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                  June 30, 2006
                               -------------------------------------------------
                                                     OR

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

For the transition period from                       to
                              -----------------------  -------------------------


Commission file number                            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 August 19, 2006
-----------------------------             ------------------------------
Common Stock, $2.00 par value                    11,367,487 Shares


<PAGE>




                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.

                                    FORM 10-Q

                                QUARTERLY REPORT
                     for the Six Months ended June 30, 2006
                                   (Unaudited)


                                TABLE OF CONTENTS

                                                                       PAGE
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements:

         Consolidated Balance Sheets
                  as of June 30, 2006 and December 31, 2005.............1-2

         Consolidated Statements of Operations
                  for the Three and Six Months ended
                  June 30, 2006 and 2005................................3

         Consolidated Statement of Stockholders' Equity
                  for the Six Months ended June 30, 2006................4

         Consolidated Statements of Cash Flows
                  for the Six Months ended
                  June 30, 2006 and 2005................................5

Notes to Consolidated Financial Statements..............................6-28

         Item 2. Management's Discussion and Analysis of
                    Financial Condition and Results of Operations.......29-45

         Item 3. Quantitative and Qualitative Disclosures
                 About Market Risk......................................46

         Item 4.  Controls and Procedures...............................46

PART II. OTHER INFORMATION

         Item 1A. Risk Factors .........................................47

         Item 2. Unregistered Sales of Equity Securities and
                 Use of Proceeds........................................47

         Item 3. Defaults Upon Senior Securities........................47

         Item 6. Exhibits ..............................................47

SIGNATURES        ......................................................48

CERTIFICATIONS..........................................................49

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    AS OF JUNE 30, 2006 AND DECEMBER 31, 2005

                                     ASSETS

                                                  June 30,
                                                    2006         December 31,
                                                 (UNAUDITED)         2005
                                                -------------    -------------
 CURRENT ASSETS:
        Cash and Cash Equivalents               $  1,095,285     $  1,846,239
        Accounts Receivable                          249,490          218,087
        Prepaid Expenses                           2,054,116        1,697,034
        Other Current Assets                         187,719          524,200
        Assets of Discontinued Operations              1,597          401,672
                                                -------------    -------------
             TOTAL CURRENT ASSETS                  3,588,207        4,687,232
                                                -------------    -------------


 VESSELS & EQUIPMENT
        Vessel - Palm Beach Princess -
         under Capital Lease                      17,500,000       17,500,000
        Equipment                                  3,878,904        3,334,079
        Leasehold Improvements                       918,999          988,625
        Vessel - Big Easy - under Capital
         Lease - Not in Service                   20,305,348       20,305,348
        Vessel Not Placed in Service -
          Royal Star                               3,054,735        3,007,216
                                                -------------    -------------
                                                  45,657,986       45,135,268
        LESS: Accumulated Depreciation
         and Amortization                          5,534,137        4,024,434
                                                -------------    -------------
             TOTAL VESSELS & EQUIPMENT - NET      40,123,849       41,110,834
                                                -------------    -------------


 OTHER ASSETS:
        Notes Receivable                          14,278,651       14,278,651
        Vessel Deposits - Related Parties          9,733,027        9,726,377
        Deposits and Other Assets -
         Related Parties                           4,587,077        4,541,125
        Deposits and Other Assets -
         Non-Related Parties                       1,359,350        1,734,756
        Spare Parts Inventory                      1,008,026        1,032,603
                                                -------------    -------------
             TOTAL OTHER ASSETS                   30,966,131       31,313,512
                                                -------------    -------------


 TOTAL ASSETS                                   $ 74,678,187     $ 77,111,578
                                                =============    =============


 See Notes to Consolidated Financial Statements.


                                        1
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    AS OF JUNE 30, 2006 AND DECEMBER 31, 2005

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                    June 30,
                                                      2006         December 31,
                                                   (UNAUDITED)         2005
                                                  -------------    -------------
 CURRENT LIABILITIES:
        Accounts Payable                          $  6,151,322     $  7,310,569
        Accrued Expenses                             4,604,753        4,519,508
        Accrued Expenses Bareboat Charter -
         Related Party                               1,235,995          129,425
        Short-Term Debt                              4,488,615        4,133,997
        Vessel Equipment Lease Payable - PDS         1,254,766                -
        Vessel Capital Lease Payable -
         Current Portion                            30,112,846       26,255,439
        Deferred Interest - Short-Term                 523,161          510,423
        Short-Term Debt - Related Parties              382,864          531,353
        Liabilities of Discontinued Operations         410,600          405,802
                                                  -------------    -------------
             TOTAL CURRENT LIABILITIES              49,164,922       43,796,516
                                                  -------------    -------------

 LONG-TERM LIABILITIES:
        Vessel Capital Lease Payable - Long Term
         Portion - Related Party                     3,500,000        3,500,000
        Long-Term Debt - Net of Current Portion         51,007           93,108
        Deferred Interest - Long-Term                  978,033        1,239,609
        Long-Term Advances From Related Parties        543,407          653,571
                                                  -------------    -------------
             TOTAL LONG-TERM LIABILITIES             5,072,447        5,486,288
                                                  -------------    -------------

 DEFERRED INCOME                                     1,523,557        1,559,388

 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,
           500,000 Issued and Outstanding            5,000,000        5,000,000
        Common Stock, $2 Par Value, Authorized
          25,000,000 Shares, 12,282,564,
          Issued and Outstanding                    24,565,125       24,565,125
        Capital in Excess of Par                    23,535,680       22,462,582
        (Deficit) (subsequent to June 30, 1993,
           date of quasi-reorganization)           (70,010,381)     (61,585,158)
                                                  -------------    -------------
                                                    19,374,799       26,726,924
        LESS:
           Treasury Stock, 915,077 Shares             (457,538)        (457,538)

                                                  -------------    -------------
             TOTAL STOCKHOLDERS' EQUITY             18,917,261       26,269,386
                                                  -------------    -------------


 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $ 74,678,187     $ 77,111,578
                                                  =============    =============


 See Notes to Consolidated Financial Statements.


                                        2
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                   (Unaudited)


<TABLE>
                                                           Three Months Ended                Six Months Ended
                                                                 June 30,                        June 30,
                                                       ----------------------------    -----------------------------
                                                           2006            2005             2006            2005
                                                       ------------    ------------    -------------   -------------
<CAPTION>
<S>                                                    <C>             <C>             <C>             <C>
 OPERATING REVENUES:
        Gaming                                         $ 7,283,863     $ 7,213,088     $ 15,137,188    $ 15,702,668
        Fare                                               651,513         754,524        1,612,529       1,830,848
        On Board                                           435,108         513,814          863,141       1,113,278
        Other                                               57,472         117,520          208,695         233,138
                                                       ------------    ------------    -------------   -------------
                    NET OPERATING REVENUES               8,427,956       8,598,946       17,821,553      18,879,932
                                                       ------------    ------------    -------------   -------------

 OPERATING COSTS AND EXPENSES:
        Gaming                                           2,765,623       2,291,658        5,973,541       4,884,559
        Fare                                               676,040       1,117,214        1,471,012       2,364,511
        On Board                                           213,234         248,762          455,684         535,594
        Maritime & Legal Expenses                        2,300,639       1,715,709        5,060,998       3,528,794
        General & Administrative Expenses                1,100,795       1,216,442        1,956,407       1,523,400
        General & Administrative Expenses - Parent         686,279         547,305        1,274,071         967,501
        Ship Development Costs - Big Easy                        -       3,273,382                -       4,382,692
        Ship Development Costs - Royal Star                512,944         165,503          898,900         177,839
        Development Costs - Other                          210,980         109,682          304,127         235,178
        Equine Costs                                             -         212,155                -         447,989
        Depreciation & Amortization                        625,061         472,911        1,680,479       1,029,406
        Loss on Impairment of Assets                             -          50,000          400,000         150,000
                                                       ------------    ------------    -------------   -------------
                    TOTAL OPERATING COSTS AND EXPENSES   9,091,595      11,420,723       19,475,219      20,227,463
                                                       ------------    ------------    -------------   -------------

 OPERATING (LOSS)                                         (663,639)     (2,821,777)      (1,653,666)     (1,347,531)
                                                       ------------    ------------    -------------   -------------

 OTHER INCOME (EXPENSE):
        Interest and Financing Expenses                 (2,744,390)       (646,598)      (4,728,830)     (1,130,324)
        Interest and Financing Expenses - Related Party   (565,111)       (302,462)      (1,116,076)       (917,862)
        Cost of Warrants Granted for Financing            (579,798)              -       (1,073,098)              -
        Interest Income                                      2,149           7,750            2,798          13,454
        Interest Income Related Parties                     71,865          73,656          143,650         146,949
                                                       ------------    ------------    -------------   -------------
                    TOTAL OTHER INCOME (EXPENSE)        (3,815,285)       (867,654)      (6,771,556)     (1,887,783)
                                                       ------------    ------------    -------------   -------------

 INCOME (LOSS) BEFORE TAX PROVISION                     (4,478,924)     (3,689,431)      (8,425,222)     (3,235,314)
         Income Tax Expense (Benefit)                            -          90,000                -          90,000
                                                       ------------    ------------    -------------   -------------

 NET (LOSS)                                            $(4,478,924)    $(3,779,431)    $ (8,425,222)   $ (3,325,314)
                                                       ============    ============    =============   =============

 NET BASIC AND DILUTED (LOSS) PER COMMON SHARE         $     (0.39)    $     (0.37)    $      (0.74)   $      (0.32)
                                                       ============    ============    =============   =============

 WEIGHTED AVERAGE COMMON
    SHARES OUTSTANDING - Basic & Diluted                11,367,487      10,303,942       11,367,487      10,303,942
                                                       ============    ============    =============   =============
</TABLE>


 See Notes to Consolidated Financial Statements.


                                        3
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 2006


<TABLE>
                                                          Series A          Series B Convertible
                                                          Preferred              Preferred                   Common
                                                   ----------------------  -----------------------   -------------------------
                                                   Number of               Number of                 Number of
                                                   Shares        Amount    Shares        Amount      Shares           Amount
                                                   -------   ------------  -------   -----------     ----------   ------------
<CAPTION>
<S>                                                <C>       <C>           <C>       <C>             <C>          <C>
BALANCE - DECEMBER 31, 2005                        362,844   $ 36,284,375  500,000   $ 5,000,000     12,282,564   $ 24,565,125

Warants Issued as Compensation                        -            -          -           -              -              -
Net(Loss for the Six Months Ended June 30, 2006       -            -          -           -              -              -

                                                   -------   ------------  -------   -----------     ----------   ------------
BALANCE - JUNE 30, 2006                            362,844   $ 36,284,375  500,000   $ 5,000,000     12,282,564   $ 24,565,125
                                                   =======   ============  =======   ===========     ==========   ============
</TABLE>

<TABLE>
                                                     Capital                      Treasury
                                                     in Excess                    Stock
                                                     of Par         (Deficit)     At Cost             Total
                                                   ------------   -------------   ----------       -------------
<CAPTION>
<S>                                                <C>            <C>             <C>              <C>
BALANCE - DECEMBER 31, 2005                        $ 22,462,582   $ (61,585,158)  $ (457,538)      $  26,269,386

Warants Issued as Compensation                        1,073,098          -            -                1,073,098
Net(Loss for the Six Months Ended June 30, 2006         -            (8,425,233)      -               (8,425,233

                                                   ------------   -------------   ----------       -------------
BALANCE - JUNE 30, 2006                            $ 23,535,680   $ (70,010,391)  $ (457,538)      $  18,917,251
                                                   ============   =============   ==========       =============
</TABLE>


See Notes to Consolidated Financial Statements.

                                        4
<PAGE>
                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

<TABLE>
                                                           Six Months Ended
                                                               June 30,
                                                     --------------------------
                                                          2006         2005
                                                     ------------  ------------
<CAPTION>
<S>                                                  <C>           <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
  (LOSS) BEFORE DISCONTINUED OPERATIONS              $ (8,425,223) $ (3,325,314)
  Adjustments to reconcile income (loss)
    to net cash (used in)  provided by operating
    activities:
      Depreciation and Amortization                     1,680,479     1,029,406
      Expense of Warrants Granted                       1,073,098             -
      Interest Added to Capital Lease Debt - PDS        3,857,405             -
      Impairment of Assets                                400,000       150,000
      (Decrease) in Deferred Income                       (35,831)      (35,594)
      Changes in Operating Assets and Liabilities -
         (Increase) Decrease in Accounts Receivable       (31,403)   (1,282,769)
         (Increase) Decrease in Other Assets              336,481      (239,756)
         (Increase) in Prepaid Expenses                  (321,742)     (256,622)
         Increase in Accounts Payable and
         Accrued Expenses                               1,287,335     3,567,444
                                                     ------------  ------------
  CASH (USED IN) OPERATING ACTIVITIES BEFORE
     DISCONTINUED OPERATIONS                             (179,401)     (393,205)
  CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES        4,800        85,402
                                                     ------------  ------------
  NET CASH (USED IN) OPERATING ACTIVITIES                (174,601)     (307,803)
                                                     ------------  ------------
 CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase and Improvements of Big Easy -
   Related Party                                                -    (7,315,923)
  Purchase and Improvements of Royal Star                       -      (564,229)
  Purchase Options in Big Easy - Related Party                  -    (2,973,575)
  Note Receivable Collected - Related Party                     -     2,600,749
  Advances -  Related Party                                     -    (2,246,355)
  Livestock Expenditures                                        -      (328,247)
  Capital Expenditures                                   (598,358)     (128,675)
  (Increase) Decrease in Other Investment Activity        435,082       226,363
                                                     ------------  ------------
  NET CASH (USED IN) INVESTING ACTIVITIES                (163,276)  (10,729,892)
                                                     ------------  ------------
 CASH FLOWS FROM FINANCING ACTIVITIES:
  Funds Received from PDS Notes & Other Lenders                 -    10,829,417
  Proceeds from Related Party Loans                             -     2,651,558
  Financing Costs                                               -    (1,120,240)
  Principal Payment on Stock Purchase Note                      -    (1,241,669)
  Advances (Paid) Received (to) From Related Parties       63,254       180,107
  Principal Payments on Short Term Notes                 (391,056)     (190,002)
  Principal Payments on Long Term Notes                   (85,686)     (574,387)
  Decrease in Balances Due to/from
   Discontinued Subsidiaries                                4,875        61,802
                                                     ------------  ------------
  CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    BEFORE DISCONTINUED FINANCING ACTIVITIES             (408,613)   10,596,586
  CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES         (4,875)      (85,477)
                                                     ------------  ------------
  NET CASH (USED IN) PROVIDED BY
     FINANCING ACTIVITIES                                (413,488)   10,511,109
                                                     ------------  ------------
 NET (DECREASE) IN CASH AND CASH EQUIVALENTS             (751,365)     (526,586)
      LESS CASH AND CASH EQUIVALENTS  FROM
      DISCONTINUED OPERATIONS                                 411            75
  CASH AND CASH EQUIVALENTS AT BEGINNING
   OF THE PERIOD                                        1,846,239     1,640,895
                                                     ------------  ------------
  CASH AND CASH EQUIVALENTS AT END OF THE PERIOD     $  1,095,285  $  1,114,384
                                                     ============  ============

  Supplemental Disclosures of Cash Flow Information:
    Cash paid during the period for:
    Interest                                         $    114,921  $  4,940,781
    Income Taxes                                     $     78,130  $          -
</TABLE>

         Supplemental Schedule of Non-Cash Investing and Financing Activities:
         During the Six Months ended June 30, 2006, the PDS interest
         expense for the period in the amount of $3,857,405 was added to
         the short term principal balance of the respective leases.

