shares of Series B  Preferred  Stock at $15.00 per  share,  a stock
purchase warrant for the purchase of 1.2 shares of the

                                        8

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Company's  common  stock for each share of Series B Preferred  Stock  purchased.
Accordingly,  if all 500,000  shares of Series B Preferred  Stock are subscribed
for, warrants to purchase an aggregate of 600,000 shares of the Company's common
stock would then be issuable. The exercise price under each such warrant will be
$3.25 per common  share,  and the warrants  issued to purchasers of the Series B
Preferred  Stock will be exercisable for a term of three (3) years beginning one
year  after  issuance.  As of  September  30,  2005  the  Company  has  accepted
subscriptions for the purchase of 197,300 shares of Series B Preferred Stock and
has received approximately $2.66 million in net proceeds.

     The Series B Preferred Stock has been established by the Board of Directors
pursuant to its authority under the Company's  Certificate of  Incorporation  to
fix the relative rights and preferences of the authorized but unissued preferred
stock of the Company. Upon accepting subscriptions for purchases of the Series B
Preferred  Stock,  the Company has entered into a Registration  Rights Agreement
with the  purchasers,  pursuant  to  which  the  Company  has  agreed  to file a
Registration Statement under the Securities Act of 1933, as amended, in order to
register the resale of the shares of common stock of the Company  issuable  upon
conversion  of the  Series B  Preferred  Stock and the  shares  of common  stock
issuable upon exercise of the accompanying stock purchase  warrants,  and to use
its best efforts to cause such Registration Statement to be declared effective.

     The Series B Preferred  Stock will  automatically  be converted into common
stock upon the effective date of the Registration  Statement covering the common
shares issuable upon conversion. The initial conversion price is $2.00 per share
of common stock,  declining by $.02 for each full calendar quarter elapsing from
July 1, 2005 to the date on which the conversion  shall occur.  Upon conversion,
each share of Series B Preferred Stock will be converted into a number of shares
of common stock determined by dividing the subscription price, $15.00 per share,
by the conversion price then in effect.  Based upon the initial conversion price
of $2.00  and the  subscription  price of  $15.00  for  each  share of  Series B
Preferred Stock, the number of common shares initially  issuable upon conversion
is 7.5 shares of common stock for each share of Series B Preferred  Stock, or up
to  3,750,000  additional  new  common  shares if the Series B  Preferred  Stock
offering is fully subscribed.

     The stock  purchase  warrants  to be issued to  purchasers  of the Series B
Preferred Stock may be exercised, beginning one year after issuance, at any time
over the next three years,  at an exercise  price of $3.25 per share  payable at
the time of exercise.  In lieu of paying the exercise price,  the holder has the
right to effectuate a cashless  exercise in which the Company would issue to the
holder a number  of  shares  of common  stock  computed  by using the  following
formula: X=Y (A-B)/A,  where X equals the number of shares of common stock to be
issued to the  holder;  Y equals the number of shares of common  stock for which
the warrant is being exercised; A equals the market price of one share of common
stock;  and B equals the warrant  exercise  price.  As a result,  the holder may
receive a number of  shares  representing  the  unrealized  appreciation  in the
warrant.

     Pursuant to the Subscription Agreement, the Company also agreed to increase
the size of its Board of Directors from four to seven  members,  and to fill two
of those  vacancies  with one person to be  designated  by MBC  Global,  LLC, an
Illinois  limited  liability  company which introduced some of the purchasers of
the  Series  B  Preferred  Stock  to the  Company,  and a  second  person  to be
designated by another group of purchasers of the Series B Preferred Stock. As of
the date  hereof,  the  Company  has  increased  the size of its  Board to seven
members and expects to fill the vacancies thereby created in due course.

     The  Company  will pay a finder's  fee of 5% of the  purchase  price of the
Series B Preferred Stock (in addition to fees payable to MBC Global as described
below).  Accordingly,  if all  500,000  shares of the Series B  Preferred  Stock
offered are purchased in the private offering,  generating $7.5 million of gross
proceeds, a

                                        9

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

finder's  fee of  $375,000  would be payable.  The Company  plans to use the net
proceeds of the sale of Series B Preferred  Stock for parent  company  operating
expenses  and for working  capital of the parent  company and its  subsidiaries,
including our ITG Vegas subsidiary.

     Also on July 13, 2005, the Company entered into an Advisory Agreement dated
as of June 30, 2005,  and an amendment  thereto dated as of July 12, 2005,  with
MBC Global,  LLC,  pursuant to which the Company  retained  the  services of MBC
Global as financial advisor on a non-exclusive basis. The Advisory Agreement has
a minimum  term of two (2) years,  and  requires the Company to pay a consulting
fee of $10,000 per month to MBC Global,  a merger and  acquisition  fee of 2% of
the purchase  price upon closing of a merger or acquisition  transaction  with a
target introduced by MBC Global, and an advisory fee upon closing of a financing
transaction  with a source  introduced  by MBC  Global  equal to 7% of the gross
proceeds in the case of an equity  transaction,  3% of the gross proceeds in the
case of any  mezzanine  debt,  and 1% of the gross  proceeds  in the case of any
senior debt. MBC Global agreed to reduce its compensation in connection with the
sale of our Series B Preferred  Stock to 5% of the gross  proceeds of such sales
to investors introduced by MBC Global.

     As additional compensation to MBC Global, the Company agreed to issue three
(3) stock purchase warrants to MBC Global, one for the purchase of up to 150,000
shares of the Company's  common stock at $2.50 per share,  a second  warrant for
the purchase of up to 100,000 shares of the Company's  common stock at $3.50 per
share,  and a third  warrant  for the  purchase of up to an  additional  150,000
shares of the  Company's  common stock at $4.50 per share.  The actual number of
common shares purchasable under each of these warrants will be determined by the
number of shares of Series B Preferred Stock, described above, subscribed for in
the Company's  private offering by July 22, 2005 (or by such later date to which
the Company may extend its private  offering of Series B Preferred  Stock).  All
three stock purchase  warrants will have a term of four (4) years. In connection
with the  Advisory  Agreement  and such  warrants,  the Company  entered  into a
Registration  Rights Agreement with MBC Global pursuant to which the Company has
agreed to file a  Registration  Statement  under the  Securities Act of 1933, as
amended,  covering the resale of shares of common stock  purchasable  under such
MBC Global  warrants,  and to use its best  efforts  to cause such  Registration
Statement to be declared effective.

(3)  PDS TRANSACTION

     During our year ended June 30,  2005 ITB and  several of its  subsidiaries,
along with Palm Beach Maritime Corporation ("PBMC") and Palm Beach Empress, Inc.
("PBE"),  companies owned or controlled by Francis W. Murray,  completed several
financial and lease transactions with PDS Gaming Corporation ("PDS"), a publicly
held  company  located  in Las  Vegas,  along  with  several  of its  affiliated
companies.  On July 7,  2004,  January  5,  2005 and  April 5, 2005 we closed on
various  transactions  with PDS. On June 30, 2005 the Company and several of its
subsidiaries,  along with  companies  controlled by Francis W. Murray,  borrowed
$29,313,889  to refinance the  approximately  $27 million in existing PDS debts,
with approximately  $2.3 million of add-on financing being provided.  During the
current year we operated  under the vessel and  equipment  leases and  financing
arrangements  under  the  July 7,  2004,  January  5,  2005 and  April  5,  2005
transactions. Below is a summary of those transactions.

     (A) On July 7, 2004 PBMC and its  affiliate  company,  PBE, the Company and
our  subsidiaries  ITG Vegas and ITG Palm  Beach,  LLC  closed on a $23  million
transaction  with PDS. The transactions  were structured as a sale/leaseback  by
PBMC and PBE,  although,  as to $20  million of the $23  million  total,  it was
effectively equivalent to a secured loan against the Palm Beach Princess and the
Big Easy  vessels.  Of the $23  million,  $14 million was advanced to PBMC by an
affiliate of PDS as purchase  price in purchasing the Palm Beach  Princess.  The
PDS affiliate leased and chartered the Palm Beach Princess back to PBMC and PBE,

                                       10

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

which then subchartered the vessel to our subsidiary, ITG Vegas, Inc. Another $6
million of the $23 million was  advanced for the benefit of PBMC and PBE for the
purchase and  retrofitting of the vessel Big Easy,  which vessel PDS (through an
affiliate) leased and chartered to PBMC and PBE, who, in turn,  subchartered the
Big Easy vessel to ITG Vegas,  Inc.  and a new  wholly-owned  subsidiary  of ITG
Vegas,  ITG Palm Beach,  LLC ("ITG Palm  Beach").  The  remaining  $3 million of
funding from PDS is for ITG Vegas and ITG Palm Beach's lease of gaming equipment
for use on the Palm Beach Princess and Big Easy vessels.

     All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
our  Chairman  and Chief  Executive  Officer.  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 had been pledged to us to secure  certain debts
owed to us as described below under "Prior Operations - Sale of Las Vegas Note."

     Such  sale-leaseback and ensuing  subcharters  accomplished our purposes of
acquiring, by means of the Big Easy subcharter, a second vessel which we plan to
operate from the Port of Palm Beach, and also paying off all of our indebtedness
to the Trustee for the  Bankruptcy  Estate of Robert E.  Brennan  (the  "Brennan
Trustee").  We had been  attempting to obtain  financing for the purchase of the
Big Easy for  several  months,  but were unable to obtain  financing  on our own
since all potential lenders required a mortgage against the Palm Beach Princess,
which was owned by PBMC. PBMC was willing to utilize its vessel,  the Palm Beach
Princess,  to obtain funds to acquire the Big Easy and then  subcharter  the Big
Easy and Palm  Beach  Princess  to ITG Vegas  and ITG Palm  Beach on a long term
basis.

