FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

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

For the quarterly period ended               September 30, 2004
                               -------------------------------------------------

                                       OR

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

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


Commission file number                0-9624
                      ----------------------------------------------------------

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

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

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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the last 90 days. Yes X No
                                             ---  ---
     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes    No X
                                               ---   ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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


            Class                           Outstanding at November 15, 2004
------------------------------              --------------------------------
Common Stock, $ 2.00 par value                        10,565,202 Shares



<PAGE>




                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.

                                    FORM 10-Q

                                QUARTERLY REPORT
                  for the Three Months ended September 30, 2004
                                   (Unaudited)


                                TABLE OF CONTENTS

                                                                      PAGE
PART I. FINANCIAL INFORMATION

    Item 1. Financial Statements:

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

    Consolidated Statements of Operations
             for the Three Months ended
             September 30, 2004 and 2003...............................3

    Consolidated Statement of Stockholders' Equity
             for the Three Months ended September 30, 2004.............4

    Consolidated Statements of Cash Flows
             for the Three Months ended
             September 30, 2004 and 2003...............................5

Notes to Consolidated Financial Statements.............................6-25

    Item 2. Management's Discussion and Analysis of
             Financial Condition and Results of Operations.............26-31

    Item 3. Quantitative and Qualitative Disclosures About Market Risk.31

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

PART II. OTHER INFORMATION

    Item 1.  Legal Proceedings.........................................32
    Item 2. Unregistered Sales of Equity Securities and Use of
             Proceeds..................................................32
    Item 6. Exhibits ..................................................32

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

CERTIFICATIONS.........................................................34




<PAGE>



                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                   AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004

                                     ASSETS

                                                       September 30,
                                                           2004        June 30,
                                                       (UNAUDITED)      2004
                                                      ------------  ------------
CURRENT ASSETS:
     Cash and Cash Equivalents                       $  4,006,769  $  7,508,632
     Accounts Receivable                                  218,815       223,411
     Prepaid Expenses                                     998,244       738,504
     Other Current Assets                                 167,905       153,625
     Assets of Discontinued Operations                    401,548       400,835
                                                      ------------  ------------
        TOTAL CURRENT ASSETS                            5,793,281     9,025,007
                                                      ------------  ------------


VESSELS, EQUIPMENT & LIVESTOCK:
     Vessel - Palm Beach Princess                      17,500,000             0
     Leasehold Improvements - Port of Palm Beach          913,394       913,394
     Equipment                                          1,931,502     2,217,322
     Livestock                                            275,971             0
     Vessel Not Placed in Service - Empress II          3,407,602             0
     Vessel Not Placed in Service - Royal Star          2,092,691     1,321,494
                                                      ------------  ------------
                                                       26,121,160     4,452,210
     LESS: Accumulated Depreciation and Amortization    1,167,340       916,186
                                                      ------------  ------------

        TOTAL VESSEL, EQUIPMENT & LIVESTOCK - NET      24,953,820     3,536,024
                                                      ------------  ------------



OTHER ASSETS:
     Notes Receivable                                  14,578,651    14,778,651
     Mortgage Contract Receivable - Related Party               0    13,750,000
     Deposits and Other Assets - Related Parties        7,920,975     8,410,940
     Deposits and Other Assets - Non-Related Parties    1,293,582       334,975
     Spare Parts Inventory                                963,543       978,119
                                                      ------------  ------------
        TOTAL OTHER ASSETS                             24,756,752    38,252,685
                                                      ------------  ------------


TOTAL ASSETS                                         $ 55,503,852  $ 50,813,716
                                                      ============  ============

See Notes to Consolidated Financial Statements.

                                        1
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                   AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                    September 30,
                                                        2004          June 30,
                                                     (UNAUDITED)       2004
                                                   -------------   -------------
CURRENT LIABILITIES:
     Accounts Payable                            $      933,179  $    1,104,721
     Accrued Expenses                                 2,379,607       2,169,197
     Short-Term Debt                                    156,772       4,186,012
     Deferred Interest - Short-Term                     508,391         514,440
     Vessel Lease Payable - Current Portion             879,238               0
     Short-Term Debt - Related Parties                  183,164         183,164
     Liabilities of Discontinued Operations             313,198         310,798
                                                   -------------   -------------
        TOTAL CURRENT LIABILITIES                     5,353,549       8,468,332
                                                   -------------   -------------

LONG-TERM LIABILITIES:
     Vessel Lease Payable - Long Term Portion        13,120,762               0
     Long-Term Debt - Net of Current Portion             41,396       4,095,827
     Deferred Interest - Long-Term                    2,082,341       1,957,920
     Long-Term Debt - Related Parties                   206,026         285,649
                                                   -------------   -------------
        TOTAL LONG-TERM LIABILITIES                  15,450,525       6,339,396
                                                   -------------   -------------

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

COMMITMENTS AND CONTINGENCIES                              -               -


STOCKHOLDERS' EQUITY:
     Series A Preferred Stock, $100 Par Value,
      Authorized 500,000 Shares, 362,489
      Issued and Outstanding                         36,248,875      36,248,875
     Common Stock, $2 Par Value, Authorized
      25,000,000 Shares,Issued, 11,480,279, and
      Outstanding,10,565,202 and 7,802,134,
      respectively                                   22,960,557      22,960,557
     Capital in Excess of Par                        20,191,982      20,191,982
     (Deficit) (subsequent to June 30, 1993,
      date of quasi-reorganization)                 (45,869,497)    (46,989,638)
                                                   -------------   -------------
                                                     33,531,917      32,411,776
     LESS:
     Treasury Stock, 915,077 and 3,678,146
      Shares, respectively, at Cost                    (457,538)     (1,839,073)
     Deferred Compensation, Net                          (5,416)         (6,666)
                                                   -------------   -------------
        TOTAL STOCKHOLDERS' EQUITY                   33,068,963      30,566,037
                                                   -------------   -------------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $   55,503,852  $   50,813,716
                                                   =============   =============

See Notes to Consolidated Financial Statements.

                                        2
<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
                                   (UNAUDITED)


<TABLE>
                                                                 September 30,
                                                          ---------------------------
                                                              2004           2003
                                                          -----------    ------------
<CAPTION>
<S>                                                     <C>             <C>
OPERATING REVENUES:
     Gaming                                             $   5,329,507   $  6,494,687
     Fare                                                     540,665        655,371
     On Board                                                 411,328        425,099
     Other                                                     96,822         42,911
                                                          ------------   ------------
        NET OPERATING REVENUES                              6,378,322      7,618,068
                                                          ------------   ------------

OPERATING COSTS AND EXPENSES:
     Gaming                                                 2,114,088      2,079,617
     Fare                                                     960,198        713,754
     On Board                                                 211,113        195,241
     Maritime & Legal Expenses                              1,467,781      1,749,269
     General & Administrative Expenses                      1,002,647        877,145
     General & Administrative Expenses - Parent               427,583        329,593
     Development Costs                                        524,814         25,355
     Depreciation & Amortization                              398,879        135,283
     ITG Vegas Bankruptcy Costs                                 1,546        258,562
                                                          ------------   ------------
        TOTAL OPERATING COSTS AND EXPENSES                  7,108,649      6,363,819
                                                          ------------   ------------

OPERATING INCOME (LOSS)                                      (730,327)     1,254,249
                                                          ------------   ------------