 See Notes to Consolidated Financial Statements.

                                        5


<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1)  BASIS OF PRESENTATION

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming   International    Thoroughbred   Breeders,   Inc.   and   subsidiaries
(collectively, the "Company") will continue as a going concern.

     The Company has recorded  recurring losses from operations of $6.8 million,
$1.9 million,  $12.2 million and $8.4 million during the fiscal years ended June
30, 2004 and 2005,  for the six months ended  December 31, 2005, and for the six
months ended June 30, 2006,  respectively.  These losses and the lack of working
capital have caused us to be unable to comply with certain of our debt covenants
and the Company has been unable to make its required debt service payments since
December,  2005. On March 22 , 2006 we entered into a Forbearance Agreement with
our lender,  PDS Gaming  Corporation  ("PDS")  which waived  prior  defaults and
permitted us to defer making  payment on our debt and certain  equipment  leases
until May 31,  2006.  On July 14,  2006,  we entered  into a First  Amended  and
Restated  Forbearance  Agreement (the "New  Agreement")  which is effective from
June 1, 2006 until August 29, 2006. The New Agreement  defers payment of monthly
principal and interest  payments  under our loan  agreement  and monthly  rental
payments under our equipment  leases which otherwise would become due during the
forbearance periods. We have agreed to retain a financial advisor to analyze and
pursue strategic alternatives. The New Agreement requires us to sell one or more
assets with closing date(s)  targeted to occur no later than August 29, 2006, or
otherwise  refinance,  and pay in full our  obligations to PDS by the end of the
forbearance  period,  August  29,  2006.  Based  upon the  Company's  historical
operating  performance we do not believe we will be able to bring ourselves into
compliance  with either the payment  requirements or the EBITDA  covenants.  The
uncertainty  about the Company's ability to generate adequate cash from the sale
of assets and cash flow from  operations  to service  its debt and meet its debt
covenants  raises  doubt  about the  Company's  ability to  continue  as a going
concern.

     The Company has taken  various  steps  intended to reduce its losses and to
increase  its  liquidity.  As discussed  in Note 13, the Company  suspended  the
operation of the Big Easy.  We will  continue to incur  expenses to maintain the
vessel in wet storage;  however,  those amounts will be substantially  less than
when we were preparing the vessel for service and while operating the vessel.

     The Company is seeking refinancing,  has liquidated its equine holdings and
may be forced to sell other Company assets. We are also exploring  opportunities
to  profitably  deploy the Big Easy or sell this  vessel.  Absent  asset  sales,
refinancing or the profitable deployment of the Big Easy, we will not be able to
make our debt service payments beginning on September 1, 2006. No assurances can
be given  that the  Company  will be  successful  in  these  endeavors  prior to
September 1, 2006 or thereafter.

(2)  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,  bars and  lounges,  swimming  pool and  sundecks.  The  casino  occupies
approximately   15,000  square  feet  aboard  the  ship  and  is  equipped  with
approximately 425 slot machines, 29 table games, including blackjack,  craps and
roulette, 7 poker tables, and a sports wagering book.

     Using the funding provided by the PDS Transactions (see Note 4) and working
capital,  our  subsidiary,  ITG  Palm  Beach,  LLC,  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 began limited regular

                                        6

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

passenger  service  also from the Port of Palm Beach,  Florida on  November  12,
2005. On February 1, 2006 we indefinitely  suspended  operations of the Big Easy
after two and one half months of operations  because the Coast Guard removed the
vessel's  Certificate  of  Inspection  until the  installation  of an insulating
bulkhead was completed. The February 1, 2006 Coast Guard decision was the latest
in a series of unforeseen  business  circumstances  which  limited  management's
ability to introduce the Big Easy to the market and  necessitated the suspension
of Big Easy  commercial  cruise  operations  indefinitely  due to  disappointing
operating results.

     (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;  although,  to a  limited  extent,  we do grant
credit to our customers.  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  activities  and skeet  shooting.  These  revenues  are
recognized on the date they are earned.

     (E)  Accounting  Periods - The  subsidiaries  which  operate the Palm Beach
Princess  and operated the Big Easy until  February  1,2006 end their  quarterly
accounting periods 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.  During the quarter ended June 30, 2006, these accounting periods ended
on July 2, 2006 as compared to July 3, 2005 in the quarter  ended June 30, 2005.
Since our accounting periods consist of a 4-4-5 week quarter,  from time to time
an additional  week is included in the first period to adjust our period ends to
more closely match a calendar year end. For example,  the period ended March 31,
2005  contained 14 weeks  compared to the 13 weeks of the period ended March 31,
2006.

     (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) Deferred  Financing Costs - Deferred  financing costs that are incurred
by the  Company  in  connection  with  the  issuance  of Debt are  deferred  and
amortized to interest expense over the life of the underlying indebtedness using
the straight-line method.

     (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 June 30, 2006 and 2005, the amortized expense was $84,635 and
$43,373,  respectively and $169,270 and $90,082,  respectively for the six month
comparable periods.


                                        7

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     As a result of the PDS  transactions  (see  Footnote  4) 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
our  previous  fiscal year end of June 30, 2005 and began  depreciating  the Big
Easy when it was placed in service on October 18,  2005.  As a result of the Big
Easy being removed from service  during the quarter ended March 31, 2006 and the
unlikelihood  that the vessel  will be  returned  to  service  in the  immediate
future,  we discontinued  depreciating the vessel.  Financing fees in connection
with the PDS financings, are being amortized over the life of the loans. For the
three months ended June 30, 2006 and 2005, the amortized expense associated with
these  finance  costs was $132,573 and  $46,336,  respectively  and $228,479 and
$120,044, respectively for the six month comparable periods.

     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, 2006 and December
31, 2005,  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 July  2002,  the  FASB  issued  SFAS  No.  148,  "Accounting  for  Costs
Associated with Exit or Disposal Activities".  This statement requires companies
to recognize  costs  associated  with exit or disposal  activities when they are
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
Management  recognized the costs incurred  associated with the suspension of the
Big Easy  operations on February 1, 2006 in our quarter ended March 31, 2006 and
future carrying costs will be recognized as incurred.

     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",  and supersedes APB Opinion No. 25,  "Accounting
for Stock Issued to  Employees"  (APB 25). SFAS 123R is now effective for public
companies for the first interim or annual  reporting  period of the registrant's
first fiscal year  beginning on or after June 15, 2005. In  accordance  with the
new rule,  the  Company  will begin to  expense  the cost of  employee  services
received in exchange for an award of equity  instruments based on the grant-date
fair value of the award,  effective July 1, 2005. Until July 1, 2005 the Company
accounted for stock option grants using the intrinsic-value method in accordance
with APB 25. Under the intrinsic-value method, because the exercise price of the
stock  options  granted  was equal to or greater  than the  market  price of the
underlying  stock  on the  date  of  the  grant,  no  compensation  expense  was
recognized.  No options were granted  during the six month period ended June 30,
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
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. The Company has provided
a valuation  reserve  against the full amount of the net operating  loss benefit
because in the  opinion of  management  based  upon the  earning  history of the
Company, it is more likely than not that the benefits will not be realized.


                                        8

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (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/leaseback of equipment of $101,522 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. When applicable, 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,  some 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.  The Company  accounts for
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142,  "Goodwill and Other  Intangible  Assets".  In accordance with SFAS No.
142,  amortization  of  goodwill  is not  required.  Goodwill is tested at least
annually for  impairment by comparing  the fair value of the recorded  assets to
their carrying  amount.  If the carrying amount of the goodwill exceeds its fair
value, an impairment loss is recognized.

(3)  SERIES B PREFERRED STOCK

     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 were received by the Company as part of a private  offering of
500,000  shares of its Series B  Preferred  Stock,  at a  subscription  price of
$15.00 per share. As of December 28, 2005 the Company had accepted subscriptions
for the purchase of 295,033 shares of Series B Preferred  Stock and had received
approximately  $4  million  in net  cash  proceeds.  On  December  29,  2005 our
Chairman,  Francis W. Murray,  purchased all of the remaining Series B Preferred
Stock which had not previously been sold in the private  offering,  amounting to
204,966  shares of Series B  Preferred  Stock,  on the same terms as the private
offering.  We sold the  Series B  Preferred  Stock to Mr.  Murray in  payment of
$3,074,500 of debt which the Company had owed to Mr. Murray. This amount has not
been included in the net cash proceeds amount of $4 million as indicated above.

     Subscribers  also  received  warrants for the purchase of 1.2 shares of the
Company's common stock for each share

                                        9

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

of Series B Preferred  Stock  purchased (an  aggregate of 600,000  shares of the
Company's  common stock based on purchases of all 500,000 shares of the Series B
Preferred Stock). The exercise price under each such warrant is $3.25 per common
share, and the warrants issued to purchasers of the Series B Preferred Stock are
exercisable for a term of three (3) years beginning one year after issuance.

     The Series B Preferred  Stock will  automatically  be converted into common
stock upon the effective  date of a Registration  Statement  covering the common
shares issuable upon conversion which was filed with the Securities and Exchange
Commission on December 30, 2005. 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. The Company will need to file an Amended
Form S-1 in the near future and if the registration  statement becomes effective
during the quarter ended December 31, 2006,  the conversion  price will be $1.90
and the outstanding  Series B Preferred Stock will be convertible into 3,947,368
shares of additional new common shares.

     During the  quarter  our net loss was  increased  by a non-cash  expense of
$163,712 as the result of the  accounting  for the sale of Series B  convertible
preferred stock. This non-cash item, known as a "Beneficial Conversion Feature",
is the result of the  application  of the Emerging  Issues Task  Force's  (EITF)
Issues 98-5 and 00-27. The beneficial  conversion  feature was calculated as the
difference  between  the  effective  conversion  price and the fair value of the
common stock, multiplied by the estimated number of common shares into which the
security is  convertible.  The number of common  shares the  Preferred  Stock is
convertible  into has been  increased  during the  current  quarter,  assuming a
delayed conversion before December 31, 2006, at a price of $1.90 per share. 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
of $15 per share by the  conversion  price then in effect.  If these  shares are
issued  before  December  31, 2006 a total of  3,947,368  shares of Common Stock
would be issued  upon  conversion  of all the Series B  Preferred  Stock,  which
represents an additional  197,368 shares above the original number had the price
been  $2.  The  value  assigned  to the  beneficial  conversion  feature  on the
Preferred  Stock was  credited  to paid in capital  and  charged to  earnings as
interest expense.

     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 has served as a financial  advisor to
the Company, and a second person to be designated by another group of purchasers
of the Series B Preferred Stock.

     The  majority of the net  proceeds of the sale of Series B Preferred  Stock
was used for working  capital of the subsidiary  companies which operate the Big
Easy and the Palm Beach Princess, and a portion of the proceeds was used for the
Parent Company operating expenses.

(4)  PDS TRANSACTIONS

     Since July 2004, 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.  We have been operating under the vessel and
equipment  leases and  financing  arrangements  consummated  on at various times
since July 7, 2004. Below is a summary of those transactions.


                                       10

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (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,
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 has been pledged to us to secure  certain debts
owed to us as described below under "Prior Operations - Sale of Las Vegas Note."

     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.

     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

                                       11

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

("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 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  ("ITGDC") 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, ITGDC, RBE, RSE
and ITGPB (collectively, the "Borrowers"), borrowed

                                       12

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

$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 17% until ITG Vegas'  EBITDA  exceeds $17 million on
an annualized basis, at which time the interest rate will be 15.5%.  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.

     In accounting for the add-on financing, we applied guidance as set forth in
EITF  96-19,  "Debtor's  Accounting  for a  Modification  of  Exchange  of  Debt
Instruments".  We  believe  this  add-on  financing  was a  modification  of the
existing debt rather than an  extinguishment  of the old debt. The present value
of the cash flows  required to fund the new debt has not  increased by more than
10%.  Therefore,  in accordance with EITF 96-19 the new debt has been treated as
an  exchange  or  modification  of the debt.  We did not write off any  deferred
financing costs which were on the books at that time.