     The  investment in and  operation of the Big Easy required  retiring all of
our debt to the Brennan  Trustee,  due to the negative  covenants  governing our
indebtedness to the Brennan  Trustee.  PBMC was willing to utilize proceeds from
its sale of the Palm Beach  Princess to pay off all of our  indebtedness  to the
Trustee,  which  resulted in  termination of our investment in the Ship Mortgage
Obligation  held by the Brennan  Trustee.  In its place,  we (through ITG Vegas)
have  options to acquire the Palm Beach  Princess  and Big Easy vessels on terms
which will credit our  investment  in the Ship Mortgage  Obligation  against the
option exercise prices for the vessels.

     Sale-Leaseback of the Princess. Prior to the closing of the PDS Transaction
(the  "Closing"),  the Palm Beach Princess was owned by PBMC.  PBMC was indebted
under the Ship Mortgage  Obligation in a principal  amount of  $12,000,000  plus
accrued  interest,  the  Brennan  Trustee  was the  holder of the Ship  Mortgage
Obligation,  and our  subsidiary,  ITG Vegas,  had agreed to  purchase  the Ship
Mortgage   Obligation  for  a  purchase  price  of  $13,750,000  (the  "Purchase
Obligation")  in order to obtain  rights to operate the vessel  under a bareboat
charter. In addition, we were indebted to the Brennan Trustee in connection with
our repurchase of 3,678,145  shares of our common stock (the "ITB  Obligation").
As of  Closing  of the first PDS  transaction  on July 7,  2004,  the  aggregate
outstanding   amount  of  the  Purchase   Obligation   and  ITB  Obligation  was
$7,916,451.71,  for all of  which  PBMC,  ITG  Vegas  and ITB were  jointly  and
severally  liable.  At the  Closing,  Cruise  Holdings  I, LLC  ("Cruise  I"), a
subsidiary of PDS Gaming Corporation ("PDS"),  purchased the Palm Beach 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 the ITB Obligation.

     Also at July 7, 2004,  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 Palm Beach Princess to PBMC and PBE for a period of five years.  The charter
hire/rent payable by PBMC and PBE was $178,500 per month for the first 12 months
and $391,762.80 for the remaining term.

                                       11

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The Princess Charter included an option for PBMC to purchase the Palm Beach
Princess at the end of the term and is structured  such that the monthly charter
hire payments under the Princess Charter would reduce the purchase price for the
Palm Beach Princess to zero in five years and title would  automatically pass to
PBMC at the end of the term of the Princess Charter.

     PBMC and PBE entered into a Sub-Bareboat  Charter to charter the Palm Beach
Princess  to ITG Vegas and ITG Palm  Beach  for the same five year  period.  The
charter  hire  payable by ITG Vegas and ITG Palm Beach to PBMC and PBE under the
Princess  Sub-Charter was $50,000 per month ($600,000 per year) plus one percent
(1%) of the gross  operating  revenues  of the Palm  Beach  Princess.  Under the
Princess Sub-Charter,  PBMC granted to ITG Vegas and ITG Palm Beach an option to
purchase PBMC's right to acquire the Palm Beach Princess at the end of the term,
for an exercise price equal to the appraised  value of the Palm Beach  Princess,
$17,500,000,  to which certain amounts, including principal payments made by ITG
Vegas on the PDS lease of the Palm Beach  Princess  were to be credited  against
the purchase price.

     Acquisition  of the Big  Easy.  On  March  1,  2004,  PBE  entered  into an
agreement to purchase the Big Easy from Empress Joliet Corporation at a purchase
price of  $3,800,000.  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  Big  Easy  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 Big Easy. 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 "Big Easy  Charter")  and a Master Lease  Agreement to charter and
lease the Big Easy to PBMC and PBE for a period of five years.  The charter hire
was $82,695 for the first 12 months and $171,702.54 for the remaining term.

     The Big Easy Charter included an option for PBE to purchase the Big Easy at
the end of the term and was structured the same as the Princess  Charter in that
the monthly payments of charter hire under the Big Easy Charter would reduce the
purchase  price for the Big Easy to zero and title would  automatically  pass to
PBE.

     PBMC and PBE also  entered into a  Sub-Bareboat  Charter to charter the Big
Easy to ITG Vegas and ITG Palm Beach for a five year  period.  The charter  hire
payable  by ITG Vegas and ITG Palm  Beach  under  the Big Easy  Sub-Charter  was
$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 ITG Palm Beach 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 following  commencement of operations of
the Big Easy, to which certain amounts were to be credited.

     Lease of Gaming Equipment. At Closing, ITG Vegas and ITG Palm Beach 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  and then
leased  back  pursuant to a Gaming  Master  Lease.  Each  Schedule of the Gaming
Equipment Lease had a term of three years. Aggregate rent during fiscal 2005 for
all  gaming  equipment  was  approximately  $1.4  million  per year  under  this
agreement.  ITG Vegas and ITG Palm Beach 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.

     (B)  On  January  5,  2005,  Royal  Star  Entertainment,   LLC  ("RSE"),  a
wholly-owned  indirect subsidiary of ITB, borrowed $2,850,000 from PDS. The Loan
was evidenced by the Note and was to be

                                       12

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

repaid on January 17, 2006.  Interest on the Loan was 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 proceeds of
the loan were used to make  improvements to the vessels Royal Star and Big Easy.
Also at the closing,  RSE entered into an equipment lease with PDS providing for
the lease by RSE of slot  machines to be located on the vessel  Royal Star.  The
term of the Lease was 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 paid a
closing fee of $57,020.74, and a security deposit in the amount of $95,351.73.

     (C) On April 5, 2005,  ITB and certain of its  subsidiaries,  together with
PBMC,  PBE,  Francis W. Murray and Francis X. Murray,  executed and delivered as
joint and several  co-borrowers,  a promissory note payable to PDS in the amount
of  $4,350,000.  The  note  evidenced  a loan  made by PDS to the  Company,  the
proceeds  of which were  placed in escrow in order to obtain the  release of the
vessel the Big Easy from dry dock.  The $4.35  million note bore interest at 20%
per annum, until June 30, 2005 when it was refinanced.  As further consideration
to PDS, ITG Vegas,  Inc. and ITG Palm Beach, LLC entered into a three-year lease
of an additional  $1.5 million of gaming  equipment.  Rental payments under such
lease were $50,000 per month for 36 months.

     (D) On June 30, 2005,  the Company,  together  with its  subsidiaries,  ITG
Vegas, Inc. ("ITGV"), ITG Palm Beach, LLC ("ITGPB"),  International Thoroughbred
Gaming Development  Corporation  ("ITGD") and Riviera Beach  Entertainment,  LLC
("RBE")  and Royal Star  Entertainment,  LLC  ("RSE"),  entered  into a Loan and
Security  Agreement  with PDS as lender,  pursuant to which ITGV,  RBE,  RSE and
ITGPB  (collectively,  the "Borrowers"),  borrowed  $29,313,889 to refinance the
approximately  $27 million in existing debts (whether in the form of loans, ship
leases or ship  charters)  to PDS,  with  approximately  $2.3  million of add-on
financing being provided.  The maturity of all of the new  indebtedness  will be
July 1, 2009.  Our  overall  annual  interest  rate on the new PDS loan is 15.5%
until  January  2006 at which  time the  interest  rate on a portion of the loan
presently  equal to $2.8  million will  increase to 20% until ITG Vegas'  EBITDA
exceeds $17 million on an  annualized  basis.  Funding was completed on July 18,
2005 following the satisfaction of certain conditions,  including the execution,
delivery and recording of ship mortgages and all other closing documents.

     Equipment leases taken during our fiscal year 2005 will remain the same and
the terms of the equipment leases and the loans, taken in January and April will
be extended until July 1, 2009.

     Effective August 1, 2005 monthly interest and principal payments are due in
the  amount of  approximately  $1,100,000  during  the  first 2 years,  with the
remaining  monthly  payments  decreasing  slightly.  The  terms  of the new loan
require the  Company to  maintain an EBITDA of $7.5  million for the nine months
ending  October 2, 2005,  $10.5 million for the twelve months ending  January 1,
2006, increasing to $12 million for the twelve months ending October 1, 2006. If
these levels are not maintained or if we should not be in compliance  with other
various loan covenants we will be in default of the loan.

     Under the Loan and  Security  Agreement  signed on June 30,  2005 with PDS,
upstream  payments by the  Borrowers  to the Company are limited to $150,000 per
month plus amounts of ITG Vegas'  income tax savings  attributed to inclusion in
the Parent Company tax return. These payments can only be made provided no event
of default has occurred  (including  compliance  with the  requirement  that the
Borrowers maintain an EBITDA for the vessels of $7.5 million for the nine months
ending October 2, 2005, increasing to $10.5 million for the twelve months ending
January 1,2006 with  continual  increases in EBITDA  required  increasing to $12
million for the twelve months ending October 1, 2006 and thereafter).

                                       13

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     As a condition  to entering  into the PDS  Transaction,  PDS  required  the
Company,  International  Thoroughbred Gaming Development  Corporation ("ITGDC"),
PBMC and PBE to guaranty  performance  of certain of the PDS  Transactions.  The
Company,  ITGDC and PBMC and PBE entered  into a Guaranty  Agreement  and Pledge
Agreements guaranteeing the obligations of the borrowers.

     The PDS  indebtedness  is secured by mortgages  on the Royal Star,  the Big
Easy and the Palm Beach  Princess,  an assignment of our  promissory  note dated
November 29, 2000 payable by Realen- Turnberry/Cherry Hill, LLC in the principal
amount of $10 million,  an assignment of our promissory note, dated May 1, 2002,
payable by OC Realty in the principal amount of $2,021,176, and stock in certain
of our subsidiaries.

     In connection with this  refinancing,  PBMC, an affiliate 100% owned by our
Chairman and CEO, Francis W. Murray, acquired all of the membership interests of
Cruise Holdings I, the owner of the casino cruise ship Palm Beach Princess,  and
PBE,  an  affiliate  50% owned by Mr.  Murray,  acquired  all of the  membership
interests  of Cruise  Holdings  II, the owner of the casino  cruise ship the Big
Easy. As a result,  the Bareboat Charters between PBMC and Cruise I, and PBE and
Cruise II, respectively,  terminated, and, in place of the sub-Bareboat Charters
by ITGV and ITGPB,  these  subsidiaries  charter the  vessels  from Cruise I and
Cruise II under substantially the same economic terms as had applied under their
previous sub-Bareboat Charters in effect on July 7, 2004.