OTHER INCOME (EXPENSE):
     Interest and Financing Expenses                       (1,011,600)      (500,452)
     Interest and Financing Expenses - Related Party         (155,991)             0
     (Loss) on Impairment of Note Receivable                 (200,000)             0
     Interest Income                                           74,343         68,695
     Interest Income Related Parties                            3,974          3,254
     Other Income                                                 241         50,914
                                                          ------------   ------------
        TOTAL OTHER INCOME (EXPENSE)                       (1,289,033)      (377,589)
                                                          ------------   ------------


INCOME (LOSS) BEFORE TAX PROVISION                         (2,019,360)       876,660
AND EXTRAORDINARY ITEM
     Income Tax (Benefit) Expense                             (42,000)        17,600
                                                          ------------   ------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                    (1,977,360)       859,060

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

NET INCOME                                              $   1,582,640   $    859,060
                                                          ============   ============

NET BASIC INCOME PER COMMON SHARE                       $        0.16   $       0.10
                                                          ============   ============

NET DILUTED INCOME PER COMMON SHARE                     $        0.15   $       0.10
                                                          ============   ============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING - Basic                               9,718,796      8,252,133
                                                          ============   ============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING - Diluted                            10,258,358      8,966,996
                                                          ============   ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                        3
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
                                   (UNAUDITED)
<TABLE>
                                                     Preferred                  Common
                                              ------------------------  -------------------------
                                               Number of                 Number of
                                                Shares       Amount       Shares        Amount
                                              ------------  ----------  ------------  -----------
<CAPTION>
<S>                                               <C>     <C>            <C>        <C>
BALANCE - JUNE 30, 2004                           362,489 $ 36,248,875   11,480,279 $ 22,960,557



Shares Issued for Options Granted

Options Issued at Less than Treasury
 Stock Cost                                       ---          ---          ---          ---

Amortization of Deferred Compensation Costs       ---          ---          ---          ---

Net Income for the Three Months Ended
 September 30, 2004                               ---          ---          ---          ---

                                              ------------  ----------  ------------  -----------
BALANCE - SEPTEMBER 30, 2004                      362,489 $ 36,248,875   11,480,279 $ 22,960,557
                                              ============  ==========  ============  ===========
</TABLE>

<TABLE>
                                               Capital                        Treasury      Deferred

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



Shares Issued for Options Granted                                                919,035                         919,035

Options Issued at Less than Treasury
 Stock Cost                                      ---              (462,500)      462,500       ---                     0

Amortization of Deferred Compensation Costs      ---             ---             ---             1,250             1,250

Net Income for the Three Months Ended
 September 30, 2004                              ---             1,582,641       ---           ---             1,582,641

                                              ------------ ----------------  ------------  ------------  ----------------
BALANCE - SEPTEMBER 30, 2004                  $20,191,982   $  (45,869,497) $   (457,538) $     (5,416)  $    33,068,963
                                              ============ ================  ============  ============  ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       4
<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
                                   (UNAUDITED)

<TABLE>
                                                                         September 30,
                                                                  --------------------------
                                                                      2004          2003
                                                                  ------------   -----------
<CAPTION>
<S>                                                             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     INCOME BEFORE DISCONTINUED OPERATIONS                      $   1,582,640  $    859,060
     Adjustments to reconcile income to net cash provided by
      operating activities:
        Depreciation and Amortization                                 398,879       135,283
        Impairment of Note                                            200,000             0
        Increase in Defferred Income                                  190,863             0
        (Decrease) in Deferred Income - Related Parties            (4,000,000)            0
        Changes in Operating Assets and Liabilities -
         (Increase) in Restricted Cash & Investments                        0    (1,294,048)
         Decrease (Increase) in Accounts Receivable                     4,596        (5,138)
         (Increase) in Other Assets                                   (14,278)      (26,130)
         (Increase) in Prepaid Expenses                              (259,740)     (321,337)
         Increase in Accounts Payable and Accrued Expenses            298,865        57,120
                                                                  ------------   -----------
     CASH (USED BY) OPERATING ACTIVITIES BEFORE
      DISCONTINUED OPERATIONS                                      (1,598,175)     (595,190)
     CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES                 2,400         2,400
                                                                  ------------   -----------
     NET CASH PROVIDED BY OPERATING ACTIVITIES                     (1,595,775)     (592,790)
                                                                  ------------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase and Improvements of Vessels                           (4,472,494)            0
    Loans Paid by Related Parties                                   3,522,538             0
    Capital and Livestock Expenditures                               (571,284)     (179,320)
    (Increase) Decrease in Other Investment Activity                  (64,911)      428,858
                                                                  ------------   -----------
     CASH (USED IN) INVESTING ACTIVITIES
      BEFORE DISCONTINUED INVESTING ACTIVITIES                     (1,586,151)      249,538
     CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES                     0             0
                                                                  ------------   -----------
     NET CASH (USED IN) INVESTING ACTIVITIES                       (1,586,151)      249,538
                                                                  ------------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal Payments on Short Term Notes                             (6,029)     (141,834)
    Principal Payments on Loans to Related Parties                   (313,195)            0
    Decrease in Balances Due to/From Discontinued Subsidiaries          1,687         2,438
                                                                  ------------   -----------
     CASH (USED IN) FINANCING ACTIVITIES
      BEFORE DISCONTINUED FINANCING ACTIVITIES                       (317,537)     (139,396)
     CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES                  (1,687)       (2,438)
                                                                  ------------   -----------
     NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES             (319,224)     (141,834)
                                                                  ------------   -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               (3,501,150)     (485,086)
          LESS CASH AND CASH EQUIVALENTS  FROM
            DISCONTINUED OPERATIONS                                      (713)           37
     CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD           7,508,632     6,123,641
                                                                  ------------   -----------
     CASH AND CASH EQUIVALENTS AT END OF THE PERIOD             $   4,006,769  $  5,638,592
                                                                  ============   ===========

     Supplemental Disclosures of Cash Flow Information:
        Cash paid during the period for:
        Interest                                                $     654,862  $    303,415
        Income Taxes                                            $           0  $          0

</TABLE>



See Notes to Consolidated Financial Statements.

                                        5
<PAGE>


<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

     (E)  Depreciation and Amortization - Depreciation of property and equipment
were computed by the  straight-line  method at rates  adequate to allocate their
cost or  adjusted  fair  value  in  accordance  with U.  S.  generally  accepted
accounting   principles  over  the  estimated  remaining  useful  lives  of  the
respective  assets.  Amortization  expense  consists  of the  write off of major
vessel repairs and maintenance work completed at dry dock period. These expenses
are written off during a two year period following the dry dock period.  For the
three months ended  September 30, 2004, the amortized  expense was $43,373.  For
the three months ended  September  30,  2003,  there were no amortized  expenses
associated with a dry dock period.

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

     (F) Net Assets of Discontinued Operations - At September 30, 2004 and 2003,
the  remaining  net assets and  liabilities  of Garden  State Park and  Freehold
Raceway  were  classified  as  "Net  Assets  of  Discontinued  Operations."  and
"Liabilities of Discontinued Operations."

     (G) Recent  Accounting  Pronouncements  - In January  2003,  the  Financial
Accounting Standards

                                        6

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

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

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

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

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

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

     (M)  Deferred  Income - The gain  from the sale of our  Garden  State  Park
property on November 28,

                                        7

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

     (O)  Capitalized  Interest - during the  quarter  we  capitalized  interest
payments  made under the  Empress II  sublease  in the amount of  $280,645.  The
interest  payments  will be  capitalized  until the vessel is placed in service,
estimated to be during our third fiscal quarter, beginning on January 1, 2005.