     Equipment  leases  taken  during our fiscal  year ended June 30,  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 were 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 were limited to $150,000 per
month plus amounts of ITG Vegas'  income tax savings  attributed to inclusion in
the Parent Company tax return.

     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 our prior fiscal year

                                       13

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

ended June 30,  2005,  ITB agreed to pay a Placement  fee of  $750,000  for such
funding.  The  agreement was verbally  agreed to between the parties  during the
period of our  negotiations  with PDS Gaming,  which  resulted in the additional
loan proceeds  given to the Company in the amount of $2,158,166  and a potential
agreement wherein PDS would loan an additional $3.2 million in the fall of 2005,
which  loan was never  completed.  ITB has made a  deposit  of  $50,000  and the
balance was to 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. Subsequently,  on December 29, 2005 PDS Gaming agreed to
accept the Company's  common stock,  valued at $2 per share,  in full payment of
the placement fee.

     (F) Deferral of Principal Payments on PDS Financing

     The Loan and  Security  Agreement  signed on June 30,  2005  permitted  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  December  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.

     (G) December 2005 Transactions

     In December  2005,  the Company  borrowed from and issued a note payable in
the amount of $535,744 to PDS Gaming in order to cover our required debt service
interest payment on December 10, 2005. See Note 10.

     (H) On October 30, 2005, we breached our loan agreements because we did not
meet the minimum EBITDA covenants and beginning January 10, 2006 through March ,
we were in default of our loan  agreements  for not  making  the  principal  and
interest  payments due under the vessel leases for the three month period.  As a
result,  the interest rate on the loans increased an additional 2.5% or to 19.5%
retroactive  to November 1, 2005.  With the additional  interest rate,  interest
payments due on the leases is approximately $600,000 per month.

     (I) Forbearance Agreement

     On March 22, 2006,  International  Thoroughbred Breeders Inc, together with
certain  of its  subsidiaries  (the  Company)  and  certain  companies  owned or
controlled by Francis W. Murray,  our CEO, (all being the same  companies  which
entered into the Loan and Security  Agreement  with PDS Gaming  Corporation  and
certain  of its  subsidiaries  on June  30,  2005)  entered  into a  Forbearance
Agreement  effective  March 22,  2006  with PDS  Gaming  Corporation.  Under the
Agreement the Lender  agreed not to enforce its rights and remedies  against the
Borrower's  due to their being in default on several loan  covenants and payment
obligations.  The  Agreement  permitted the Company to defer the payments on our
loan and  equipment  lease  payments  until June 1, 2006.  A fee of $165,796 was
charged by the lender for the Forbearance Agreement.  This fee has been added to
the   outstanding   lease   balances  in  addition  to  costs  and  expenses  of
approximately $150,000.

     Under the Agreement, upstream payments to the parent company were permitted
in the approximate amount of $19,000 per week. The lender permitted the upstream
of funds to continue despite our not making a required May 1, 2006 payment.

     We have also agreed to deliver the Second Cherry Hill Note to the lender as
additional  collateral.  This note has a face value of approximately $35 million
but is recorded on our books for $4.3 million.

                                       14

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     During the  forbearance  period the Company was to use its best  efforts to
sell or  refinance  the Big Easy  Vessel and reduce  the loan  balance  with the
proceeds from such a transaction. However, we were unsuccessful in our efforts.

     In accordance with Emerging Issues Task Force (EITF) 86-30, "Classification
of Obligations  When a Violation is Waived by the Creditor," we have  classified
the  long-term  portion of vessel  leases and the Royal Star note payable due to
PDS Gaming as current  liabilities on the balance sheets because the Forbearance
Agreements  signed were only  effective  through the periods ending May 31, 2006
and August 29, 2006, respectively.

     (J) First Amended and Restated Forbearance Agreement

     On July 14, 2006, International  Thoroughbred Breeders, Inc. and certain of
its subsidiaries (collectively, the "Company") and certain other companies owned
or controlled by Francis W. Murray,  our CEO (all being the same companies which
are parties to the Loan and Security  Agreement  dated as of June 30, 2005, with
PDS Gaming  Corporation and being  hereinafter  collectively  called the "Credit
Parties"),  entered into a First Amended and Restated Forbearance Agreement (the
"New  Agreement").  The New Agreement,  which was effective June 1, 2006, amends
and restates the original  Forbearance  Agreement  among the same parties  dated
March 22, 2006, which had expired on May 31, 2006. Under the New Agreement,  PDS
Gaming Corporation ("PDS") agreed, as lender and as lessor,  that, as long as no
additional defaults occur under the New Agreement or under our loan and security
agreements or equipment leases with PDS, it will forbear,  for a period expiring
August 29, 2006, from accelerating payment and enforcing its rights and remedies
against the Credit  Parties due to the specified  payment  defaults and covenant
defaults  presently  existing on our part under our loan documents and equipment
leases.  Notwithstanding  expiration of the original Forbearance Agreement,  PDS
has not accelerated payment of the balance of our indebtedness.

     Also under the New Agreement, PDS deferred payment of monthly principal and
interest payments under our loan agreement and monthly rental payments under our
equipment leases which otherwise would become due during the forbearance  period
ending  August  29,  2006.  In  consideration  of  PDS'  agreements  in the  New
Agreement, we agreed to pay a forbearance fee of $173,687 to PDS at maturity.

     The  Company  also  agreed to pay,  as damages to PDS on account of default
interest  that  it in  turn  is  required  to pay to its  financier,  additional
interest at a rate of 2-1/2% per annum above the  interest  rate  already  being
charged to us on our principal and delinquent  interest  payments under our loan
agreement with PDS. Therefore, the effective rate of interest we are required to
pay on the unpaid principal balance plus delinquent  interest payments which are
being capitalized  totaling $33,238,091 as of June 30, 2006 is approximately 22%
per annum. As of June 30, 2006, the amount of such additional  interest which we
agreed to pay to PDS is $526,565.

     Under  the New  Agreement,  the  Credit  Parties  have  agreed  to retain a
financial  advisor to analyze and pursue strategic  alternatives,  including the
sale of assets,  and to retain a broker in connection  with such asset sales, in
order to reduce  indebtedness.  The New Agreement requires the Credit Parties to
sell one or more assets  with  closing  date(s)  targeted to occur no later than
August 29, 2006, or otherwise refinance,  and pay in full our obligations to PDS
by the end of the forbearance period, August 29, 2006.

     Also pursuant to the New Agreement,  the EBIDTA requirements  applicable to
the Company will be waived for the 12 month  periods  ending July 2, July 30 and
August 27, 2006. All disbursements by our operating subsidiary, ITG Vegas, Inc.,
will require written approval by an assigned Crisis Manager,  and  disbursements
may only be made in  accordance  with an  approved  budget as  submitted  by the
Company and approved by PDS.

     After expiration of the forbearance period on August 29, 2006, we do expect
to be able to make our monthly loan and lease  payments  unless,  as a result of
closing an Alternative Transaction,  our outstanding loan and lease payments are
substantially  reduced. We also do not expect that we will be able to consummate
the sale of any of our vessels, the Original

                                       15

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Cherry  Hill  Note  or our  operating  business  before  the  expiration  of the
forbearance  period on August  29,  2006 and will  seek to  negotiate  a further
amendment to the forbearance  agreement  giving us additional time to consummate
any such  transactions  based on  circumstance  existing on August 29, 2006.  No
assurance  can be given that PDS will be willing to grant any further  extension
of time or otherwise agree to forbear from exercising  rights or remedies it may
have due to our defaults.

(5)  DESCRIPTION OF LEASING ARRANGEMENTS

     As  mentioned  in the  footnote 4 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.  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 4 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 transaction  described in
note 4 also permits the Company to purchase the Big Easy for the appraised value
of the vessel which shall be determined  upon the refitting and  refurbishing of
the vessel. The Company has determined the value of the Big Easy by capitalizing
the total of: 1) the costs it had incurred for  improvements  it had made to the
Big Easy; and 2) all payments required under the PDS Gaming loans.

     The  transaction  described  in  Note  4(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 June 30, 2006 include the following amounts
for capitalized leases:

               Vessel, Palm Beach Princess           $ 17,500,000

               Vessel, Big Easy                        20,305,348
                                                      -----------
               Less: allowance for depreciation       (1,098,577)
                                                      -----------
               Capital Leases                        $ 36,706,771
                                                      ===========

     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 June 30, 2006:

Period ending June 30, 2006

Total minimum lease payments                   $    41,089,334
                                                ---------------
                                               $    41,089,334
Less: amount representing interest                 (10,976,488)
                                                ---------------
Present value of net minimum lease payment     $    30,112,846
                                                ===============



                                       16

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

The following is a schedule of capital lease at June 30, 2006:

                                                  June 30, 2006
                                     ---------------------------------------
Vessel                                Short-Term    Long-Term       Total
-----------------------------------  -----------   -----------   -----------
Palm Beach Princess                 $ 15,736,187  $          -  $ 15,736,187
Big Easy                              14,376,659             -    14,376,659
Royal Star                             3,093,925             -     3,093,925
                                     -----------   -----------   -----------
Amount due to PDS for vessels         33,206,771             -    33,206,771
Less: Royal Star Note shown in
 Notes Payable (See Note 10)          (3,093,925)            -    (3,093,925)
Fair Market Valuation -
 Palm Beach Princess                           -     3,500,000     3,500,000
                                     -----------   -----------   -----------
Total Short and Long Term Vessel
 Leases Payable                     $ 30,112,846  $  3,500,000  $ 33,612,846
                                     ===========   ===========   ===========

(6)  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 financial
statements and financial projections by the developer of the property.  Now that
a portion  of the mixed use  project  is  opened,  we  believe  that the  future
projections  of cash flow  previously  obtained  from the  project,  along  with
historical financial statements provided by the developer and prices obtained on
the  re-sale of  portions  of the  property  give us a basis on which to develop
assumptions  which  continue to indicate a fair value based on  discounted  cash
flows in excess of the carrying value.

     (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,

                                       17

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

a non-recourse loan from Turnberry Development,  LLC, an affiliate of the Buyer,
in the amount of $5 million and a promissory note issued by  Soffer/Cherry  Hill
Partners, L.P. ("Cherry Hill Partners"),  another affiliate of the Buyer, in the
principal amount of $35,842,027  (the "Second Cherry Hill Note").  The principal
amount of the Second  Cherry  Hill Note  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. Due to our
negative  cash  position,  we have not made the $50,000 per month  payment since
January 2005.

     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  $10,000,000  note  to be  fully  paid,  it was  not
optimistic   that  this  Second  Cherry  Hill  Note  will  be  fully  paid,  and
accordingly,  during the fiscal  years  ended June 30, 2004 and 2005 the Company
wrote down the Second Cherry Hill Note on its books to $4,278,651.

     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. 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.

     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.

     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.

     Fair  value  and the  collectability  of the  Second  Cherry  Hill Note was
determined by 1) assessing  the present value of the Big Easy vessel,  since 50%
of the stock in the  company  which owns it (PBE) is pledged as security of this
note; 2) and the present value of a $483,000 payment due us from the sale of the
El Rancho property. When the

                                       18

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

fair value of this note was  originally  computed we assumed 50% of the value of
the Big Easy to be $5,000,000, based upon the estimated value of the Big Easy at
the time.

(7)  DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES

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

                                             June 30, 2006   December 31, 2005
                                             -------------   -----------------
Long-Term Prepaid Loan Costs - Net of
amortization in the amount of ($819,796)
 and ($362,424), respectively                $    989,944   $       1,411,976

Port Lease Rights                                 250,000             250,000

Other Misc. Assets                                154,746              72,780
                                               ----------    ----------------
         Total                               $  1,394,690   $       1,734,756
                                               ==========    ================

(8)  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.  We have not paid the  bareboat  charter  fees on  either  the Palm  Beach
Princess or the Big Easy since  December 2005.  The  outstanding  balance due at
June 30, 2006 is $1,235,995 which is classified as current on our balance sheet.


                                       19

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (B)  Deposits and Other Assets - Related Parties:

                                                         June 30,   December 31,
                                                           2006        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)                 1,623,142     1,577,190

Goodwill on Purchase of GMO Travel                         193,946       193,946
                                                       -----------  ------------
Total Deposits and Other Assets - Related Parties     $  4,587,077 $   4,541,125
                                                       ===========  ============

(9)  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     (A)  The following  table  represents  the aging of accounts  payable as of
          June 30, 2006 and December 31, 2005.

                                                                         Over
                       Total      Current   31-60 Days   61-90 Days    91 Days
                    ----------    -------   ----------   ----------   ----------
June 30, 2006      $ 6,151,322  $ 367,667  $ 1,176,382  $   611,727  $ 3,995,546

December 31, 2005  $ 7,310,568  $ 599,387  $ 1,216,245  $ 1,244,204  $ 4,250,732

     (B)  Accrued  expenses  consisted of the  following as of June 30, 2006 and
          December 31, 2005

                                  June 30, 2006    December 31, 2005
                                  -------------    -----------------
Trade Payables                   $    1,790,113  $         1,544,211

Payroll and Related Obligations       1,364,363            1,819,604

Interest                                947,255              725,272

Various State Taxes                     163,717               91,016

Prior State Tax Audit                   339,405              339,405
                                   ------------    -----------------
Total                            $    4,604,853  $         4,519,508
                                   ============    =================


                                       20

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(10) NOTES AND MORTGAGES PAYABLE

     Notes and  Mortgages  Payable  are  summarized  below.  The  capital  lease
transactions  with PDS other than the Royal Star loan are  carried  under  lease
liabilities (See Note 4).