     (E) Placement Fee Agreement

     On September 1, 2005 the Company  entered  into a Placement  Fee  Agreement
with PDS Gaming Corporation.  In consideration of PDS providing $29.3 million in
funding and lease  agreements  to the Company  during its 2005 Fiscal year,  ITB
agreed to pay a  Placement  fee of  $750,000  for such  funding.  ITB has made a
deposit of $50,000 and the balance will be paid monthly  beginning March 1, 2006
with monthly payments of $58,333,  without interest, until February 1, 2007. The
Placement Fee Agreement also permitted the Company to cancel an equipment  lease
it had signed with PDS on April 5, 2005.  The original  amount of the  equipment
lease was $1.5  million.  Under the  Placement  Fee  Agreement,  the Company was
permitted to cancel the lease after paying the $250,000 rental for the period to
the date of  cancellation,  the  equipment was returned to PDS and the Placement
Fee Agreement was put in place of the equipment lease.

     (F) Deferral of Principal Payments on PDS Financing

     The Loan and Security Agreement signed on June 30, 2005 permits the Company
to defer the principal  portion of its  scheduled  payments of up to $3 million,
providing  the Company meets certain  conditions.  In order to conserve  working
capital the Company began deferring principal payments of approximately $450,000
on September 1, 2005 through  November 1, 2005. This action was necessary due to
the continued delays in receiving the necessary approvals to begin operating the
Big Easy and the Company's current negative working capital position.

(4)  DESCRIPTION OF LEASING ARRANGEMENTS

     As  mentioned  in the  footnote 3 above,  the  Company  and  several of its
subsidiaries  have entered into charter  transactions  for two vessels and lease
transactions for equipment placed on three vessels.

     The charter for the Palm Beach Princess, which is currently in service, has
been  accounted  for as a capital  lease.  Principal  payments on the Palm Beach
Princess  portion  of the loan ($14  million)  will  reduce  the  capital  lease
purchase  liability  and the interest  portion of each  monthly  payment will be
expensed.

                                       14

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Depreciation  expense  will be  recorded  for the Palm Beach  Princess  using an
estimated  useful life of 20 years.  Charter hire fees of $50,000 per month plus
1% of gross  revenues  of the Palm Beach  Princess  have been  accounted  for as
additional  interest  payments  on the  capital  lease and will be  expensed  as
incurred.  The lease for the gaming  equipment  currently aboard the vessels and
the lease for new gaming equipment will be accounted for as an operating lease.

     The  transaction  described in Note 2 also  included the charter of the Big
Easy and a lease for gaming  equipment  aboard that  vessel.  As a result of the
June 30, 2005 PDS  transaction,  we have accounted for the Big Easy charter as a
capital  lease.  Principal  payments on the Big Easy  portion of the PDS loan of
$12.6 million will reduce the capital lease purchase  liability and the interest
portion  of  each  monthly  payment  will  be  expensed.   The  total  costs  of
improvements  made together with the present value of the minimum lease payments
were  used to  calculate  the  capitalized  vessel  cost.  Charter  hire fees of
$100,000 per month plus 1% of gross revenues will be accounted for as additional
interest  payments  made on the  capital  lease.  Depreciation  expense  will be
recorded for the Big Easy  following the vessel being placed in service using an
estimated  useful life of 20 years. The gaming equipment lease will be accounted
for as an operating lease.

     The  transaction  described  in  Note  3(B)  included  a lease  for  gaming
equipment  aboard the vessel,  Royal Star.  The gaming  equipment  lease will be
accounted for as an operating lease.

     Vessels,  plant and  equipment at September  30, 2005 include the following
amounts for capitalized leases:


          Vessel, Palm Beach Princess       $       17,500,000

          Vessel, Big Easy                          17,050,721
                                                 -------------
          Less: allowance for depreciation          (1,875,991)
                                                 -------------
          Capital Leases                    $       32,674,730
                                                 =============

     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 September 30, 2005:

Period ending September 30,

                         2006               $         8,658,186

                         2007                         8,987,638

                         2008                         8,979,341

                         2009                         7,475,490

                         2010                           747,148
                                                ---------------
Total minimum lease payments                $        34,847,803

Less: amount representing interest                   (8,554,019)
                                                ---------------
Present value of net minimum lease payment  $        26,293,784
                                                ===============

                                       15

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The  following is a schedule of lease  liabilities  due to PDS at September
30, 2005:

<TABLE>
                                                                      September 30, 2005
                                                            -----------------------------------------
Vessel                                                       Short-Term    Long-Term        Total
----------------------------------------------------------  -----------  -------------  -------------
<CAPTION>
<S>                                                        <C>           <C>            <C>
Palm Beach Princess                                        $  2,746,465  $  11,037,553  $  13,784,018

Big Easy                                                      3,417,828      9,091,938     12,509,766

Royal Star                                                      401,340      2,448,660      2,850,000
                                                              ---------     ----------     ----------
Amount due to PDS for vessels                                 6,565,633     22,578,151     29,143,784

Less: Royal Star Note shown in Notes Payable (See Note 9)      (401,340)    (2,448,660)    (2,850,000)

Fair Market Valuation - Palm Beach Princess                           -      3,500,000      3,500,000

Capital Lease Charter Valuation - Big Easy                    1,343,527      2,735,390      4,078,917
                                                              ---------     ----------     ----------
Total Short and Long Term Vessel Leases Payable            $  7,507,820  $  26,364,881  $  33,872,701
                                                              =========     ==========     ==========
</TABLE>

     The  following  is a schedule of lease  liabilities  due to PDS at June 30,
2005  as a  result  of  the  June  30,  2005  transaction  wherein  we  borrowed
approximately  $29  million  to  refinance  the vessel  leases for vessel  lease
payables as shown on the Balance Sheet:

<TABLE>
                                                                         June 30, 2005
                                                            ------------------------------------------
Vessel                                                       Short-Term    Long-Term        Total
----------------------------------------------------------  -----------  --------------  -------------
<CAPTION>
<S>                                                        <C>           <C>             <C>
Palm Beach Princess                                        $  2,746,465  $   11,253,535  $  14,000,000

Big Easy                                                      2,273,672      10,326,328     12,600,000

Royal Star                                                      401,340       2,448,660      2,850,000
                                                              ----------    -----------    -----------
Amount due to PDS for vessels                                 5,421,477      24,028,523     29,450,000

Less: Royal Star Note shown in Notes Payable (See Note 9)      (401,340)     (2,448,660)    (2,850,000)

Fair Market Valuation - Palm Beach Princess                           -       3,500,000      3,500,000

Capital Lease Charter Valuation - Big Easy                            -       4,450,722      4,450,722
                                                              ----------    -----------    -----------
Total Short and Long Term Vessel Leases Payable            $  5,020,137  $   29,530,585  $  34,550,722
                                                              ==========    ===========    ===========
</TABLE>

                                       16

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     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 September 30, 2005:

Period ending September 30,

                         2006    $             3,142,168

                         2007                  2,765,830

                         2008                  1,867,875
                                     -------------------
Total minimum lease payments     $             7,775,873
                                     ===================


(5)  NOTES RECEIVABLE

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


     (B) 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").  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

                                       17

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

amount of the Second  Cherry  Hill Note  equaled 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.

     The Company is not liable for  repayment of the principal of the $5 million
loan,  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 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 on its books to  $4,278,651.  In its
assessment  of the fair  value of the  Second  Cherry  Hill  Note,  the  Company
estimated  its share of proceeds from the sale of the Garden State Park property
after collection of the $10 million note along with interest due on the note.

     The  Second  Cherry  Hill Note is  secured  by a pledge  of stock  owned by
Raymond  Parello,  an  affiliate  of the  Buyer,  in 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 has
begun 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 has been 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)  repayment  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  (as holder of the Second Cherry Hill
Note) to the put option.

                                       18

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     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.

(6)  DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES

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

                                                     September 30,  June 30,
                                                        2005          2005
                                                     ------------  ----------
Long-Term Prepaid Loan Costs - Net of amortization
in the amount of ($655,337) and ($362,424),
respectively                                        $     666,650 $   959,563

Port Lease Rights                                         250,000     250,000

Other Misc. Assets                                         84,985     226,360
                                                     ------------  ----------
         Total                                      $   1,001,635 $ 1,435,923
                                                     ============  ==========

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

     (A) Vessel Deposits - Related Parties

     Beginning  on July 7, 2004,  we entered into  Sub-Bareboat  Charters of the
vessels Palm Beach  Princess  and Big Easy with  entities  (Palm Beach  Maritime
Corporation  and Palm Beach Empress,  Inc.) owned or controlled by our Chairman,
Francis W. Murray.  Pursuant to our June 30, 2005 refinancing and  restructuring
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise Holdings I and Cruise Holdings II, respectively, which
companies are owned by Palm Beach Maritime  Corporation  and Palm Beach Empress,
Inc. Pursuant to the new charters,  we pay Cruise Holdings I and Cruise Holdings
II, as owners of the  vessels,  charter  fees of $50,000  per month for the Palm
Beach  Princess and  $100,000  per month for the Big Easy,  plus 1% of our gross
revenues from operation of those vessels.  We have the right to purchase  either
or both vessels,  at our option, for $17.5 million in the case of the Palm Beach
Princess (representing its appraised value at the time of $17.5 million) and for
fair market value (to be  determined  by appraisal) in the case of the Big Easy.
Once we pay off the loans against the Palm Beach  Princess and Big Easy, we will
be entitled to substantial credits against the purchase prices of the vessels: a
$14  million  credit in the case of the Palm  Beach  Princess  and a $6  million
credit in the case of the Big Easy,  representing the original principal amounts
of the July 2004 sale - leaseback  transactions involving those vessels; as well
as  credits  for  our  investment  in  the  net  Ship  Mortgage   Obligation  of
approximately  $7.2 million which can be applied to the purchase price of either
vessel;  and a  credit  for  the  portions  of the  costs  of  refurbishing  and
retrofitting  the Big Easy in excess of $6 million  which we paid,  amounting to
approximately $14 million,  that can be applied to the purchase price of the Big
Easy.