(2)  PDS TRANSACTION

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

     All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
the Chief Executive Officer of the Corporation. PBMC owns 50% of the outstanding
capital stock of PBE. The remaining 50% of the outstanding  capital stock of PBE
is owned by  Raymond  Parello  and has been  pledged  to the  Company  to secure
certain debts as described in the Company's  Report on Form 8-K filed on July 6,
2004.

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

     Sale-Leaseback   of  the  Princess.   Prior  to  the  closing  of  the  PDS
Transactions  (the "Closing"),  the Princess was owned by PBMC. On May 13, 1999,
PBMC issued to Cambridge  Capital Group,  Inc. a note in the original  principal
amount of  $12,000,000  (the  "Ship  Mortgage  Note"),  which  was  subsequently
acquired by Donald F. Conway,  as Chapter 11 Trustee of the Bankruptcy Estate of
Robert E. Brennan (the "Brennan Trustee"). The Ship Mortgage Note was secured by
a  Second  Naval  Mortgage  over the  Princess  (which  became a first  priority
mortgage when  obligations  secured by the first  mortgage were paid) (the "Ship
Mortgage").  Pursuant to a Purchase and Sale agreement  dated February 22, 2002,
ITG Vegas agreed to purchase the Ship  Mortgage  Note and Ship Mortgage from the
Brennan Trustee for a purchase price of $13,750,000 (the "Purchase Obligation").
In addition, the Company was indebted to the Brennan Trustee in

                                        8

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

connection with the Company's repurchase of 3,678,145 shares of its common stock
(the "ITB Obligation").  As of Closing, the aggregate  outstanding amount of the
Purchase Obligation and ITB Obligation was $7,916,451.71, for all of which PBMC,
ITG Vegas and the Company were  jointly and  severally  liable.  At the Closing,
Cruise  Holdings I, LLC  ("Cruise  I"), a subsidiary  of PDS Gaming  Corporation
("PDS"),  purchased the Princess  from PBMC for  $14,000,000;  $7,916,451.71  of
which was paid by PBMC  directly to the Brennan  Trustee to satisfy the Purchase
Obligation and ITB Obligation.

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

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

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

                                        9

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

$14,000,000  amortized over 48 months at an interest rate of 15.3%. In addition,
the exercise price for the assignment option may be offset by any debts owing by
PBMC to ITG Vegas and/or ITGPB.

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

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

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

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

                                       10

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

improvements  to the Empress which are paid by ITG Vegas or ITGPB plus (iii) the
aggregate  amount  of all Cash  Flow  Sweep  payments  made  under  the  Empress
Sub-Charter,  plus (iv) the portion of the Empress Additional  Payments made for
the 13th month  through the 60th month of the term of the Empress  Sub-  Charter
which would be considered  principal  payments if such Additional  Payments were
payments of principal  and interest on a loan of  $6,000,000  amortized  over 48
months at an interest rate of 16.54%.  In addition,  the exercise  price for the
assignment  option may be offset by any debts owing by PBMC to ITG Vegas  and/or
ITGPB.

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

     Guaranty  Agreements.  As a condition to entering into the PDS Transaction,
PDS  required  the  Corporation,  ITG  Vegas,  ITGPB,  PBMC and PBE to  guaranty
performance of certain of the PDS Transactions.  The Corporation,  ITG Vegas and
ITGPB entered into Guaranty  Agreements  guarantying the obligations of PBMC and
PBE under the Princess  Charter,  Princess  Master  Lease,  Empress  Charter and
Empress  Master  Lease.  The  Corporation,  PBMC and PBE entered into a Guaranty
Agreement  guarantying  the  obligations of ITG Vegas and ITGPB under the Gaming
Equipment Lease.

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

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

                                       11

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



(3)  DESCRIPTION OF LEASING ARRANGEMENTS

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

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

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

     Vessels,  plant and  equipment at September  30, 2004 include the following
amounts for capitalized leases:


       Vessel, Palm Beach Princess       $   17,500,000
       Less: allowance for depreciation       (201,923)
                                           ------------
       Capital Leases                    $   17,298,077
                                           ============

















                                       12

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of September 30, 2004:

Period ending September 30,
                         2005               $      3,528,526
                         2006                      5,661,154
                         2007                      5,661,154
                         2008                      5,661,154
                         2009                      4,717,628
                                               -------------
Total minimum lease payments                $     25,229,616
Less: amount representing interest              (11,229,616)
                                               -------------
Present value of net minimum lease payment  $     14,000,000
                                               =============

     Operating Leases

     The  following  is a schedule by years of future  minimum  rental  payments
required under  operating  leases that have initial or remaining  non-cancelable
lease terms in excess of one year as of September 30, 2004:

Period ending September 30,
                         2005               $      1,038,098
                         2006                      1,362,147
                         2007                      1,135,122
                                               -------------
Total minimum lease payments                $      3,535,367
                                               =============


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

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


                                       13

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

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

(5)  NOTES RECEIVABLE

     (A)  Second Cherry Hill Note

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

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

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

     The Company is not liable for  repayment of the principal of the $5 million
loan included in the foregoing consideration.  However, the Company is obligated
to pay interest and fees on such loan aggregating

                                       14

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

$600,000 per year ($50,000 per month) for five (5) years.

     The Second Cherry Hill Note received by the Company  matures in 2015 and is
similar to the Las Vegas Note which was sold, in that both generally are payable
prior to maturity only from  distributable cash of the maker. The Las Vegas Note
was payable  prior to maturity from  distributable  cash of the entity which had
purchased,  in May of  2000,  the  real  property  (the  "El  Rancho  Property")
previously  owned by our  Orion  Casino  Corporation  subsidiary  in Las  Vegas,
Nevada,  which had been the site of the former El Rancho Hotel and Casino. Since
the maker of the Las Vegas Note has not yet finalized  plans for  development of
that property,  the time at which the Company might have received payments under
the Las Vegas Note (had it not been sold) remained uncertain.  The obligor under
the Second Cherry Hill Note is one of the principal partners in the entity which
purchased  the Garden  State Park real  property  from a Company  subsidiary  in
November of 2000,  and such  obligor  will only have funds with which to pay the
Second Cherry Hill Note out of its profits from the  development of Garden State
Park. The development of Garden State Park,  located in Cherry Hill, New Jersey,
was  delayed as a result of  community  opposition  to certain  elements  of the
development  plan, and, while the Company  believes that the development plan is
now  moving  forward,  the  timing  and  amount of  profits  there  also  remain
uncertain. The Company already holds a promissory note in the face amount of $10
million, received from the purchaser of Garden State Park in connection with the
sale of such real  property,  which the  Company  expects  will be fully paid in
time. While the Company expects that note to be fully paid, it is not optimistic
that this  Second  Cherry  Hill Note will be fully paid,  and  accordingly,  the
Company has written  down the Second  Cherry  Hill Note  (defined  above) on its
books.  The interest  portion of the Las Vegas Note  amounting to  approximately
$20,866,000 has never been included as income on the Company's books,  therefore
the interest  capitalized  under the Second Cherry Hill Note is not subject to a
write  down.  The  remaining  portion  of the Second  Cherry  Hill Note has been
written down to $4,578,651  which  resulted in an  impairment  charge of the new
note of $12,786,589,  recorded in the 4th quarter of the Company's June 30, 2004
fiscal year and an additional  impairment charge of $200,000 recorded during the
quarter ended September 30, 2004. The Company had previously  recorded  deferred
income of  $2,786,589  on the  original  sale of the El Rancho  property in May,
2000,  which amount was used to reduce the  impairment  charge to $10,000,000 at
June 30, 2004.  In its  assessment  of the fair value of the Second  Cherry Hill
Note,  the Company  estimated that its share of proceeds from the sale of the El
Rancho property prior to July 31, 2005 would generate approximately $500,000. If
a sale does not occur prior to July 31, 2005 it is anticipated  that the Company
will take an  additional  impairment  write down against the Cherry Hill Note of
approximately $300,000 in this fiscal year ending June 30, 2005.