<TABLE>
                                                     June 30, 2006           December 31, 2005
                                 Interest %    ------------------------    ----------------------
                                 Per Annum      Current      Long-Term      Current     Long-Term
                                 ----------    ----------    ----------    ----------   ---------
<CAPTION>
<S>                                 <C>      <C>           <C>            <C>          <C>
International Thoroughbred
Breeders,Inc.:

PDS Gaming (A)                          20%  $    541,102  $        -0-   $   541,102  $      -0-
Francis X. Murray (B)                    8%       382,864           -0-       459,164         -0-
William H. Warner (B)                   12%        37,000           -0-        37,000         -0-
MBC Global (C)                           9%       200,000           -0-       200,000         -0-
Westminister Investments (C)             9%       150,000           -0-       150,000         -0-
Ryan Moore Trust (C)                     9%        25,000           -0-        25,000         -0-
James B. Moore Trust (C)                 9%        25,000           -0-        25,000         -0-
Other                               Various        25,000           -0-        36,595         -0-

ITG Vegas, Inc.:

PDS Gaming (D)                        22.5%     3,125,250           -0-     2,733,838         -0-
Maritime Services, Corp.                 9%           -0-           -0-       166,156         -0-
International Game Technology (E)        8%       345,253        28,349       221,297      59,568
Others                              Various        52,010        22,658        35,009      33,540

Garden State Park:

Service America Corporation (F)          6%       160,000           -0-       160,000         -0-
                                               ----------    ----------    ----------   ---------
                 Totals                      $  5,068,479  $     51,007   $ 4,790,161  $   93,108

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

 Related Party Notes                             (419,864)          -0-      (496,164)        -0-
                                               ----------    ----------    ----------   ---------
Totals                                       $  4,488,615  $     51,007   $ 4,133,997  $   93,108
                                               ==========    ==========    ==========   =========
</TABLE>

     (A) On December 9, 2005,  the Company  executed and  delivered a promissory
note in the original principal amount of $541,102 to PDS Gaming. The proceeds of
the note were used to make several December 9, 2005 interest payments due on the
PDS  Transactions.  The interest  rate is 20% until such time as the  annualized
EBITDA for the various  vessels  operated  by the  Company  reach $20 million at
which time the interest rate will be reduced to 15%

     (B) 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 December  31, 2005 was  $459,164  and  accrued  interest  was
$29,052.  On September 19, 2005 Mr.  Murray lent an  additional  $300,000 to the
Parent Company.  At June 30, 2006 the outstanding  balance on the line of credit
was $382,864 and accrued  interest was $41,962.  In fiscal 2003 and fiscal 2005,
we issued  promissory  notes  for  $24,000  and  $13,000  respectively,  bearing
interest at 12% to


                                       21

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

William H. Warner,  Secretary of the Company.  The outstanding balance is due on
demand. The proceeds from both notes were used for working capital.

     (C) On November 9, 2005, we borrowed $400,000 from four (4) private parties
and agreed to issue our promissory  notes evidencing the loans. In consideration
of the loans we also agreed to issue 3-year warrants to purchase 100,000 shares,
in the aggregate of our common stock, exercisable at $2.50 per share. The loans,
bearing interest at 9% per year, and the principal were due on December 9, 2005.
The terms of the note required the Company to issue penalty warrants on December
9, 2005 to purchase  100,000  shares of our common stock at an exercise price of
$2.50  per  share.  If the  notes  are not  paid  by the  9th day of each  month
thereafter,  we are required to issue  additional  penalty  warrants to purchase
200,000  shares  of  common  stock at the  lesser of $2.50 per share or the then
current  market price per share for each month  beginning  January 9, 2006 until
these notes are paid.  Proceeds of the loans were used to pay interest  then due
on our secured indebtedness for borrowed money to PDS Gaming Corporation.

     (D) 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 this note to July 1, 2009. The interest rate
is 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%. We are currently paying a default interest rate of 22.5%

     (E) 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  were 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 were to be paid on the balance. At June 30, 2006, the
principal balance on the two notes to International Game Technology was $373,602
of which  $345,253 was  classified  as short term and the balance of $28,349 was
classified as long term. At June 30, 2006 the balance on the notes includes past
due  payments.  The  Company is  negotiating  new terms under these notes and if
unsuccessful the creditor may seek to enforce payment of the notes.

     (F) 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 has been  unsuccessful  in negotiating new terms under this note and 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  $39,600
as of June 30, 2006.


                                       22

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(11) VESSELS AND EQUIPMENT

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

                                        Estimated
                                       Useful Lives    June 30,     December 31,
                                         in Years        2006           2005
-------------------------------------- ------------  ------------  ------------
Leased Vessel - Palm Beach Princess         20      $  17,500,000 $  17,500,000

Leased Vessel - Big Easy Not in Service     20         20,305,348    20,305,348

Vessel Not Placed in Service -
  Royal Star                               N/A          3,054,735     3,007,216

Equipment                                  5-15         3,878,904     3,334,079

Leasehold Improvements                    15-40           918,999       988,625
                                                     ------------  ------------
                                                       45,657,986    45,135,268
Less Accumulated Depreciation
 and Amortization                                      (5,534,137)   (4,024,434)
                                                     ------------  ------------
                                                    $  40,123,849 $  41,110,834
                                                     ============  ============

(12) RELATED PARTY DEBT

     The following schedule represents related party debt (See Note 17 - Related
Party Transactions):

<TABLE>
                                               June 30, 2006              December 31, 2005
                                          -----------------------     ------------------------
                                          Short-Term    Long-Term     Short-Term     Long-Term
                                          ----------    ---------     ----------     ---------
<CAPTION>
<S>                                     <C>            <C>          <C>            <C>
Accrued Wages due to and Advances from
 Francis W. Murray                      $    382,864   $        -   $    531,353   $         -

Advances from Palm Beach Maritime Corp.
 (Francis W. Murray ownership)                     -      543,407              -       653,571
                                          ----------    ---------     ----------     ---------
         Total Debt - Related Parties   $    382,864   $  543,407   $    531,353   $   653,571
                                          ==========    =========     ==========     =========
</TABLE>

(13) COMMITMENTS AND CONTINGENCIES

     See Note 4 for additional commitments and contingencies with respect to the
PDS Transactions.

     See Notes 12 and 17 for additional  commitments  and  contingencies  of the
Company and transactions with related parties.

     See Note 18 with respect to events and developments after June 30, 2006.

     On February 1, 2006 we indefinitely  suspended operations of the vessel the
"Big Easy" until further notice and released the Big Easy employees. The Company
has  requested an extension  from the United  States Coast Guard to complete the
installation of bulkhead  insulation  on-board the vessel because the contractor
doing the work was unavailable until mid-February 2006. However, the Coast Guard
denied  the  request.  As a result  the Coast  Guard has  removed  the  vessel's
Certificate of Inspection  until the  installation  is completed.  This work has
been substantially completed.


                                       23

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The vessel passed Coast Guard  approval to operate on October 11, 2005, but
because of the  continuing  effects of hurricane  Wilma,  inclement  weather and
rough seas,  mechanical  problems and our inability to meet the minimum employee
counts  per  Coast  Guard  regulations,  we did not begin  operations  until mid
November.  On February 1, 2006 we indefinitely  suspended  operations of the Big
Easy after two and one half months of  operations.  On that date the Coast Guard
had denied our request for an extension  to complete  certain work and the Coast
Guard rescinded our Certificate of Inspection until the work was completed.  The
Coast Guard's decision,  coupled with an inadequate number of on-board personnel
due to the Coast Guard administrative delays in licensing our personnel, was the
latest in a series  of  unforeseen  business  circumstances  which  had  limited
management's  ability to introduce  the Big Easy to the market and  necessitated
the suspension of Big Easy commercial cruise operations indefinitely.  We intend
to explore all of our options  including  changing the Big Easy from a U.S. to a
foreign flag vessel which would  require less  administrative  dependency on the
U.S.  Coast Guard.  Relocation of the Big Easy to a new domestic or foreign port
is being explored.

     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 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 4A) 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

                                       24

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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 June 30, 2006 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.  The Company will not receive any  insurance  reimbursement  for our
costs of this remediation project.

     The following table summarizes commitments on non-cancelable  contracts and
leases as of June 30, 2006.

<TABLE>
                                                     Twelve Month Period Ended June 30,
                                        ---------------------------------------------------   There-
                                           2007          2008          2009          2010     after        Total
                                        -----------   ----------    ----------    ---------  --------    -----------
<CAPTION>
<S>                                    <C>           <C>          <C>           <C>         <C>         <C>
Capital Leases:
  P.B. Princess - Principal & Interest $ 21,080,158  $         -  $          -  $        -  $       -   $ 21,080,158
     Bare Boat Charter - Related Party      960,000      960,000       960,000       80,000         -      2,960,000
  Big Easy - Principal & Interest        20,325,907            -             -            -         -     20,325,907
     Bare Boat Charter - Related Party    1,200,000    1,200,000     1,200,000      100,000         -      3,700,000
Notes and Mortgages:
  Principal & Interest                    6,094,364      192,235         3,965            -         -      6,290,564
   Interest Only                            173,135                                                          173,135
Deferred Interest Payments                  600,000      600,000       450,000            -         -      1,650,000
Operating Leases:
  Casino Equipment                        3,201,719      572,110       681,820            -         -      4,455,649
  Administrative & Office                   995,863      120,503         2,028        2,873         -      1,121,267
Purchase Obligations                        345,890       45,056        10,592            -         -        401,538
                                        -----------   ----------    ----------    ---------  --------    -----------
Total                                  $ 54,977,036  $ 3,689,904  $  3,308,405  $   182,873 $       0   $ 62,158,218
                                        ===========   ==========    ==========    =========  ========    ===========
</TABLE>

(14) LEGAL PROCEEDINGS

     LIQUOR LICENSE

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


                                       25

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

the  lessee/buyer  refused to perform.  On January 18, 2006 the Company  filed a
Complaint in Camden  County  Superior  Court of NJ,  Chancery  Division,  (Civil
Action No.  C-7-06)  against  the  defendants  to protect our  interests  in the
license.  In May 2006 the judge ruled against us in a bench ruling.  The Company
is appealing this matter.  The carrying value of the liquor license was $400,000
and as of March 31, 2006 we expensed off the $400,000 as a result of the court's
ruling.

     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.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of June 30, 2006, 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 recorded a $10.5 million  impairment loss during
the fiscal year ended June 30, 2004 and 2005 to reflect  the  estimated  current
market value of this note. (See Note 6-B)

(16) OPTIONS AND WARRANTS

     A.   STOCK BASED COMPENSATION

     In June 2005,  the  Company's  Board of Directors  adopted and approved the
2005 Stock Option and Award Plan (the "2005  Plan").  The 2005 Plan would permit
the grant of options to purchase  up to  1,300,000  shares of Common  Stock at a
price per share no less than 100% of the fair market  value of the Common  Stock
on the date an option is granted with respect to incentive  stock  options only.
The  price  would be no less than  110% of fair  market  value in the case of an
incentive  stock option  granted to any individual who owns more than 10% of the
total  combined  voting power of all classes of  outstanding  stock.  Due to the
Company's  continuing  cash  shortages  we did not have the funds  available  to
conduct a stockholder  meeting before June 30, 2006 and therefore the 2005 Stock
Option and Award Plan expired  along with the options  that were  granted  under
that plan.  No expense has been  recognized  for the 300,000  options which were
issued on June 27, 2005 and expired on June 27, 2006.


                                       26

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     B.   ISSUANCE OF ADDITIONAL WARRANTS

     In connection  with our borrowing of $400,000 on November 9, 2005 we agreed
to issue additional  penalty warrants,  exercisable for a period of three years,
if the loan was not paid by January 9, 2006; we agreed to issue 200,000 warrants
each month at a price of the lower of $2.50,  or the market  value on the day of
issue in each  month  for each  additional  month  until  the loan is paid.  The
following  table  summarizes  our stock prices for each month that warrants were
issued.

    Date of Issue                 Price
    ----------------             -------
    January 9, 2006               $2.45
    February 9, 2006              $1.50
    March 9, 2006                 $1.25
    April 7, 2006                 $0.75
    May 9, 2006                   $0.80
    June 9, 2006                  $0.55

During the quarter ended June 30, 2006, we recognized a non-cash expense for the
600,000  warrants issued in the amount of $579,800.  During the six months ended
June 30, 2006,  we  recognized  a non-cash  expense for the  1,200,000  warrants
issued in the amount of $1,073,098. As of August 21, 2006, the loan has not been
paid.

     The fair  value of the  warrants  was  estimated  on the date of each grant
using the  Black-Scholes  model utilizing the assumptions shown in the following
table:

                            Three Months Ended     Six Months Ended
                               June 30, 2006        June 30, 2006
                            -------------------    ----------------
Expected volatility              20% to 140%          20% to 445%

Risk-free interest rate                 4.7%                 4.7%

Expected term                        3 Years              3 Years

     In  determining  expected  volatility,  we based  the  assumptions  using a
ceiling of the higher prices quoted for our stock over the last year.  Our stock
is traded on the "Pink  Sheets"  of the  over-the-counter  market  and our stock
prices and number of shares traded have historically been very erratic.

(17) RELATED PARTY TRANSACTIONS

     See  Footnote  4  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  of $735,584  and  accrued  interest,  in the amount of  $193,957  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.  These
balances are shown in the "Deposits and Other Assets - Related  Parties" section
of the Balance Sheet (See Footnote 8 (B)).

                                       27

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



     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. As of December 31, 2005, we had lent $2,034,405 in
total to the project and we have accrued interest in the amount of $1,429,185 on
the loan.  These  balances are shown in the "Deposits and Other Assets - Related
Parties"  section of the Balance  Sheet (see  Footnote 8 (B)).  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 Realty based on
comparable  sales of like  units in the  marketplace  which  suggest  demand for
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 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.