                                       19

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (B) Deposits and Other Assets - Related Parties (See Note 16):

                                                      September 30,   June 30,
                                                           2005        2005
                                                       -----------  ----------
Loans to the Ft Lauderdale Project (OC Realty, LLC)   $  2,769,989 $ 2,769,989

Accrued Interest on Loans to the Ft. Lauderdale
Project (OC Realty,LLC)                                  1,577,190   1,485,080

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

Advances to PBMC                                            16,903      33,156
                                                       -----------  ----------
Total Deposits and Other Assets - Related Parties     $  4,558,028 $ 4,482,171
                                                       ===========  ==========

(8)  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     (A) The  following  table  represents  the aging of accounts  payable as of
September 30, 2005 and June 30, 2005.

                      Total       Current   31-60 Days  61-90 Days  Over 91 Days
                    -----------  ----------  ---------- ----------- -----------
September 30, 2005  $ 5,068,244  $  820,084  $ 707,195   $  547,556  $2,993,409

June 30, 2005       $ 5,505,374  $1,472,680  $ 890,700   $1,382,776  $1,759,218

     (B) Accrued  expenses  consisted of the  following as of September 30, 2005
and June 30, 2005

                                     September 30, 2005    June 30, 2005
                                     -------------------  ----------------
Trade Payables                   $             2,011,337 $         964,805

Payroll and Related Obligations                  767,246           915,177

Interest                                         463,779           161,040

Various State Taxes                              125,984           330,157

Prior State Tax Audit                            339,405           339,405
                                     -------------------  ----------------
Total                            $             3,707,751 $       2,710,584
                                     ===================  ================

                                       20

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(9)  NOTES AND MORTGAGES PAYABLE

     Notes and Mortgages Payable are summarized below. The June 30, 2005 capital
lease  refinancing  loans with PDS other  than the Royal  Star loan are  carried
under lease liabilities (See Note 3).

<TABLE>
                                                         September 30, 2005                        June 30, 2005
                                    Interest %    -----------------------------------    -----------------------------------
                                    Per Annum        Current            Long-Term           Current            Long-Term
                                  ------------    --------------    -----------------    --------------    -----------------
<CAPTION>
<S>                                    <C>      <C>               <C>                 <C>                <C>
International Thoroughbred
Breeders, Inc.:
---------------
Francis X. Murray (A)                       8%  $        459,164  $               -0- $         159,164  $               -0-

William H. Warner (A)                      12%            37,000                  -0-            37,000                  -0-

Other                                  Various            25,000                  -0-            25,000                  -0-

ITG Vegas, Inc.:
----------------
PDS Gaming (B)                             10%           401,340            2,448,660           401,340            2,448,660

Maritime Services, Corp. (C)                9%           248,109                  -0-           410,187                  -0-

International Game Technology (D)           8%           221,331              147,300           221,296              190,621

Others                                 Various            39,937               27,651            32,656               44,151

Garden State Park:
------------------
Service America Corporation (E)             6%           160,000                  -0-           160,000                  -0-
                                                  --------------    -----------------    --------------    -----------------
                 Totals                         $      1,591,881  $         2,623,611 $       1,446,643  $         2,683,432

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

Related Party Notes                                     (496,164)                 -0-          (196,164)                 -0-
                                                  --------------    -----------------    --------------    -----------------
Totals                                          $        935,717  $         2,623,611 $       1,090,479  $         2,683,432
                                                  ==============    =================    ==============    =================
</TABLE>

     (A) On March 1,  2003,  we  issued a  promissory  note for a line of credit
bearing interest at 8% to Francis X. Murray. The outstanding balance on the line
of credit note at June 30, 2005 was $159,164  and accrued  interest was $29,052.
On  September  19,  2005 Mr.  Murray lent an  additional  $300,000 to the Parent
Company. At September 30, 2005 the outstanding balance on the line of credit was
$459,164 and accrued  interest was $32,306.  In fiscal 2003 and fiscal 2005,  we
issued promissory notes for $24,000 and $13,000  respectively,  bearing interest
at 12% to William H. Warner,  Secretary of the Company.  The outstanding balance
is due on demand. The proceeds from both notes were used for working capital.

     (B) On  January  5,  2005,  the  Company  and its  subsidiary,  Royal  Star
Entertainment,  LLC  ("RSE"),  executed and  delivered a promissory  note in the
original  principal  amount of $2,850,000  (the "Note").  The Note is secured by
RSE's Preferred Ship Mortgage. The lender and holder of the Note and Mortgage is
Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation. 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  proceeds  of the Loan  were  used to make
improvements  to the vessel  Royal Star or to the vessel Big Easy.  The Note was
originally due on January 17, 2006, however,  the PDS re-financing  completed on
June 30, 2005 extended the terms of

                                       21

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

this note to July 1, 2009.  The interest  rate is 10% until  January 19, 2006 at
which time the  interest  rate will be  increased  to 20% until such time as the
annualized  EBITDA for the various  vessels  operated  by the Company  reach $17
million at which time the interest rate will be reduced to 15%

     (C) On May 20, 2005, the Company's wholly owned subsidiary, ITG Palm Beach,
LLC  ("ITGPB"),  together with an affiliate,  Palm Beach Empress,  Inc.  ("PBE")
issued a seven month  promissory note in the amount of $569,482 bearing interest
at 9% to Maritime Services, Corp. for drydock retrofit services performed on the
Big Easy.  A  payment  of  $83,813  was due and paid on June 1,  2005,  five (5)
consecutive monthly installments of $83,813 are to be paid on the balance with a
final  Payment of $84,216 due on December 1, 2005.  At September  30, 2005,  the
principal balance on the Maritime Services, Corp. note was $248,109.

     (D) 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.  In March 2005,  ITG
Vegas,  Inc. issued an additional  thirty month promissory note in the amount of
$387,463  bearing  interest at 8.15% to  International  Game  Technology for the
purchase of fully  reconditioned  gaming equipment.  Thirty consecutive  monthly
installments of $14,319.49 are to be paid on the balance. At September 30, 2005,
the principal balance on the two notes to International Game Technology note was
$368,631  of which  $221,331  was  classified  as short term and the  balance of
$147,300 was classified as long term.

     (E) 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 and have not been paid.  The
Company is continuing to negotiate new terms under this note and if unsuccessful
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 $32,400 as of September 30, 2005.

                                       22

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(10) VESSELS, EQUIPMENT AND LIVESTOCK

     Vessels owned and leased, equipment and livestock consist of the following:
Depreciation is being computed over the estimated  remaining  useful lives using
the straight-line method.

                                  Estimated Useful  September 30,     June 30,
                                   Lives in Years       2005            2005
--------------------------------  ----------------   -----------    -----------
Leased Vessel - Palm Beach               20         $ 17,500,000  $  17,500,000
 Princess

Leased Vessel Not Placed in
 Service  - Big Easy                    N/A           24,501,803     24,318,989

Vessel Not Placed in Service -
 Royal Star                             N/A            3,011,292      2,971,141

Equipment                               5-15           3,164,503      3,118,284

Leasehold Improvements                 15-40             987,974        987,267

Livestock                               N/A              328,247        328,247
                                                     -----------    -----------
Totals                                                49,493,819     49,223,928

Less Accumulated Depreciation
 and Amortization                                     (3,166,917)    (2,625,763)
                                                     -----------    -----------
                                                    $ 46,326,902  $  46,598,165
                                                     ===========    ===========

(11) RELATED PARTY DEBT

     The following schedule represents related party debt (See Note 16 - Related
Party Transactions):

<TABLE>
                                                                  September 30, 2005                June 30, 2005
                                                             ----------------------------     ----------------------------
                                                               Short-Term      Long-Term      Short-Term        Long-Term
                                                             --------------   -----------     ------------     -----------
<CAPTION>
<S>                                                        <C>               <C>            <C>              <C>
Advances from OC Realty (Francis W. Murray  ownership)     $      2,753,203  $        -0-   $    2,800,964   $         -0-

Accrued Wages due to and Advances from Francis W. Murray            523,502           -0-          182,307             -0-

Advances from Palm Beach Maritime Corp.(formerly MJQ Corp.)
(Francis W. Murray  ownership)                                          -0-        77,650              -0-          98,099
                                                             --------------   -----------     ------------     -----------
          Total Long Term Debt - Related Parties           $      3,276,705  $     77,650   $    2,983,271   $      98,099
                                                             ==============   ===========     ============     ===========
</TABLE>

                                       23

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(12) COMMITMENTS AND CONTINGENCIES

     See Note 3 for additional commitments and contingencies with respect to the
PDS Transactions.

     See Note 16 for additional commitments and contingencies of the Company and
transactions with related parties.

     See Note 17 with respect to events and  developments  after  September  30,
2005.

     During the 2005 fiscal year, the Big Easy had been undergoing  retrofit and
improvements  and we had  originally  expected  to place the Big Easy in service
during our third quarter of Fiscal 2005.  Cost overruns and delays in having the
vessel released from Dry Dock and in obtaining vessel certifications from the US
Coast Guard have  adversely  affected the working  capital of the  Company.  The
result has been about $1 million per month in unexpected costs and expenses from
April 1,  2005 to  November  15,  2005;  totaling  about $7  million,  which has
contributed  to the increase in our  negative  working  capital.  On October 11,
2005, we received  certification for passenger operations pursuant to the United
States Coast Guard's Alternative  Compliance  Program.  Although the Alternative
Compliance  Program  certification  procedure is less complex and time consuming
than regular Coast Guard  certification,  it was nevertheless a rigorous process
involving the  jurisdiction of at least four separate  departments of the United
States Coast Guard and the ship's classification  society,  Lloyd's Register. As
indicated  by  the  table  at  the  end  of  this  footnote,  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 the
Big  Easy.  We are  dependent  upon the  expected  additional  revenue  from the
operations of the second vessel to cover the increased financing costs.