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

     Mr. Parello will have the right to acquire the Second Cherry Hill Note from
the Company in exchange  for his stock in Palm Beach  Empress,  Inc.  Such "put"
option held by Mr. Parello  (giving him the right to put his stock in Palm Beach
Empress,  Inc.  to the  Company  in  exchange  for the  Cherry  Hill  Note) will
effectively limit the value to the Company of the Second Cherry Hill Note to the
value of Mr.  Parello's  one-half  interest  in Palm  Beach  Empress,  Inc.  Mr.
Parello's put right will be  exercisable  upon the later to occur of (1) payment
by or for the account of Cherry Hill  Partners of  $483,205.48  under the Second
Cherry Hill Note, and (2)

                                       15

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

payment of the entire principal balance of the non-recourse loan received by our
Orion subsidiary in the principal amount of $5 million,  referred to above (upon
which  repayment the  Company's  obligation to pay interest and fees of $600,000
per  year on  such  loan  would  end).  Such  put  option  is set  forth  in the
Shareholders'  Agreement  among Palm Beach Empress,  Inc.,  Raymond  Parello and
PBMC,  to which our Orion  subsidiary  has  joined  solely  for the  purpose  of
confirming its agreement to the put option.

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

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

     (B)  Original Cherry Hill Note

     A portion of the proceeds  from the sale on November 30, 2000 of our Garden
State Park property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill,
LLC ("Realen")  was paid in the form of a promissory  note in the face amount of
$10 million (the  "Note.")  Under the Note,  the interest  rate will be adjusted
from time to time since the interest  actually  payable will be dependent  upon,
and payable solely out of, the buyer's net cash flow available for  distribution
to its equity owners ("Distributable  Cash"). After the buyer's equity investors
have received aggregate  distributions equal to their capital contributions plus
an agreed  upon  return  on their  invested  capital,  the next $10  million  of
Distributable Cash will be paid to us. We will thereafter receive payments under
the Note equal to 33 1/3% of all  Distributable  Cash until the  maturity  date,
which occurs on the 15th anniversary of the issuance of the Note. We may convert
the  promissory  note, at our option,  into a 33 1/3% equity  interest in Realen
during the six month period prior to the 15th anniversary of the issuance of the
Note. If not then  converted,  the Note will be payable at maturity on said 15th
anniversary  in an  amount  equal to (i) the  difference,  if any,  between  $10
million and total payments previously made to us under the Note and (ii) 33 1/3%
of any excess of the fair market  value of  Realen's  assets over the sum of its
liabilities  (other than the Note) and any unreturned  equity  investment of its
owners.  Fair value and the collectability of this note was determined by a real
estate  appraisal  completed  in  March,  2002  for a bank  in  anticipation  of
financing for Turnberry.














                                       16

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(6)  DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES

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

                                September 30, 2004    June 30, 2004
                                ------------------   --------------
Long-Term Lease Deposits     $             293,695 $              0
Long-Term Prepaid Loan Costs               664,912                0
Port Lease Rights                          250,000          250,000
Other Misc. Assets                          84,975           84,975
                                ------------------   --------------
         Total               $           1,293,582 $        334,975
                                ==================   ==============


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

     The following  items are  classified as Deposits and Other Assets - Related
Party Transactions (See Note 22):

<TABLE>
                                                             September 30, 2004      June 30, 2004
                                                             ------------------     ------------
<CAPTION>
<S>                                                        <C>                   <C>
Loans to the Ft Lauderdale Project (OC Realty, LLC)        $        2,034,405    $     2,034,405

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

Accrued Interest on Loans to the Ft. Lauderdale Project
(OC Realty, LLC)                                                    1,270,624            911,350

Purchase Option Deposits on Vessels                                 3,686,416                  0

Advances to PBMC                                                            0            616,534

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

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

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

Accounts Receivable from Francis W. Murray                                  0             32,751

Loans to Francis W. Murray                                                  0             93,000

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

Accounts Receivable from Frank Leo                                          0             24,512
                                                               --------------      -------------
         Total Deposits and Other Assets - Related Parties $        7,920,975    $     8,410,941
                                                               ==============      =============
</TABLE>





                                       17

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



(8)  NOTES AND MORTGAGES PAYABLE

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

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

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

Other                                        Various            34,617                  -0-            25,000                  -0-

ITG Vegas, Inc.:
----------------
International Game Technology (C)                 8%           122,155               41,396           122,174               71,685

Garden State Park:
------------------
Service America Corporation (D)                   6%           160,000                  -0-           160,000                  -0-
                                                        --------------    -----------------    --------------    -----------------
                 Totals                               $        499,936  $            41,396 $       4,529,176  $         4,095,827

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

Related Party Notes                                           (183,164)                 -0-          (183,164)                 -0-
                                                        --------------    -----------------    --------------    -----------------
Totals                                                $        156,772  $            41,396 $       4,186,012  $         4,095,827
                                                        ==============    =================    ==============    =================
</TABLE>
The effective Prime Rate at June 30, 2004 was 4%.

     (A)  Balance  as  of  June  30,  2004:  In  connection  with  the  Plan  of
Reorganization we became liable for the purchase of the Ship Mortgage Obligation
in the amount of $9.75 million and that  obligation was combined with the unpaid
balance of the Stock  Purchase  Note,  and an additional  obligation to purchase
450,000 shares for $225,000,  plus accrued interest,  for a total amount due the
Brennan Trustee of $11,623,414  ("The Payment  Obligation").  In connection with
the PDS  transactions,  on July 7, 2004 the  outstanding  principal  balance  of
$7,744,936  was paid by PBMC  directly  to the  Brennan  Trustee to satisfy  the
Payment Obligation. (See Note 2)

     (B) On March 1, 2003,  we issued a promissory  note for a line of credit up
to $225,000 bearing interest at 8% to Francis X. Murray. The outstanding balance
on the line of credit  note at  September  30,  2004 was  $159,164  and  accrued
interest was $19,396.  In fiscal 2003,  we issued  promissory  notes for $24,000
bearing interest at 12% to William H. Warner, Secretary of the Company. Interest
is paid monthly on the note to Mr.  Warner.  The proceeds from Mr.  Murray's and
Mr. Warner's notes were used as working capital.


                                       18

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (C) On December  22,  2003,  ITG Vegas,  Inc.  issued a  twenty-four  month
promissory  note  in  the  amount  of  $231,716  bearing  interest  at  8.5%  to
International Game Technology for the purchase of gaming equipment. A payment of
$30,000  was  paid on  delivery  of the  equipment  and 24  consecutive  monthly
installments of $10,532.85 are to be paid on the balance. At September 30, 2004,
the principal balance on the International Game Technology note was $163,551.