(18) SUBSEQUENT EVENTS

     (A)  First  Amended  and  Restated  Forbearance  Agreement  with PDS Gaming
          Corporation. See Note 4-J

     (B)  Issuance of additional Warrants. See Note 16-B


                                       28

<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
elsewhere in this document,  particularly under "Risk Factors", 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    increased competition from new and existing forms of gaming;

          o    our  ability  to  reposition  the Big Easy in a  timely  and cost
               effective manner in the future,  or as an alternative,  sub lease
               the vessel to other parties;

          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.

Overview

     We lease through a bareboat  charter and operate,  through our wholly owned
subsidiary,  ITG  Vegas,  Inc.  ("ITGV"),  the  gaming  vessel,  M/V Palm  Beach
Princess.  The M/V Palm Beach  Princess  sails twice daily from the Port of Palm
Beach,  Florida.  Once beyond the state's  territorial  water  limits the vessel
engages in a casino gaming business. The business of operating the cruise vessel
includes a variety of shipboard activities, such as dining, music, casino gaming
and other entertainment.

     We also lease through a bareboat  charter the gaming  vessel,  Big Easy and
during the six month  period  ended June 30,  2006  operated  the vessel for one
month, through our wholly owned subsidiary, ITG Palm Beach, LLC ("ITGBP"). After
retrofitting  and  refurbishing  the Big Easy, this vessel was initially  placed
into  service on October  18,  2005,  also from the Port of Palm Beach  Florida,
although  we did  not  commence  regular  (although  limited)  operations  until
November 12,  2005.  The Big Easy did not meet our  expectations  and due to the
operating  losses and the removal of the vessel's  Certificate  of Inspection by
the U.S. Coast Guard, on February 1, 2006 we indefinitely  suspended  operations
of the Big Easy and have placed the vessel in wet dock storage.

     During the course of retrofitting and getting the Big Easy operational,  we
were required to raise the significant  funding needed to accomplish the goal of
making this vessel  comply with U.S.  Coast Guard  regulations  and placing this
vessel into service. We entered into various debt service agreements  throughout
Fiscal 2005, primarily with PDS Gaming ("PDS"),  which at June 30, 2005 amounted
to  approximately  $33.8  million  which  balance  includes  accrued  but unpaid
interest.  The loans are secured by mortgages on the Palm Beach Princess and the
Big Easy as well as  virtually  all of the assets of ITGV and its  subsidiaries,
including  the vessel Royal Star in addition to pledges of our stock in ITGV and
its subsidiaries, and collateral assignments of certain promissory notes payable
to us. We, along with Palm Beach  Maritime  Corporation  ("PBMC") and Palm Beach
Empress,  Inc.  ("PBE"),  companies  affiliated  with our  Chairman,  Francis W.
Murray, have guaranteed the loans.

                                       29

<PAGE>


     ITGV charters the M/V Palm Beach  Princess  from Cruise  Holdings I, LLC, a
company  owned by PBMC,  for a five year period  ending  July 2009.  The charter
provides for the payment to Cruise  Holdings I, LLC of $50,000 per month plus 1%
of the  gross  operating  revenues  of the M/V Palm  Beach  Princess.  Under the
charter, ITG Vegas has the option to purchase the M/V Palm Beach Princess at the
end of the term, for an exercise  price equal to the appraised  value of the M/V
Palm Beach  Princess,  $17,500,000,  to which certain amounts are to be credited
against the purchase price.

     ITGPB  charters the Big Easy from Cruise  Holdings II, LLC, a company owned
by PBE,  for a five year period  ending  July 2009.  The  charter  provides  for
payments to Cruise  Holdings  II, LLC of $100,000 per month plus 1% of the gross
operating  revenues  of the Big Easy.  Under the Big Easy  charter,  PBE granted
ITGPB an option to purchase the Big Easy at the end of the term, for an exercise
price  equal  to  the  appraised  value  of the  Big  Easy,  which  is yet to be
determined  following the  retrofitting  and  refurbishment  of the Big Easy, to
which certain  amounts are to be credited  against the purchase  price.  The Big
Easy is currently in wet dock storage  following a brief period of operations as
deiscribed below in Liquidity and Capital Resources.

     We continue to explore other gaming  opportunities,  both  domestically and
internationally.  During our 2004 fiscal year we purchased a third  vessel,  the
M/V Royal  Star.  The Royal Star is  currently  in wet dock  storage  and we are
limited by our negative  cash position to make any further  improvements  on the
vessel.  In  the  past  we  have  explored  possible  locations  from  which  to
potentially operate the vessel, however additional financing is necessary before
we move forward with the extensive  improvements  and  outfitting  needed before
being placed in service.

Liquidity and Capital Resources

     Our cash flow from  operations is primarily  dependent  upon the cash flows
from ITG Vegas, which operates the vessel,  M/V Palm Beach Princess.  During the
six months ended June 30, 2006,  the Palm Beach  Princess  operations  generated
approximately  $3.9  million  of cash  (which  amount was only  achieved  by the
deferral of $2 million of interest  payments due) which was insufficient for our
consolidated  needs,  thus we had to rely on other adjustments in our operations
to meet our cash requirements.

     ITG Vegas' cash flow from operations is seasonal. The period from January 1
to June 30 has been a period of increased activity and revenues. The period July
1 to December 31 is a seasonably slow period for vessel  operations and a period
during  which  we have  suffered  from  hurricanes  interrupting  our  business.
Therefore,  we  normally  schedule  dry dock or wet dock vessel work during this
period,  which further  negatively  effects our operations during this six month
period. Many of ITG Vegas' operating costs,  including leasing and charter fees,
fuel costs and wages,  are fixed and cannot be  reduced  when  passenger  counts
decrease.

     During the past few fiscal quarters,  we extended the terms of our payables
and as a result,  our accounts payable and accrued expenses exceeded our cash by
approximately $12 million as of June 30, 2006. We continued to defer payments on
vessel and equipment leases, on notes payable and charter hire fees and continue
to defer the salary of our Chairman.

     Our cash flows were  negatively  impacted  by the delay in putting  the Big
Easy in full service,  caused by delays in obtaining certification for passenger
operations  pursuant to the United States Coast Guard's  Alternative  Compliance
Program.  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
and required us to borrow additional funds which increased our interest expense.
These borrowings will continue to adversely affect our cash flows in the future.
More than 150 crew  members and other  employees  were hired and trained  during
this period and employees  who normally  worked  exclusively  for the Palm Beach
Princess spent time completing  assignments  for the Big Easy,  putting a severe
drain on our operational efforts and our cash flow during this period.

     On November 12, 2005 we placed the Big Easy vessel into  limited  scheduled
service from the Port of Palm Beach,  Florida.  The vessel  received Coast Guard
approval to operate on October 11, 2005 but because of

                                       30

<PAGE>


the continuing  effects of hurricane  Wilma,  inclement  weather and rough seas,
mechanical  problems and our inability to meet the minimum  employee  counts per
Coast Guard regulations,  we did not begin regular, limited operations until mid
November.  The Big  Easy  did not  meet  our  expectations  and  with  its  poor
performance together with continuing Coast Guard licensing  difficulties we were
forced  to remove  the Big Easy from  service  on  February  1, 2006 in order to
conserve working capital.

     During the six months ended June 30, 2006,  the operating  loss for the Big
Easy for January 2006 and the carrying  costs for the remaining five months were
$3.55 million  before  interest  expense.  We expect that future  carrying costs
during the wet dock  storage  will be  approximately  $325,000  per month before
interest expense.

     During our 2004 fiscal year, we 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.  The vessel had been placed in wet storage and 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 six months
ending June 30,  2006,  carrying  costs for the Royal Star vessel and the gaming
equipment leases were approximately $900,000 before interest expense.

     Our debt to PDS Gaming for the vessel  leases was $29.3 million on June 30,
2005, with interest rates ranging from  approximately  15.3% to 20%. We have not
made the required interest and principal payments since December 1, 2005 and the
PDS loan balances are approximately $33.8 million as of June 30, 2006 due to the
accrued interest  accumulating at an interest default rate of an additional 2.5%
and fees for the Forbearance Agreements.  We borrowed and additional $535,744 to
make the December  2005  interest  payment.  We did not make the  required  debt
service  payments or the equipment  lease  payments to PDS from January  through
June  2006.  On June 1, 2006 we  entered  into the First  Amended  and  Restated
Forbearance  Agreement  with PDS which  will defer any  payments  due them until
August 29, 2006.

     The new agreement  requires us to sell the Big Easy vessel,  the Royal Star
vessel  and the $10  million  Original  Cherry  Hill Note  with a  closing  date
targeted to occur no later than August 29, 2006. While  proceeding  toward sales
of such assets,  we also are required to retain a financial  adviser to sell the
Palm Beach Princess vessel and our casino cruise business operating that vessel,
or otherwise refinance and pay in full our obligations to PDS, by the end of the
forbearance  period,  August 29, 2006.  In that regard,  (a) we were required to
provide to PDS, on or before July 28, 2006, an offering memorandum prepared by a
financial adviser and designed to seek the sale or refinancing of the Palm Beach
Princess  assets  and  business;  (b) not later  than  August 2, 2006 we were to
deliver the offering  memorandum and all other relevant  information to at least
15 third  party  lenders or third  party  purchasers  identified  by us as being
reasonably  likely lenders or purchaser;  and (c) no later than August 14, 2006,
we were  required  to have a written  term  sheet from a third  party  lender or
purchaser  for the sale or  refinancing  of the Palm Beach  Princess  assets and
business.  We do not believe that such time schedule is realistic and we are not
able to meet such time  deadlines.  Notwithstanding  such  provisions and others
which we may not be able to comply with under the terms of the new agreement, we
agreed to enter into the new agreement and make additional  payments to PDS of a
forbearance fee of $173,687 and an additional  2.5% per annum default  interest,
under duress,  since we were faced with PDS' threats of imminent  foreclosure on
substantially all of our assets.

     Under the new agreement,  PDS may elect to extend the deadlines provided in
such agreement for the sale of collateral after its due  consideration of, among
other things,  (a) purchase  offers received from the third parties with respect
to the sale of the Big Easy,  Royal Star or Cherry  Hill Note,  (b) the range of
values proposed by brokers and financial advisers, (c) the timing of such sales,
and (d) the net cash proceeds realizable from any alternative  transaction to be
paid in reduction of our obligations to PDS.

     After expiration of the forbearance period on August 29, 2006, we do expect
to be able to make our monthly loan and lease  payments  unless,  as a result of
closing an Alternative Transaction,  our outstanding loan and lease payments are
substantially  reduced. We also do not expect that we will be able to consummate
the sale of any of our vessels,  the Original  Cherry Hill Note or our operating
business before the expiration of the forbearance  period on August 29, 2006 and
will seek to negotiate a further  amendment to the forbearance  agreement giving
us additional  time to consummate any such  transactions  based on  circumstance
existing on

                                       31

<PAGE>


August 29, 2006. No assurance can be given that PDS will be willing to grant any
further  extension of time or otherwise agree to forbear from exercising  rights
or remedies it may have due to our defaults.

     Additionally  the EBITDA  requirements  applicable  to the Company  will be
waived for the 12 month  periods  ending  July 2, July 30,  August 27,  2006 and
disbursements by our operating subsidiary, ITG Vegas, Inc., will require written
approval by an assigned crisis manager,  and  disbursements  may only be made in
accordance with an approved budget as submitted by the us and approved by PDS.

     The Company is seeking refinancing,  has liquidated its equine holdings and
may be forced to sell other Company assets. We are also exploring  opportunities
to  profitably  deploy  the Big Easy or the sale of this  vessel.  Absent  asset
sales,  refinancing or the profitable deployment of the Big Easy, we will not be
able to make the debt  service  payments  beginning  on  September  1, 2006.  No
assurances  can be given that the Company will be successful in these  endeavors
prior to September 1, 2006 or thereafter.

     Our working capital as of June 30, 2006 was a negative ($45.6 million). Our
cash flow and negative  working  capital  circumstances  worsened during the six
months ended June 30, 2006 due in part to:

          o    classifying  all the debt due to our  primary  lender as  current
               debt,

          o    operating  losses  suffered  by the Big Easy from  January 1st to
               January  31st  due to  her  limited  sailing  schedule  in  which
               scheduled cruises were cancelled due to Coast Guard restrictions,
               mechanical problems,  high seas, or scheduling conflicts with the
               Palm Beach Princess.

          o    costs to carry  the Big Easy  after the  vessel  was taken out of
               service on February 1, 2006,

          o    costs to carry the Royal Star,

          o    expenses  paid  for  costs  of  the  Holding  Company  and  other
               developmental costs and

          o    a decrease in the net income before depreciation and taxes of the
               Palm Beach Princess of approximately $1.34 million as compared to
               the corresponding six month period of last year.

     The following table summarizes commitments on non-cancelable  contracts and
leases as of June 30, 2006.

<TABLE>
                                                     Twelve Month Period Ended June 30,
                                        ---------------------------------------------------   There-
                                           2007          2008          2009          2010     after        Total
                                        -----------   ----------    ----------    ---------  --------    -----------
<CAPTION>
<S>                                    <C>           <C>          <C>           <C>         <C>         <C>
Capital Leases:
  P.B. Princess - Principal & Interest $ 21,080,158  $         -  $          -  $        -  $       -   $ 21,080,158
     Bare Boat Charter - Related Party      960,000      960,000       960,000       80,000         -      2,960,000
  Big Easy - Principal & Interest        20,325,907            -             -            -         -     20,325,907
     Bare Boat Charter - Related Party    1,200,000    1,200,000     1,200,000      100,000         -      3,700,000
Notes and Mortgages:
  Principal & Interest                    6,094,364      192,235         3,965            -         -      6,290,564
   Interest Only                            173,135                                                          173,135
Deferred Interest Payments                  600,000      600,000       450,000            -         -      1,650,000
Operating Leases:
  Casino Equipment                        3,201,719      572,110       681,820            -         -      4,455,649
  Administrative & Office                   995,863      120,503         2,028        2,873         -      1,121,267
Purchase Obligations                        345,890       45,056        10,592            -         -        401,538
                                        -----------   ----------    ----------    ---------  --------    -----------
Total                                  $ 54,977,036  $ 3,689,904  $  3,308,405  $   182,873 $       0   $ 62,158,218
                                        ===========   ==========    ==========    =========  ========    ===========
</TABLE>

                                       32

<PAGE>


Outlook

     Based on our  historical  level of operations of the Palm Beach Princess we
believe that cash  generated  from  operations  will not be adequate to meet our
anticipated  loan payment  requirements and our other working capital needs. The
Big Easy began  limited  regular  passenger  service in November  2005,  however
operations  were  suspended  on  February 1, 2006.  While we have  substantially
reduced the operating  losses for the Big Easy  effective  February 1, 2006 with
its  suspension of service,  we will continue to incur costs while the vessel is
held in wet storage along with the Royal Star.