     On June 30, 2005, the Company,  together with its subsidiaries,  ITG Vegas,
Inc. ("ITGV"), ITG Palm Beach, LLC ("ITGPB"),  International Thoroughbred Gaming
Development Corporation ("ITGD"),  Riveria Beach Entertainment,  LLC ("RBE") and
Royal  Star  Entertainment,  LLC  ("RSE"),  entered  into  a Loan  and  Security
Agreement  with PDS as  lender,  pursuant  to which  ITGV,  RBE,  RSE and  ITGPB
(collectively,   the  "Borrowers"),   borrowed   $29,313,889  to  refinance  the
approximately  $27 million in existing debts (whether in the form of loans, ship
leases or ship  charters)  to PDS,  with  approximately  $2.3  million of add-on
financing being provided.  The maturity of all of the new  indebtedness  will be
July 1, 2009. The Company,  ITGD, PBMC and PBE are  guaranteeing the obligations
of the  Borrowers.  Monthly  payments  of  approximately  $1.1  million  will be
required to fund the debt service on the new refinanced debt. (See Note 3)

     Our vessels are subject to the provisions of the  International  Convention
on Safety of Life at Sea as Amended  ("SOLAS 74"),  which was adopted in 1974 by
the  International  Maritime  Organization,  a specialized  agency of the United
Nations that is  responsible  for measures to improve the safety and security of
international  shipping, and to prevent marine pollution from ships. SOLAS 74 is
the  current  basic  safety  standard  for all ships  engaged  in  international
service.  The Convention was substantially  amended in 1992 and 2000 in order to
upgrade  and  improve  shipboard  fire  safety  standards.  The  Amendments  are
applicable to all passenger ships engaged in  international  service,  including
retroactively  those ships such as the Palm Beach Princess that were built prior
to 1980. Under the terms of the Amendments,  full compliance by older ships with
SOLAS 74  standards  is to be  phased  in and  implemented  over the  years  and
completed no later than October 1, 2010. The Palm Beach Princess,  in compliance
with the SOLAS 74  requirements  to date, has previously  completed  substantial
upgrading and  installation  of fire sprinkler and smoke  detection  systems and
other fire safety construction  standards. By 2010 the ship must comply with the
final phase of the implementation of the SOLAS 74 Amendments, most notably being
requirements that no combustible material be used in ships' structures and

                                       24

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

that certain other  interior  structure and space  standards be met. The precise
nature and scope of necessary  work will be determined in  conjunction  with the
ship's  classification  society, Det norske Veritas. To accomplish such work may
entail  substantial  cost in order to  remove  all  wood and  other  combustible
materials  now used in the  structure of the Palm Beach  Princess,  to refit the
ship with non-combustible materials, and otherwise to upgrade interior structure
and spaces.  We have not yet  obtained an  estimate of such cost.  The  Bareboat
Charter and Option to Purchase  Agreement for the Palm Beach Princess permits us
to purchase  the vessel for $17.5  million at the end of the  charter  period on
July 1, 2009. We will be allowed  credits for the payments made on the PDS lease
of $14  million,  provided  such  payments  are made,  and credits of up to $7.2
million  against the purchase of the Palm Beach Princess.  (However,  use of the
$7.2 million as a credit toward the Palm Beach Princess  purchase would decrease
the  credits  allowed for the  purchase  of the Big Easy since the $7.2  million
credit can be used for the  purchase  of either  vessel)  (See Note 2 A) We will
need to make a determination if it will be economically feasible to purchase the
Palm Beach Princess at the end of the charter period considering the costs which
may be involved in readying the vessel for "SOLAS" requirements.

     With the sale of our  Freehold  Raceway  property  on January  28,  1999 we
assumed  full  responsibility  for the  costs  associated  with the  clean up of
petroleum  and related  contamination  caused by the  leakage of an  underground
storage  tank  which was  removed in 1990,  prior to our  purchase  of  Freehold
Raceway.  In  February  2000 the N.J.  Department  of  Environmental  Protection
approved our remedial  investigation  workplan  ("RIW").  Under the RIW numerous
test wells were  drilled  and the soil tested and  monitored  to  determine  the
extent and direction of the flow of underground  hazardous  material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey,  the
work was  stopped  due to a lack of funds  resulting  from  the  institution  of
proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code. At
this time we are unable to predict the effects that such delay may cause, but it
is likely that some retesting of the wells may be necessary. Prior to the delays
it was  estimated  that the cost to  remediate  the site would be  approximately
$750,000.  However,  we now  estimate  that  the  total  cost of  clean up to be
approximately  $830,000  including  costs we have already spent according to the
environmental consulting firm handling this matter. These costs include drilling
of test  wells and  monitoring,  lab  testing,  engineering  and  administrative
reports,  equipment and remediation of the site through a "pump and treat" plan.
The Company has made  payments of  approximately  $617,000  during  prior fiscal
years 2000, 2001 and 2002. As of September 30, 2005 we have accrued $211,000 for
the additional  work. It is estimated that  completion of the site clean up will
take  approximately  18  months  from the time  the  work is  reinstated.  It is
unlikely that the Company will receive any insurance reimbursement for our costs
of this remediation project.

                                       25

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The following table summarizes commitments on non-cancelable  contracts and
leases as of September 30, 2005.

<TABLE>
                                                              Twelve Month Period Ended September 30,
                                           --------------------------------------------------------------     There-
                                              2006         2007          2008          2009        2010        after          Total
                                           ----------   ----------    ----------   -----------    -------    --------    -----------
<CAPTION>
<S>                                      <C>          <C>           <C>           <C>           <C>        <C>          <C>
Capital Leases:
    P.B. Princess - Principal & Interest $  4,525,373 $  4,701,153  $  4,701,154  $  3,917,628  $ 391,763  $        -   $ 18,237,071

       Bare Boat Charter - Related Party      960,000      960,000       960,000       800,000          -           -      3,680,000

    Big Easy - Principal & Interest         4,132,813    4,286,485     4,278,187     3,557,862    355,385           -     16,610,732

       Bare Boat Charter - Related Party    1,560,000    1,560,000     1,560,000     1,300,000          -           -      5,980,000

Notes and Mortgages:

   Principal & Interest                     2,386,412    1,313,893     1,137,137       456,825          -           -      5,294,267

    Interest Only                             166,603            -             -            -           -           -        166,603

Deferred Interest Payments                    600,000      600,000       600,000       350,000          -           -      2,150,000

Employee Contracts - Related Party            146,314            -             -             -          -           -        146,314

Operating Leases:

    Casino Equipment                        3,142,168    2,765,830     1,867,875             -          -           -      7,775,873

    Administrative & Office                   625,118      169,140        80,699         2,028      2,028         338        879,351

Purchase Obligations - Big Easy             2,092,176            -             -             -          -           -      2,092,176

Purchase Obligations                          594,755      151,006        61,006        61,006     61,006     193,184      1,121,963
                                           ----------   ----------    ----------   -----------    -------    --------    -----------
Total                                    $ 20,931,732 $ 16,507,507  $ 15,246,058  $ 10,445,349  $ 810,182  $  193,522   $ 64,134,350
                                           ==========   ==========    ==========   ===========    =======    ========    ===========
</TABLE>


(13) 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.

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of  September  30,  2005,  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  a $10.5  million
impairment  loss during the fiscal years ended June 30, 2005 and 2004 to reflect
the estimated current market value of this note

                                       26

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(15) 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.  We had  deferred  all income from these
transactions  until such time as payment was received.  During the first quarter
of Fiscal 2005 we recorded the payment for the previously  deferred income,  net
of tax, in the amount of $3,560,000.

(16) RELATED PARTY TRANSACTIONS

     See  Footnote  3  for  related   party   transactions   regarding  the  PDS
Transaction.

     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  was due December  31, 2004,  but was extended by the
Board of Directors to December 31, 2007, 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 (through OC Realty) 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.  During  Fiscal  2001 and Fiscal  2002,  we lent
$2,034,405 in total to the project and we have accrued interest in the amount of
$1,485,080  on the loan.  These loans bear interest at 12% and will be repayable
out of OC Realty's share of proceeds,  after payment of bank debts, generated by
the  sale  of  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  $14 million (at  present)  and,  second,  construction  financing
expected to amount to $25 to $30 million and third,  any capital invested by and
fees payable to joint venture partners including OC Realty. OC Realty's share of
proceeds  thereafter  will  range  from  22.5%  to  45%.  We have  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  condominium  units  will  be  adequate  to  meet  its
obligations  and  provide  sufficient  return to OC Realty  with which to pay OC
Realty's debt to us.

     Beginning  on July 7, 2004,  we entered into  Sub-Bareboat  Charters of the
vessels Palm Beach  Princess  and Big Easy with  entities  (Palm Beach  Maritime
Corporation  and Palm Beach Empress,  Inc.) owned or controlled by our Chairman,
Francis W. Murray.  Pursuant to our June 30, 2005 refinancing and  restructuring
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise

                                       27

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Holdings I and Cruise  Holdings II,  respectively,  which companies are owned by
Palm Beach Maritime Corporation and Palm Beach Empress, Inc. Pursuant to the new
charters,  we pay Cruise  Holdings I and  Cruise  Holdings  II, as owners of the
vessels,  charter  fees of  $50,000  per month for the Palm Beach  Princess  and
$100,000  per  month  for  the Big  Easy,  plus 1% of our  gross  revenues  from
operation  of those  vessels.  We have  the  right to  purchase  either  or both
vessels, at our option, for $17.5 million in the case of the Palm Beach Princess
(representing  its  appraised  value at the time of $17.5  million  and for fair
market value (to be determined  by appraisal) in the case of the Big Easy.  Once
we pay off the loans  against the Palm Beach  Princess and Big Easy,  we will be
entitled to substantial  credits against the purchase  prices of the vessels:  a
$14  million  credit in the case of the Palm  Beach  Princess  and a $6  million
credit in the case of the Big Easy,  representing the original principal amounts
of the July 2004 sale - leaseback  transactions involving those vessels, as well
as  credits  for  our  investment  in  the  net  Ship  Mortgage   Obligation  of
approximately  $7.2 million which can be applied to the purchase price of either
vessel,  and a  credit  for  the  portions  of the  costs  of  refurbishing  and
retrofitting  the Big Easy in excess of $6 million  which we paid,  amounting to
approximately $14 million,  that can be applied to the purchase price of the Big
Easy.