     (D) In  connection  with the January 28,  1999 lease  transactions  for the
Garden State Park facility,  the Company  purchased a liquor license  located at
Garden  State  Park  owned  by an  unaffiliated  third  party,  Service  America
Corporation (the "Holder"),  for $500,000 financed by a five (5) year promissory
note at a 6% interest rate.  Yearly principal  payments of $80,000 plus interest
were due on  December  28, 2002 and  December  28,  2003.  The  payments  due on
December 28, 2002 and 2003 have not been made as of September  30, 2004.  We are
attempting  to  negotiate  new terms for  payment  of this  obligation,  but the
creditor may bring an action to collect this debt.

(9)  COMMITMENTS AND CONTINGENCIES

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

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

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

     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,  ITG Vegas,  under Chapter 11 of the bankruptcy
code.  At this time we are unable to  predict  the  effects  that such delay may
cause, but it is likely that some retesting of the wells may be necessary. Prior
to the delays it was estimated that the cost to remediate the site would be

                                       19

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

approximately  $750,000.  As of June 30,  1999 we had  accrued  $362,000  and we
accrued an additional amount of approximately $388,000 during fiscal 2001 as the
scope of the project was further defined.  Such accruals were made with the help
of the environmental consulting firm engaged by the Company. 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  $93,600,
$200,000,  and $323,000 during fiscal years 2000, 2001, 2002 respectively  which
were charged against the accrued balances.  As of September 30, 2004 the accrued
balance was $130,398.  It is estimated that completion of the site clean up will
take  approximately  18  months  from the time  the  work is  reinstated.  It is
unlikely that the Company will receive any insurance reimbursement for our costs
of this remediation project.

     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 the  lessee/buyer  did not have a use for
the liquor  license at that  property.  By the terms of the contract the Company
has the right to  re-acquire  the liquor  license for $100,000 and has exercised
such  right,  however  the  lessee/buyer  has  refused to  perform.  The Company
believes  it will need to take legal  action to enforce  its right to the liquor
license.

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

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

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

                                       20

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



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

     The PDS Transaction  involved,  among other things, our chartering a second
vessel,  the  Empress  II.  We  have  committed   $3,407,602  towards  costs  of
refurbishing  and  retrofitting  the  Empress II vessel to date.  Start up costs
associated with  refurbishing and retrofitting the Empress II vessel and placing
it in service (including  marketing expenses and other soft costs), are expected
to amount to  approximately  $10 million,  $6 million of which has been provided
for by means of an escrow of our  $2,880,652  payment  and  proceeds  of the PDS
Transactions.  Additional amounts necessary to begin operation of the Empress II
vessel  are  expected  to be  provided  from  working  capital  of our ITG Vegas
subsidiary. ITG Vegas' ability to generate sufficient working capital with which
to pay such  costs may be  adversely  affected  by delays  or cost  overruns  in
connection with refurbishing and refitting the Empress II and by weather related
and other  uncertainties  affecting  its  operations.  As indicated by the table
below, our debt service  requirements have increased  significantly with the PDS
financing  due to the  increase  in  amounts  of debt and  rates  involved.  The
increase in the amount is attributed in part to the  arrangement for procurement
and refurbishment for a second vessel, the Empress II. We are dependent upon the
expected  additional  revenue from the  operations of the second vessel to cover
the increased financing costs.

The following summarizes  commitments on non-cancelable  contracts and leases as
of September 30, 2004:
<TABLE>
                                                   Twelve Months Ended September 30,
                                 --------------------------------------------------------------------    There-
                                       2005      2006           2007          2008           2009        after         Total
                                 ----------    -----------    -----------   -----------   -----------   ---------   -------------
<CAPTION>
<S>                            <C>           <C>            <C>            <C>           <C>           <C>         <C>
Capital Leases - PBP           $  3,528,526  $   5,661,154  $   5,661,154  $  5,661,154  $  4,717,628  $      -0-  $   25,229,616
 Leases - Empress II              1,981,755      3,410,430      3,410,430     3,410,430     3,072,930         -0-      15,285,975
Notes and Mortgages:
   Principal                        684,912            -0-            -0-           -0-           -0-         -0-         684,912
    Interest                         22,475            -0-            -0-           -0-           -0-         -0-          22,475
Deferred Interest Payments          450,000        600,000        600,000       600,000       450,000         -0-       2,700,000
Employee Contracts                  722,884        146,314            -0-           -0-           -0-         -0-         869,198
Operating Leases:
    Casino Equipment              1,038,098      1,362,147      1,135,122           -0-           -0-         -0-       3,535,367
    Administrative & Office         517,317        265,032        122,787        68,018           -0-         -0-         973,154
Purchase Obligations                204,374         61,120         61,006        61,006        61,006     254,190         702,702
Other Long-Term Debt                    -0-        285,649            -0-           -0-           -0-         -0-         285,649
                                 ----------    -----------    -----------   -----------   -----------   ---------   -------------
Total                          $  9,150,341  $  11,791,846  $  10,990,499  $  9,800,608  $  8,301,564  $  254,190  $   50,289,048
                                 ==========    ===========    ===========   ===========   ===========   ==========  =============
</TABLE>




                                       21

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



(10) LEGAL PROCEEDINGS

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


(11) FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of  September  30,  2004,  in  assessing  the fair  value  of  financial
instruments,  the Company has used a variety of methods and  assumptions,  which
were based on estimates  of market  conditions  and loan risks  existing at that
time. For certain instruments, including cash and cash equivalents, investments,
non- trade accounts  receivable and loans, and short-term debt, it was estimated
that the  carrying  amount  approximated  fair value for the  majority  of these
instruments because of their short-term  maturity.  The carrying amounts of long
term debt approximate fair value since the Company's  interest rates approximate
current  interest  rates.  On our original  Cherry Hill note  receivable  in the
amount of $10  million,  we have  elected  to defer the gain on the sale and the
interest to be accrued until such time that collectability can be determined. On
our second Cherry Hill note  receivable  we have recorded a $200,000  impairment
loss during this current  quarter to reflect the estimated  current market value
of this note.  In its  assessment  of the fair value of the Second  Cherry  Hill
Note,  the Company  estimated that its share of proceeds from the sale of the El
Rancho property prior to July 31, 2005 would generate approximately $500,000. If
a sale does not occur prior to July 31, 2005 it is anticipated  that the Company
will take an  additional  impairment  write down against the Cherry Hill Note of
approximately $300,000 in this fiscal year ending June 30, 2005. (See Note 5)

(12) EXTRAORDINARY ITEM

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

(13) TREASURY SHARES

     On December 13, 2002, the Company issued a promissory note in the amount of
$1,648,403 to purchase 3,228,146 shares of its Common Stock under the control of
the  Chapter 11  Trustee  for the  bankruptcy  estate of Robert E.  Brennan.  In
connection  with our Chapter 11 Plan of  Reorganization,  effective  October 15,
2003, we purchased an  additional  450,000  shares for  $225,000,  and the total
amount  of our  debt for the  purchases  of stock  as of  October  15,  2003 was
$1,873,413 which also includes accrued interest.

                                       22

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Such  indebtedness  was  combined  with the  obligations  to  purchase  the Ship
Mortgage  Obligation,  and was payable over the next three years  together  with
interest at 12% per annum.  On July 7, 2004 the Company  paid in full the amount
due under the Stock Purchase Agreement. (See Note 2).