     We will need additional funds to meet our working capital deficiency,  debt
service needs and operating  losses.  However we have no present  commitments to
obtain such necessary  funds. The failure to obtain such funds on a timely basis
may require us to curtail  operations or sell assets such as the Royal Star, the
Big Easy or our Note  Receivable  on the Cherry  Hill  Property or even our Palm
Beach Princess  business.  The sale of assets with insufficient  proceeds to pay
related debt may lead to default in our debt service payments,  which could lead
to foreclosures on the leased 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,  seasonality  of our business,  and other
factors, many of which are beyond our control.

Critical Accounting Policies and Estimates

     Financial  Reporting  Release  No.  60  requires  companies  to  include  a
discussion of critical  accounting policies or methods and estimates used in the
preparation  of  financial  statements.  We prepare our  Consolidated  Financial
Statements in conformity with accounting  principles  generally  accepted in the
United States. Certain of our accounting policies, including the estimated lives
assigned to our assets, asset impairment,  and the calculation of our income tax
liabilities,  require  that  we  apply  significant  judgment  in  defining  the
appropriate  assumptions for calculating  financial estimates.  By their nature,
these judgments are subject to an inherent degree of uncertainty.  Our trends in
the industry and information  available from other outside sources,  are used as
appropriate.  There can be no assurance that actual results will not differ from
our estimates.  Note 2 to the Consolidated  Financial  Statements  describes the
significant  accounting  policies we have selected for use in the preparation of
our financial statements and related disclosures. We believe the following to be
the most critical  accounting  estimates and assumptions  affecting our reported
amounts and related disclosures.

Notes Receivable

     Statement  of  Financial  Accounting  Standards  No.  114,  "Accounting  by
Creditors for Impairment of a Loan" as amended,  requires  management  judgments
regarding the future  collectability of notes receivable and the underlying fair
market  value of  collateral.  As a result of the sale of the Garden  State Park
Racetrack  property in Cherry Hill NJ, and the sale of the non-operating  former
El Rancho Hotel and Casino in Las Vegas,  NV, portions of the proceeds from each
sale were paid in the form of  promissory  notes.  During the fiscal  year ended
June 30, 2004 we sold the note  receivable we held on the Las Vegas, NV property
for cash and other future  benefits  including a second note payable solely from
profits of the Cherry  Hill,  NJ property  (Second  Cherry  Hill  Note).  We had
previously  received a note  receivable  from the sale of the Garden  State Park
property in the amount of $10 million  (original Cherry Hill Note) and together,
these notes are  classified on the Balance Sheet as Long Term Notes  Receivables
in the amount of $14,278,651 as of June 30 2006 and December 31, 2005. Estimates
are required to be used by management to assess the  recoverability of our notes
receivable.  We regularly  review our receivables to determine if there has been
any decline in value.  These reviews  require  management  judgments  that often
include estimating the outcome of future events and determining  whether factors
exist that indicate  impairment  has  occurred.  We evaluate  financial  balance
sheets, earnings and cash forecasts of the Cherry Hill developer. Our returns on
the Cherry  Hill Notes are  subject to debt  incurred  by the  property  and the
developer's capital  contributions that precede the debt owed to us. Our returns
are also subject to factors  affecting the  profitability and saleability of the
project. Our assumptions, estimates and evaluations

                                       33

<PAGE>


are  subject  to the  availability  of  reliable  data  and the  uncertainty  of
predictions  concerning  future  events.  Accordingly,  estimates of recoverable
amounts and future cash flows are subjective and may not ultimately be achieved.
Should the underlying  circumstances  change, the estimated  recoverable amounts
and future cash flows could change by a material amount.

     When making our impairment  review for the year ended June 30, 2004 for the
Note Receivable on the Las Vegas property we determined that after this note was
transferred  to the Cherry Hill property (the Second Cherry Hill Note) a portion
of it should be impaired by $12,786,589 (or a net of $10,000,000  when offset by
$2,786,589 of deferred gain on the sale of the Las Vegas  property) based on the
collectability  of the  note  since  we  already  held a note in the  amount  of
$10,000,000 on that same property.  Additionally  during the year ended June 30,
2005 an  additional  impairment  charge of $500,000  was  recorded on the Second
Cherry Hill Note because projected future events did not materialize.

Valuation of Vessels and Vessel Deposits - Related Parties

     We charter vessels, the Palm Beach Princess and the Big Easy, directly from
companies  owned or  controlled  by our  Chairman  and CEO.  The charter and PDS
Gaming loan  agreement for the Palm Beach  Princess has been  accounted for as a
capital lease. In accordance with our lease and purchase  agreement for the Palm
Beach  Princess we have the right to purchase the vessel for  $17,500,000 at the
end of the lease term, and up to $14 million of principal payments to be made by
us and  allocable to the Palm Beach  Princess  debt will be credited  toward the
purchase price.  The carrying value of the Palm Beach Princess of $17,500,000 is
less than the fair value  appraisal  on the  vessel.  The charter and PDS Gaming
loan  agreement for the Big Easy has also been accounted for as a capital lease.
In accordance with our lease and purchase agreement for the Big Easy we have the
right to purchase the Big Easy for the appraised value of the vessel which would
be determined upon the refitting and refurbishing of the vessel. The Company has
determined the capital lease value of the Big Easy by capitalizing the total of:
1) the costs it had incurred for  improvements  it had made to the Big Easy; and
2) all payments required under the PDS Gaming loans.

     The Company has credits in the amount of $9,726,377  which are available to
use against the purchase costs for the vessels.  See footnote 8 to our financial
statements with respect to the credits which are available  against the purchase
costs of the  vessels.  Should the Company  elect not to purchase  one or either
vessel at the end of the lease,  the Company could lose some or all of the value
of the credits unless other terms are negotiated with the owner of the vessels.

Results of Operations for the Three Months Ended June 30, 2006 and 2005

     The  following  are the most  important  factors and trends that affect our
operating   performance  and  the  comparability  of  historical  results,  both
currently and in the future:

     We are  currently  dependent  upon  operating  revenues from the Palm Beach
Princess to pay the wet dock storage, interest, debt service and equipment lease
costs of the Big Easy and the  Royal  Star and the  administrative  costs of the
Parent Company.  Big Easy  operational  losses and carrying costs have adversely
affected our cash position. We could face significant challenges in managing and
integrating  the  combined  operations  of the Big Easy  and the M/V Palm  Beach
Princess  should we relocate the Big Easy to a different  port or reinstate  its
operation in Palm Beach.  Any future  integration of the Big Easy operation will
require dedication of management resources that may temporarily divert attention
from our day-to-day business.

     We have approximately $33.8 million of indebtedness  outstanding to PDS for
vessel  leases and loans taken to pay interest as of June 30, 2006. We have been
unable to make the required monthly debt service payments required under the PDS
loans since  November  2005 and in December 2005  borrowed  additional  funds in
order to make interest  payments due under the debt agreement.  We have extended
payment terms of our accounts payable in order to conserve working capital. This
action could jeopardize the relationships  with our vendors and we may be forced
to find alternative sources for some of our suppliers and professional advisors,
further disrupting our operations.  We will incur additional indebtedness in the
future  for  accrued  but  unpaid  interest  on  the  PDS  debt.  Our  level  of
indebtedness will have several significant negative effects on our future

                                       34

<PAGE>


operations, including the following:

          o    we will be  required  to use the  majority  of our cash flow from
               operations  for the payment of any  principal  or interest due on
               our  outstanding  indebtedness  or may  need  additional  working
               capital in addition to our cash flow for payment of principal and
               interest due;

          o    our  outstanding  indebtedness  and  leverage  will  increase the
               impact of  negative  changes in  general  economic  and  industry
               conditions, as well as competitive pressures; and

          o    the level of our  outstanding  debt may  effect  our  ability  to
               obtain   additional   financing  for  working  capital,   capital
               expenditures or general corporate purposes.

     If we cannot generate sufficient cash flow from operations in the future to
service our debt, we may, among other things be forced to:

          o    seek  additional  financing in the debt or equity markets further
               diluting our current shareholders;

          o    refinance or restructure all or a portion of our indebtedness; or

          o    sell selected assets or our operating business.

     These  measures  might  not be  sufficient  to  enable  us to  service  our
indebtedness.  In addition,  any financing,  refinancing or sale of assets might
not be available on economically favorable terms.

     On March 8, 2005 the citizens of Broward County  approved a referendum that
will  amend  Florida's  constitution  to permit  slot  machines  at  pari-mutuel
facilities  in Broward  County.  Currently  there are three race  tracks and one
jai-alai  facility in the County.  Broward  County is  contiguous  to Palm Beach
County in which we conduct  operations.  In a special  session in early December
2005, the Florida  legislature  passed legislation which would permit 1,500 slot
machines  at each of the four (4)  pari-mutuel  facilities  in  Broward  County.
Neither the timing of the  installation of the slot machines,  nor the impact to
our Company,  can be predicted at this time. Over the past few years,  there has
been an attempt to legalize gaming throughout the State of Florida. It is likely
that the gaming  industry  will  continue  to pursue  legalization  of gaming in
Florida,  and we believe that the legalization of gaming in Florida could have a
material adverse impact on our operations.


                                       35

<PAGE>


Consolidated

     The table below separately  identifies and compares the revenues,  expenses
and net  income  before  taxes of our  vessels  and other  operating  subsidiary
companies as shown on the  Consolidated  Statement of  Operations  for the three
months ended June 30, 2006 as compared to the three months ended June 30, 2005.

<TABLE>
                                            Three Months Ended                          Three Months Ended
                                               June 30, 2006                                 June 30, 2005
                         ------------------------------------------------ --------------------------------------------------
                                                  Holding Co                                       Holding Co
                         Palm Beach      Big           &                  Palm Beach      Big            &
                          Princess       Easy     Other Subs     Total     Princess       Easy      Other Subs     Total
                         -----------  ----------- ----------- ----------- -----------  ----------- ------------ ------------
<CAPTION>
<S>                      <C>          <C>         <C>         <C>         <C>           <C>         <C>          <C>
Operating Revenues:

  Gaming                 $ 7,283,863  $         - $         - $ 7,283,863 $  7,213,088  $         - $          - $  7,213,088

  Fare                       651,513            -           -     651,513      754,524            -            -      754,524

  On Board                   435,108            -           -     435,108      513,814            -            -      513,814

  Other                            -            -      57,472      57,472            -            -      117,520      117,520
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
                  Total    8,370,484            0      57,472   8,427,956    8,481,426            0      117,520    8,598,946
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
Operating Costs and
Expenses:

  Gaming                   2,406,679      358,944           -   2,765,623    2,291,658            -            -    2,291,658

  Fare                       586,280        9,919      79,841     676,040    1,014,790            -      102,424    1,117,214

  On Board                   201,401       11,833                 213,234      248,762            -            -      248,762

  Maritime & Legal         1,977,572      323,067           -   2,300,639    1,715,709            -            -    1,715,709

  G & A Expenses           1,032,808      253,674     500,592   1,787,074    1,070,893            -      692,854    1,763,747

  Development Costs                -            -     210,980     210,980            -    3,273,382      109,682    3,383,064

         Royal Star                -            -     512,944     512,944            -            -      165,503      165,503

             Equine                -            -           -           -            -            -      212,155      212,155

  Impairment of Assets             -            -           -           -            -            -       50,000       50,000

  Dep & Amort                622,585            -       2,476     625,061      468,638            -        4,273      472,911
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
                  Total    6,827,325      957,437   1,306,833   9,091,595    6,810,450    3,273,382    1,336,891   11,420,723
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
Operating Income (Loss)    1,543,159     (957,437) (1,249,361)   (663,639)   1,670,976   (3,273,382)  (1,219,371)  (2,821,777)

Other Income (Expense):

  Interest &
  Financing Expenses      (1,189,904)  (1,277,840)   (276,646) (2,744,390)    (419,099)           -     (227,499)    (646,598

  Interest & Financing
  Expenses - RP             (265,111)    (300,000)          -    (565,111)    (286,485)           -      (15,977)    (302,462

  Warrant Expense                  -            -    (579,798)   (579,798)           -            -            -            -

  Interest Income              2,149            -           -       2,149            -            -        7,750        7,750

  Interest Income - RP        64,540            -       7,325      71,865       66,329            -        7,327       73,656
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
                  Total   (1,388,326)  (1,577,840)   (849,119) (3,815,285)    (639,255)           0     (228,399)    (867,654)
                         -----------  ----------- ----------- ----------- ------------  ----------- ------------ ------------
Income (Loss) Before
Income Tax               $   154,833  $(2,535,277)$(2,098,480)$(4,478,924)$  1,031,721  $(3,273,382)$ (1,447,770)$ (3,689,431)
                         ===========  =========== =========== =========== ============  =========== ============ ============
</TABLE>

                                       36

<PAGE>


     Revenues  decreased  slightly  by  $171,000  primarily  as a result  of the
revenues generated by the Palm Beach Princess decreasing by $111,000.