     From time to time  Francis W. Murray has  advanced  funds to the Company to
meet its operating  expenses.  Mr. Murray is normally reimbursed directly by the
Company or through miscellaneous  advances it may make on his behalf. During our
fourth quarter of Fiscal 2005 which ended June 30, 2005, Mr. Murray or companies
owned or  controlled  by him made  advances  to the  Company  in the  amount  of
approximately   $2,150,000  to  fund  the  Company's   working   capital  needs.
Additionally,  the Company has deferred making salary payments to Mr. Murray and
payments to his  companies,  the majority of which were during the last quarter,
for charter  hire fees on the Palm Beach  Princess and Big Easy  vessels.  As of
September  30,  2005,  the total  advances  and  deferred  payments due him were
$3,277,000.  The timing of the repayment is unknown at this time.  Approximately
$1.7  million is due from the parent  company  and could be repaid if it were to
receive  sufficient  funds from the sale of the Series B  Preferred  Stock.  The
balance  is due  from ITG  Vegas  and its  subsidiaries  and  repayment  by such
entities is  restricted by the PDS loan  agreement  until such time as ITG Vegas
achieves certain EBITDA levels.  Interest to Mr. Murray is not being recorded at
this time.

     During Fiscal 2005, the Company re-entered the equine business. In addition
to the  purchase  of horses from  outside  parties,  the  Company has  purchased
horses,  the  majority  being one and two year olds,  from  Francis W. Murray at
prices to be determined by an 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.

     On September 19, 2005, Francis X. Murray,  Vice President of our ITG Vegas,
Inc. subsidiary and son of Francis W. Murray, our President,  CFO and CEO loaned
the Parent  Company an  additional  $300,000  which  amount is due on demand and
bears interest at 8%.

(17) SUBSEQUENT EVENTS

     (A) Commencement of the Big Easy Operation

     On October 11th, the United States Coast Guard completed its  certification
of the Big Easy and issued  its  formal  Certificate  of  Inspection.  All other
certificates required for the ship's commencement of passenger service have been
received.  The ship  completed two voyages  beginning on October 18, 2005 but on
October  19th left the Palm Beach port  because  of the  threat  from  hurricane
Wilma.  The  vessel  returned  to the area on  November  1st but  because of the
lingering  effects of the  hurricane  and high seas,  the vessel  operated  only
intermittently  for approximately two weeks. The vessel has missed several other
cruises because of the

                                       28

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

minimum  staffing  requirements  required  by the Coast  Guard  were not met and
because of mechanical problems.  As of November 15th, the Big Easy has completed
only eight  cruises.  Beginning  November  19th, we plan to bring the vessel 'on
line' in a steady and  measured  progression,  with one  evening  cruise per day
scheduled  during the week and an afternoon and an evening  cruise  scheduled on
Saturdays and Sundays.

     (B) Hurricane Wilma

     On October 24, 2005  hurricane  Wilma passed over Florida and  particularly
affected the East Coast and the Palm Beach area. We suffered materially from the
direct effects of the hurricane  that left the area without power,  resulting in
curfews  and  limited  food,  water and life  resources.  This storm  caused the
evacuation of the  population in our area, and further  affected  tourism in the
area, severely reducing our pool of potential  passengers,  both local residents
and tourists. Fifteen (15) of our daily cruises during October and thru November
13th for the Palm Beach  Princess were cancelled  during the period  immediately
after the hurricane.

     (C) Palm Beach Princess - Dry Dock

     On October 17, 2005,  the Palm Beach  Princess was placed in dry dock for a
period of one week.  The Palm Beach  Princess  lost  fourteen (14) daily cruises
that would have been normally  scheduled during that period. The combined effect
of the cruises  lost due to the dry dock and the cruises  lost due to  hurricane
Wilma have  negatively  impacted  our  revenues  for the Palm Beach  Princess by
approximately $1,275,000 or 36% during the period of October thru November 13th.

                                       29

<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, 2005,  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  timing  of the  installation  of slot  machines  in  Broward
               County's three race tracks and one jai-alai  facility as a result
               of a  referendum  approved  on March 8, 2005.  Broward  County is
               contiguous to Palm Beach County where we conduct operations;
          o    fluctuations  in  quarterly  operating  results  as a  result  of
               seasonal and weather considerations; and
          o    events  directly or indirectly  relating to our business  causing
               our stock price to be volatile.

Background

     The  Company,  through its wholly  owned  subsidiary,  operates an offshore
gaming vessel,  the M/V Palm Beach Princess which we charter.  This vessel sails
twice daily from the Port of Palm Beach,  Florida  and,  once beyond the state's
territorial water 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
bareboat  charter for a second vessel,  the "Big Easy". We have  refurbished and
retrofitted  that  vessel  and it is our plan to place  the Big Easy in  regular
passenger  service  on  November  16,  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
lease and sub-bareboat  charter and equipment lease  transaction for the purpose
of operating  and  acquiring  the vessels Palm Beach  Princess and the Big Easy.
During the year the Palm Beach  Princess  charter was accounted for as a capital
lease. In April 2005 the  improvements  made to the Big Easy were  substantially
completed and we spent  approximately  six months  obtaining  certification  for
passenger  operations from the U.S. Coast Guard.  During the last quarter of the
2005 fiscal  year,  the Big Easy sub charter  was  recorded as a capital  lease.
Through these transactions,  payments were made on our behalf to pay in full all
indebtedness to the Brennan Trustee.  (This  transaction is more fully described
in  footnote  3 of the  financial  statements).  We  are  expanding  our  gaming
operations and it is our plan to place the Big Easy in regular passenger service
scheduled  for  November  19,  2005.  Also we continue to explore  other  gaming
opportunities,  both  domestically and  internationally.  During our 2004 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 Fiscal 2005, we re-entered the equine business.  We currently own 55
horses, a share of 15 horses,  and are leasing 2 other horses,  all of different
ages. Several are currently racing and a few are held as

                                       30

<PAGE>

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
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.  We are stabling and training the majority of these horses in New
Jersey and in Brazil.

Liquidity and Capital Resources

     During the quarter ended  September 30, 2005,  the Company's cash flow from
the Palm Beach  Princess  operations  was not  sufficient  to meet the financial
requirements of our consolidated  companies.  During our first quarter, the Palm
Beach  Princess  operations  generated  approximately  $850,000  of cash  before
depreciation  which was materially  insufficient  for our needs,  thus we had to
rely on other sources of working capital to meet our cash requirements.

     On July 13, 2005 we began accepting  subscriptions in a private offering of
shares of the Company's Series B Convertible Preferred Stock. We are offering up
to 500,000 shares of our Series B Preferred  Stock,  at a subscription  price of
$15.00 per share  ($6.75  million  net if all  500,000  shares are sold).  As of
September  30, 2005 we have accepted  subscriptions  for the purchase of 197,300
shares of Series B Preferred  Stock and received  $2.66 million in net proceeds.
No  assurances  can be given that we will be  successful  in selling all 500,000
shares of the Series B Preferred  Stock.  The  proceeds  from this  offering are
expected to be used for working  capital at the parent and subsidiary  level. As
of November  17,  2005,  we have  received  total net  proceeds in the amount of
approximately $4 million from the sale of the Series B Preferred Stock.

     During the quarter,  we continued  extending terms of our payables and as a
result,  our accounts  payable and accrued  expenses  increased by approximately
$560,000.  We continued deferring payments of charter hire fees of approximately
$170,000  per  month  and  continue  to defer the  salary  of our  Chairman.  On
September 19, 2005,  Francis X. Murray,  Vice  President of our ITG Vegas,  Inc.
subsidiary, advanced $300,000 to our Parent Company.

     The Loan and  Security  Agreement  signed with PDS on June 30, 2005 permits
the Company to defer the principal portion of its scheduled payments of up to $3
million,  providing  the  Company  meets  certain  conditions.  The  Company has
deferred  principal  payments of  approximately  $450,000 from September 1, 2005
through November 1, 2005.

     Our cash flows  continue to be negatively  impacted by the delay in putting
the vessel "Big Easy" in operation,  caused by delays in obtaining certification
for passenger operations pursuant to the United States Coast Guard's Alternative
Compliance Program.  Although the Alternative  Compliance Program  certification
procedure  is  less  complex  and  time   consuming  than  regular  Coast  Guard
certification,  it is nevertheless a rigorous process involving the jurisdiction
of at least four separate  departments  of the United States Coast Guard and the
ship's  classification  society,  Lloyd's  Register.  The delays  and  increased
interest  expense on our  borrowings  for the vessel  have and will  continue to
adversely affect our cash flows. During the quarter ended September 30, 2005, we
spent  approximately  $2,333,000 for the Big Easy development and carrying costs
and $465,000 in interest  expense on the $12.2 million of PDS debt  attributable
to the  Big  Easy.  Additional  amounts  subsequent  to  September  30,  2005 of
approximately  $930,000  per month  for  development  and  interest  costs  were
necessary  to carry the  vessel  until it begins  regular  passenger  operations
scheduled for November 19, 2005.  The Company's  ability to generate  sufficient
working capital with which to pay such costs was adversely affected by continued
delays in  connection  with Coast  Guard  approval.  The costs  associated  with
refurbishing and  retrofitting the Big Easy for placing it in service  increased
substantially  due to upgrades to the vessel,  expansion of our Mardi Gras theme
build out, and improvements  required by the Coast Guard,  further depleting our
working capital from our original estimate. More than 150 crew members and other
employees have been hired and trained to operate the Big Easy, and employees who
normally  work  exclusively  for the  Palm  Beach  Princess  are  spending  time
completing  assignments  for  the  Big  Easy,  putting  a  severe  drain  on our
operational efforts and our cash flow. As indicated by the table below, our debt
service requirements have increased

                                       31

<PAGE>

significantly with the PDS financing due to the increase in amounts of debt. The
increase  in  the  amount  is   attributable   in  large  part  to  procurement,
refurbishment,  our  operational  efforts and delays in bringing the Big Easy in
service.  We are  dependent  upon  the  expected  additional  revenue  from  the
operations of the second vessel to cover the increased financing costs.