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

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


(14) RELATED PARTY TRANSACTIONS

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

     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.
Mr. Murray's equity interest in the limited partnership,  indirectly through his
ownership of the general partner,  as of December 26, 2002, was 64%. At December
26, 2002,  loans of $735,584 were outstanding on such project and we had accrued
$155,945  of  interest  due on the loans.  On  December  26,  2002,  the limited
partnership's  indebtedness  to us 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  described below.  Such  indebtedness is due December
31, 2004 and bears an interest rate of 6%.

     In the second project, Mr. Murray is participating in the development of an
oceanfront  parcel  of land,  located  in Fort  Lauderdale,  Florida,  which has
received all governmental  entitlements from the City of Fort Lauderdale and the
state of Florida to develop a  14-story  building  to include a 5-story  parking
garage,  approximately  6,000 square feet of commercial  space and a residential
9-story tower.  The property had been owned by MJQ  Development,  LLC, which was
owned by Michael J. Quigley,  III until  December 26, 2002 when the property was
acquired by OC Realty,  LLC, the entity owned by Mr. Murray.  Mr. Quigley has no
relationship to Robert J. Quigley, one of our directors. OC Realty is developing
a condominium  hotel resort on the property as discussed  above. As of September
30, 2004, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest  in the amount of  $911,350 on the loan.  Upon the  acquisition  of the
property,  OC Realty assumed MJQ  Development's  indebtedness to us. These loans
bear  interest at 12% and will be  repayable  out of the first  proceeds,  after
payment of bank debts,  generated by the sale of the condominiums.  We will also
have the right to receive, as participation  interest,  from available cash flow
of OC Realty if the project is successful,  a priority  return of our investment
and a priority profits interest for up to three times our investment.  Repayment
of these loans and our  participation  interest will be subject to repayment of,
first,  bank debt of  approximately  $5.5 million (at  present)  incurred in the
purchase of the real property and, second, construction financing expected to

                                       23

<PAGE>


                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

amount to $25 to $30 million  and third,  capital  invested  by a joint  venture
partner  (which had been expected to be up to $6.5 million) plus a 15% per annum
return  thereon.  At the time the loans to MJQ  Development  were approved,  Mr.
Murray stood to receive a substantial  contingent  benefit from MJQ  Development
for his  participation  in the  project.  Fair value and  collectability  of the
original  investment of $2,034,405  and accrued  interest was  determined by the
joint venture through  projections  evidencing our collection upon build out and
sale of the project.

     In order to raise the capital with which to proceed in the  development  of
the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in
a joint venture in connection  with which the other joint venture partner was to
fund up to $6.5 million for development and receive a 50% equity  interest.  Our
loan and participation  interest will be payable out of OC Realty's 50% share of
distributions  after repayment of debt and the new investor's capital investment
and  15%  annual  return  thereon.   However,  the  joint  venture  partner  has
discontinued  its funding  for the  project.  OC Realty has loaned  funds to the
joint venture to meet its current requirements at a 20% annual interest rate. In
addition,  OC Realty is in  discussions  with third parties to replace its joint
venture partner and is considering entering into a development  agreement with a
recognized  developer to aid the  marketability  of the project,  however,  such
arrangements  will vary from the  arrangements  cited  above  with its prior 50%
joint venture.  The Company has assessed the collectability of the advances made
to OC Reality based on comparable  sales of like units in the marketplace  which
suggest  demand is strong and  prospective  sales of the project's  inventory or
units  will  be more  than  adequate  to  meet  its  obligations  including  our
outstanding notes payable.

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

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

     During the quarter,  the Company  re-entered the equine  business for which
the Company was originally established and purchased several horses of different
ages. The Company has committed to purchasing several horses, the majority being
one and two year olds,  from Francis W. Murray at prices to be  determined  by a
current appraisal of their values. Payment for such horses will only be made out
of profits realized from the horses purchased from Mr. Murray, if any. Effective
September 1, 2004,  the Company has taken over the  stabling and training  costs
for these horses  previously owned by Mr. Murray.  It is our plan to bring these
horses  into racing if we  consider  them  competitive  following  the  training
period.







                                       24

<PAGE>




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

Forward-Looking Statements

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

          o    general  economic and business  conditions  affecting the tourism
               business in Florida;
          o    competition;
          o    execution of our new business strategy;
          o    changes in laws regulating the gaming industry;
          o    fluctuations  in  quarterly  operating  results  as a  result  of
               seasonal and weather considerations;
          o    events  directly or indirectly  relating to our business  causing
               our stock price to be volatile; and
          o    delays or  cost-overruns  in  connection  with  refurbishing  and
               refitting a second vessel which we plan to place in service.

Background

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

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

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



                                       25

<PAGE>




     On January 6, 2003 our  subsidiary  which  operates the Palm Beach Princess
filed a voluntary  petition for relief under Chapter 11 of the  Bankruptcy  Code
because it did not have the funds to complete the purchase of the Ship  Mortgage
on the Palm Beach Princess.  On October 15, 2003 a Plan of Reorganization  under
Chapter 11 was  approved  and on July 17, 2004 the court  issued a final  decree
closing the Chapter 11 case.


Liquidity and Capital Resources

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

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

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

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

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

     The PDS Transaction  involved,  among other things, our chartering a second
vessel,  the Empress II. We have  committed  $3,407,602 to date towards costs of
refurbishing and  retrofitting the Empress II vessel.  Start up costs associated
with  refurbishing  and  retrofitting  the  Empress II vessel and  placing it in
service  (including  marketing  expenses  and other soft costs) are  expected to
amount to approximately  $10 million,  $6 million of which has been provided for
by  means  of an  escrow  of our  $2,880,652  payment  and  proceeds  of the PDS
Transactions. Additional amounts necessary to begin operations of the Empress II
vessel are expected to be provided from working capital of our ITGV  subsidiary.
ITGV's  ability to generate  sufficient  working  capital with which to pay such
costs may be adversely  affected by delays or cost overruns in  connection  with
refurbishing  and  refitting  the  Empress II and by weather  related  and other
uncertainties affecting its operations.  Any delays in commencing the Empress II
operations will adversely  affect our cash flow because of the continuing  costs
of carrying  the vessel.  As  indicated  by the table  below,  our debt  service
requirements  have  increased  significantly  with the PDS  financing due to the
increase in amounts of debt and rates  involved.  The  increase in the amount is
attributable in part to the arrangement for procurement and  refurbishment for a
second  vessel,  the Empress II. We are dependent  upon the expected  additional
revenue  from  the  operations  of the  second  vessel  to cover  the  increased
financing costs.

                                       26

<PAGE>




     In our last fiscal year,  the Company  purchased  the vessel Royal Star. We
anticipate  that the vessel  will need  extensive  improvements  and  outfitting
costing  between $5 and $6 million  before  being  placed in service as a gaming
vessel.  Until the amounts due to the Brennan  Trustee were paid in full on July
7, 2004,  expenditures for  improvements  were restricted by the Brennan Trustee
and we were required to make  simultaneous  dollar  pre-payments  to the Brennan
Trustee for each dollar spent on improvements. We are currently negotiating with
a financial institution to obtain the balance of the funds necessary to make the
required  improvements  and lease or otherwise  acquire the gaming  equipment to
place the ship in service. No assurances can be given that we will be successful
in obtaining the necessary additional funds. Delays in commencing the Royal Star
operations have and will continue to adversely  affect our cash flows because of
the continuing costs of carrying the vessel.