     Operating  expenses  decreased  approximately  $2.6  million,  or 23%, from
$11,420,721  in the three months ended June 30, 2005 to  $8,827,232 in the three
months ended June 30, 2006 primarily the result of:

     o    a  decrease  in the  development  costs of the Big Easy of  $3,237,382
          offset by carrying costs in the amount of $957,434  incurred while the
          vessel is in wet dock;

     o    a decrease in the Parent Company administrative expense of $192,262;

     o    a  decrease  in  operating  expenses  for the Palm Beach  Princess  of
          $137,072 offset by an increase in depreciation of $153,947;

     o    a decrease in equine  operating costs of $212,155  because the Company
          terminated its equine operations on December 31, 2005;

     o    a decrease in other  development  costs of $101,298  since the Company
          was forced to reduce its costs in search for new gaming opportunities;
          offset by,

     o    an  increase  in the  carrying  costs  for our  Royal  Star  vessel of
          $347,441,  which  vessel  has  been  in wet  dock  storage  since  its
          purchase.  The  increase was  primarily  caused by the payments we are
          making on the  gaming  equipment  placed  aboard the vessel in January
          2005  whereas last year the payments on the  equipment  were  interest
          only and classified as an interest expense;

     o    an impairment of a note receivable in the amount of $50,000 during the
          comparative quarter last year.

     The  Operating  (loss)  for the  three  months  ended  June  30,  2006  was
($663,639) as compared to an operating loss of ($2,821,777)  for the comparative
period of last year.

     Other  expenses  increased  by  approximately  $3 million as a result of an
increase in the interest and financing expense due to: 1) the higher debt levels
on the  vessel  leases;  2) higher  interest  rates as a result  of the  penalty
interest  incurred on the $30 million  loan from PDS; 3) a $173,687  forbearance
fee;  and 4)an  increase in the costs of warrants  granted for  financing in the
amount of $579,798.

     The Net (Loss) for the three months ended June 30, 2006 was ($4,478,924) or
($0.39) per share as compared to a net loss of  ($3,689,431) or ($.37) per share
for the three months ended June 30, 2005.

     For the three  months  ending  June 30,  2006 the (loss)  before  interest,
taxes,  depreciation and amortization and an impairment loss,  (Adjusted EBITDA)
was  ($38,578)  as  compared to Adjusted  EBITDA  loss of  ($2,478,865)  for the
corresponding  period.  The change in the Adjusted EBITDA (loss) of $2.4 million
was  primarily  due to the losses  sustained by the Big Easy  decreasing by $2.3
million before interest  expense.  See the  reconciliation of Adjusted EBITDA to
net income for the three month periods ended June 30th below.

Reconciliation of Non-GAAP Measures to GAAP

     Adjusted  EBITDA or  earnings  before  interest,  taxes,  depreciation  and
amortization  and unusual  items is not a measure of  performance  or  liquidity
calculated in accordance with generally accepted accounting  principles.  EBITDA
information  is  presented  as  a  supplemental  disclosure  because  management
believes  that it is a widely  used  measure of such  performance  in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the  operating  performance  of its  operations,  including  the  evaluation  of
operating  personnel.  Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance,  or
as an  alternative  to cash flows  from  operating  activities,  as a measure of
liquidity,  or as any other measure of performance determined in accordance with
generally

                                       37

<PAGE>


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 June 30,
                                        ------------------------------
                                             2006             2005
                                        --------------    ------------
Total Adjusted EBITDA                  $       (38,578) $   (2,478,865)
     Depreciation & Amortization              (625,061)       (472,911)
     Interest & Financing Expenses          (3,889,302)       (949,058)
     Interest Income                            74,017          81,404
     Tax Benefit (Expense) on Income                 -          90,000
Net Income (Loss) before Unusual Items      (4,478,924)     (3,729,430)
     Impairment Loss                                 -         (50,000)
                                        --------------    ------------
Net Income (Loss)                      $    (4,478,924) $   (3,779,430)
                                        ==============    ============

     Vessel Operations

     Palm Beach Princess

     During the current period net operating  revenue from vessel operations was
$8,370,484 as compared to $8,481,428. The decrease in revenue of $111,000 during
the comparable quarters is due to a decrease in the passenger counts from 70,213
in 2005 to 63,406 or 10% for the three months ended June 30, 2006. We attributed
this drop in passenger  counts  primarily to a decrease in the amounts spent for
marketing  and  advertising  during the three month  period due to a decrease in
cash  available.  During  the  quarter  we  spent  $428,510  less or 42% less on
marketing and advertising then during the corresponding  period in the prior six
month period.  The drop in passenger  counts was partially offset by an increase
in the revenue per passenger from $120.80 to $132.01 during the current period.

     Casino   operating   expenses  which  also  includes  food,   beverage  and
entertainment  increased  $115,022 from $2,291,657 or 31.8% of casino revenue in
2005 to  $2,406,679  or 33% of casino  revenue in 2006  primarily  the result of
dividing costs, many of which are fixed by their nature, over reduced revenues.

     During the three  months  ended June 30,  2005,  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 $296,900
of salaries  allocated to the Big Easy were  expensed as operating  costs during
the three  months  ended  June 30,  2005 and  $37,300  of  salaries  which  were
capitalized  as part of the vessel  costs during the three months ended June 30,
2005  where as  during  the  three  months  ended  June 30,  2006,  there was no
allocation  of employee  cost made to the Big Easy  Operation.  This  allocation
should be taken into consideration when comparing operating results from year to
year for the Palm Beach Princess.

     Maritime and legal expenses increased  approximately $262,000 or 27% due to
an increase in fuel costs of  approximately  $100,000 and an increase in medical
insurance  expense  of  approximately  $100,000  as a result  of a self  insured
medical claims during the comparable three month periods.

     Administrative  expenses decreased $263,527.  During the quarter ended June
30,  2005 we wrote off an amount of $322,000  for  payments we made on behalf of
the day cruise casino  operating  companies for lobby  efforts  concerning  slot
machines to be placed at racetracks in Miami-Dade and Broward counties.

                                       38

<PAGE>


     Finance expenses increased $855,615 as a result of the higher interest rate
due to default  interest being charged and a forbearance fee recorded during the
quarter.  Depreciation and amortization increased $153,947 from $468,638 for the
three  months ended June 30 2005 to $622,585 for the three months ended June 30,
2006 as a result of the  increase  in the  amortization  expense of the dry dock
expenditures made in October 2005.

     The income  before  income tax expense for the three  months ended June 30,
2006 was $273,729 as compared to income  before  income tax of $1,031,722 in the
comparable three month period of 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 425 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book.

     The following is a  comparative  summary of income and expenses of the Palm
Beach  Princess  operation  for the 13 weeks  ended  July 2, 2006 and for the 13
weeks ended July 3, 2005:

                                          Three Months Ended
                                      July 2,         July 3,
             Description               2006            2005          Change
---------------------------------   -----------     -----------    ----------
Passenger Count                          63,406          70,213        (6,807)
Number of Cruises                           177             175             2
Average Number of
 Passengers per Cruise                      358             401           (43)
Net Revenue per Passenger          $     132.01   $      120.80  $      11.21

Revenue:

    Gaming                         $  7,283,863   $   7,213,088  $     70,775
    Fare                              1,794,255       1,946,858      (152,603)
    On Board                            903,562       1,025,473      (121,911)
    Less: Promotional Allowances
    Fare                             (1,142,742)     (1,192,333)       49,591
    On Board                           (468,454)       (511,658)       43,204
                                    -----------     -----------    ----------
    Net Operating Revenue             8,370,484       8,481,428      (110,944)
                                    -----------     -----------    ----------
Expenses:

    Gaming                            2,406,679       2,291,657       115,022
    Fare                                586,280       1,014,790      (428,510)
    On Board                            201,401         248,762       (47,361)
    Maritime and Legal Expenses       1,977,572       1,715,709       261,863
    Administrative                      701,759         965,286      (263,527)
    Finance Expenses - Net            1,600,479         744,864       855,615

    Depreciation and Amortization       622,585         468,638       153,947
    Total Expenses                    8,096,755       7,449,706       647,049
                                    -----------     -----------    ----------
             Income Before Income
             Tax Expense           $    273,729   $   1,031,722  $   (757,993)
                                    ===========     ===========    ==========

     Big Easy

     The  United  States  Coast  Guard  issued the Big Easy her  Certificate  of
Inspection on October 11, 2005,  following an extensive and unexpected  delay in
receiving  such   certification.   The  vessel's   first   official   cruise  to
international  waters was October 18,  2005.  Due to the  approaching  Hurricane
Wilma,  the vessel was  ordered  out of the Port for safe  haven  following  her
afternoon cruise on October 19, 2005.  Hurricane Wilma struck Florida on October
24,  2005.  Due to the damages  caused by  Hurricane  Wilma and vessel  schedule
conflicts,  the Big Easy was unable to sail commercially until November 6, 2005.
The unexpected delay in receiving the

                                       39

<PAGE>


vessels'  Certificate  of  Inspection,  and the  subsequent  delays,  damage and
inconveniences caused by Hurricane Wilma immediately following the maiden voyage
had a compounding  adverse effect on the Company's  ability to retain personnel.
As a result, the Company  experienced  greater than normal attrition of Big Easy
personnel,  particularly  those who carried Coast  Guard-issued  Merchant Marine
cards  (i.e.  also known as  z-cards).  These are issued by the Coast  Guard and
serve as required  documentation for those working on US flagged vessels to fill
Coast Guard  mandated  muster station  requirements).  As the number of Merchant
Marine card personnel became  increasingly  inadequate,  it became  increasingly
difficult for management to meet muster station requirements,  often forcing the
cancellation of many sailings,  particularly in December and January.  The Coast
Guard stopped issuing Merchant Marine cards suddenly and  unexpectedly  sometime
in October, 2005. Adverse sea conditions in November and December were generally
unfavorable  for commercial  sailing and were a  contributing  factor to several
missed sailings. As a result of these numerous challenges the vessel was able to
make only nineteen  sailings in November;  twenty-four  sailings in December and
eight  sailings  in January.  On January  31,  2006 the Coast  Guard  denied the
Company's  request to provide an extension to complete certain mandated work and
removed  the  vessels'   Certificate  of   Inspection.   On  January  31,  2006,
approximately one hundred Coast Guard Merchant Marine card applications relating
to the Big Easy  remained  unprocessed  by the Coast  Guard for twelve  weeks or
longer.

     We were having challenges  attracting  customers to the Big Easy, given her
inconsistent schedule of sailings.  The initial delay in receiving a Certificate
of Inspection and subsequent  inconsistencies  in scheduling caused  significant
negative cash flow and made advertising and promotional  efforts  difficult from
both a financial and practical  planning  perspective.  The lack of a consistent
commercial service schedule caused  insignificant  customer support resulting in
negative results. On February 1, 2006 we suspended operations indefinitely.

     During the three month period ended June 30, 2006 the Big Easy  sustained a
loss before interest  expense of approximately  $957,000.  The majority of these
costs  consist of the  continuing  expenses to keep the ship at wet dock and the
casino  equipment  leases.  Gaming  expenses  consist of gaming  equipment lease
expense in the amount of  approximately  $300,000 and an additional  $59,000 for
miscellaneous  expense in connection with the termination of services.  Maritime
and legal  expense  to keep the vessel at dry dock were  $322,000.  Fare and on-
board expenses of $21,751  consist of various  expenses  incurred as a result of
the termination of the vessel operations. General and administrative expenses of
$253,673  consist of $187.500  for the  deployment  of the vessel to its current
location  in  St.  Petersburg,   Florida  and  approximately   $35,000  for  the
exploration  of a new  location  for the vessel and  approximately  $30,000  for
miscellaneous  administrative  expenses  during the dry dock  period.  Interest,
financing  expense and the bare boat  charter  fees during the quarter were $1.8
million  resulting  in a net (loss) of  ($2,535,277)  for the three months ended
June 30, 2006 as compared to ($3,273,382) during the comparable six month period
when all of the Big Easy costs were charged to development costs.


                                       40

<PAGE>


Results of Operations for the Six Months Ended June 30, 2006 and 2005

     Consolidated

     The table below separately  identifies and compares the revenues,  expenses
and net  income  before  taxes of our  vessels  and other  operating  subsidiary
companies  as shown on the  Consolidated  Statement  of  Operations  for the six
months ended June 30, 2006 as compared to the six months ended June 30, 2005.