     During our 2004 fiscal  year,  the Company  purchased a third  vessel,  the
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.  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.  During the quarter ended  September 30, 2005, the carrying
costs for the Royal Star were $350,569 and the interest  expense for the funding
received from PDS for the Royal Star was $61,686.

     The principal  amount of our  indebtedness  increased over fiscal year 2005
from  approximately $27 million to approximately  $29.3 million on June 30, 2005
with interest accruing at approximately  15.3%. We may not be able to borrow any
additional  funds that may be needed,  as our loan  agreement with PDS restricts
our ability to do so.

     Under  the loan  agreement  signed  on June 30,  2005  with  PDS,  upstream
payments  by our  operating  subsidiaries  to the parent  company are limited to
$150,000 per month plus amounts of ITG Vegas's income tax savings  attributed to
inclusion  in the Parent  Company tax return.  These  payments  can only be made
provided  no  event  of  default  has  occurred  including  compliance  with the
requirement that the Borrowers  maintain an EBITDA for the vessels of $7,500,000
for the nine months ending October 2, 2005,  increasing to  $10,500,000  for the
twelve months ending January 1, 2006 with continual increases in EBITDA required
increasing  to  $12,000,000  for the twelve  months  ending  October 1, 2006 and
thereafter.

     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  Princess  operation.  Certain  of ITGV's  operating  costs,
including  leasing and charter fees, fuel costs and wages,  are fixed and cannot
be reduced when passenger counts decrease.

     Our working  capital as of September 30, 2005 was a negative  ($16,051,879)
as compared to a negative amount of ($13,083,678) at June 30, 2005. The decrease
in working capital of $2,968,201 during the quarter was primarily due to the net
effect of cash used to fund our operating losses caused in part by the expensing
of  the  carrying  costs  for  the  vessels  of   approximately   $2.7  million,
reclassifying   approximately  $1.1  million  of  PDS  debt  from  long-term  to
short-term,  principal payments made on the PDS loans of approximately $440,000,
and disbursements of approximately  $270,000 for capital  improvements offset by
proceeds from the Series B  Convertible  Preferred  Stock sale of  approximately
$2.66  million and  receipt of $1.3  million on July 18, 2005 from June 30, 2005
PDS financing.

     Our cash  flow and  negative  working  capital  circumstances  worsened  in
October and November 2005 due to: 1) the  continued  delay until October 11th in
obtaining  Coast  Guard  approval to operate  the Big Easy  vessel;  2) start up
issues  concerning  the  operation  of the Big Easy  after  the  approvals  were
obtained;  3) the scheduled dry dock of the Palm Beach Princess  during which we
lost 14 of our normally  scheduled  cruises;  4) the effects of hurricane Wilma,
and as a consequence  of which we lost 15 cruises of the Palm Beach Princess and
caused  continued  delays in the start up of the Big Easy  vessel.  The combined
effect  of the  cruises  lost due to the dry dock  and the  cruises  lost due to
hurricane  Wilma  have  negatively  impacted  our  revenues  for the Palm  Beach
Princess  operation  by  approximately  $1,275,000  or 36%  during the period of
October through November 13th.

                                       32

<PAGE>

     The following table summarizes commitments on non-cancelable  contracts and
leases as of September 30, 2005.

<TABLE>
                                                         Twelve Month Period Ended September 30,
                                          -----------------------------------------------------------------    There-
                                              2006         2007           2008         2009         2010        after       Total
                                          ------------  -----------   -----------   -----------   ---------   --------   -----------
<CAPTION>
<S>                                      <C>           <C>           <C>           <C>           <C>         <C>        <C>
Capital Leases:

    P.B. Princess - Principal & Interest $   4,525,373 $  4,701,153  $  4,701,154  $  3,917,628  $  391,763  $       -  $ 18,237,071

       Bare Boat Charter - Related Party       960,000      960,000       960,000       800,000           -          -     3,680,000

    Big Easy - Principal & Interest          4,132,813    4,286,485     4,278,187     3,557,862     355,385          -    16,610,732

       Bare Boat Charter - Related Party     1,560,000    1,560,000     1,560,000     1,300,000           -          -     5,980,000

Notes and Mortgages:
   Principal & Interest                      2,386,412    1,313,893     1,137,137       456,825           -          -     5,294,267

    Interest Only                              166,603            -             -             -           -          -       166,603

Deferred Interest Payments                     600,000      600,000       600,000       350,000           -          -     2,150,000

Employee Contracts - Related Party             146,314            -             -             -           -          -       146,314

Operating Leases:

    Casino Equipment                         3,142,168    2,765,830     1,867,875             -           -          -     7,775,873

    Administrative & Office                    625,118      169,140        80,699         2,028       2,028        338       879,351

Purchase Obligations - Big Easy              2,092,176            -             -             -           -          -     2,092,176

Purchase Obligations                           594,755      151,006        61,006        61,006      61,006    193,184     1,121,963
                                          ------------  -----------   -----------   -----------   ---------   --------   -----------
Total                                    $  20,931,732 $ 16,507,507  $ 15,246,058  $ 10,445,349  $  810,182  $ 193,522  $ 64,134,350
                                          ============  ===========   ===========   ===========   =========   ========   ===========
</TABLE>

     Outlook:

     Based on our historical  level of operations of the Palm Beach Princess and
additional  revenues  anticipated  from the  operation of the Big Easy which was
placed in regular  passenger  service in mid November 2005, we believe that cash
generated from operations will be adequate to meet our anticipated  loan payment
requirements and working capital needs for our fiscal year ending June 30, 2006.
If the Big Easy does not meet our anticipated revenue projections,  it is likely
that we will need additional funds during our second fiscal quarter, and we have
no present plans or commitments  to obtain such  necessary  funds except for the
Series B Preferred Stock subscription sales. The failure to obtain such funds on
a timely  basis may require us to curtail  operations,  sell assets (such as the
Royal  Star) or cease  operations,  and may lead to default in our debt  service
payments, which could lead to foreclosures on the vessels.

     No assurances can be given 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, weather and other factors, many of which are beyond
our control.

     On July 7, 2004 we entered  into a loan  transaction  with PDS and  entered
into long-term sub charters in connection  with capital lease  transactions  for
two  vessels  and  equipment.  As a result  of these  transactions  and  further
borrowing  in  Fiscal  2005  from  PDS,  the  debt   outstanding  has  increased
significantly  to $29.3 million at June 30, 2005 and payments made to PDS are at
a rate of interest of over 15%. Additionally,  we 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.  The  maturity  of all the  PDS  indebtedness  will  be July 1,  2009.
Beginning in July 2004 our payments to PDS were interest only for the

                                       33

<PAGE>

first six to twelve months on the various leases and loans.  Effective August 1,
2005 we must  make  interest  and  principal  payments  to PDS in the  amount of
approximately  $1.1 million per month.  Therefore our annual  combined,  charter
hire fees and loan  payments  and lease  payments  to PDS for vessel  leases and
gaming equipment,  will be significantly higher than those payments were for the
year ended June 30, 2005.

     Effective July 7, 2004 we began leasing a second  vessel,  the Big Easy. We
completed the  refurbishing  and retrofitting of this vessel for use as an ocean
going casino cruise ship and placed it in regular  passenger service on November
12,  2005.  We  continued  to incur  substantial  costs for the  vessel  and its
personnel while we were waiting for Coast Guard  certifications and permits.  We
anticipate  operating  the vessel from the same port as the Palm Beach  Princess
and it is possible that competition from each vessel will have an adverse effect
on the operations of the other vessel.

     We also continue to incur costs on the vessel,  Royal Star of approximately
$133,000  per month.  If we decide to place the Royal Star in  service,  we 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 Fiscal 2005, we re-entered the equine business.
We currently  own 55 horses,  own a share in 15 horses,  and are leasing 2 other
horses,  all of different ages. Several 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
significant  revenue  during the quarter.  We have  purchased  livestock,  which
includes  stud fees  which  total  $328,000  as of  September  30,  2005 and our
training and operational  expenses are  approximately  $75,000 per month.  These
costs could increase  substantially in the near future if additional  horses are
purchased.

     Results of  Operations  for the Three Months Ended  September  30, 2005 and
2004

     Consolidated

     Revenue for the three  months  ended  September  30,  2005,  (fiscal  2006)
increased $1,012,745 from $6,378,322 in Fiscal 2005 to $7,391,067 in Fiscal 2006
primarily  as a result of  increase  in  revenues  generated  by the Palm  Beach
Princess operations during the comparable periods.  Operating expenses increased
$3,115,886  from  $7,108,649  in the  three  month  period  in  Fiscal  2005  to
$10,224,535 in Fiscal 2006 primarily the result of : 1) recording start up costs
for the Big Easy of $2,332,773 compared to last year when no start up costs were
recorded;  and  carrying  costs on the Royal Star of  $350,569;  2)  expenses of
$241,504  incurred  as a result of our entry  into the  equine  business;  3) an
increase  in  depreciation   and   amortization  of  $258,319  as  a  result  of
depreciation  being  recorded on the Palm Beach  Princess as a result of capital
leasing arrangements effective in July, 2004 and amortization of finance fees as
a result of the PDS  transactions;  4) an  increase  in the Palm Beach  Princess
operating  expenses,  before depreciation and interest expense of $37,369 due to
an increase in revenues and the increased  number of cruises as compared to last
year;  and 5) an  increase in the  general  and  administrative  expenses of the
Parent Company of $146,147 due in part to expensing the 400,000  options granted
at various  prices to our  financial  advisor  in the  amount of  $86,590  which
contract  was  effective  on  July  1,  2005,  offset  by a  decrease  in  other
development costs of $250,795 as compared to last year when the Company had more
funds to actively search,  both domestically and  internationally for additional
gaming opportunities.