The following summarizes  commitments on non-cancelable  contracts and leases as
of September 30, 2004:
<TABLE>
                                              Twelve Months Ended September 30,
                              ----------------------------------------------------------------     There-
                                 2005          2006          2007         2008         2009        after         Total
                              ----------   -----------   -----------   ----------   ----------    --------     ----------
<CAPTION>
<S>                         <C>          <C>           <C>           <C>          <C>           <C>         <C>
Capital Leases - PBP        $  3,528,526 $   5,661,154 $   5,661,154 $  5,661,154 $  4,717,628  $      -0-  $  25,229,616
Leases - Empress II            1,981,755     3,410,430     3,410,430    3,410,430    3,072,930         -0-     15,285,975
Notes and Mortgages:
  Principal                      684,912           -0-           -0-          -0-          -0-         -0-        684,912
  Interest                        22,475           -0-           -0-          -0-          -0-         -0-         22,475
Deferred Interest Payments       450,000       600,000       600,000      600,000      450,000         -0-      2,700,000
Employee Contracts               722,884       146,314           -0-          -0-          -0-         -0-        869,198
Operating Leases:
  Casino Equipment             1,038,098     1,362,147     1,135,122          -0-          -0-         -0-      3,535,367
  Administrative & Office        517,317       265,032       122,787       68,018          -0-         -0-        973,154
Purchase Obligations             204,374        61,120        61,006       61,006       61,006     254,190        702,702
Other Long-Term Debt                 -0-       285,649           -0-          -0-          -0-         -0-        285,649
                              ----------   -----------   -----------   ----------   ----------    --------     ----------
Total                       $  9,150,341 $  11,791,846 $  10,990,499 $  9,800,608 $  8,301,564  $  254,190  $  50,289,048
                              ==========   ===========   ===========   ==========   ==========    ========     ==========
</TABLE>


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



                                       27

<PAGE>




     The  Company  anticipates  $2.5  million of capital  expenditures  for Port
improvements the timing of which is subject to financing.

     The  timing  and  amount of  payments  on  obligations  owing to the Parent
Company at September 30, 2004 comprised  primarily of the First Cherry Hill Note
and the Second Cherry Hill Note, remain unpredictable.

     Outlook:

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

     On July 7, 2004 we paid off the Brennan  Trustee and entered into long-term
sub  charters  in  connection  with  lease  transactions  for  two  vessels  and
equipment. As a result of these transactions,  lease payments made to PDS are at
a higher rate of interest  (15.3% to 16.54%)  than the  interest  that was being
paid to the Brennan  Trustee  (12%).  The debt  outstanding  has also  increased
significantly.  Additionally,  we must make charter  hire  payments for the Palm
Beach  Princess of $50,000 per month plus 1% of its gross  revenues  and charter
payments for the Empress II of $100,000 per month plus 1% of its gross revenues.
Therefore  our combined  monthly  charter  payments  predicated on capital lease
interest  payments plus charter hire fees will be significantly  higher than the
payments to the Brennan  Trustee and the prior bare boat  charter fee of $50,000
per month for the Palm Beach Princess would have been.

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

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

     ITG  Vegas is  scheduled  to  place  the Palm  Beach  Princess  in wet dock
beginning  early  in  January  2005.  During  the  period  of  wet  dock,  it is
anticipated that  approximately  10 cruises will be lost and that  approximately
$150,000 will be spent on routine  maintenance  items.  However,  the extent and
costs of repairs  required to be done during the wet dock cannot  accurately  be
determined in advance.

     Our working  capital as of  September  30, 2004 was $439,735 as compared to
$556,675 at June 30, 2004. The decrease in working capital during the past three
months was primarily due to the net effect of disbursements for the improvements
made to the Empress II and Royal Star and lease payments offset by the payoff of
the Brennan Trustee on our behalf.







                                       28

<PAGE>




  Results of Operations for the Three Months Ended September 30, 2004 and 2003

     Overall

     Revenue  from for the three  months  ended  September  30,  2004  decreased
$1,239,746 from $7,618,068 in Fiscal 2004 to $6,378,322 in Fiscal 2005 primarily
as a result  of  decrease  in  revenues  generated  by the Palm  Beach  Princess
operations during the comparable periods.  Operating expenses increased $744,829
from $6,363,819 in the three month period in Fiscal 2004 to $7,108,648 in Fiscal
2005 primarily the result of an increase in the development costs of $499,459 as
a result of our  continued  search both  domestically  and  internationally  for
additional  gaming  opportunities  offset by a decrease in  bankruptcy  costs of
$257,016 as a result of the bankruptcy  being finalized on July 17, 2004.  Other
expense increased by $911,444 as a result of (1) an increase in the interest and
financing  expense of $667,139 due to the higher debt level on the vessel leases
than that amount  previously  owed to the Brennan Trustee and an increase in the
rates of  interest  and (2) during the first  quarter of Fiscal 2005 the Company
recorded an impairment loss in the amount of $200,000.

     For the three months ended September 30, 2004 loss before an  extraordinary
item was  ($1,977,359)  as compared to income of $859,060  for the three  months
ended September 30, 2003. During the current fiscal quarter the Company recorded
extraordinary  income,  net of tax,  of  $3,560,000.  This was the result of the
collection  of success  fees  charged to Leo Equity  Group,  Inc. and Palm Beach
Maritime Corporation (formerly MJQ) for our efforts in connection with the final
settlement  with the Chapter 11 Trustee for the  Bankruptcy  Estate of Robert E.
Brennan.  We had deferred all income from these  transactions until such time as
payment  was  received.  During the first  quarter of Fiscal  2005,  we received
payment for the previously deferred income.

     Net Income for the three months ended  September 20, 2004 was $1,582,641 or
$.15 per diluted share as compared to $859,060 or $.10 per diluted share for the
three months ended September 30, 2003.

     Vessel Operations

     During the three months ended  September 30, 2004,  net  operating  revenue
from vessel  operations  was  $6,281,500 as compared to $7,575,158 for the three
months ended  September 30, 2003.  The decrease in revenue of $1,293,658  during
the  comparable  quarters  was due to a decrease in the number of cruises  which
resulted in a decrease in  passenger  counts of 7.5%.  Additionally,  during the
current  quarter our revenue per passenger fell 9% from $123.20 per passenger in
Fiscal 2004 to $112.22 in Fiscal 2005.  This  decrease of revenue per  passenger
for this  quarter  follows a trend  which  began in the forth  quarter of Fiscal
2004. However,  the Company believes the decrease in the first quarter of Fiscal
2005 was due primarily to the uncertainties of the hurricanes  because for month
of  October  2004,  our  revenues  per  passenger  have  recovered  and  were at
approximately  $137.00.  During the current  quarter gaming  revenues  decreased
$1,165,180,  or 18%,  from  $6,494,687  in the first  quarter of Fiscal  2004 to
$5,329,507  in the first  quarter of Fiscal  2005.  Net fare and on board income
decreased  $128,478 or 12%. Casino operating  expenses which also includes food,
beverage and entertainment  increased $34,470 from $2,029,618,  or 32% of casino
revenue in fiscal 2004 to  $2,114,088,  or 40% of casino  revenue in fiscal 2005
primarily the result of dividing costs, many of which are fixed by their nature,
over reduced revenues.