<TABLE>
                                            Six Months Ended                                     Six Months Ended
                                              June 30, 2006                                        June 30, 2005
                         -----------------------------------------------------------------------------------------------------------
                                                     Holding Co                                            Holding Co
                          Palm Beach       Big          &                        Palm Beach      Big            &
                           Princess        Easy      Other Subs       Total       Princess       Easy      Other Subs      Total
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
<CAPTION>
<S>                      <C>           <C>          <C>           <C>           <C>          <C>          <C>           <C>
Operating Revenues:

  Gaming                 $ 15,074,450  $     62,738 $          -  $ 15,137,188  $ 15,702,668 $         -  $          -  $15,702,668

  Fare                      1,606,196         6,333            -     1,612,529     1,830,848           -             -    1,830,848

  On Board                    853,722         9,419            -       863,141     1,113,278           -             -    1,113,278

  Other                             -             -      208,694       208,694             -           -       233,138      233,138
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
                  Total    17,534,368        78,490      208,694    17,821,552    18,646,794           -       233,138   18,879,932
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
Operating Costs and
Expenses:

  Gaming                    4,745,356     1,228,185            -     5,973,541     4,884,559           -             -    4,884,559

  Fare                      1,185,473        96,723      188,816     1,471,012     2,160,152           -       204,359    2,364,511

  On Board                    422,135        33,549            -       455,684       535,594           -             -      535,594

  Maritime & Legal          3,781,011     1,279,987            -     5,060,998     3,528,794           -             -    3,528,794

  G & A Expenses            1,547,789       583,955    1,098,734     3,230,478     1,516,131           -       974,770    2,490,901

  Development Costs                 -             -      304,127       304,127             -   4,382,692       235,178    4,617,870

         Royal Star                 -             -      898,900       898,900             -           -       177,839      177,839

             Equine                 -             -            -             -             -           -       447,989      447,989

  Impairment of Assets              -             -      400,000       400,000             -           -       150,000      150,000

  Dep & Amort               1,264,020       411,104        5,355     1,680,479     1,020,860           -         8,546    1,029,406
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
                  Total    12,945,784     3,633,503    2,895,932    19,475,219    13,646,090   4,382,692     2,198,681   20,227,463
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
Operating Income
(Loss)                      4,588,584    (3,555,013)  (2,687,238)   (1,653,667)    5,000,704  (4,382,692)   (1,965,543)  (1,347,531)

Other Income (Expense):

  Interest &
  Financing Expenses       (2,030,540)   (2,173,497)    (524,793)   (4,728,830)     (900,160)           -     (230,163)  (1,130,323)

  Interest & Financing
  Expenses - RP              (506,571)     (600,000)      (9,505)   (1,116,076)     (486,485)   (415,400)      (15,977)    (917,862)

  Warrant Expense                   -             -   (1,073,098)   (1,073,098)            -           -             -            -

  Interest Income               2,798             -            -         2,798        15,233           -             -       15,233

  Interest Income - RP        124,498             -       19,152       143,650       130,726           -        14,440      145,166
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
                  Total    (2,409,815)   (2,773,497)  (1,588,244)   (6,771,556)   (1,240,686)   (415,400)     (231,700)  (1,887,786)
                         ------------  ------------ ------------  ------------  ------------ ------------ ------------  -----------
Income (Loss) Before
Income Tax               $  2,178,769  $ (6,328,510)$ (4,275,482) $ (8,425,223) $  3,760,018 $(4,798,092) $ (2,197,243) $(3,235,317)
                         ============  ============ ============  ============  ============ ============ ============  ===========
</TABLE>

     Since our accounting periods consist of a 4-4-5 week quarter,  from time to
time an  additional  week is included  in the first  period to adjust our period
ends to more closely  match a calender  year end.  For example,  the three month
period ended March 31, 2005  contained 14 weeks  compared to the 13 weeks of the
three month period ended March 31, 2006. As a result,  the six months ended June
30, 2006 had 26 weeks as compared to 27 weeks in the same six month period ended
June 30, 2005

                                       41

<PAGE>


     Revenues  decreased  $1,058,380  primarily as a result of the net effect of
the revenues  generated by the Palm Beach Princess  decreasing by  approximately
$1.1 million, offset in part by the Big Easy revenues generated during the month
of January 2006.

     Operating  expenses  decreased  approximately  $.752  million,  or 4%, from
$20,227,463  in the six months  ended June 30,  2005 to  $19,475,219  in the six
months ended June 30, 2006 primarily the result of:

     o    a decrease in the  operating  and  carrying  costs for the Big Easy of
          approximately  $750,000 for the six months as compared to the previous
          six month period when we incurred start-up costs of $4.4 million;

     o    a  decrease  in  operating  expenses  for the Palm Beach  Princess  of
          approximately $700,000;

     o    a decrease in equine  operating costs of $447,989  because the Company
          terminated its equine operations on December 31, 2005; and

     o    an  increase  in the  carrying  costs  for our  Royal  Star  vessel of
          $721,061,  which  vessel  has  been  in wet  dock  storage  since  its
          purchase.  The  increase was  primarily  caused by the payments we are
          making on the  gaming  equipment  placed  aboard the vessel in January
          2005  whereas last year the payments on the  equipment  were  interest
          only and classified as an interest expense;

     o    an  increase  in  the  Parent   Company   administrative   expense  of
          approximately $124,000;

     o    the  impairment  of the liquor  license in the amount of  $400,000  as
          compared  to an  impairment  of a note  receivable  in the  amount  of
          $150,000 during the comparative six month period.

     The  Operating   (loss)  for  the  six  months  ended  June  30,  2006  was
($1,653,667)  as  compared  to an  operating  (loss)  of  ($1,347,531)  for  the
comparative six month period ended June 30, 2005.

     Other expenses  increased by  approximately  $4.9 million as a result of an
increase in the interest and financing expense due to: 1) the higher debt levels
on the  vessel  leases;  2) higher  interest  rates as a result  of the  penalty
interest  incurred on the $30 million  loan from PDS; 3)  forbearance  fees;  4)
interest  for the Big Easy being  capitalized  until  March 31,  2005 during its
reconstruction  period which is reflected in the six month period ended June 30,
2005;  and 5) an increase in the costs of warrants  granted for financing in the
amount of approximately $1.1 million.

     The Net (Loss) for the six months ended June 30, 2006 was  ($8,425,223)  or
($0.74)  per share as  compared  to a net (loss) of  ($3,325,314)  or ($.32) per
share for the six months ended June 30, 2005.

     For the six months ending June 30, 2006 the income before interest,  taxes,
depreciation  and amortization  and an impairment  loss,  (Adjusted  EBITDA) was
$426,812  as  compared  to  Adjusted  EBITDA of a  negative  ($348,125)  for the
corresponding six month period.

     Reconciliation of Non-GAAP Measures to GAAP

     Adjusted  EBITDA or  earnings  before  interest,  taxes,  depreciation  and
amortization  and unusual  items is not a measure of  performance  or  liquidity
calculated in accordance with generally accepted accounting  principles.  EBITDA
information  is  presented  as  a  supplemental  disclosure  because  management
believes  that it is a widely  used  measure of such  performance  in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the  operating  performance  of its  operations,  including  the  evaluation  of
operating  personnel.  Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance,  or
as an alternative to cash flows from operating activities,

                                       42

<PAGE>


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)

                                           Six Months Ended June 30,
                                        ------------------------------
                                              2006            2005
                                        --------------    ------------
Total Adjusted EBITDA                  $       426,812  $     (348,125)
  Depreciation & Amortization               (1,680,479)     (1,029,406)
  Interest & Financing Expenses             (6,918,004)     (2,048,182)
  Interest Income                              146,448         160,399
  Tax Benefit (Expense) on Income                    -          90,000
                                        --------------    ------------
Net Income (Loss) before Unusual Items      (8,025,223)     (3,175,314)

  Impairment Loss                             (400,000)       (150,000)
                                        --------------    ------------
Net Income (Loss)                      $    (8,425,223) $   (3,325,314)
                                        ==============    ============


     Vessel Operations

     Palm Beach Princess

     During the current period net operating  revenue from vessel operations was
$17,534,368 as compared to $18,646,794.  The decrease in revenue of $1.1 million
during the  comparable  quarters is due to comparing  the 26 weeks of operations
during 2006 to 27 weeks of  operations  during 2005.  The  operating  subsidiary
which operates the Palm Beach Princess ends its quarterly  accounting  period on
the last Sunday of each quarter.  These end of the week cut offs normally create
more comparability of the Company's quarterly  operations by generally having an
equal number of weeks (13) and weekend days in each quarter. Periodically,  this
system  necessitates  a 14 week  quarter.  The March 31, 2005 quarter was such a
quarter,  therefore,  the number of cruises,  revenues and expenses reported for
the first Fiscal quarter of last year included one additional week of operations
as compared to the first  quarter of 2006.  The average  revenue per week during
the six months  ended June 30, 2006 was  $674,400  compared to $690,622  for the
comparable six month period ended June 30, 2005. This was a result of a decrease
in the number of passenger per week of 5.4%,  partially offset by an increase in
the revenue per passenger of $119.25 to $123.07.

     Casino   operating   expenses  which  also  includes  food,   beverage  and
entertainment  decreased  $139,203 from $4,884,559 or 31.1% of casino revenue in
the six  month  period  ended  June 30,  2005 to  $4,745,356  or 31.5% of casino
revenue in the six month  period  ended June 30,  2006  primarily  the result of
dividing costs, many of which are fixed by their nature, over reduced revenues.

     During the month of January 2006, 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 operation.  These  allocations were made
to more  accurately  reflect  the cost of the Big Easy  used as a casino  gaming
vessel.  Approximately  $161,465  of  salaries  allocated  to the Big Easy  were
expensed  as  operating  costs  during  the six months  ended  June 30,  2006 as
compared  to  approximately  $295,000  of salary  costs that were  expensed  and
$60,000 of salaries  which were  capitalized  as part of the vessel costs during
the six  months  ended  June 30,  2005.  This  allocation  should be taken  into
consideration  when comparing  operating  results from year to year for the Palm
Beach Princess.


                                       43

<PAGE>


     Sales,  marketing and advertising  expenses  decreased $974,679 or 45%. The
amounts incurred for marketing and advertising decreased because the Company did
not have sufficient  funds to spend due to our negative cash position.  On Board
expenses  decreased by $113,459 as a result of fewer cruises  during the current
six month period.

     Maritime,  legal  and  administrative  expenses  increased  $527,762  which
reflects  in part the  decrease  in the  allocation  of salaries to the Big Easy
since the allocation was only done for one month in the current year.

     Finance expenses increased $925,241 as a result of the higher interest rate
due to default  interest being charged and a forbearance fee recorded during the
quarter.  Depreciation  and  amortization  increased  $243,160  as a  result  of
amortizing the dry dock expenses incurred in October of 2005.

     The income before income tax expense for the six months ended June 30, 2006
was  $2,178,769  as compared to income  before  income tax of  $3,760,017 in the
comparable six month period ended June 30, 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 425 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book.

The following is a comparative  summary of income and expenses of the Palm Beach
Princess  operation  for the 26 weeks  ended  July 2,  2006 and for the 27 weeks
ended July 3, 2005:

                                            Six Months Ended
                                        July 2,        July 3,
             Description                   2006           2005        Change
---------------------------------  ------------    -----------   -----------
Passenger Count                         142,477        156,361       (13,884)
Number of Cruises                           350            367           (17)
Average Number of
 Passengers per Cruise                      407            426           (19)
Net Revenue per Passenger         $      123.07   $     119.25  $       3.82

Revenue:

    Gaming                        $  15,074,450   $ 15,702,668  $   (628,218)
    Fare                              4,638,017      4,627,835        10,182
    On Board                          1,452,037      2,176,936      (724,899)
    Less: Promotional Allowances
    Fare                             (2,638,235)    (2,796,987)      158,752
    On Board                           (991,901)    (1,063,658)       71,757
                                   ------------    -----------   -----------
    Net Operating Revenue            17,534,368     18,646,794    (1,112,426)
                                   ------------    -----------   -----------
Expenses:

    Gaming                            4,745,356      4,884,559      (139,203)
    Fare                              1,185,473      2,160,152      (974,679)
    On Board                            422,135        535,594      (113,459)
    Maritime and Legal Expenses       3,781,011      3,528,794       252,217
    Administrative                    1,547,789      1,272,244       275,545
    Finance Expenses - Net            2,409,815      1,484,574       925,241

    Depreciation and Amortization     1,264,020      1,020,860       243,160
                                   ------------    -----------   -----------
    Total Expenses                   15,355,599     14,886,777       468,822
                                   ------------    -----------   -----------
        Income Before Income
        Tax Expense               $   2,178,769   $  3,760,017  $ (1,581,248)
                                   ============    ===========   ===========


                                       44

<PAGE>


     Big Easy

     During the six month  period  ending June 30,  2006 the Big Easy  sustained
losses before interest expense of approximately $3,555,000. This loss consist of
the  operational  loss for the month of January and the  continuing  expenses to
keep  the ship at wet dock  after  February  1,  2006 and the  casino  equipment
leases.  Interest,  financing  expense and the bare boat charter fees during the
six months were $2.8 million  resulting in a net (loss) of ($6,328,510)  for the
six  months  ended June 30,  2006 as  compared  to a net (loss) of  ($4,798,092)
during the  comparable  six month period when the Big Easy costs were charged to
development costs.


Inflation

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


                                       45

<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 June 30,  2006 in the  Company's  internal  controls  or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.


                                       46

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES


                                     Part II

                                OTHER INFORMATION

ITEM 1A. RISK FACTORS

     As disclosed in Part I, Item 1,  Footnote 4, the Company has entered into a
First Amended and Restated  Forbearance  Agreement with its primary lender,  PDS
Gaming  Corporation,  ("PDS") which  agreement  expires on August 29, 2006.  The
agreement  which among other  things  requires  that we sell assets or refinance
their  indebtedness  in full by  August  29,  2006 and if not  renewed,  PDS may
foreclose on its collateral which could put us out of business.

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

     See Part I, Item 1, Note 16 regarding  warrants to purchase  stock which is
incorporated herein by reference.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     See Part I, Item 1, Footnote 4 which is  incorporated  herein by reference.
The  Company  has failed to made any  payments of  principal  or interest  since
January  2006.  As of June 30,  2006,  the balance of the monthly  interest  and
principal payments that are in arrears total approximately $7 million dollars.

     The Company has also  defaulted  in the payment of $400,000 of an unsecured
promissory  note due December 9, 2005.  The note bears  interest at 9 % and more
importantly  requires  the payment of penalty  warrants  for each month the note
remains outstanding. See Part I, Item 1, Note 16-B, which is herein incorporated
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.


                                       47

<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.




August 21, 2006        /s/Francis W. Murray
                       ----------------------------------------------------
                       Francis W. Murray, President, Chief Executive Officer and
                       Chief Financial Officer


                                       48

<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: August 21, 2006


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

                                       49

<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: August 21, 2006


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


                                       50

<PAGE>


                                                                      Exhibit 32

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

     In  connection  with the  filing  of the  Quarterly  Report on Form 10-Q of
International  Thoroughbred Breeders, Inc. (the "Company") for the three and six
months ended June 30, 2006 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
August 21, 2006


                                       51

<PAGE>