     The  operating  (loss)  for  the  quarter  ended  September  30,  2005  was
($2,833,468)  as  compared  to  an  operating   (loss)  of  ($730,327)  for  the
comparative  quarter,  an increase in loss of $2,103,141  for the reasons stated
above.

     Other net expenses  decreased by $7,372 due to the  additional  interest of
$205,179  paid to PDS on the  additional  borrowings we received from PDS during
the last fiscal year. We began the quarter with note and

                                       34

<PAGE>

capital lease  borrowings  from PDS in the  approximate  amount of  $29,314,000,
compared  to the  first  quarter  of  last  fiscal  year  when  the  outstanding
borrowings  from PDS were $27  million.  The  increase in  interest  expense was
offset by the  decrease of $200,000 on a note  impairment  which was  recognized
last year as compared to this year when there was no impairment expense. The net
(loss) before  extraordinary  item for the quarter ended  September 30, 2005 was
($4,035,539)  as compared  to a (loss) of  ($1,977,360)  during the  comparative
quarter.

     The Net (loss) for the quarter ended September 30, 2005 was ($4,122,130) or
a (loss) of ($.39) per diluted  share as compared  to income of  $1,582,640,  or
($15) per diluted  share for the quarter ended  September  30, 2004.  During the
first quarter of the 2005 Fiscal year the Company recorded extraordinary income,
net of tax, of $3,560,00 as compared to this year when no  extraordinary  income
was recorded..

     For the quarter ended September 30, 2005 earnings before  interest,  taxes,
depreciation and  amortization  and our unusual items of  extraordinary  income,
impairment  losses and vessel start up costs  (Adjusted  EBITDA) was $156,502 as
compared to a (loss) of ($331,207) for the quarter ended September 30, 2004. The
increase in Adjusted  EBITDA of $487,709 was  primarily due to EBITDA levels for
the Palm Beach Princess increasing from approximately $970,000 in Fiscal 2005 to
approximately  $1.6 million in Fiscal 2006. In the quarter  ended  September 30,
2004,  adjusted  EBITDA  levels  were  negatively  affected  by  the  hurricanes
experienced during that quarter.

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
management 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)

                                       Three Months Ended Septmeber 30,
                                       -------------------------------
                                             2005             2004
                                        --------------    -----------
Total Adjusted EBITDA                 $       156,502  $    (331,207)
     Depreciation & Amortization             (657,198)      (398,879)

     Interest & Financing Expenses         (1,368,217)    (1,167,591)

     Interest and Other Income                 86,556         78,317

     Income Tax (Expense) Benefit              (7,000)        42,000
                                        --------------    -----------
Net Income (Loss) before Unusual Items     (1,789,357)    (1,777,360)

     Extraordinary Item                             -      3,560,000

     Start Up Costs for Big Easy           (2,332,773)             -

     Impairment Loss                                -       (200,000)
                                        --------------    -----------
Net Income (Loss)                     $    (4,122,130) $   1,582,640
                                        ==============    ===========

                                       35
<PAGE>

     Vessel Operations for the Three Months Ended September 30, 2005 and 2004

     During the three months ended  September 30, 2005,  net  operating  revenue
from vessel  operations  was  $7,327,204 as compared to $6,281,500 for the three
months ended  September 30, 2004.  The increase in revenue of $1,045,704  during
the comparable  quarters was due to an increase in passenger counts of 5,434 for
the quarter or an increase of 274 passengers per cruise,  and a slight  increase
in the number of cruises.  During the current  quarter our revenue per passenger
also  increased  from $112.22 per  passenger in Fiscal 2005 to $119.31 in Fiscal
2006.  The  revenue  per  passenger  of  $119.31  is within a range we  normally
achieve.  We believe the revenue per passenger  was  depressed  during the first
quarter of Fiscal 2005 because of the uncertainties  caused by the hurricanes of
September,  2004. During the current quarter gaming revenues increased $903,088,
or 17%, from $5,329,507 in the first quarter of Fiscal 2005 to $6,232,595 in the
first quarter of Fiscal 2006.  Net fare and on board income  increased  $86,415.
Casino operating  expenses which also includes food,  beverage and entertainment
increased  $27,941 from  $2,114,088,  or 40% of casino revenue in Fiscal 2005 to
$2,142,029,  or 34% of casino  revenue in Fiscal  2006  primarily  the result of
dividing  costs,  many of  which  are  fixed  by their  nature,  over  increased
revenues.

     Fare expenses,  which included sales,  marketing and  advertising  expenses
increased $15,403 from $875,189 to $890,592.

     General and  administration  expenses  decreased  $355,518 from  $1,002,647
during  the  quarter  ended   September  30,  2004  to  $647,129  for  the  2005
corresponding  quarter.  During the  current  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 $365,000
of salaries were allocated to the Big Easy and expensed as developmental  costs.
This  allocation  should be taken into  consideration  when comparing  operating
results from year to year for the Palm Beach Princess.

     Interest and finance  expenses  increased  $88,785 from $637,178 during the
quarter ended September 30, 2004 to $725,963 for the current quarter as a result
of the interest  paid on the capital lease and the charter hire payments for the
Palm Beach Princess on July 7, 2004 and June 30, 2005.

     Depreciation and amortization  increased  $148,826 from $394,280 during the
quarter ended September  30,2004 to $543,106 for the current quarter as a result
of the capital  lease  arrangement  for the Palm Beach  Princess the Company has
recorded  depreciation  on the vessel for the full quarter,  as compared to last
year  when the  Company  recorded  depreciation  on the  vessel  for part of the
quarter.

     Income before income tax expense in Fiscal 2006 was $313,128 as compared to
(loss) before income tax of ($420,776) for the first quarter of Fiscal 2005.

     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 first quarter
of Fiscal 2005 the ship  completed 156 cruises and 25 cruises were missed due to
hurricanes  and inclement  weather.  During the first quarter of Fiscal 2006 the
ship completed 159 cruises and 18 cruises were missed due to inclement weather.

                                       36

<PAGE>

The following is a comparative  summary of income and expenses of the Palm Beach
Princess  operation  for the three months  ended  October 2, 2005 and October 1,
2004:

<TABLE>
                                                         Three Months Ended
                                                       October 2,     October 1,
             Description                                 2005            2004           Change
-------------------------------------------------     -----------     -----------     -----------
<CAPTION>
<S>                                                <C>              <C>             <C>
Passenger Count                                            61,411          55,977           5,434
Number of Cruises                                             159             156               3
Average Number of Passengers per Cruise                     3,862           3,588             274
Net Revenue per Passenger                                 $119.31         $112.22           $7.09

Revenue:

    Gaming                                         $    6,232,595   $   5,329,507   $     903,088
    Fare                                                1,623,217       1,479,831         143,386
    On Board                                              916,574         867,483          49,091
    Less: Promotional Allowances
    Fare                                                 (996,137)       (939,166)        (56,971)
    On Board                                             (449,045)       (456,155)          7,110
                                                      ------------    ------------    ------------
    Net Operating Revenue                               7,327,204       6,281,500       1,045,704
                                                      ------------    ------------    ------------
Expenses:
    Gaming                                              2,142,029       2,114,088          27,941
    Fare                                                  890,592         875,189          15,403
    On Board                                              218,295         211,113           7,182
    Maritime and Legal Expenses                         1,846,962       1,467,781         379,181
    Administrative                                        647,129       1,002,647        (355,518)
    Finance Expenses - Net                                725,963         637,178          88,785
    Depreciation and Amortization                         543,106         394,280         148,826
                                                      ------------    ------------    ------------
    Total Expenses                                      7,014,076       6,702,276         311,800
                                                      ------------    ------------    ------------
          Income (Loss) Before Income Tax Expense  $      313,128   $    (420,776)  $     733,904
                                                      ============    ============    ============
</TABLE>

     Horse Operations

     We  currently  own 55 horses,  own a share in 15 horses,  and are leasing 2
other horses, all of different ages. Several 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
significant revenue during the fiscal year. We have purchased  livestock,  which
includes  stud fees,  which  total  $328,000  as of  September  30, 2005 and our
training and operational  expenses are  approximately  $75,000 per month.  These
costs could increase  substantially in the near future if additional  horses are
purchased.

Inflation

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

                                       37

<PAGE>

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.

ITEM 4. 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.

     As of the  end of the  period  covered  by 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 September 30, 2005 in the Company's  internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.

                                       38

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES


                                     Part II

                                OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     As of  September  30,  2005,  we have sold  197,300  shares of our Series B
Convertible  Preferred  Stock in a private  offering  believed to be exempt from
registration  under Section 4(2) and Rule 506 under the  Securities Act of 1933.
Among other things,  all purchasers of the shares are  accredited  investors and
all  conditions  under  SEC Rules  501,  502 and 506 are  believed  to have been
satisfied.  Reference  is made to (a) our Current  Report on Form 8-K filed July
15,  2005,  and  (b)  note 2 to  our  financial  statements  herein,  which  are
incorporated herein by reference.

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.

                                       39

<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.




November 21, 2005     /s/Francis W. Murray
                      --------------------
                      Francis W. Murray, President, Chief Executive Officer and
                      Chief Financial Officer

                                       40

<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: November 21, 2005

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

                                       41

<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: November 21, 2005

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

                                       42

<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 months
ended September 30, 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
November 21, 2005

                                       43

<PAGE>