     Sales,  marketing and advertising expenses increased $161,435 from $713,754
in fiscal  2004 to  $875,189  in fiscal  2005.  The  increase  was the result of
additional   advertising   and  promotions  to  attract   customers   after  the
cancellation  of cruises due to the  hurricanes,  inclement  weather and curfews
following the hurricanes.  Maritime and legal expenses decreased $281,488 or 16%
as a result of fewer cruises being performed during the current quarter. Finance
expenses  increased  $400,720 from $236,458 in fiscal 2004 to $637,178 in fiscal
2005 as a result of the interest  paid on the capital lease and the charter hire
payments  for the  Palm  Beach  Princess  which  was  effective  July  7,  2004.
Depreciation and amortization increased $263,883 from $130,397 in fiscal 2004 to
$394,280 in fiscal 2005.  As a result of the capital lease  arrangement  for the
Palm Beach  Princess  the  Company is  recording  depreciation  on the vessel as
compared to last year when the Company did

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<PAGE>




not record depreciation because it operated the vessel under an operating lease.
Administration  expense decreased $116,417 or 10% from $1,119,064 in fiscal 2004
to  $1,002,647  in fiscal 2005 due to fewer days of operation and steps taken to
reduce expenses during this quarter.  The loss before income tax expense for the
first  quarter of operation in fiscal 2005 was  $(420,776) as compared to income
before Income Tax of $1,351,357 in the comparable quarter of fiscal 2004.

     The Palm  Beach  Princess  performs  fourteen  cruises  weekly,  that is, a
daytime  and an evening  cruise  each day.  Each  cruise is of five to six hours
duration.  During  each  cruise,  the  Palm  Beach  Princess  offers  a range of
amenities  and services to her  passengers,  including a full  casino,  sit-down
buffet dining, live musical shows, discotheque,  bars and lounges, swimming pool
and  sundecks.  The casino  occupies  15,000  square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice,  roulette and poker), and a sports wagering book. During the first quarter
of Fiscal 2005 the ship  completed 156 cruises and 25 cruises were missed due to
hurricanes  and inclement  weather.  During the first quarter of Fiscal 2004 the
ship  completed 167 cruises and 11 cruises were missed due to scheduled wet dock
maintenance.

The following is a comparative  summary of income and expenses of the Palm Beach
Princess operation for the three months ended September 30, 2004 and 2003:

                                             Three Months Ended
                                               September 30,
                                          ------------------------
             Description                     2004          2003       Change
--- -----------------------------------   ----------    ----------  -----------
Passenger Count                               55,977        61,487      (5,510)
Number of Cruises                                156           167         (11)
Revenue:
    Gaming                              $  5,329,507  $  6,494,687 $(1,165,180)
    Fare                                   1,479,831     2,136,192    (656,361)
    On Board                                 867,483       917,357     (49,874)
    Less: Promotional Allowances
    Fare                                    (939,166)   (1,480,821)    541,655
    On Board                                (456,155)     (492,257)     36,102
                                          -----------   ----------- -----------
    Total Revenue                          6,281,500     7,575,158  (1,293,658)
                                          -----------   ----------- -----------
Expenses:
    Casino Operating Expenses              2,114,088     2,079,618       34,470
    Hotel and Gift Shop Expenses             211,113       195,241       15,872
    Sales, Marketing and Advertising
     Expenses                                875,189       713,754      161,435
    Maritime and Legal Expenses            1,467,781     1,749,269     (281,488)
    Finance Expenses - Net                   637,178       236,458      400,720
    Depreciation and Amortization            394,280       130,397      263,883
    Administrative                         1,002,647     1,119,064     (116,417)
                                          -----------   ----------- -----------
    Total Expenses                         6,702,276     6,223,801      478,475
                                          -----------   ----------- -----------
          Income (Loss) Before Income
             Tax Expense                $   (420,776) $  1,351,357 $ (1,772,133)
                                          ===========   =========== ===========

     Horse Operations

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

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<PAGE>




horses in New Jersey and in Brazil.  Additionally,  the Company has committed to
purchasing  several  horses,  the  majority  being one and two year  olds,  from
Francis W. Murray at values to be  determined  by a current  appraisal  of their
values.  Payment for such horses will only be made out of profits  realized from
the horses purchased from Mr. Murray, if any.  Effective  September 1, 2004, the
Company  has taken  over the  stabling  and  training  costs  for  these  horses
previously owned by Mr. Murray.  Our horse operation did not produce any revenue
during the quarter.  Training and operational expenses of approximately  $25,000
are  reported  in  Development   Costs.   We  expect  these  costs  to  increase
substantially in the near future as additional horses are purchased.

Inflation

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

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.

     Within  90 days  prior  to the  filing  of this  report,  we  completed  an
evaluation,  under the supervision and with the participation of our management,
including  our chief  executive  officer  and chief  financial  officer,  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures.  Based on the  foregoing,  our  chief  executive  officer  and chief
financial  officer  concluded  that  the  Company's   disclosure   controls  and
procedures were effective.

     There have not been any significant changes that occurred during the fiscal
quarter ended September 30, 2004 in the Company's  internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.












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<PAGE>




                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES


                                     Part II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

     On July 28, 2004 Mr.  Francis W. Murray  exercised his option to purchase 2
million  shares of our Common Stock at an exercise  price of $0.26875 per share.
The Company  issued 2 million  shares of Treasury stock it received for proceeds
of $537,500.  The proceeds were used for working capital.  Also on July 28, 2004
the  Company  issued  689,730  Treasury  shares to Mr.  Murray in payment of the
deferred  salary of $344,865 we owed to him for the period from  January 3, 2003
until November 18, 2003.

     On August 31,  2004 the Company  issued  73,339  Treasury  shares to Robert
Quigley  in  payment  of the  deferred  salary of $36,670 we owed to him for the
period from January 3, 2003 until November 18, 2003.

     The sales of shares to Messrs.  Murray and Quigley were made under  Section
4(2) of the Securities Act of 1933, as amended,  as  transactions  by the issuer
not involving a public offering.  Each of Messrs. Murray and Quigley are members
of our Board of Directors and are fully  familiar  with our financial  condition
and  affairs.  Each  acquired the shares for  investment,  without a view to any
distribution  of those shares,  and their resale or other  disposition  of those
shares is restricted.

ITEM 6. EXHIBITS

Exhibit                     Description of Exhibit

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

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

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










                                       32

<PAGE>






                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                                   SIGNATURES


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



                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.




November 22, 2004       /s/Francis W. Murray
                        -----------------------------------------------------
                        Francis W. Murray, President, Chief Executive Officer
                        and Chief Financial Officer
































                                       33

<PAGE>






                                                                    Exhibit 31.1

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

I, Francis W. Murray, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: November 22, 2004

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





                                       34

<PAGE>





                                                                    Exhibit 31.2

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

I, Francis W. Murray, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: November 22, 2004

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



                                       35

<PAGE>



                                                                      Exhibit 32

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

     In  connection  with the  filing  of the  Quarterly  Report on Form 10-Q of
International  Thoroughbred Breeders,  Inc. (the "Company") for the three months
ended September 30, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Francis W. Murray, Chief Financial Officer of
the Company,  hereby certify pursuant to 18 U.S.C.  ss.1350, as adopted pursuant
to  Section  906 of the  Sarbanes-Oxley  Act of  2002,  that,  to the best of my
knowledge:

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

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



 /s/ Francis W. Murray
 ------------------------------
 Name: Francis W. Murray
 Title: Chief Financial Officer
 November 22, 2004


                                       36

<PAGE>